Business related risks
EBīs operative business risks are mainly related to following items: uncertainties and short visibility on customersī product program decisions, their make or buy decisions and on the other hand, their decisions to continue, downsize or terminate current product programs, execution and management of large customer projects, ramping up and down project resources, availability of personnel in labor markets (in particular in Germany), accessibility on commercially acceptable terms and on the other hand successful utilization of the most important technologies and components, competitive situation and potential delays in the markets, timely closing of customer and supplier contracts with reasonable commercial terms, delays in R&D projects, realization of expected return on capitalized R&D investments, obsolescence of inventories and technology risks in product development causing higher than planned R&D costs. Revenues expected to come from either existing or new products and customers include normal timing risks. EB has certain significant customer projects and deviation in their expected continuation could result also significant deviations in the Companyīs outlook. In addition there are typical industry warranty and liability risks involved in selling EBīs services, solutions and products.
EBīs product delivery business model faces such risks as high dependency on actual product volumes, timing risks and potential delays in the markets. The above-mentioned risks may manifest themselves as lower amounts of products delivered or higher costs of production, and ultimately, as lower profit. The bringing of EBīs products into the global defense markets can take longer time than expected since the projects are by their nature long and the purchasing programs are driven by national governments and availability of funding. The purchases of the selected products take place over several years. EBīs net sales from the automotive industry is currently primarily driven by the development of software for electronic devices to be used in new car models, and sales of licenses for in-car software and software development tools. EB aims at developing its business model to be more based on software products, which is expected to increase the direct dependency of net sales on production volumes over the forthcoming years. The dependency on EBīs net sales on car delivery volumes is also increased by EBīs customers tending to allocate a part of the software development costs to be paid in license fees based on the actual car delivery volumes. When using this pricing model, which is common in the automotive industry, the project specific operating result and positive cash flow will be typically reached first during the car production years and this may cause significant additional financing needs for the R&D phase. However, this model can offer EB also an opportunity for higher cumulative income, in case the take rate of additional software products or services, like in-car navigation system in the new cars sold, would be higher than originally estimated. This is dependent among others on the amount of additional software products and services, such as in-car navigation, chosen to new cars at the time of purchase.
Some of EBīs businesses operate in industries that are heavily reliant on patent protection and therefore face risks related to management of intellectual property rights, on the one hand related to accessibility on commercially acceptable terms of certain technologies in the EBīs products and services, and on the other hand related to an ability to protect technologies that EB develops or licenses from others from claims that third partiesī intellectual property rights are infringed. Additionally, parties outside of the industries operate actively in order to protect and commercialize their patents and therefore in their part increase the risks related to the management of intellectual property rights. At worst, claims that third partiesī intellectual property rights are infringed could lead to substantial liabilities for damages. Also, EB has received a formal request from one of its customers for indemnification that is unspecified both in terms of the basis of liability and the amount claimed. Based on information available, it does not seem likely that the claim would result in significant liability in the short term. It is possible that, based on later information, the above views may need to be reconsidered. In addition, the progress of the customer projects and delivery capability may be also affected by potential challenges in global accessibility of key technologies and components on commercially acceptable terms. In the Wireless Business Segment accessibility of chipsets to provide LTE-capabilities on commercially acceptable terms may affect the development and delivery of competitive special terminal products.