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Electronics Production | April 26, 2007

Elcoteq in the Red, Extends Services to IEMS

Elcoteq recorded net sales of 952.5 million euros (9811) between January and March 2007. The company now looks over its strategy to broaden Elcoteq's current service offering (EMS) into integrated electronics manufacturing services (IEMS).
Operating income, -52.4 million euros (8.3), included restructuring costs totaling 30.1 million euros related to the company's action plan to restore its profitability and competitiveness.

The weak operating income is due to low production volumes, price pressure experienced by the Communications Networks business area, and production problems in Mexico.

The Group's net financial expenses were 6.4 million euros (5.1). Income before taxes was -59.0 million euros (2.9) and net income totaled -46.9 million euros (2.1). Earnings per share (EPS) were -1.49 euros (0.07).

The Group's gross capital expenditures on fixed assets between January and March were 11.2 million euros (16.0) or 1.2% of net sales. Depreciation amounted to 20.1 million euros (18.9).

Elcoteq's Board of Directors has approved a plan that will significantly increase and broaden Elcoteq's current service offering (EMS) into integrated electronics manufacturing services (IEMS). The change includes development of existing operating models, as well as M&A arrangements and various forms of collaboration with other companies operating in the same field.

Mr. Anssi Korhonen (MSc, Electrical Engineering) has been appointed President for Elcoteq's geographical Asia-Pacific effective June 1. Mr. Korhonen will also continue in his current role as Senior Vice President of Product Development Services and member of the Elcoteq Management Team (EMT). Mr. Korhonen will be based in Hong Kong.

Mr. Korhonen has been employed by Elcoteq since 1992 with the exception of years 1995 - 1997, when he worked for Ericsson Mobile Communications AB in Sweden.

Elcoteq has two business areas: Terminal Products and Communications Networks. In the first quarter Terminal Products contributed 81% (82%) and Communications Networks 19% (18%) to the Group's net sales.

Elcoteq's sales to companies within the Ericsson and Nokia groups during the first quarter decreased by roughly 20% compared to the same period last year and the aggregate contribution of these companies to Elcoteq's consolidated net sales amounted to 58.5% (72.0%). These figures do not include business activities with Sony Ericsson. Net sales from customers not belonging to the Nokia and Ericsson groups, in contrast, increased by more than 40% from the comparison period and Research in Motion (RIM) rose to become Elcoteq's second largest customer.

Net sales of the Terminal Products business area were slightly lower in the first quarter than one year earlier, standing at 767.2 million euros (808.0). The segment's operating income was -36.9 million euros (15.9), or -4.8% of its net sales. Operating income excluding restructuring costs was -8.6 million euros. Operating income was weakened by lower production volumes, lower prices and production problems in Mexico.

Net sales of the Communications Networks business area increased by roughly 7% on last year's first quarter to 185.3 million euros (173.1). The segment's operating income was -4.7 million euros (4.6), or -2.5% of its net sales and, excluding the restructuring costs, -3.3 million euros. Underlying the weaker operating income were heavy pressure on prices, especially in Europe, and lower than forecast production volumes from new customers acquired during the second half of 2006.

In March Elcoteq signed a multi-year manufacturing services contract with Redline Communications. Elcoteq is Redline's primary EMS provider of manufacturing services for WiMAX Forum Certified base station and end-user devices as well as its RedCONNEX backhaul products.

Approximately 12 million euros of the 35 million euro restructuring costs affect the company's cash flow. The cash flow items will mostly be recognized during 2007, although it is possible that items related to lease commitments could also be paid during 2008 and 2009. Elcoteq is also undertaking other streamlining measures including a global program to raise production efficiency at all the company's manufacturing plants and the adoption of a new contract and invoicing model in Europe.

Elcoteq forecasts that its full-year net sales will increase only slightly on last year's and that its operating income excluding restructuring costs will be on a break-even level.

Net sales in the second quarter of 2007 are expected to be slightly higher than in the first quarter. Operating income excluding restructuring costs is forecast to improve on the first quarter but still to be negative.

Elcoteq's forecasts are based on the company's view of market growth and on the project-specific forecasts of its customers, based on which Elcoteq makes its own forecasts of the realization of agreed and planned new projects.

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