Telefonaktiebolaget LM Ericsson (ERIC) 2003 Q1 法說會逐字稿

Welcome to the Ericsson's Analyst and Media Conference Call for their first quarter report for 2003.

To view visual aids for this call, please log on to www.ericsson.com/Press or Investors.

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As a reminder, replay will be available one hour after today's conference.

Mr. Gary Pinkham, Vice President Investor Relations will now open the call.

Thank you operator and hello everyone and welcome to our call today.

With me here today are Carl-Henric Svanberg, President and CEO of Ericsson, Per-Arne Sandstrom, Deputy CEO and Karl-Henrik Sundstrom, Chief Financial Officer.

We will be making forward-looking statements during the call today.

These statements are based on our current expectations and certain planning assumptions, which are subject to risk and uncertainties.

The actual results may differ materially due to factors mentioned in today's press release and discussed in this conference call.

We encourage you to read about these risks and uncertainties in our Earnings Report as well as in our Annual Report.

With that out of the way, I would like to hand the call over to Mr. Carl-Henric Svanberg for comments about our performance and plans going forward.

Well good morning and good afternoon ladies and gentlemen Here, I will go through my first impressions coming into this company.

I will also highlight some of the achievements in the first quarter and then I will then turn into the additional actions that we're doing, as we're determined to drive this company to a strong profitable development, irrespective, we would see a further a weakening in the market, which I will come back to.

Starting off here with my initial impressions.

I must say that, first of all, we, through the whole organization there is a clear and strong crisis awareness.

Everybody understands where we are.

Everybody understands that what we need to do and I can also say that differently, maybe, from my expectations, I find a surprisingly strong spirit throughout the whole organization and a strong commitment to what we need to do and a belief in the future.

I was maybe worried before I came in that because of all the cutbacks that wouldn't be the case, but I must say there is no doubt what we need to do in support around the additional measures that I'll come back to in a minute.

Of course, that comes from a strong loyalty and joy of being an employee at Ericsson but it also comes from sharing the vision of the telecom industry as a growing industry and the growth opportunities that we have in the future, but we're all standing behind the corrections that we're doing right now.

Let me talk a little bit about the first quarter highlights here.

We achieved close to 26 billion in sales, which was much in line with what we expected.

It is, of course, down 30% from last year but still, considering the circumstances; it's somewhere where we thought it would be.

We have in that number, quite some effect from an almost 90% decline from the TDMA technology and also PDC in Japan, so the GSM and WCDMA track is so far only down 12% in this year and that's quite encouraging and that's where we expect it to be going forward.

We also see the wide band CDMA being 12% over mobile systems sales right now, which of course, means that 3G for us is not just a future vision, it is happening now.

It is happening every day and that we're seeing -- we're having five networks up and running of 3G right now and quite some exciting experiences coming out of, for example, Italy and Australia and so.

We have also a book-to-bill that is above 1.

We have an order intake of over 27 billion, which is the first time in five quarters that we see better booking than billed and that is, of course, a good point.

We have not drawn any particular conclusions after that because for the reasons I'll come back to about the increased uncertainty in the market.

If we then turn to the gross margin, we have a gross margin of 34.1%, which is also encouraging since we have said this year that we should improve 2 to 4% during the course of the year, we are now 1.5% up sequentially from fourth quarter last year, which is encouraging and we will continue our efforts to improve that margin.

You should know, however, that we have a falling dollar working the opposite way and of course, also it continues -- as normally, there continues price pressure, but we have ambitions to continue to work on that number.

We have earlier indicated when we talk about OPEX reductions that we expected the first quarter to be down on an annual -- on a run rate of 48 billion and we are down to 47 billion, so we are a little bit ahead and that is also the reason why you can see in that restructuring charges in the first quarter are also somewhat ahead.

Quite positive, of course, is the fact that we have a positive cash flow in spite of the losses we're making in the quarter, we are working with our working capital and inventories and receivables and work flows and it does have a positive effect, which means that we are ending this quarter with a maintained liquidity from year-end and this is, of course, important going forward.

This means, in summary, if we look at the efficiency programs that we are well on plan there with the programs that are running right now and we expect the OPEX to end up at 38 billion this year should we do nothing new.

We are also seeing that the number of employees coming down to 54,000, which includes some of the restructuring layoffs but also the announced outsourcing programs that goes on, so that is the program that we have as of now.

What we see, however, is an increased uncertainty in the market.

We have the world economic situation with -- we have the Iraqi war, we have the SARS situation that is putting hesitation and have bank investments in Asia, and so on, that we take into account and we have said earlier, if we go more into the precise market outlook guidance here, we have it before, earlier, we have said that we thought the market could go down as much as to 10%.

We are now saying that we cannot exclude that it goes down more than 10%.

This is in U.S. dollars and this is the outlook for 2003 over 2002.

We are also seeing in the area of professional services continued strong growth and if we, again, look in U.S. dollars, our pick up in the quarter is about 6% but all-in-all an increase market uncertainty and, of course, we in Ericsson, we cannot allow ourselves to bet on any particular upturn, so we must adjust accordingly.

But also, we are seeing new opportunities emerging here as our new landscape surfaces and this, maybe one should put that a bit into perspective because here we're seeing an organization that grew tremendously strong during the 90's, 10, 20, 30 to 40% a year, and it wasn't a matter of being efficient.

It wasn’t a matter of any operational excellence.

It was more a matter of bringing out the new technology as fast as one could and then we have done dramatic cutbacks and then from my point of view, extremely impressive in spite painful, of course, cutbacks from 88 billion of OPEX down to 38 and I think it would be un-logical if that created an immediately efficiently operation.

We are now in this more stagnant market and shrinking market, we have a chance of improving our different ways of working, our workflows and so in a number of areas and, of course, we can do things simpler.

We can do things more clear and we can do things with a better organization.

We have the technology and we have the customers and we have the global presence.

We have done -- we are excellent in bringing out new technologies to the market.

We are excellent in doing this throughout the world and we have a global presence.

And, we have all this from a fantastic staff of skilled employees.

But we do have yet to establish an operational excellence and this is something that we will now spend a lot of time on and we have introduced a number of initiatives here and this is the other part why we are able to cutback another 7,000 and this, of course, is still increasing our -- lower our cost base, increasing our profitability and increasing our competitiveness.

So let's then talk more about the additional measures that we're doing here.

We are planning a cutback of further 5 billion of operational expenses and we're also reducing another 8 billion of cost of sale, all of this, of course, is what adds up to the 7,000 additional layoffs that we're doing.

We are not into the details yet.

We will do that now and we expect all the actions to be fully implemented by the third quarter in 2004.

This will add 11 billion of restructuring charges.

We should, however, remember that basically what we talk about is bringing down the cost basis 13 billion, so once we're through this process, we basically -- it’s self-financing and we expect through the additional work that we do on working capital and so on, that we're confident that we should need no further capital increase or any new issuance on.

So that brings us to this new perspective of a run rate of operational expenses by the third quarter in 2004 of 38 billion -- 33 billion and we also bringing down the employees to 47,000 and that's very much where we are and you could say that the strategy that we're working from here, is based on three steps forward.

The first thing is to make sure that we create a profitable organization with a clear strategic direction.

It's, of course, important for any company's success that all employees and managers share the vision and idea where we're heading but it's even more important when you're going through restructuring and laying off people that we understand why we're doing all this ,and we are sure that we are going to create now a strong profitable company.

We're then going into the second level of operational excellence where, we as any other industry in this growing market, we have so much we can do faster and more efficiently and quickly and that will lay the foundation for how we should be able to continue and strengthen our world leadership.

We are in a world leading position and we, as all our competitors are adjusting to this new market environment, and we just intend to get there faster and stronger than others and be able to strengthen our world leadership and bring -- drive the industry to the future.

So that is very much concluding my remarks here and before the Q&A sessions, I will leave over to Kalle Sundstrom who will update us on some more of the financial issues.

Thank you.

Thank you.

First of all, good afternoon Europe, good morning U.S. and good evening for those of you in Asia.

Carl-Henric covered most of the highlights of the first quarter of 2003.

I would like to, yet to mention here that when it comes to market we have a book-to-bill above 1 for Western Europe and Latin America and for products and services, we have a book-to-bill above 1 for the GSM/WCDMA track, as well as for Professional Services.

All the other points here were covered in Carl-Henric's presentation, so I will just take the lowest point and that is that we all expect to report profit in 2003, excluding new restructuring charges.

This assumes that Q1 being the low point in sales for this year.

We turn to the next slide please.

I only want to make a few comments on the Ericsson financial summary and that is that despite a nine billion -- reduction in sales, we have substantially increased the operating margin due to, as we mentioned before, increased gross margin and reduction of OPEX.

Sales are down 23% year-on-year excluding the negative currency effect.

Next slide please.

The contribution to gross margin improvement of 1.4% compared to last quarter of last year and over 2% compared to the first quarter of last year are mainly due to the fact of product redesigns of which fewer variance were coming out and we were able to reduce the procurement costs quite substantially.

It's also part of elimination excess capacity and get the stock utilizations in our high labor-intensive services business.

We are also addressing the other steps in the newly announced program as presented on the slide here.

Next slide please.

As pointed out, we did report a positive cash flow in the first quarter of this year and I would like to highlight a couple of things here.

First of all, income-to-cash is improved substantially compared to last quarter of last year and the first quarter of last year.

The other thing is that we have continuously reduced our working capital during this year.

I would also like to point out that included in the cash flow is additional equity put into the Sony Ericsson joint venture and I would like to ensure that the work on reducing working capital is a high priority focus within Ericsson at the moment.

Next slide please.

We have increased our cash position with 1.6 billion in the first quarter of 2003 and we have maintained—-we have an increased our payment readiness and we are in a situation where we actually are cash positive.

The 5.8 in brackets at the end of this slide, means that we more financial assets than financial liabilities.

Next slide please.

Carl-Henric mentioned when it came to sales by segments, that we are having now, a reduction of the TDMA and PDC mobile networks by 90% and we also would like to point that today that the WCMDA sales are bigger than fixed network sales in the first quarter of this year.

Secondly, I would like to point out that the GSM/WCDMA system track are down 12% on a year-on-year level.

Next slide please.

Sony Ericsson had a very tough first quarter and the TDMA was down -- TDMA mobile phones were down 90%, which overshadowed the good progress in GSM.

Next slide please.

This [short] here is part -- I would like to point out this short is part of the package that we're providing and this is the way where the different restructuring programs are reconciled but I would -- and the cash impact and I would like to, just to clarify that the timing of cash outlays on that side, the new programs which have a cash outlay for 8.6 billion is divided in-- 4 million in 2003 and 4 million on 2004 and that is the change when it comes to the timing of cash outlays compared to the previous period.

If we then turn to the very last slide, I would to comment on the key planning assumptions for 2003.

We are focusing on returning on profit during 2003 excluding new restructuring charges and as I said, in the beginning, assuming that the first quarter is the low point in sales during this year.

When it comes to sales development at least maintain the share of served markets and it's important to understand that the full year sales negatively affected by the U.S. currency impact, sales will be slightly up sequentially in quarter two compared to quarter one and we will have a payment readiness around 40 billion at the end of this year.

We having now, with the two programs, as shown in the previous slides, 15 billion of cash outlays for restructuring.

We have up to 11 billion Swedish Croner on long-term maturities to be repaid and we all continue reduction of customers, financing exposure, as well improving our working capital.

Sony Ericsson joint venture will start reporting profit later this year.

Thank you and now I hand over to Gary Pinkham.

Thank you Kalle and with that, operator, we're ready for questions now.

Thank you.

Ladies and gentlemen, at this time, we will begin the question-and-answer session.

If you would like to ask a question, please press the star, followed by the one on your push button phone.

If you would decline from the polling process, please press the star, followed by the two.

As always, please limit yourselves to one question at a time and please keep your questions at a board level as we do not have enough time to get into details.

Plenty of detailed information is provided in the report.

Ericsson's Investor Relations and Media Relations interns will be happy to discuss further details with you after the call.

Our first question comes from Sam May, with Piper Jaffray.

Please go ahead.

Hi good afternoon everyone.

My question is, will Ericsson -- can you discuss more -- in more detail how Ericsson can make significant changes in vertical integration of the business and how that can impact the bottom line going forward.

Thank you very much.

The vertical integration, I don't know if you'd talk about outsourcing or in sourcing or what do you actually mean there?

Sir, he removed himself from the queue.

Would you like to take the next question?

But let's address Sam's questions here.

I don't know if Sam, actually, when he talks about vertical integration, if we talk about-- if he means outsourcing or in sourcing as the one.

We are -- what we're doing here in this cost efficiency program, is just adjusting to falling sales volumes and we're also looking through the way in which we work, how we can simplify and so on and that deals a lot, also, with the whole supply chain or from our suppliers or from our own factories when we do our own productions all the way out to install and these are the workflows that we talk so much about improving and especially we're looking at the main [closer] for example, radio base stations, which is much of a volume flow even if these are products that could cost $20,000 to $30,000 U.S. dollars a piece, they are still products that goes out in hundreds of thousands, so this is a workflow that should be organized as a volume workflow and we have that potential to do better there.

Operator, next question, please.

Thank you.

Our next question comes from Per Lindberg with Dresdner Bank .

Please go ahead.

Hey, yes, good morning, good afternoon everyone.

Carl-Henric Svanberg, you come from [inaudible] and you have enjoyed company's margins there, thanks also to your own executive skills, when you see a company of Ericsson's caliber with its install base, with the immense prospect of [inaudible] as you also -- like when you pointed out, the market leading position that should yield the market leading profitability, what do you think would be a realistic target in the longer run provided, of course, that the investment attitudes of operators eventually, finally, become balanced?

Thank you.

It's a very interesting question that occupies my mind quite a lot and I will be glad, in the future, to share that with you, but it is quite clear that with the strong market position we have, and the large market share, we should be able to have a cost advantage in basically everything we do and I don't think we have that today, so we have quite some potential to improve here but I think the clear determination of us as a management team, now, is to make sure we get good profitability and create a strong company and can drive afford.

Once we're there, we can come back and talk about the longer-term targets.

Thank you.

Next question, please, operator.

Thank you.

Our next question comes from Dale Pfau with CIBC World Markets.

Please go ahead.

Yes, good morning gentlemen.

We noticed some flattening order trends year-over-year in Western Europe in your report.

Can you give us an outlook here on how you see the rest of the year in order trend in your GSM track in Western Europe and then if the weakness that you're counting on is going to come primarily from the U.S. and China, do your indications give you any look into 2004 for those areas?

Thank you.

Well, I can comment a little bit on the market situation, what it looks like right now and I will also ask Per-Arne to add on a bit here.

The overall situation that we're seeing is that we can see a bit of a flattening trend in Europe, a stop of the decline in Europe and we haven't drawn any conclusions on where it's heading from there but at least, it's flattening out.

In Latin America, we have some possible development with a couple of orders in Brazil.

Maybe it's a bit early to do any big conclusions of that but Latin America's contributed for us in this period.

We have Asia is the area where, as you say, China is down quite a lot and actually to levels where we don't think it can last with the high number of subscribers that is being added every day and we will actual have a -- we would have expected that market to start to recover a bit but I think in the present situation with the SARS disease there and epidemics, we have a hesitant again, on operators depending on or sort of-- waiting to see the development in that market.

U.S. is holding up fairly well this year for us but with the large installations and rollouts that we're going through there, we would rather, as you say, would start to see maybe more decline there next year.

We'll see what -- see if Per-Arne has more to add here.

Yes, I can just compliment by saying that we've seen this in the past, in China that they have built -- a lot of capacity and then they all of a sudden come to a standstill over almost a year or so and then they come back again and invest in their network, so I think that it's perhaps we're seeing trends but we're seeing also that this is not uncommon to happen in China.

Next question, please, operator.

Our next question comes from Jeffrey Schlessinger with UBS Warburg.

Ericsson gave very good details in the restructuring effort from last year, with respect to headcount and from the other areas of savings, non-headcount related, can you at least give us a sense of how this will breakout for the additional restructuring efforts that were announced today that produced a 13 billion in savings, 8 billion on the cost of sales side, 5 billion on the OPEX side, it looks like there's probably, at least, 5 billion of that from the headcount savings of 7,000, what are the other areas we should be looking at for the additional savings of 8 billion Swedish Croner .

Thank you.

I'll let Per-Arne, who is our -- is responsible for this efficiency program to give you some of more details.

Hi Jeffrey.

The other part that you should be looking for and we are including in this so-called is what we're doing with ISIT, the outsourcing part of ISIT will bring our cost down in that area and that's a very significant part, both in the Oppart and in the cost of sales part since the cost of sales is also relying on ISIT you know but that's the most important part, I would say, in addition to headcount reduction.

Per-Arne, I follow up, I think the ISIT savings from the restructuring program last year was roughly, I think, 6 billion, so that has been expanded fairly significantly as the result of this new restructuring effort announced today?

Correct, yes.

I mean we are showing the trends as we have pointed out in this presentation are very encouraging and we are showing at this point in time, the level of 47 on the OPEX rather than the forecasted 48, we’re moving strongly towards the 38 within the existing programs and then with the experience we have now in doing these things, unfortunately to the company, we can then further improve as Carl-Henric mentioned here on the efficiency improvements, the processing improvements in the company and again, it's not possible to come to after all these tremendous cuts from 88 down to 38 to a very efficient company.

We see further -- as we have done these cuts, we see further -- possibly for improvements and that's what we're putting forward here – but in the cost of sales area and the OPEX area.

Thank you very much.

Next question, please.

Thank you.

Our next question comes from Wojteck Uzdelewicz of Bear Stearns.

Please go ahead.

Thank you.

More of a question on -- a big picture question, sort of, for your longer-term strategic position, when I look at the space right now, the hope was that we will see some consolidation.

If anything, we probably have more companies right now in the wireless infrastructure that at the top of the bubble, as we looked at Alcatel is getting more aggressive, Motorola looked like they might exit the market but now they are back and, if anything, they're adding capacity by buying Winforia and then the Chinese vendors, so when you look at restructuring, part of it is that you're internally streamlining your operations but then, also, going out and competing with other companies in a marketplace, are you looking, given what we're hearing about this very aggressive pricing environment, renegotiation prices, are you looking to walking away from deals, losing market share, in certain areas for example, in CDMA, whatever, in order to improve profitability?

How do you make that trade-off kind of, in this environment where we have so many competitors in order to improve the profitability to not only internally but how do you compete externally?

Well I think we will add something to that picture, both our own and may -- let me -- and let me just first say that this is an industry where we not only bring new technologies to the market all the time but we are redesigning our products step by step, a cheaper and a simpler product designs and cheaper [inaudible] so there is a natural drop in prices in here and I don't think one should exaggerate.

There is, of course, to some extent an increase price pressure because this is a mature market and we're fighting more for the orders but I wouldn't say that the situation is dramatically different but I'm sure Per-Arne can add to this.

Yes, I can just add to that that we've been watching this -- the experience over a decade in GSM when it was brought to the market and also of course bringing the WCDMA into the market, as well as the CDMA but we don't see any unusual behaviors of the market, in terms of price pressure.

We, as the market leader, have encouraged this all the time and we've dealt with it and we've dealt with it the way we're chasing out cost and cost of sales and so this is not an unusual pattern.

so you wouldn't walk away from -- I mean if there was some -- we've heard about their aggressive pricing type of situations where would you be give up some market share if there's some irrational pricing for the profitability sake or would you be more focused right at this point on maintaining market share if it was [sort of] to a trade-off?

I say yes that we are defending our market shares wherever we can and will and we look at the different market behaviors and, of course, we will judge whether it’s feasible and viable to stay in the market if there are any kind give away offers but again, this happens all the time.

It's not unusual.

OK.

Thank you.

Thank you Wojteck and now for the first next question, please.

Thank you.

Our next question comes from James Crawlshaw (ph) with Smith Barney.

Please go ahead.

Sorry.

You talked about restructuring some of the existing businesses, are there any plans to divest, if any, the sub-scale and non-core businesses like defense, enterprise or some of the – [inaudible]operations or are you simply downsizing all of your businesses?

Well let me just say on defense there that because that maybe the major business here that are at times discussed and coming from other industries I must say that Ericsson is such a focused company and, of course, you could point at defense saying that that is less non-core.

In most companies it could be considered close to core but it's the furthest away we have but still there are big ties between both radio and with the rest of the company, so -- but certainly we could live well without the defense business as well, so there is a strong competitive price being proposed to us we would, of course, think about it, but it also fits well in and we need a good price to sell it.

The answer then is that you are not thinking of exiting or exiting a portfolio of businesses more focused, you're continuing with the same business mix, but just cutting across all of the different business units equally?

We are evaluating -- we're are evaluating our options in the areas as you point out and for the right price we would divest but we're not giving it away because it's sound businesses with good profit.

OK, thanks very much.

We have the next question please, operator.

Thank you.

Our next question comes from Mats Nystrom with Enskilda.

Please go ahead.

Yes, good afternoon.

Going to be the gross margin, you have, I believe, the target of 2 to 4% up and I believe that is in relation to Q102, correct me if I'm wrong.

Now you have again stated that target but on the other hand you are also cutting further 8 billion on cost of goods sold within your program, so my question is I guess, why are you not increasing your gross margin target here, although bearing in mind the four X effects here and then secondly, what kind of guidelines could you, perhaps, provide in -- for us, in order to determine the potential gross margin gains for the rest of the year?

Thank you.

This Karl-Henrik Sundstrom speaking.

I would like to point out that the reference point for the 2 to 4% increase in gross margin was second quarter last year.

Secondly, regarding your question, why we are not increasing the target, there for gross margin, we do have a challenge with the currency effect and remember that slightly half of Ericsson sales are in U.S. dollar or U.S. dollar dominated currency.

Sure, so 2 to 4% if and will remain the target even including the new program that is the answer.

And remember also that 2 to 4% is the guidance for this year whereas the cost of sales program basically starts this year and we'll hardly have much effect during this year not proposing any new guidance until next year on this number but keep in mind that the time schedules don't match here.

OK, thank you very much.

Thank you Mats and operator, could we have the question please.

Thank you.

Our next question comes from Mike Walkley with RBC Capital Markets.

Please go ahead.

Great.

Thank you.

Just a follow up question on your restructuring costs.

Can you give us an estimate of your total restructuring costs that you expect to incur in 2003 and 2004?

Mike, everything is in the chart that is part of this package.

OK, thank you.

Question pleas operator.

Thank you.

Our next question comes from Matt Hoffman with Soundview Technology Group.

Please go ahead.

Well, Carl-Henric, I'd like to build on an earlier line of questioning here.

As a telecom outsider until this year, I wonder if you'd share your perspective on the necessity of industry consolidation and whether you think we can again see double-digit growth -- organic growth for Ericsson without the consolidation?

Thanks.

Well, I won't comment today about when we can see double- digit growth, if and when we can do that but I can say having come from an industry where we have consolidated a lot, this is a very consolidated industry and I can hear many comments that there could be a potential for consolidation of a handful suppliers of telecom equipment and also on the operator side.

It doesn't, for an outsider, look as that's the most apparent need in this industry and we all have our different technologies and portfolios and things and I know by pure experience that it's a lot of energy that is needed to go through a big merge where you have lots of different ways of working in technology, so it doesn't look very tempting to me although I don't think one should rule out in this industry that there aren't great fits somewhere but it doesn't seem like a main point on the agenda for anyone right now.

OK, thanks.

Might an offer the next question?

Thank you.

Our next question comes from Alec Shutze with Goldman Sachs.

Please go ahead.

Thanks.

I was wondering if you could walk us through some of the potential roadblocks or risk involved with the second round of the restructuring program.

You've talked about the 5 billion crown OPEX reduction program.

We've talked about the 8 billion crown cost of goods sold, attempt to reduce, what do you think would be the possible risk?

Is it that in trying to cut heads or sorry, trying to reduce employees in Sweden?

Is it a matter of outsourcing?

Is it a matter of competition?

Just some, if you could highlight some of those.

Thank you.

Well, again, I'll hand over in a second here to Pet-Arne whose been through this whole program but I think we're -- the company as such, we put more in our [close] than doing this restructuring, we've come down from 107,000 to 54,000 and then we're adding another 7.

I don't think there are any major risks involved here.

It's tough work and a lot of things that needs to be done, but we are also convinced that we can go through these further adjustments without losing any of our core competence or other output of our important product in R&D and so we're not leaving any important product area behind.

I think we just adjust to somewhat falling volume and work smarter and simpler, but I'll let Per-Arne, of course, put a comment in.

I can just agree with what you're saying that after all we've gone through and the experience we have gained, painfully gained, over the past two years, I don't see any major obstacles.

By now, coming back to the part of the question regarding the relationship between Ericsson and the Swedish unions and so I think we are addressing these kind of issues and challenges facing all of us in a very professional way and that's also acknowledged by the unions, so we have an excellent working relationship when it comes to dealing with these kind of challenging issues.

Of course, it's a big -- yet another big program and its taking us into Q3 2004 and that's a long -- over a long time but again that -- well the way we have done it and the way we have followed it up in the previous experience over the past two years, I'm extremely encouraged to deal with yet another big challenge for Ericsson and I think the risks are dealt with on a case by case basis and I don't see any major things showing up.

Thanks.

Next question please operator.

Thank you.

Our next question comes from John Bucher with Gerard Klauer Mattison.

Please go ahead.

Wondering if you have a forecast for the percentage of WCDMA of your systems revenue, say, a year from now or any sort of forecast that you have looking forward.

This is Karl-Henrik Sundstrom speaking.

We believe that WCDMA sales as part of Mobile Network sales would remain at around 12% for the year.

Then do you have a forecast for next year?

We believe it will be about a third.

Thank you very much.

2005.

One-third in 2005.

Next question, please, operator.

Thank you.

Our next question comes from Thomas Langer with WestLB.

Please go ahead.

Thank you.

Maybe we can come back to some financial items.

First, can you indicate what you expect as a cash tax rate in the year 2004 and 2005, given that you have a huge amount of deferred tax assets on the balance sheet?

In addition, could you give us your view on your fixed costs you currently incur?

Do you expect the fixed costs to be at year-end and at the end of Q2 2004 and then maybe, lastly, can you tell us a bit more about what's going on in other operations?

The adjusted operating margin is below minus 20%, what is the real problem in that area or is it all across the board or is there one specific division in there?

This is Karl-Henrik Sundstrom speaking.

Regarding the first question, I -- we think it's around 30% and then in regards to the other questions, could you please call us later because it was quite a lot of detailed questions, please.

Yes, OK, but coming back to my question about the tax rate.

This is really about what will be the anticipated cash outflow or will you be able to utilize your deferred tax assets in the year 2004 and 2005?

Very limited.

Very limited.

Thank you.

Thank you Thomas.

Next question, please.

Thank you.

Our next question comes from Kulbinder Garsha with CFSB.

Please go ahead.

Mr. Garsha, are you there?

The next question, please.

Our next question comes from Angela Dean with Morgan Stanley.

Please go ahead.

Thank you.

You took the first points today about a maturing industry, it was [inaudible] maybe a shrinking industry, is that preparing us for potentially another year of decline in 2004 and is that potentially a reason why you're not prepared to give more guidance on your gross margins in 2004, well third quarter, when you've achieved the sort of 8 billion reduction in cost of sales because that would suggest that you should go significantly higher, further all things being equal, then the 2 to 4% sequential improvement, you’re aiming for the moment.

Right.

We are not at this point in time giving guidance for 2004 anyway but it's -- it is -- what we're saying, is that we are seeing increased uncertainty in the market and we can all discuss when the operators are cleaning out the balance sheets and when they start to invest somewhat more because we know that they're investing too little to maintain their quality levels right now.

But what we have said, right now, is that we must be able to live on the volumes that we're seeing in the first quarter.

For example, we are determined to get us to a profitable level even if we should do four times.

The first quarter here this year or next year and we haven't given an indications where the market is going in 2004.

OK, thank you.

Thank you Angela and then operator, one last question please.

Thank you.

Our final question comes from Richard Kramer with Arete (ph.).

Please go ahead.

thank you very much.

Couple quick questions, first of all, can you confirm whether you intend to stay in the CDMA infrastructure business?

The previous management had suggested if a certain level of sales was not achieved the business would be sub-scale and Ericsson might exit.

Second, just to understand the cost reduction in the cost of goods sold, can you suggest what the split between fixed and variable costs in that business might be just to give us a better idea of how much can be cut and then finally, on R&D, can you suggest right now how many staff Ericsson has in R&D and how much the headcount reductions would affect that R&D staff versus the other staff across the rest of the business?

Thank you.

Let me start with the first question on CDMA.

We are, as you know, world leaders in WCDMA and we are a runner-up, if you say that, in the CMDA business and we have a 5% world market share there.

As Kurt Hellsman have been quoted several times, we need to get up to, say, 15% world market share to make it profitable and a prosperous business, in that field of course, we follow that very closely.

It is, of course, our -- we're convinced that that we can do that otherwise we wouldn't be in the business but there is a volume we need to get to.

The other questions we're not prepared to give any further guidance on.

Just maybe then one last question, in the current quarter were there any provisions written back into the P&L?

I think there was a comment in the Annual Report about the potential for some half a billion crowns to be written back in the first quarter.

Did that take place and if so, where might we have seen those?

Yes, we took some against costs.

And how much -- at what level?

We will not disclose that.

OK, thank you.

Thank you Richard and operator that's the last call for today -- last question, I'm sorry.

Thank you.

This concludes the Ericsson's conference call.

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