Telefonaktiebolaget LM Ericsson (ERIC) 2003 Q4 法說會逐字稿

Ladies and gentlemen.

Welcome to the Ericsson analyst and media conference call for their Q4 report for 2003.

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

Thank you operator.

Hello everyone and welcome to our call today.

With me here today are Carl-Henric Svanberg, President and Chief Executive Officer of Ericsson.

Per-Arne Sandstrom, Deputy Chief Executive Officer and Chief Operating Officer and Karl-Henrik Sundstrom, Chief Financial Officer.

Before we get started I would like to remind you that we will be making forward looking statements during the call today.

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

The actual results may differ materially due to materials mentioned in today's press releases, as well as discussed in the conference call.

We encourage you to read about these risks and uncertainties in our earnings report as well as our annual report.

With that out of the way, I would like to hand over the call to our President who will comment about our performance and plans going forward.

Thank you Gary.

Hello everyone.

Let me go through the slides.

I will comment rather briefly on them because I am sure we are eager to go into the Q and A session as well.

On the first slide we're talking about a successful turnaround.

We are concluding a successful turnaround and it is with great pleasure that we can now note a result in Q4 of SEK 5.5b, which even takes our full year adjusted profit into a plus of SEK 2.8b before restructuring costs.

It is a major achievement by all the employees and the management and unions.

It means that we can go forward with a lot of self-confidence from here.

We have also had a great cash flow again for Q4, which builds up a solid, robust financial position with the net cash of SEK 27b.

So all in all we're coming close to the end of the restructuring.

Of course, forever, the strive for operational excellence and cost leadership is there.

This is a very competitive environment and we will continue with that focus.

If we turn to the next slide here on the web, we talk about "In Focus 2004".

What we can see right now is a rollout of 3G, it happens and I will talk more about it in a second.

EDGE plays an important role here as a complement to the 3G rollout.

We are also experiencing operators' capacity constraints in the GSM networks.

So not only do we see a 3G rollout, but we're also seeing pick-ups on the GSM area.

All of this of course, also comes back to what 3G is all about, providing more services and making sure also - a lot of the focus among money operators is to provide seamless services.

We have the uses that we shouldn't need to bother when we log on our PCs and download our data and so on, whether we are in a hot spot or in an enterprise environment or at home, and the same thing with our mobile phones.

So there is a lot of convergence between different technologies here.

We talk in more detail on the next slide on the 3G rollout.

We have so far been involved in 8 of the 10 networks that have been launched worldwide.

We are now involved in launching another 46 networks, which means that 3G in terms of network rollout really is happening now.

We were there early and we were more globally widely spread than anyone else.

We have a unique position to capture growth in.

In this context, we are also starting strong subscriber growth.

Where on the wideband CDMA, which is the latest technology, we have about 3 million subscribers right now and a growth of about 65% sequentially.

In CDMA that was launched a couple of years ago, we now have a total of 70 million subscribers and a growth of about 15% sequentially.

Again with the new technologies like this, handsets and applications are quickly coming into focus.

Of course it is a matter of providing services, launching services and making them available in the handsets.

So we are looking forward to a mass market to build up from 2005.

Moving onto to emerging markets, and the opportunities we see there.

We have today launched a new concept, a new technology called "Ericsson Expander", which is what we call the new coverage optimized technology.

We want to make a difference between capacity driven markets, where we have a high degree of subscribers and a lot of traffic.

Where capacity is really the key for expansion, [versus] in the emerging markets rural areas of India, China, Russia or many of these emerging markets, where there is really a strive for being able to cover as big an area as possible, reaching out to new portions of the population.

In our Expander technology here we can cover considerably more area in exchange for less capacity, but that's not the issue right now.

So with this we believe we can expand the market for mobile subscribers with another billion actually, over a longer time.

This of course means that no consumer spend is not going to have as big a barrier and the operators can address more consumers.

We then look at the 2003 highlights.

This year we have landed 23 3G contracts and six in the last quarter.

We are also seeing an increasing demand for managed services, which is when we take over and actually run the networks for the operators.

This is an area where we can actually capture synergies between our own organization and the operators' organizations.

That is basically the reason why we can run the networks more cost efficiently.

This year we have received eight contracts, of which two were landed in this last quarter.

Finally, as I touched on before, several years now of held-back investments for operators focusing on cash flow and paying down debt, has meant that there is now a need for a pick-up and dealing with network constraints and quality constraints.

If you look at the restructuring as such.

As I said initially we're coming to the end of the restructuring.

We started off with 107,000 employees, we're now reporting 51,000 plus a few hundred employees.

But of this, 3,000 are already in transit on their way to leaving the company.

In operations we have about 48,500 people.

There is another 1,000 to 1,500 people that will leave during the spring, but we're now in the phase of minor adjustments.

This brings the OPEX run rate in Q4 to SEK 37b and we will hit the SEK 33b goal in Q3.

Gross margin was a particular area of exceeding expectations for any analyst in the market I would say.

It even exceeded our expectations if you go three/four months back.

We have been working intensely through this year with our cost of sales projects in bringing the costs down in the production of the product.

Including the redesign of the products and lower pricing on purchased portions and products.

So we reached a high number of 41.6%.

This does include a smaller part, which deals with the high capacity utilization in Q4.

Therefore we should, going into Q1 2004 we will probably see a slight drop, but basically we have established ourselves on a much higher level than in Q3.

If we then go to the more bottom line numbers here.

So, if we go to orders received, we had orders received of SEK 31b.

We also did a clean out of a couple of orders from 2001 and 2002, which means that bookings were SEK 29.5b but orders received in the quarter was SEK 31b.

This is fairly much even if that means we had book to bill below 1.

This follows the seasonal patterns where we have seen growing orders throughout this year, where we normally see higher orders received than sales in the beginning of the year and higher sales at the end of the year, when projects are being completed.

If we do compare the numbers of 2003 Q4 versus 2002 we have quite some interesting growth when you take away the currency exchange effects.

Sales were at SEK 36.2b, 29% up, which was basically seasonality effect but also some starting signs of growth there.

The gross margin I have already spoken about, so there we [procured] a really strong step forward.

If you go to the more bottom line numbers, we had an adjusted income after finance of SEK 5.5b.

Of course one needs to understand the effects of the strong invoicing in Q4.

With that in mind we have definitely stabilized stronger earnings level going forward.

Cash flow once again was strong, SEK 4.6b, that includes a one-time payment of SEK 3.7b, so from operations we have a cash flow of over SEK 8b.

That brought us to a very solid financial position, no debt but net cash of SEK 27b.

That is, of course, a dramatic difference from only nine months ago, when there was still speculations on our financial strain.

So I think we have all the strength we need going forward.

Let me then turn to Sony Ericsson where Sony Ericsson is now step by step improving their position.

We are today experiencing a very attractive product portfolio that is gaining momentum.

If we look at GSM, what we did at the beginning of last year is that we really focused our [indiscernible] on where we have the strong areas and the opportunities to grow.

We got out of certain areas where we didn't have enough volume to build a solid position.

So we actually have closed down the CDMA phones during this year for example.

Therefore in the core areas in GSM we are 50% up, a considerably strengthened position in that area.

Japanese shipments are up 15% per year.

But we closed down products also in mind here, it ended up with a 10% sequential sales growth and a slight improvement of the market share.

But, keeping that all in mind, we have considerably strengthened our position.

The income before tax in Q4, which you are well aware of €46m is also a sign of improvement.

We are happy with the Company's performance, although we still can improve quite a lot on its absolute performance, but the direction is very, very clear.

If we look at the market outlook, we are seeing here a mobile system market, which earlier in Q3 we talked about a market going forward 2004 to be in line with 2003.

We are slightly more optimistic here and we're saying that we should look forward to in line with or a slight growth.

What we mean by a slight growth, is in single digits, in the lower range of single digits here.

We are at the same time looking forward to a stronger first quarter.

We are just a bit cautious there because there are elements here of catching up and operators catching up in network qualities and capacities in the GSM area.

So some part of the growth that we may record here, we are cautiously studying and monitoring to make sure what the long-term and sustainable trends are.

But there is no doubt that we are gradually coming into a growth period again.

Then, as we have said so many times before, we see good growth in the professional service markets.

For us as a company, we have 13% increase year-on-year in that area.

So we are seeing a better growth environment, a better market environment.

As a summary the turnaround is much completed, but we all understand and all put an intense effort continuously always on cost awareness and operational excellence.

There are still a number of areas where we can improve.

3G is happening.

It does accelerate and we have definitely strengthened our market and technology leadership.

In that whole context we also see a focus shift towards consumers, both big operators in the market place but also with ourselves.

It is not so much a matter of making sure that we not only have the technology in place, but we need to make sure that we do the right thing for the consumer.

Seamless networks, reachability, ease of use and what have you, so much, much more customer orientation from our side and the whole business environment.

That concludes my presentation.

I will hand over to Karl Sundstrom our CFO to give you more of the financial details.

Hello to everyone and thank you for being with us.

I would like to move into the financial summary.

Before going into any numbers I would like to highlight a couple of things.

If you compare the full-year of 2002 with the full year of 2003, we have had a decrease in sales of 19%, which is around SEK 28b.

At the same time we have improved the adjusted income after financial items, almost by SEK 17b.

That's the explanation about the very solid performance in Q4 of last year.

We have had two quarters of positive operating income adjusted and three quarters of adjusted positive EBITDA margin.

As Carl-Henric mentioned, the gross margin improvement exceeded expectations.

The gross margin improvement of 5.7% sequentially and 7.5% compared to the last quarter in 2002 is mainly driven by the successful cost of sales reduction project.

Where we have got a lot of the program announced in Q1 last year included, a lot faster than we had expected.

We had high capacity utilization from our very strong sales in Q4, a favorable product mix, benefiting from lower project pricing and higher utilization rates in services.

As we all know, when the US dollar depreciates Ericsson loses money.

For the full-year the effects in the income statement, if we had the same currency a year ago was SEK -3.1b.

The effect in the quarter was SEK -1.6b.

I would like to remind you that we had an average exchange rate of 8.08 for the dollar during 2003.

The closing rate at the end of 2003 was 7.26, which means that we have had a further depreciation towards the Swedish krona.

Book-to-bill - if you adjust the order booking of SEK 29.5b with the adjustments of the prior years booking of SEK 1.5b and add the currency effect, we had around a 9% growth in orders booked between Q4 of last year, which is the fourth quarter of 2002.

Going through to the book-to-bill, Western Europe ended up with 0.6.

If you adjust for the adjustments of prior years' backlog, we ended up with around 0.7.

We always have to remember that there was an enormously strong sales increase in Q4 of 43% and we do have a very strong backlog in Western Europe.

Central Europe, Middle East and Africa, is a fairly volatile market.

I don't think the 0.6 there is really anything to talk about, but that is a long-term growth market.

North America, 1.3 and Asia Pacific 1.1.

The adjusted book-to-bill is 0.9 if the order intake is SEK 31b.

I think it is important to remember that we have had three quarters of a positive adjusted operating margin in the Systems business.

This is a profitable business even if you included all restructuring costs.

There are two things on this slide that I would like to highlight to you.

First of all the big change compared to prior quarters that is the very strong positive income to cash coming from operations.

Also to remember that the full-year cash flow was almost SEK 20b for Ericsson.

If you adjust for the restructuring charges of SEK 2.6b and adjust for the Alecta pension payment, we ended up with an operational cash flow of SEK 11b.

Regarding operation efficiency trends we reached the best DSO days in a long, long time in Ericsson of 79 days, as well as an inventory turnover of SEK 6.1b.

These are well within the targets that Ericsson gave some years ago.

We are in good progress towards operational excellence in this area.

Customer financing - I would like to remind you here that new credits are only given on a selected basis, even though we see an increasing demand in some emerging markets.

We have had in the period an increase in provisions of SEK 0.5b and the commitment has been reduced slightly in the last quarter.

As previously mentioned by Carl-Henric we had a very solid liquidity with cash of SEK 73b, payment readiness of SEK 75b and net cash of SEK 27b.

Equity ratios were slightly changed in Q4.

We have had five consecutive quarters on improved net cash as well as payment readiness.

Sony Ericsson as Carl-Henric mentioned has had another quarter with profits.

I think the very competitive product portfolio is demonstrated in the solid ASP (average sales price) per phone, increasing between the last quarter of 2002 compared to last quarter 2003.

Outlook and restructuring progress - I will not comment any further about the outlook.

I would like to remind you that as we have said the OPEX run-rate target of SEK 33b remains for the third quarter of 2004 and that SEK 5b of the remaining SEK 9.1b in restructuring cash outlays will be consumed in 2004.

Thank you very much ladies and gentlemen.

Operator we are ready to start the questions and answers please.

As always, please limit yourselves 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 Ericsson's Investor Relations and Media Relations Team will be happy to take additional questions or discuss further details with you after the call.

Your first question comes from Mr. Inga(ph) Haydorn(ph) of ABN.

Please go ahead.

Good morning and congratulations on the good results.

I have a quick question regarding the guidance you have given on the market outlook.

Could you give your graphical breakdown, how you see the different markets, North America, Europe and Asia please?

If we just talk about these three areas, we saw last year for example in Asia a weak start to the year and we were all a bit nervous during the SARS infection period there, but it picked up at the end of the year.

We expect that 2004 should be a year of growth there.

In the United States, or rather in North America, I guess we also last year were a bit cautious over where it was going to go, because we've had some big rollouts as an industry - several of our standards that are active there - in the last year.

So we expected that 2003 could have shown a decline, but it ended up as a rather good year.

In Europe on the other hand, we saw a weaker year because we were going through this operators' process of stabilizing their balance sheets and paying down debt and focusing on cash flow and so on.

In Europe I think we will see a better development in this year.

It should at least be a flat year, where we have the rollout, but we're also seeing the capacity constraints in the networks, so we could very well start to see also some growth in Europe.

So somewhere between flat and a bit of growth in Europe, about the same scenario I would say in the US and growth in Asia.

So you're not worried about the weak order intake in Europe?

That I wouldn't worry about at all.

I think it is important to remember that the order intake swings a little bit back and forth, because we always talk about rather big contracts.

We could land one contract and in another quarter that could be the opposite, so that swings a bit.

You can't really estimate it over one quarter only.

One thing in that context I could also talk about I guess, is the upcoming, as it kind of looks, consolidation on the operators' side in the US.

That could have different affects.

Basically we are look favorably on such a consolidation because it means that the industry gets healthier and can spend more investments on developing that market.

Depending on what the combinations could be there, it could have a short positive or slight negative effect of course.

But principally that's a good development as well.

Okay, thank you very much.

Thank you.

Your next question comes from Mr. Matt Nystrom of Enskilda.

Please go ahead.

A quick question on profitability 2G versus 3G if you could comment on that please in terms of the gross margin level?

Secondly the COGS reduction program Karl-Henrik Sundstrom referred to that had kicked in a lot faster than had expected.

It is possible to quantify the size of that, [order] in Q4, is it like 10% or 20% or whatever, of SEK 8b that kicked in already now and how much remains for Q3 this year?

I can start off with only the [indiscernible] and leave it to Per-Arne and Karl to comment more on the margins there.

If we talk about [indiscernible] 3G versus GSM, it is of course so that the new technologies, that is where we spend most of our R&D resources in the growing and therefore still smaller area.

Of course with smaller volumes, shorter [indiscernible] there is still an awful lot of efficiency to gain as we expand 3G.

But that is the natural course of our business.

We always have the best profitability and the oldest products and we're building up profitability in the world to come.

But there is no doubt in our minds that 3G will reach the same profitability going forward.

But we won't give you any particular guidance as to when and how.

On the margin development over last year and the effects of the two programs, the [2%+ 4%] units as we announced in Q2 2002 as well as the announced in Q1 SEK 8b.

Most of these two programs have now come into effect in what you're seeing in the margin development over 2003.

There was an accelerated effect in Q3 and Q4 last year.

So now we're coming into the phase of much more standardized rationalization or [over] product as we walk into 2004.

To clarify, is it correct to interpret your answer in that out of the SEK 8b COGS restructuring reduction target for Q3, do you see most of that - [indiscernible] be kicked-in in Q4?

Is that what you are saying?

Yes.

Okay.

Thank you.

Thank you.

Your next question comes from Mr. Jeffrey Slarson(ph) of UBS.

Please go ahead.

Following up on the COGS program.

Does that imply that you'll be finished with this program Per-Arne by mid-year this year?

Then you'll be at the run rate going forward that we should expect?

What is the time frame for the completion?

Thank you.

Most of what I said, most of those two programs have now kicked-in.

As we said we saw an accelerated effect of it during Q3 and Q4 last year.

So, as we move ahead into 2004, of course there is a slight connection to even further rationalization from those programs.

But from now on it is more of a standard nature.

Where we rationalized, we rationalized all our programs within GSM and wideband CDMA.

So no real further effects on those two programs apart from what has just been achieved.

Okay.

Thank you.

Thank you sir.

Your next question comes from Mr. Per Lindberg of Dresdner Kleinwort Wasserstein.

Please go ahead.

Congratulations to the tremendous bounce in profit and the return to underlying growth.

Could you perhaps shed more light on what you are experiencing?

Because certainly you must have been positively surprised, I guess, since the summer.

My inference is that month-by-month things appeared to be picking up.

December for instance must have been far beyond expectations.

Do you see this pattern continuing into the new year?

Thank you.

What we are seeing is a rollout of 3G networks.

As we commented on 46 networks being completed this year.

But, at the same time, it is interesting to see how operators obviously - and I think we all kind of sensed, have held back investments and had ambitions to run their networks with maybe lower CAPEX spend than I think is really healthy for the networks long-term.

That is starting to change also, as everyone, including yourselves analysts and so on, are starting to look for where do we see growth and what do we need to do to expand our business and launch new services and so on.

So I think we're coming back to a more normal situation.

I think we will also continue to see growth in the GSM networks and so on.

Some [indiscernible] think that now it's over with GSM, now it all turns to 3G.

But we will continue to see investments in GSM in parallel with the 3G build-up.

Have you also seen that operators perhaps are influencing each other and if one of them starts to move, month-by-month, week-by-week, you'll have more activities in your local offices etcetera.

Is that the pattern that you had discerned?

I think it is true that - and I think we have all followed I'm sure with great interest, for example [Horizon] in the US that have with little hesitance continued with their investments on a pretty strong level and are now running probably better networks than most other operators and are steadily gaining market share.

I think that is something that is noticed and I think we can see exactly what you're pointing at.

We have also another part that is interesting.

We are spending 150 MOU for example on average or so in Europe, whereas the lower tariffs and more flat rates, [package] deals and so on, MOUs in the US is somewhere north of 600 driven by this tariffing.

This is also starting to come into play.

You already have it in China where MOU are double of Europe's, 250 million users.

The first signs we have seen now is that T-Mobile have introduced a flat rate.

So I think this will also stimulate traffic growth and in the long-term that has an impact on ourselves.

Thank you very much.

Thank you sir.

Your next question comes from Mr. Paul Sagawa of Sanford Bernstein.

Please go ahead.

Looking at the progress of the restructuring and [revisal] that you're going to be picking at a further SEK 4b from the operating expense rate.

There is a remaining SEK 4.1b in the provisions for restructuring, which appears to be moving into 2005.

There was a note in the press release saying that that relates primarily to under utilized real estate.

I am wondering if you could explain a little bit what the cash impact is of that under utilized real estate, whether it's dispositions or write-downs that you're anticipating or what?

Also, if we could consider that there might be further benefit to your overall cost structure by virtue of that additional spend that's left.

Thank you.

You faded away a bit, but I think I got your question.

It was regarding those SEK 4.1b of cash outlays regarding the restructuring coming after year 2005?

Correct.

That relates to real estate and premises that we have partly or have vacated.

As you are probably aware, most of our normal contracts for real estate rented are many years.

That is the way how we see the phase out of those contracts.

It is done contract by contract.

At the moment, in many locations where we are, we are sitting on huge real estate, which means that this is a very big risk.

Will there be further cost benefits to either operating expenses or COGS as a result of that further real estate reduction?

You faded away sir, can you repeat the question.

Yes I can.

The disposition of those leases, will that have any further improvement to either operating expenses or to your COGS as we look forward beyond 2004?

Since they are rented properties, we have taken out the cost in that provision for the cost that we had today.

So the benefits of those will be sustained over the time since we are not using those premises, so the answer is yes.

Thank you.

Thank you sir.

Your next question comes from Mr. Voitec(ph) Ustelivich(ph) of Bear Stearns.

Please go ahead.

In terms of gross margins, if you could clarify a little bit more.

You have done a really good job improving them in the last couple of quarters.

You did mention also in Q4 you had some one-time, it sounded like 2G a lot of software upgrades.

How shall we view the next couple quarters in Q1, do you still see some positive impact from the 2G/2.5G upgrades?

Then as we're still ramping to 3G, will that bring down the margins, or would you expect to keep it around 40% and improving slightly from that level?

That seems like that is one area of the expense in the costs that you have a very good handle now and a much better handle than in the past.

If you could comment on that.

The level that we have established, is a level that we believe we can carry on forward, although we might see a slight drop in Q1 because of [less] capacity utilization.

But it is not so that we expect that number to come down as newer products kick-in or something.

This is a level which we should keep.

We also see opportunities to develop it further with the economies of scale and efficiencies that we are developing.

Okay.

Just a clarification - at which point do you expect to report - until now there has been a lot of restructuring.

From which quarter on would you expect to have no charges, just clean numbers, starting with?

From Q1.

Okay, so starting this Q1 there shouldn't be any charges shown any more?

Yes.

Thank you.

I could just add on.

I heard some questions about the sustainability of the product mix.

Product mix varies from quarter to quarter.

Sometimes it is favorable when there is a lot of software, sometimes it is less favorable.

So what we saw in Q4 does not prevail as a product mix over the full-year 2004 and beyond.

Okay, but you shouldn't see any major - let's say if the 3G kicks-in in a bigger way.

At this point you don't see like we could see all sign of 36% gross margins or something.

Would that not [indiscernible] extend the impact, you don't see that?

No.

Great, thank you.

Great quarter.

Thank you sir.

Your next question comes from Mr. Tim Luke of Lehman Brothers.

Please go ahead.

I have a clarification and a question.

The clarification is with respect to the first quarter, in suggesting that you would see moderate year-over-year growth.

Should we be thinking in our range of 5% to 10% range?

Is that the right kind of range?

With respect to the gross margin there, should we assume then that it would start with a [four], just to follow-up on [indiscernible].

Then my last question was, I was wondering Karl-Henrik if you could just give us a sense of how you perceive the potential impact of consolidation in the US market as we move through 2004 on the service provider side?

Thanks very much.

Something to fill in your spreadsheet there.

I guess your ballpark figures are probably not too much off track.

I think you're probably in the right area.

When it comes to the consolidation, that's an interesting one, because it is obvious that something is about to happen on the consolidation of operators.

I don't know if it could trigger even a further consolidation.

I believe it unlikely that we end up with nothing happening.

Depending then, if we see culminations of Asian or European culminations with the Americans or whether we see two Americans merging or so on, the affects will be slightly different.

But almost in every combination we are a strong vendor on both sides and we see that out of this will come a strong player that can announce its services faster and do better business and we should gain from that.

Exactly what the short-term effects could be in three or six months in the merger process I wouldn't be able to say really.

Okay.

Congratulations on the quarter.

Thank you sir.

Your next question comes from Mr. Sam May of Piper Jaffray.

Please go ahead.

I am going to take a lead from Tim and ask for a quick clarification.

That is the gross margin improvement - part of it came from lower purchasing costs.

Can you clarify whether that is sustainable?

Then my question is, you talked about some catching up in Q1.

Could that lead us to an actual sequentially down quarter in Q2?

Thanks.

Definitely sustainable purchasing levels that is just part of the continuous rationalization work that we do.

What we are talking about here going forward in terms of growth, is that the growth element that we will see, some of that growth element could be driven by catch-up, but you'd still have the other parts that would still be there.

I don't think we see either that this one particular quarter and then that catch-up is gone.

I think we could very well see one, two or three quarters.

But still going forward if we have a good quarter here, we shouldn't immediately translate that as a long-term trend going forward.

That is a catching up element, but that's a part of the growth that we're expecting.

Great.

But that catching-up is not so ephemeral that it just lasts for one quarter or even less?

No.

Okay, great.

Thank you very much.

Thank you sir.

Your next question comes from Mr. Peter Dionisio of Merrill Lynch.

Please go ahead.

Just a very quick question.

Can you give us your thoughts on the reason behind the 72% sequential increase in your professional services orders?

If you can just comment on the margin level of this business in Q4 and beyond Q4?

Thanks.

What is important here is when you report a service business and a portfolio, one must look at that in a slightly different way, than when you run infrastructure.

Because you run a portfolio and that means that you can have those kind of swings.

But it was a good quarter and we landed some very, very interesting orders and that is encouraging for going forward.

It is quite clear that the operators, and they focus much, much more really on the end user and providing services and so on, to run their networks is not necessarily something they need to spend their time on.

In the same way as we outsource our manufacturing when we move forwards upwards in the value added chain.

So there is an interesting opportunity for us here.

But I wouldn't draw any conclusions from that particular figure you mentioned in saying that we now have a new trend.

But it is an encouraging sign.

Great, that's fine, thank you.

Thank you sir.

Your next question comes from Mr. Mark Davis-Jones of JP Morgan.

Please go ahead.

Can I come back to WCDMA.

There have been a few shifts in vendor selections here in Europe over the last few months.

I wondered if you could say firstly whether you still feel you have roughly 40% of that market in terms of booked value of orders.

Secondly, whether now that margins have recovered to this much higher level, you're in a position to get rather more aggressive on pricing on 3G, because it appears that in some contracts your competition has been under cutting you on price?

On the last part of your question I would say that, our competition, since we have a leading position, our competitors are always trying to undercut us.

That is our daily life.

They hardly take orders on higher prices than ours.

So that is part of what we do everyday and I don't think that trend is any different.

I think we have been aggressive enough in those biddings that have taken place.

We are certain that we are hanging on well to our 40% market share.

You should remember also, that if you measure single quarters and so on, when right now we have awarded two contracts this quarter and so on, it can of course be individual swings, but we certainly have a solid position there.

Thank you.

Thank you sir.

Your next question comes from Mr. Matthew Hoffman of Schwartz Soundview Capital.

Please go ahead.

Again congratulations on the strong results gentlemen.

I'd like to drill down on the CDMA 1X infrastructure market a bit.

While you announced a contract for 1X in India with TATA during the quarter.

Could we ask you to shed some light on your progress with CDMA in North America?

This would be a technology a strong contributor to your North American book-to-bill, which was well over 1.

Thanks.

We are showing good progress when it comes to the merger of the two portfolios as we announced in the capital markets day last year.

So the portfolios in wideband CDMA and CDMA are being brought together and you will see the effects of that in the latter part of this year and throughout 2005 and beyond.

As far as the US is concerned we have only minor contracts achieved on CDMA, but of course we are in the running for whenever there are opportunities to take out the competition and be aggressive on those operators.

The CDMA operators like Horizon and [indiscernible] in particular.

The book-to-bill was mostly GSM with T-Mobile [indiscernible]?

Sure.

GSM on the three GSM operators.

Thank you.

Thank you.

Your next question comes from Mr. Tim Body of Goldman Sachs.

Please go ahead.

Just one final question on gross margins if I may.

Talking about Ericsson's cost structure in manufacturing.

Is it fair to continue to use a rule of thumb that about a third of manufacturing costs could be considered fixed?

In this instance with volumes improving and growths returning it is fair to assume that gross margins can continue to trend upwards, even though the cost reductions of the SEK 8b are now largely completed.

Thank you.

I'll answer that question about fixed and variable costs and I will refer to what I have always said.

I think we have demonstrated in Ericsson that we have considered almost all costs variable.

However, I would say that you're in the ballpark when it comes to what is fixed and variable in the manufacturing cost.

Great.

Thank you.

Thank you.

Your next question comes from Mr. Thomas Langer(ph) of WestLB Panmure.

Please go ahead.

I have a question here on your outlook for 2004 as far as the market is concerned.

You have slightly revised your guidance upwards, now looking at flat growth, or maybe a bit of growth in US dollar terms.

But I think that is due to maybe simply to currency movements.

So why are you so cautious when you see some more positive signs in the market?

When you add two and two together, sell the better sentiment in the market among operators and the improving exchange rate for the US dollar market projection.

Why are you not saying that you maybe could see some double digit growth in the market?

Thank you.

The exchange rate - I am not sure I understand, because if anything the US dollar has slid somewhat further down.

But, going forward when we speak about it, we do not anticipate any particular currency movements going forward from here.

That we will follow and see what happens, but we are not currency speculators here.

I think there are some signs that if you put them together it could paint a bit of a positive picture.

But I think we also want to make sure that we all understand that we can have a bit of a catch-up effect.

We have all burnt our fingers a bit in this whole restructuring process and so on.

So we want to make sure that we go step-by-step forward here.

Thank you sir.

Your next question comes from [indiscernible] of CSFB.

Please go ahead.

Just one quick clarification.

I assume that your guidance for Q1 includes currency impact.

Could you give us an idea of what that is for you in Q1 at current rates?

Also, given the very strong margins you've produced, do you feel comfortable at this stage talking about long-term operating margins for Ericsson?

Thanks.

We are not disclosing any targets.

We haven't done and will not do.

But it is clear that we don't expect margins except this high capacity utilization in Q4 to - that has its particular effects, but the run rate that we are at now, we expect that we can continue to develop.

Then I'm talking about gross margins.

Then of course the bottom line has a strong effect in this particular strong quarter and that I think you all understand.

I'll leave it to Karl-Henrik Sundstrom to talk about currency effect here.

I don't have any currency expectation.

That's the way we work in Ericsson. 97% of sales is on export.

So we make sure we don't take any currency exposure, that's why we are hedging when we haven't known exposure.

The only thing I am seeing is that the average - or the closing rate for the Swedish krona towards the dollar was 7.26 at the end of the year.

The exchange rate, [indiscernible] two minutes when I walked into this room at 7.30 and that is the environment we are living in.

Thank you.

Thank you.

Your next question comes from Mr. Dale Prout(ph) of CIBC.

Please go ahead.

My question is on professional services.

You saw a nice growth last year and you say you're going to continue to see growth in 2004, whether that begins with a larger part of your revenue base, could we see up to 20% growth and what is the margin effect of the overall growth in professional services?

Thank you.

As we have said before that we believe that this market is showing growth of around 10% per year.

Anything above that is us taking market shares in that case.

I don't think we have reasons to change that estimate of where the market is going.

We are not disclosing margins in particular businesses, as this one for example.

But it is a good margin business.

[indiscernible] 10% would you see margin expansion?

In fact this is not an economies of scale gain.

Every contract has its own challenge and opportunities.

You can develop favorable margins in smaller contracts as well as larger.

Then of course if you'd start to run managed networks and you get into the position where you can even run several competitors' networks in a particular area you can gain some other synergies.

But that is not so far the case that we're [indiscernible] in that area.

But that could come in the future.

Thank you sir.

Your next question comes from Mr. Robin Nazazardi(ph) of Smith Barney.

Please go ahead.

I was wondering if you could give us an idea of what software sales as a percentage of total system sales were in developed markets and what the same percentage would be in emerging markets?

Thank you.

The percentage I can leave for Karl-Henrik Sundstrom [indiscernible] any guidance, but there is no particular difference between the emerging and mature markets on that stance.

But I don't know if Karl if you want to...

I think it maybe not a relevant question to ask.

Because we sell complete systems, hardware, services etcetera including services.

So the timing of when you do certain deliveries into the network might have an impact on the margin but it is a complete system that we are selling.

Okay, thank you.

Thank you sir.

Your next question comes from Mr. Francois Duhen of CIC.

Please go ahead.

In the past you gave some guidance about what your [indiscernible] effects could be at the present adjusted system sales.

Could you give us a hint, [because] you've changed your forecast the furthest you're stating is 2005 and what this [indiscernible] was in Q4 2003?

Thanks.

In 2003 as a whole we ended with 13% around 3 and we have said in 2005 that it could very well be a third.

I think that still is a good estimate in 2003.

I guess in 2004 we should get closer to that number.

My second question - you gave out a very good operating margin for your fixed line business.

Was it still at a loss or is it now profitable?

Again we don't break down the different areas within the system sales in their respective margins.

But we have been very successful in turning our wireline business around from a very steep downhill ride, I can tell you.

Thanks.

Thank you sir.

Your next question comes from Miss Angela Dean of Morgan Stanley.

Please go ahead.

Just going back to some dollar related issues.

Your guidance for the first quarter is in krona terms I assume and that's talking about, I guess 5% to 10% year-on-year growth.

Yet given what we know has already happened to the currency, that would suggest in dollar terms something like double digit growth.

Now that doesn't seem to fit.

It is obviously much higher than you're suggesting for the overall industry for 2004 as a whole.

So are you allowing for some slow down because of this potential catch-up business?

I don't know whether you can explain how you identify catch-up business?

But that's one area I wondered if you could talk about.

The other was just to say whether the weakening dollar has been beneficial for you in terms of component purchasing and how we should look at that going forward?

Let me kick it off and I'm sure we will all answer this in different ways.

When it comes to first US dollar effects on everything we do, it is obvious that we have - it is favorable on components of course, because that has the same effect coming the other way than when we sell to our operators.

But what you want to remember that when we sell to operators throughout the world, part of it is sold of course to the US some 14%.

But the majority of US dollar sales are made outside the US and in competition with European players that have European cost structure.

Our course in the competitive pricing that does have an effect over time, but you don't see the normal reductions in US dollars as you see normally, because the fall in dollars.

In terms of the market growth, what we're saying is that we will see some slight growth in 2004 and moderate growth a bit higher in Q1.

That is a US dollar based forecast.

But I think it is important here that you cannot nail down forecasts for quarters down to the particular single digit precision.

I think we are more inclined to say that we will see a better growth in the beginning of the year.

If that holds out for the full-year and going forward, or whether there is a more of a catch-up effect I think we will have to wait and see and we want to be a bit cautious there.

So, just to be clear, your guidance for Q1 is also in dollar terms, is it?

We are running now at a particular currency exchange rate for US dollars and so on.

So our own guidance is we report sales in Swedish krona, so in that sense it is Swedish krona guidance.

Right.

Thank you sir.

Your next question comes from Mr. Mark Lucy of TD Securities.

Please go ahead.

I'm sorry I guess we've beaten the contrasting guidance here.

Just to be specific Nokia seems to have stated that their [indiscernible] to slightly up guidance is in euro terms.

You've done it in US dollar terms on a year-over-year basis.

That would imply that Nokia flat euro guidance is closer to 9% given the movement in the currency.

Is there any reason, other than conservatism, that you see the world developing different than Nokia?

That's all, beating that one down at this point.

Thank you.

I don't think we have any different opinion about the market than Nokia have.

Thank you sir.

Your next question comes from Mr. Richard Windsor of Nomura.

Please go ahead.

I'd like to ask a really general question.

That is, what is your view in terms of how the market in general is changing?

Do you think that perhaps in the longer-term you see the rollout of 3G and you actually quite potentially see much better growth than anyone is anticipating '04, '05 and '06 and then perhaps a cyclical downturn?

What I'm really questioning is, do you think this market is actually becoming cyclical in nature and we're actually going to see some quite wide swings in the longer-term?

I think this is an industry that has shown [indiscernible] some extreme dynamism over a couple of years.

I think we do anticipate that we're going back to more stability.

Although predicting the long future is always difficult.

But we're thinking we're coming back to more stable growth.

I think we haven't really seen yet the opportunities that will develop when we really start to launch broadband wireless and other services and so on.

That will start to surface in the market place.

So I think we have seen many, many years of very stable traffic growth, doubling every third year and I don't think that we have a reason to see that that is going to get lower going forward.

But with all the services, have a chance that we're getting even higher.

We are delivering very powerful equipment with a lot of opportunities.

Rather soon we will see again upgrades of the equipment that provide 510 megabits of speed, which means that you can download a CD in a couple of seconds.

There are many things here that offer us opportunities, but again, I think we want to make sure that we build this company forward step-by-step, but we're pretty optimistic about the future.

So you would be quite prepared - your cost structure is quite well prepared for a cyclical downturn?

The cyclical downturn I don't think is an obvious scenario that we see ahead of us.

But I think we have demonstrated a capability of handling a cyclical downturn, but that certainly is not the main scenario [indiscernible].

We'd rather see growth trends going forward.

Of course.

Thank you very much.

Thank you sir.

Your next question comes from Mr. John Bucher of Harris Nesbitt.

Please go ahead.

I am wondering if some of the strength from this last quarter's revenue, and for next quarter is a result of acceptance testing perhaps picking up on the part of the operators, with respect to wideband CDMA equipment.

Therefore you are able to recognize revenue on equipment that has already been out there shipped for a while, it is just that the acceptance testing is picking up pace?

Thank you.

That's an interesting thought, but it is not the case.

Before we close today I'd like to mention one thing.

That is to let you know that we are planning our next capital markets day here in Stockholm for May 3 and 4.

We'll put more information on the web site over the next couple of weeks to let you know more of the details.

With that I would like to thank you very much for participating today and look forward to seeing you next quarter.

Good bye.