Telefonaktiebolaget LM Ericsson (ERIC) 2003 Q3 法說會逐字稿

Good afternoon ladies and gentlemen.

Welcome to the Ericsson Analyst and Media Conference Call for the Q32 Report of 2003.

To view visual aids to this call, please log on to www.ericsson.com/pressorinvestors.

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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.

Hello everyone and welcome to our conference 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.

As you know, we will be making some forwarding-looking statements during the call today, and 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 reports as well as our annual report.

With that out of the way, I would like to hand over to our CEO for comments about our performance and plans going forward.

Hello everybody.

I will talk you through the slides and look forward to your further questions.

We have reported in the quarter before restructuring charges, SEK1bn in earnings and that is, of course, a milestone in the company's development after the dramatic downturn that we have seen.

And that means that we have actually cut spending of SEK50bn over the last two years, so SEK0.5bn per week in 100 weeks.

It is, of course, a very, very important moment.

We have still a way to go before we are where we want to be in profitability but it is, of course, an important milestone.

If we go to the first slide there where we talk about our rate of success, this starts with off our profits and get a stable ground.

And agree on our direction, and then turn into operational excellence where can still improve our position.

And by that create a platform for leveraging our world leadership in technology and marketing.

If we look at our direction now, our direction is clear.

We have a strong focus on cost and it is a focus that will stay.

That is there to stay.

We need operational excellence in every aspect of our business to make sure that we are always doing everything on time, being there for the customers, whenever they need us we are there.

And that goes for launching our new technologies, launching our installation projects or service calls, or what have you.

And that is the important ingredients for leveraging our market and technology leadership.

We are seeing good progress in our restructuring, on the next slide there.

Our operation expenses run rate is now, hitting SEK38bn.

This is the target we set at the beginning of the year for the full year.

So we are one quarter ahead and we will continue to see it come down.

This is a reduction of SEK4bn only since the last quarter and, as I said initially, this means we have now cutback SEK50bn over the last two years.

What is important in a downsizing of this magnitude is, of course, to make sure that we secure confidence for the future and we feel confident that we have done it.

We have been doing downsizing in every corner of the company but there is no particular part that is more affected than any other.

And it is encouraging to see that half our staff is below 36 years, that is where we want to be.

And it is important mix that, with further downsizing, have not lost the young guys and we think we have a good balance there.

We have a third of our employees in R&D.

We are still close to 20,000 people in R&D.

And it is very, very powerful force which makes us comfortable that we will continue to lead our industry in this respect.

When you look at the two following charts and then look at the OPEX run rate, you can see that we are at SEK38bn.

And that we are focused on getting to our SEK33bn in Q3 next year.

We are assuming that by the end of the year we will have established everything as planned that will eventually take us to those SEK33bn, which means that all the restructuring charges up to the total SEK16.3bn for the year will be taken in Q4.

And thereafter it is only execution.

If you look at the number of employees, we are now down to 53,400 and I think it is well known that we are aiming for 47,000.

The next slide talks about leadership in a changing industry and we brought it up last year.

But from the 90s, when there was a lot of focus on lower amounts of geographical coverage and mobility, we have now, from the operators' point of view, there life is changing.

And it is much, much more focused on the end user and the end user needs.

And we must understand the operators are all here and understand the operators' needs.

And there are many with new technologies, 3G and so on.

New services being launched and new services, therefore, also requiring new business models.

And one of our key aspects in everything we do is to make sure that we deliver quality long-term solutions.

There is also a more and more distinction now between matured and emerging markets.

Emerging markets where we are going for the next billion and looking forward in the future to see two billion subscribers.

There is more covering in new geographical areas and we roll-out traditional voice applications.

And we have strong growth in areas like China.

India has doubled this last year from six to 12 million subscribers.

This year it is heading for 25 million subscribers and next year heading for 50 million, and then the year after another doubling.

So there is strong growth in areas like that and that includes also Central and Eastern Europe, Middle East, Africa and so on.

But then we also have the mature markets in Western Europe, in parts of Asia, Japan, Australia and America, where the penetration has come much further and where the role of the new technologies and new services are important growth drivers.

And in all of this comes back to really understanding the consumer needs.

It is very much about what we call reachability.

In fact, one of the strengths in mobile telephony is the fact that we reach one another through individual phones.

So we have the phone books in our phones.

And maybe 80% of the time we are sitting and calling on mobile phones, being in offices and in homes and so on, where there are also fixed lines.

So it has [not] been with the ease of use and we will see going forward also much more of mobile telephony and fixed telephony coming together and converge.

We are also strongly focusing on operational excellence which you know by now.

But not simply for the fact that we think we can be more efficient and improve our bottom line but as a competitive tool.

To be faster, to be quicker, to be reliable, to be always be there for the customer.

And it all starts with the customer.

If we turn to the next page, we are talking about strong growth in 3G.

And we see strong growth now in subscriptions, of course, coming from low numbers because it is new technology.

But last time we met, we talked about one million subscribers in wideband CDMA and now we have 1.7 million, so it is actually 70% up in subscribers in only one quarter.

CDMA is showing good growth in both, for example, China and India, an emerging market.

Also, last time we talked about operators starting to look at one another and seeing when others are planning for launches of new technologies and so on.

And now we are seeing much more confirmed Wideband CDMA launch dates throughout Europe and it is truly happening.

We are also seeing the roll-out as such of Wideband CDMA following very much the roll-out of GSM some 10/12 years ago.

And it is, of course, an advanced technology and it requires available handsets, and education of the operator and of the consumer, and so on.

But it follows very much the GSM launch curve.

We are the world leader in 3G.

We have a market share in Wideband CDMA of 40%.

And we are also noticing strong growth in emerging markets with CDMA.

And CDMA, as you know, we estimate we have a 5% world market share but we have a 10% share of the awarded contracts of this year so far.

So 3G is important and, to put it simply, it is really broadband mobility.

It is broadband wireless and it will open up an awful lot of new opportunities.

If we then turn the page and look at business highlights.

After having seen the market decline by 65% over the last years, it is of course incredibly encouraging to see that the market is now taking the first steps to stabilizing.

And we have, as a company, three quarters of consecutive growth, increasing sales, and we have a posted book to bill throughout the year.

We are also a leader in service applications and this is important because this is an area where a lot of the operators are targeting quite good growth over the years to come.

It is a young area and we have, through our 50% world market share in MMS, a leading position there.

For example, we have about 100 million users in our pre-paid systems among operators.

And those two applications, I think, are the most significant ones so far in service applications.

Professional services continue to show good growth.

We are up 12% year-over-year if we adjust for currencies.

So I think we are very much holding our market share as well.

If we look somewhat more concretely at the next slide, more concretely we can see have received three new Wideband CDMA contracts since we last spoke.

We have three new EDGE contracts.

We have also received three new CDMA2000 contracts.

And on top of that, we see continued good demand for GSM/GPRS.

So overall we believe that we have strengthened our position in the leading technologies.

If we go more concretely into the highlights, we see sales of SEK28bn which is SEK 0.4bn up from the second quarter, 2% sequential growth.

We did say in Q2 that we expected sales to be level with Q2 or slightly down.

So, what we see here is a little bit better than we then guided for and so on.

I think it is a good sign of the stabilization of the market.

Book to bill is still about SEK1bn for the third consecutive quarter, of course, encouraging.

And we have a gross margin that is up 0.8% percentage points from the 35.1% where we were last time.

And we still have a way to go to the 36.5% which is the upper part of the range of 34.5-36.5%, which we indicated as a potential target for this year.

And we will continue to see margins come up in the fourth quarter but we still believe that they will stay within that frame.

If we look at the next slide, we talk about adjusted income after finances, that is before restructuring.

And there we have a result of SEK1bn which, as I mentioned in the introduction, is extremely encouraging after all the hard work.

Of course, negative after restructuring operations but it is certainly encouraging to see positive numbers now coming out of the operations.

Cash flow continues to be stronger than expectations, both internally and externally, I would think.

SEK9.1bn is certainly a very healthy number for the quarter which includes some SEK5bn coming out of the sale of the France Telecom bond.

This leads us to a strong financial position.

For a company that is now starting to get to black numbers and have no debt, of net assets, some hundreds, millions or billions of net assets, net booked financial assets and liabilities, we are in a very healthy, financial position.

If we also comment on the next slide a little bit about Sony Ericsson.

That was another piece of positive news that I am sure you all know all the details.

But the fact that they report now a very clear profit of €39m in the quarter is very encouraging.

And also a milestone for them since the joint venture was launched.

And the 16% sequential sales growth there is also encouraging, considering that they are also laying off certain older standards and the American CDMA standards.

Behind that is a continuously strong and product program where GSM unit shipments are up 73% year-on-year, and the Japanese shipments are actually up as strong as 130% year-on-year.

So overall, we feel that Sony Ericsson is gradually improving their position, and they are certainly in much better shape now than some time ago.

If we then go to the next slide and talk about the market outlook.

The first bullet point on the market outlook which is called mobile systems, market [could have] declined by than more 10% for 2003 in US dollars [and of] growth.

That is the outlook that we have had for the year and it is unchanged.

This is how we see it.

But it is clear that the market is now stabilizing.

And we have, therefore, said that we expect the mobile systems market for 2004 to be in line with 2003.

In addition to that, we also we look forward to continued good growth in the professional services market.

This leads us to the last slide before the Q&A and the financial comments.

The summary slide, where we conclude that we have reached profitability or at least we have reached profit which is a milestone for the company, an important moment.

The market is stabilizing.

The dramatic decline, over 65% over a couple of years, is definitely over.

And we feel that we are very well positioned now to capture new opportunities and we are ready for a industry in change.

So with that short introduction, I will hand over to Karl-Henrik Sundstrom here for more financial comments before the Q&A session.

Good morning, good afternoon.

This is Karl-Henrik Sundstrom, the CFO of Ericsson speaking.

If we move in to the first slide, I would like to highlight a couple of things, even though Carl-Henric has mentioned most of the significant things.

I would like to say that, regarding the financial summary, I would like to point out a couple of things.

We have had a book to bill, both accumulated for the three quarters of this year, as well as for every single quarter during this year.

We have also had sequential sales increase and we have had a quite dramatic increase in adjusted gross margin from 32.6% in the quarter a year ago to today's 35.9%.

We have also seen a situation where we have now turned in to a positive adjusted income after financial items, which is an important milestone in our journey.

Can we please move over to the second slide please.

System book to bill has had three consecutive quarters above SEK1bn which I think is a very important sign of the market stabilization that we have seen.

And for most areas we have seen book to bill about SEK1bn for the last two quarters.

It has been a positive shift in Western Europe compared to last quarter and Latin America still remains below SEK1bn but, however, with a healthy sequential change in sales.

Then we move over to the next slide.

Still like to highlight on the system.

It is an improved performance.

If you compare the orders in the third quarter of last year to the order booking of the third quarter this year, if you adjust for cancellations as well for currencies, you will have a 12% increase in order booking.

This is the first time in a long period where we have had double digit growth in orders booked.

I would also like to point out that this is the second consecutive quarter where we have reached an adjusted operating income.

Next slide please.

Operating efficiency trends.

This is a highly focused area within Ericsson and we have continuously improved the DSO, [and to other] inventory turnovers with inventory days.

And this a very focused area within Ericsson and this is a step towards operational excellence.

I will then move over to the cash flow.

As previously mentioned, we have had four consecutive quarters of positive cash flow.

And what I would like to do is to turn over to the next slide to do a simple cash flow analysis for the third quarter.

If we take down underlying cash flow of SEK9.1bn and then add back the restructuring, and then take off the one-time effects of customer financing and some cash collateral that we managed to remove.

The underlying cash flow from operations is a healthy SEK5.8bn.

And if we then move over to the strong liquidity situation.

We have had an increase in liquidity, as was previously mentioned.

We have improved cash, we have improved net cash, we have improved payment readiness, and we have gone to this negative net debt which is net of financial assets of SEK20.5bn.

So, as was previously mentioned by Carl-Henric, we are already in a very strong liquidity situation at the moment.

If we then move over to customer financing.

I would like to point out that the gross customer financing exposure remains at SEK11.8bn and we have increased the provisions now to about 50% from last quarter.

It is also important to note that the Latin American exposure has gone down by three percentage points as well as an increase in the [inaudible] region.

If we then move over to customer financing commitments.

We have seen a reduction of commitment by around 40% in the third quarter.

This is mainly explained by renegotiation of commitment as well as a number of expiring commitments.

And I would like to point out that new credits are only given on a selected basis.

Next slide please.

We can now move in to the key planning assumptions for the remainder of 2003.

We say that sales is expected to be up significantly sequentially.

And I think it is appropriate here to say that, historically we have had enormous, or a very strong growth in the fourth quarter.

However, last year we had a modest growth and I would say [significant means here] somewhere between the historical growth rate and the growth rate we had last year.

Gross margin remains at 34.5-36.5% despite the weaker US dollar.

Full year cash outlay for restructuring is likely to be less than previous year announced SEK15bn.

We had SEK2.2bn of long-term maturities to be repaid in quarter four.

Continued focus on working capital efficiencies and the payment readiness will be approximately around SEK70bn at the year end.

That is all from me.

Thank you very much.

With that operator, we're ready start our questions and answers.

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 key *1 on your pushbutton telephone.

If you would like to decline from the polling process please press *2.

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

Detailed information is provided in the report and the Ericsson's Investor Relations and Media Relations team will be happy to either take additional questions or discuss details with you after the call.

And your first question comes from the line of Mr. Kulbinder Garcha from CSFB.

Thank you.

Just a quick question on the comments you made in 2004.

It seems that, as you recognize, operators are bringing forward or becoming slightly more aggressive on Wideband CDMA roll-outs.

You feel more comfortable with the environment and the professional services that [this] is going to pick up.

So why are you only implying flat guidance?

Is that concerns you have over pricing or just a conservatism with your guidance?

Thanks.

If we start off there.

The Wideband CDMA is right now about 12% of total sales.

It is within that area that we will start to see some pick up.

And, of course, that offsets other [inaudible] GSM.

So I think it is a pretty balanced situation.

We should remember that we are seeing a stop to the very, very dramatic drop in investments, and that is very positive news in itself.

The fact now that operators are starting to see their financials being back in better shape.

And the fact that they are, more or less, all in black numbers over Europe gives some encouragement going forward.

But I guess you are still not prepared to say that next year would be an up year?

We are not saying that at this point in time.

Okay, then.

Just one follow-up.

In the context of a flat market and the services business growing, could we be looking at Ericsson making a high, single digit operating margin next year?

Could you repeat the question please?

In the context of a flat equipment market and the services business continuing to grow, and the restructuring continuing.

Would you expect that Ericsson can see a high, single digit operating margin in 2004?

We are not making any predictions on our operating margins at this point in time.

We feel it is now important for us now to focus on getting the restructuring done and capturing the opportunities that are out there.

And I think that about this time next year, I think we will be more precise on where we would see targets for the longer run.

Okay, thank you.

Thank you.

And your next question is from Wojtec Uzdelewicz from Bear Stearns.

Thank you.

The question would be, just one for clarification may be.

Can you give us any sense in Q3 what the gross margins would have been if were it just for hedging or currency?

If there has been any impact?

But more of a strategic question I had was on your wireline business.

There was a lot of initiatives in the past, such as with ATM.

That business has been coming down a little bit in the last few quarters and bookings were fairly soft.

What is your strategic in this?

What are your plans in this business for the wireline fixed part of the networks?

Well, I can start with the latter part.

This Carl-Henric.

I will leave the other question to Carl-Henric again -- but the other one.

On the wireline side, I think we are historically in a very, very strong position.

We have a larger installed base than anyone else.

But for a long period of time, mobility has really been taking a lot of our [inaudible] business [alone].

But certainly we think that wireline and wireless, in many ways, are converging.

And for an operator who is sitting there with networks, with wireless access and wireline access, it all plays down to a communication network.

And we think we have a lot of opportunities there.

So this is an area where we are strengthening our focus but it is clear it's not a strong area as of now.

But we think there are a lot of growth opportunities.

And now Karl-Henric can comment on the gross margin.

Regarding the hedging question.

I would like to refer the report that when out.

So we have a SEK1.5bn loss if you compare to the currency rate that we had a year ago.

If we had not had any hedging that means we will have a loss of SEK2.2bn.

So the gross is SEK2.2bn, less SEK0.7bn, and that brings us to minus SEK1.5bn, of which the great part will be in the gross margin and, to a lesser extent, in the operating margin.

Thank you.

Thank you.

And your next question comes from the line of Mr. Tim Luke of Lehman Brothers.

Thank you.

I was wondering if you could just give any clarification.

First, when you say significant sequential revenue increase for the fourth quarter.

Should we take that be to be in the 20-25% or how would you like to frame that?

With respect to the gross margin, I was wondering to what extent you expect that to progress in the fourth quarter?

Is it fair to say that should see further sequential improvement as the revenue moves higher?

Thank you.

I think that your guess, 20-25% up in the fourth quarter, is probably in the neighborhood.

We are giving any closer guidance on that but it is probably in the neighborhood.

When it comes to the gross margin for the fourth quarter, we are right now at the 35.9%.

At the end of the indicated range for the full year was up to 36.5% and we think that that range is good enough as a target.

Henric, do you have any comments on the competitive landscape or on pricing currently?

Are there any material changes there?

I do not think there are any particular changes.

I think that this is an industry where we continuously develop new generation products.

Products that are simpler to produce, and so on, than before and take advantage of new technologies.

So there is always a price drop like it is in most other industries of this kind.

But we don't see that that is changing at all.

And we also have a situation where I think our economies of scale will start to play quite an important role, because we are twice the size of other competitors in our segment.

Thank you very much.

Thank you.

And your next question comes from the line of Matt Hoffman from Soundview.

Good afternoon.

Looks like the Americas, and Latin America specifically, were some of your better regions in the third quarter.

Can we ask you, please, to talk about the technology sales in those regions, i.e., was the sales strength coming more from CDMA or from the TDMA to GSM technology migration that many of the operators in this region are doing?

And, secondly, are you seeing any momentum in terms of operator CAPEX budget [growth] in any geography, especially in light of some of the recent cuts we have seen by operators in Europe like Orange?

Thanks.

Well, if we look at it geographically.

First of all, we are seeing a stabilizing in Europe.

We are seeing growth in Central, Eastern Europe, Middle East and Africa.

We are seeing growth in Asia starting and specifically in China.

Also, Latin America is a bit up whereas we still expect America probably to come down a bit.

The fact that America, North America, is coming down a bit has nothing to do with the industry.

That is a healthy industry.

It is only that there has been some period now of strong roll-out in investments in the US.

So it could very well come down a bit but at the same time, it really has not.

Every quarter turns out reasonably well.

So that it where you have a little bit of expectation.

If you look particularly at [inaudible] in North American, we are no in CDMA there.

We do not have a position there.

We have our CDMA positions based in emerging markets, including Latin America and India and China.

So it is basically GSM Broadband and GSM growth that we see in the US.

Thank you.

Thank you.

And your next question comes from the line of Mr. Per Lindberg of DrKW.

Yes, good morning, good afternoon everyone.

I would like to stretch myself into 2004 and 2005 if I could.

You did mention here, along with your competitors, that you see the market stabilizing, recovering, etc.

We have for long argued also, and I think you have shared the sentiments, that operators have been spending irrationally little.

We also see all on both sides of the Atlantic that operators grew their top line by some 10%.

And that must mean globally some 15%.

That means that even if operators spend as little in terms of their top line next year, this year, the base reference for you must be something like 15%.

On top of which you should add your service revenues which you continue to grow because of professional activities.

Could you elaborate on that and why you see your growth coming back first 2005?

And why?

Because, otherwise, it would imply the fact that operators will continue to spend even less in terms of their top line next year than this year.

Even though realistically no big operators can complain about either their lack of cash flow generation, let alone the balance sheet health.

Well, if you look at your whole argument about how traffic and subscriber growth looks, that is there.

I mean that is fundamental in this industry.

And as you are indicating that there are spending irrationally little right now.

We must remember that they spent irrationally much in the euphoria days.

And that is also what we are recovering from.

So when the bubble burst here and everybody became more realistic.

Not only did they realize that they had maybe bought at times too much equipment but they have also trimmed the networks much better.

And with [majors] running better, they could capture more traffic.

So I think this is the whole correction.

But it is also clear that we are getting closer and closer to running capacity filled up.

And I am sure I am not the only mobile user that at times has seen drop calls.

And this is, of course, a problem for the industry.

So, of course, there are capacity needs to be filled up and we should see gradually increasing spending.

And on top of that we should, at the same time, remember that when we roll out 3G, we roll out a technology with much more capacity, that can swallow much more traffic.

But, again, if you look at when you installed Broadband at home and so on, and you think you have installed something very, very powerful.

And very soon you see it is not enough again because it is slow to download big files.

I think it all plays together.

There are more ups and downs in this.

And so far we say there are good long-term opportunities here but short-term we still look ahead to another flat year.

Thank you.

Thank you.

And your next question comes from the line of Mr. Francois Duhen from CIC Securities.

Hello.

You managed once again to take your cost base much under what was expected.

Are you not too conservative with yours SEK33bn and switch product target for middle of next year?

Well, I think it is still a very powerful and strong target, so let us look at that when we are there.

But just a quick follow-up there.

You have got positive [inaudible] for the other [one-off] this time.

You mentioned someone else.

Could you just tell us what it is and what a recurring level of profitability could be for this business?

In other operations we had half dozen of one-off items but if you eliminate those, the loss would have been around minus SEK0.1bn.

Thanks.

Thank you.

And your next question comes from the line of Mr. James Crawshaw from Commerzbank.

Thank you.

I just wonder if you could provide a bit more detail on one of the line items.

It is adjusted other operating revenues and costs.

It is a policy of SEK635m out of a total adjusted operating income of SEK1.287bn in the quarter.

It is quite a big increase on the trend level in that line item.

Can you give any breakdown of what is within that SEK600m and what it is likely to be on an ongoing basis?

I do not want to give any future guidance.

I can only say that it is mainly due to increase in license and they have a tendency to be lumpy.

And that would include things like Ericsson mobile platform licenses?

Other licenses.

Other licenses.

Okay, thanks very much.

Thank you.

And your next question is from the line of Dale Pfau from CIBC World Markets.

Your line is through Dale.

Okay and we will take another question from the line of Mr. Alec Shutze from Goldman Sachs.

Thanks.

From the conversations we have had with the global operators, we understand that a lot of the Wideband CDMA equipment being installed now is relatively low capacity and low cost per base station, which we think this is part of the reason you are having lower gross margins for WCDMA.

Would you just give us an idea of when you might see gross margins for advanced CDMA approaching the group level?

Wideband CDMA is not necessarily on any different level than regular GSM.

I do not think we have even given out such indications.

I think it's quite obvious that in the early days of the technology, there are economies of scales that are not fully developed.

They are, of course, coming from a lower level but that is for lower volumes.

Very, very quickly we are seeing we are approaching healthy numbers.

Okay, so the gross margin, that is only about 60 basis points improvement in the fourth quarter.

Seems with 20-25% revenue growth, you would also have fairly substantial increase in gross margins for the leverage.

But we have assumed that 3G will have a higher percentage of sales.

That was what was bringing the gross margin back down.

I guess that is incorrect to think that way?

But remember two things.

And one is that we are in [12-13%] to Wideband CDMA sales in the whole lot.

It does not have that kind of strong impact.

And the other point is that we are also outsourced in several steps of the manufacturing.

So the leverage effect from volume like you are saying it not maybe as big as you think.

Thanks very much.

Thank you.

And your next question is from the line of Mr. Paul Sagawa from Stanford Bernstein.

I am wondering if you cold talk a little bit about how quickly the market transitions of 3G may happen, and in particularly in Europe, in terms of crossover points of subscribers?

And what are the real obstacles that are keeping us from that?

In the first part of the question I also want to talk about the coverage for when we go from a central city coverage to a much more broad coverage in the market, etc.

Do there remain technical obstacles that need to be passed in order to deliver the services that the carriers are requiring?

Thanks.

Well, this is an area where I am sure that several of us will have an input at least at the start.

But the first thing is that this is an advanced technology, of course, that is a learning curve for everybody involved.

It is a learning curve also for operators and that means operators need to learn how to handle the technology as such.

And users need to learn the services, and so on.

We think we are still a couple of years from a mass market and we have indicated that we believe in 2005 it may come up as much to a third of our sales.

One limiting factor, of course, is also the availability of handsets.

And we went through a year now with a couple of manufacturers supplying handsets.

I think by the end of next year you will see six, seven, eight manufacturers supplying handsets.

And that is also an important thing, that you get enough variety there and ease of use of all the services.

So I think it is actually growing very much like what we imagined for a technology like this.

Thank you.

Thank you.

And your next question is from the line of Angela Dean from Morgan Stanley.

Thank you.

A couple of follow-up questions.

First on your outlook for 2004 for the industry.

Given that is in dollars and see what has happened to the exchange rate.

Should we assume that your own business is likely to show a decline next year?

That is the first question.

The second one is just concerning both your better than expected revenues and your improvement in the gross margin.

How much of that was driven by some good, some reasonable business, with end of life technology to PDC and TDMA?

And how much they will continue into the fourth quarter?

Well, we can start off with the last question here. 2G sales were up somewhat in the second quarter but PDC and TDMA and CMA are still a relatively small part of the business and did not have an extraordinary effect on the gross margin.

That is my conclusion.

Let me just say on the currency exchange rate that the forecasts for the outlook for 2004 is, if you read it carefully, is not tied to any particular currency.

This is because we are not currency exchange forecasters here.

This is how we look at the business if currencies remain as they are.

When it comes to the impact of the currency exchange, I think one should remember that, even in North America, our competition basically comes out of European manufacturers from a European cost base.

So we are competing with our European cost base and, therefore, US dollars changes have some sort of effect but not to the same extent as if we had other competitors in the US.

But in the past you have talked about the industry [loss] in dollar terms.

So is this a change?

It is only that we did that we saw the impact of the dollar decline but we just concluded when we are sitting here we have to assume in our forecasting stable currencies.

If then currencies, as we go along, start to increase or decrease, then of course you have to translate that into your accounting currency and that is another story.

But this is assuming today's currency exchange rate.

But then you have already have had a clear weakening?

We made the statement yesterday.

What do you mean?

No, I mean you had already had a clear weakening in exchange rate during the course of this year if you look at the spot rate.

Absolutely, but from here today and looking into 2004, we have assumed stable currency exchange rate.

Okay, thank you.

Thank you.

And your next question is from the line of Sam May from Piper Jaffray.

Hi, good afternoon.

Just one quick question, Karl-Henrik.

What would be a reasonable level of restructuring charges to anticipate for Q4?

And then my larger question is do you have plans under consideration, not necessarily underway, to reduce the OPEX run rate below SEK33bn for the Q3 timeframe next year?

And can you do that without further headcount reductions?

Thank you.

This is Karl-Henrik Sundstrom speaking.

When it comes to the restructuring, we have stated that the program will conclude this year and we have so far taken SEK12.5bn in restructuring.

And we will conclude the program at the end of the year at the amount of SEK16.3bn as previously announced.

[inaudible] And how about plans that are under consideration for further reduction in OPEX run rate?

Per-Arne Sandstrom here .

I can comment on that that so far we have for 100 weeks successfully run an OPEX reduction program in compressing SEK500m.

We have also put together an ambitious target to reduce a further SEK5m from the level of SEK38m by Q3 next year.

And the restructuring for that and all the plans are in place as Karl-Henrik Sundstrom just mentioned.

So there are no further plans.

And then on top of that, we also have a SEK8bn cost of sales reduction program going to further improve on the cost of sales side.

So no other plans.

Great.

Thank you very much.

Thank you.

And your next question is from the line of Mr. Hassan Iman from Thomas Weisel and Partners.

Yes, thank you.

My question has to do with 3G in Asia, particularly the two largest markets, China and India.

I was wondering if you could comment on what your sense of timing of 3G deployment in these markets?

And then given the margins for the [HM] vendors in WDCMA on the equipment side.

What do you see as Ericsson's opportunity there?

Do you think you can capture similar market share?

And then finally, do you expect vendor financing to play a role in that market as we have seen in Latin America?

Well, let me start off with the timing issue.

This is, of course, difficult to read the Chinese government and their various authorities to the detail.

It is quite clear that they are moving closer and closer to their decision but I think we've had indications of everything from the first quarter to the fourth quarter.

And the best guess is probably somewhere during mid year or so.

But I do not think we can be too specific there.

When it comes to local vendors, they are good.

We need to have full focus on them.

Thee are also important competitors to us.

You should remember though that we started to sell equipment in China, in Shanghai, in 1892 and we have been there for an awful long time.

We have lots of activities in China, in both R&D and manufacturing, and assembly, and so on.

So we are almost considered as Chinese vendors by the Chinese.

This has partly to do with cost structure but it has also to do with being very, very close to the customer, and being adaptive and responsive.

So, I think our position is good there and for that reason I think we should hold on to our market share as well in China.

There was a third question.

What was that?

Yes, about vendor financing.

Do you expect that to play a role as we saw in Latin America?

We have not really seen any such things and right now vendor financing is not really a big issue.

But I do not think one should conclude that vendor financing could come back in some form.

And it has been a good area for us over the years.

We have over the years for Ericsson been successful in that area and lost very, very little.

So it could very well come back but there are no such indications right now.

Thank you.

Thank you.

And your next question comes from the line of Mr. Peter Dionisio from Merrill Lynch.

Thanks for taking my call.

In terms of your 04 flat market forecast, regionally where do you expect growth and where do you expect to see declines for next year?

Thanks.

If you put it very shortly, I would say could be some decline in US.

Could be unexpected growth in Asia and a stabilizing Europe.

And then growth in what we call the [seam] area: Middle East, Africa, Central Europe, East Europe.

Also maybe some growth, we expect some growth in Latin America but that is small numbers.

So, all in all, flat in the middle and decline in the US maybe, and growing in Asia.

Great.

Thank you.

Thank you.

And your next question comes from the line of Mr. Mats Nystrom

Yes, hello.

Two quick questions.

Per-Arne mentioned the SEK8bn cost of goods sold reduction program.

My question is have there been effect on that seen in Q3 and are you expecting any effect Q4 or is this largely first half Q3 seen next year?

Secondly, on the financial net.

It was minus SEK300m in Q3 compared with minus SEK6m only in Q2.

What would you guide us for a level going forward here?

Thank you.

Per-Arne here.

I could take the first part of the question regarding the SEK8bn cost of sales reduction program.

It is impossible to distinguish one from the other and there are lots of plans in directing.

But the majority of that part will, of course, take place during the course of next year.

Okay, thank you.

And the financial net?

This Karl-Henrik Sundstrom speaking.

Regarding the financial net, the one effect that we managed in the release is that in this quarter a lot of the step up in our bonds has been kicked in because of our downgrading from previous periods.

That is one of the reasons.

The other reason is that we also sold off quite a lot of our cost in the financing portfolio which means that we also lost some revenue interest.

You would expect a similar kind of level in Q4 as in Q3 stats?

Correct?

We do not give forward stating outlooks on the financial net but that is all I can say.

Okay, thank you.

Thank you.

And your next question comes from the line of Mr. John Bucher from Harris Nesbitt.

John Bucher, Harris Nesbitt.

Question somewhat related to Wojcet's previous question.

Over the last year or so have you seen much of a change in the mix of wireline and wireless switching equipment as a percentage of your overall systems sales?

And how do you expect that that mix is going to change going forward with the introduction of soft switches and other non-traditional network switching elements?

Thank you.

We are not seeing any particularly change from the mobility point of view but it is certainly an area where we could see some growth.

And where we have not really been as focused as maybe we could have been, considering our historic position on the wireline side.

So there is no sort of switch from one to the other really.

It is just various complementing ways of assessing the networks.

So you would not anticipate much of a change in the mix of switching equipment related to base station equipment going forward?

Okay.

And your next question is from the line of Mr. James Faucette from Pacific Crest.

Thank you.

I just want to ask a question pertaining to your expense reductions and operating expense reductions.

Those have been pretty impressive, obviously over the course of the last year and I think you are looking at a good target.

The question I have, though, is are you starting to cut in to, if you will, a muscle of the business?

And if we think about your reaching the SEK33bn run rate on operating expense by third quarter of next year.

How high a revenue level or what kind of recovery level would that type of operating expense level support?

Thank you very much.

A couple of comments and I will let Per-Arne answer these because he has been in this whole process the whole time.

But let us first remember that we are seeing a general market decline where every competitor is challenged by the same situation, where still our relative position versus competitors are the same.

We have an R&D organization of 20,000 people.

We are investing in R&D probably as much as the rest of the Swedish industry, the entire industry is doing.

It is an extremely powerful organization.

And in that whole process, where things were growing so much in the 90s, 20-30% per year and so on.

Operational efficiency was never really a focused area.

So I think we feel very confident that we have not cut into any muscle of importance here.

I think we are in very good shape going forward.

But I will let Per-Arne come in on this one.

I could just comment that this has been the challenge all along of course.

To see [to it] that you do not carve yourself into vital parts of the body here.

And we have been very successful in doing that and achieving that.

When you look at the robustness of the level we are going down to, SEK33bn in terms of handing in a profit.

It is like we said in Q1 that even it would turn out to be four times SEK25bn, meaning SEK100bn, we should be markedly able to come to a profitable situation.

And that is the whole planning essence of that statement and we will continue along that path.

I guess I appreciate your efforts to become profitable.

But my question is, how much growth can those type of operational levels support?

Should we see substantial leverage or are you going to, as we see a rebound in the market, maybe 2005, have to start to grow operational expenses again, in line with that, with the rebound?

I do not want to quantify that robustness but I can tell you, rest assured, that this is a robust level being able to also cope with growth.

We do not plan to actually increase the headcount nor the OPEX [stand] significantly as a result, if the market would turn north.

Great.

Thank you very much.

Thank you.

And your next question comes from the line of Mr. Richard Windsor from Nomura.

Hi, yes.

Good afternoon.

Just really following on from that question.

I wonder if you could clarify on the operating expenses.

I presume by hitting a run rate next year your total operating expenses would be slightly more than SEK33bn in 04?

And then just sort of maybe gradually increase from that?

Is that really what we are looking at?

Yes, I think that is mathematics that we are looking at.

Yes.

Okay, thanks very much.

Thank you.

And your next question comes from the line of Mr. Richard Kramer from Arete Research.

Thank you.

Several specific questions please.

Were there any property gains in these results?

Did you have any sale of property that provided any gains, and perhaps could have explained the sharp swing in the profitability from a loss to a profit in other operations?

Second, you have signed two large outsourcing deals this year with HP and IBM.

Were there any financial impact, any material financial impact in this current quarter from those outsourcing deals and where would we see those in the P&L?

And finally, a question on the book to bill.

The orders that you showed in Asia Pacific -- your highest book to bill for the quarter, were actually down sequentially from the SEK7.6bn reported in second quarter to the SEK7.2bn in third quarter.

And that seems a bit surprising given that it is the quarter after the SARS epidemic.

And one would have expected orders would be up quite sharply.

Can you explain that declining trend in Asian orders?

Is that a function of less business in the third quarter and seasonality?

Is it a function of pricing pressure?

Can you just put a little meat on the bones of that?

Thanks.

We will start off with the property gains and orders of the [inaudible].

Per-Arne will come back to HP and IBM.

Property gains in other operations.

When you talked about the book to bill in Asia and that we had a, as I understand your question, had a strong one in Q2.

I do believe that one of the reasons was that we actually had a very weak first quarter this year.

And I think the Chinese operators were sending a signal regarding the importance of infrastructure in the second quarter.

The financial impact of HP and IBM.

There was no financial impact.

I think one could say also for Q3 when it comes to orders booked in Asia and so on.

One must not draw too strong detailed conclusions from orders booked because sometimes it can be a bit lump.

And some of the orders that we have received we do not book in full as orders even if we receive them and announce them.

Because they can be covering several quarters ahead and we cannot book them as orders booked as we get the purchase orders.

Okay.

And just to confirm that were no gains from sale of property in this current quarter?

Or no gains from the outsourcing deals?

Could you then perhaps just explain a little bit what is behind the swing from a SEK340m loss to a SEK150m profit or so in other operations?

As I said, there were no property gains in this quarter and in other operations.

I reiterate my previous.

It is about half dozen of one-off items.

If they are eliminated, it would have been a loss in other operations of around minus SEK100m.

Okay.

Thank you.

Operator, we take one last question please.

Yes.

And the final question comes from the line of Mr. Alexey Boulgakov from Commercial Bank Securities.

Yes.

Hello.

One short question about your cash flow.

Probably mentioned it somewhere but maybe I missed.

In your cash flow statement you say that you derived about SEK5bn of positive cash from reduction in customer financing.

In your presentation you say that your gross customer financing exposure stayed the same at about SEK12bn.

The question is where the cash flow comes from and if you sold any receivables of customer financing to external customers?

And whether you retain any [recourse] from that?

Thank you.

Regarding this SEK5bn.

In the second quarter this year we announced the sale of some customer financing, of which one had a separate press release.

That was the French Telecom bond.

However, payment was received in the third quarter and that is why it has a positive impact of SEK5bn.

Alright.

Thank you.

Okay, with that I think we can conclude the call today.

Thank you operator.

Before we finish though, I would like to remind all of you that if you have not done so already, you need to register for our capital markets day by tomorrow if you plan to participate.

With that we look forward to seeing you next Friday and thank you very much.

Thank you ladies and gentlemen.

This now concludes your conference call for today.

You may disconnect.