Report by the Board of Directors

Wireless Business Segment

In the Wireless Business Segment EB offers products and product platforms for defense, public safety and other authorities markets as well as for industrial use. Further, EB offers product development services and customized solutions for wireless communications markets and for companies needing wireless connectivity for their products. EBīs products in the Wireless Business Segment are the EB Tactical Wireless IP Network for tactical communications, EB Tough VoIP for tactical IP-based communication and EB Wideband COMINT Sensor for signals intelligence. The product platforms are the Android- based EB Specialized Device Platform and EB LTE Connectivity Module for specialized markets. For the latest wireless technologies and applications EB offers a broad range of R&D services such as consulting, integration, and development of software and hardware.

Development of the Wireless Business Segment in 2013

The Wireless Business Segmentīs net sales from Continuing Operations in January-December 2013 decreased by 3.7 per cent year-on-year, to EUR 61.2 million (EUR 63.5 million, 1–12 2012). The decrease in the net sales was due to decline in the demand for R&D services in the wireless telecommunications market. The operating loss from Continuing Operations of the Wireless Business Segment in January-December 2013 was EUR -0.5 million including the nonrecurring cost of approximately EUR 0.8 million resulting from the cost saving measures in the first quarter of 2013 (operating loss of EUR -2.2 million including non-recurring items of approximately EUR 4 million weakening operating result, 1–12 2012). In addition to the decreased net sales, the profitability was negatively affected in 2013 by the ongoing investments into the marketing and product development of products targeted for the global defense and other authority markets; these investments are expected to start gradually generating net sales from the latter half of 2014 onwards. Operating result of the Wireless Business Segment in January- December 2013 without non-recurring costs was EUR 0.4 million (EUR 1.8 million, 1–12 2012).

EB and Anite plc signed an agreement on January 28, 2013, under the terms of which EB agreed to sell its Test Tools product business to Anite (“the Transactionī). The Transaction comprised the sale of the shares of EBīs subsidiary Elektrobit System Test Ltd., a company based in Oulu, Finland, and certain related other assets in the USA and China. EBīs Test Tools product business provided radio channel emulation tools and testing solutions for the development of the wireless technologies and was part of EBīs Wireless Business Segment employing a total of 54 persons in Finland, USA and China.EB started measures to improve its cost structure in the Wireless Business Segment during the first quarter. The measures were completed on April 4, 2013 and the Company estimates to reach the targeted approximately EUR 2 million annual cost savings in its Wireless Business Segment, fully effective from the second half of 2013 onwards. The measures resulted non-recurring costs of approximately EUR 0.8 million that affect negatively the Companyīs operating result of the first quarter of 2013. The underlying reasons for the measures to improve the cost structure were the changed business requirements. As part of these measures, EB reduced its personnel in the Wireless Business Segment globally by altogether 32 persons, 8 of them in Finland. In addition, EB also concentrated some of its Wireless Business Segment operations to Finland and moved the centre of its US operations from west coast to east coast, where many of the public sector customers are located.

During the first quarter, EB launched its Tough VoIP phone for industrial use. The product is suitable for demanding environments like manufacturing, construction, power plants, mining sites, and transportation. EB also broadened its Android-based product platform (EB Specialized Device Platform) with three new platform variants: smartphone, tablet and LTE connectivity module.

In April, EB signed a contract with the Finnish Defence Forces for deliveries of the EB Tactical Wireless IP Network communication system. The product delivery contains tactical routers and radio head units for the land forcesī communication needs. This contract is a continuation to the EBīs Tactical Wireless IP Network development and pilot delivery contract signed in September 2011. The value of the purchase is EUR 7.0 million (excl. VAT). The deliveries are to be finalized by the end of March 2014.

In the last quarter EB started the product deliveries of the tactical communication system to Finnish Defence Forces and delivered a batch of special terminal products to one customer for authority use. These product deliveries generated product-based net sales of EUR 6.9 million in the fourth quarter, the rest of the net sales being R&D services sales. Net sales and operating result were negatively affected by the decreasing demand from a significant customer in the second half of 2013 due to which the company started cost level adjustment measures. Between September and November 2013 EB gave temporary layoff notice to 74 employees for a maximum of 90 days, part or full time. With these measures the company estimated to target approximately EUR 0.8 million cost savings, that were expected to materialize mainly during the fourth quarter. As the demand outlook of the Wireless Business Segment became more accurate, it was possible to decrease the amount of temporary layoffs from previously estimated maximal amount. The materialized amount of temporary layoffs decreased to 64 employees and the cost savings were EUR 0.6 million.

Wireless Business Segment Market Outlook

In the Wireless Business Segment, EBīs customers operate in various industries, each of them having own industry specific factors driving the demand. A common factor creating demand among the whole customer base is the introduction of new technologies. In 2014 the implementation of LTE (Long Term Evolution) technology is expected to continue to be important technological change driving the demand. It is accelerated by a growing need for faster and higher quality data transmission. Due to the long history in developing smart phones and mobile communication devices, EB is in a good position to offer solutions, where e.g. mastering of multi-radio technologies and end-to-end system architectures covering both terminals and networks is needed.

Following factors are estimated to create demand for EBīs products and services in 2014 and beyond:

  • In the mobile infrastructure equipment market the use of LTE technology is expected to continue strong. This creates the need for services for LTE base station design. There is a wide range of frequencies allocated for LTE globally, thus creating a need to develop multiple products to cover the market, and creating demand for R&D services for design of product variants.
  • The trend of adopting new commercial technologies, such as LTE and smart phone related operating systems and applications, is expected to continue in special verticals such as public safety. The specific LTE frequency band allocations for authorities create demand for customized LTE devices, such as EBīs specialized terminals, tablets and communication modules.
  • The need for R&D services for connected devices for business or consumer use, such as smart watch and other Wearable devices, is evolving and creating demand for customized solutions based on EBīs product platforms.
  • In the defense marketīs tactical communication the need for larger amounts of information data grows, generating demand for broadband networks, such as EBīs customized IP (Internet Protocol) based tactical communications solutions.

EB aims at bringing its products to the global defense and other authorities markets, where they are expected to start gradually generating net sales from the latter half of 2014 onwards. The public defense budget cuts affect negatively the demand for products and product development services in Europe and also all over the world, simultaneously increasing the competition between the suppliers.

The defense, authorities and national security markets are by their nature slowly developing markets. They are characterized by long sales cycles driven by purchasing programs of national governments, and the purchases of the selected products take place over several years.