Telefonaktiebolaget LM Ericsson (ERIC) 2004 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen.

Welcome to the Ericsson's Analyst and Media Conference Call for their second quarter report, 2004.

To view visual aids for this call, please log on to www.ericsson.com/press, or www.ericsson.com/investors. [OPERATOR INSTRUCTIONS].

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

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

Thank you, Operator, and hello everyone, and welcome to our conference call today.

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

Before we get started, I need to remind you that we will be making forward looking statements during the call today, and these statements are based on our current expectations and certain planning assumptions, and of course, they are subject to risks and uncertainties as the actual results may differ materially due to factors mentioned in today's press release, as well as in discussions in this conference call.

We also encourage you to read about these risks and uncertainties in our Annual Report.

With that out of the way, I'd like to hand it over to you, our CEO, who will comment about our performance and plans going forward for the quarter.

Good morning and good afternoon to you all, Carl-Henric here.

We are reporting from a quarter where we clearly have strengthened our leadership position.

We have a solid performance of sales and orders up 17% and 18% year-on-year.

In that is an underlying growth which we will come back and talk about, of slight to moderate growth in the business, but there is also a catch-up element from operators that may have held back a little bit too much during the troubled years.

We have also an operating income which has increased to SEK7.4b, with operating margins at 22.8%.

This is different from previous quarters where a lot of these profit improvements are coming from the major lay-offs that have taken place.

This is a quarter with no lay-offs at all, and where basically, the whole effect is coming from everybody's contributions throughout the whole organization, with a much clearer organization, clearer responsibilities, focus on simplicity, focus on simplifying work flows, driving down cost of sales, which you see in the improved gross margin and just being a stronger and more responsive, better company.

We said in the last quarter that the mid teens was a sustainable margin level.

We are raising that to high teens, closer to 20%.

I don't think it would be right at this point in time to draw the conclusion that we can do 22.8% or so going forward.

These are margins that always can fluctuate a little bit between quarters due to product mix and other things, but clearly it is a step forward in the right direction.

Operational excellence is clearly leading the way.

We have a much more committed organization.

We are exceeding expectations, even our own, if we look six to nine months back, not so much to what we do achieve, but with a pace and the fastness with which we have achieved things.

With the organization and the focus we have right now, and the fact that we are almost twice the size of our competitors, we have the ambition to continue to deliver Best in Class margins here.

Sony Ericsson also continues to show great development and growth, and I'll come back and talk about it in a second.

But we already, five quarters ago, we introduced our three arrows, talking about operational excellence, to create a strong organization with inspired and responsive employees, and to focus on profitable growth, to make sure that we have a performance to drive our own destiny, and also to strive for true world leadership with satisfied customers.

If we could only measure three things, to measure our profitability, our employee satisfaction and our customer satisfaction, that would tell the whole story for us, and I think we have come a long way in making a stronger, better company, although we are smaller, but we are stronger and we are faster.

Let me say a few words about our global position.

Our global presence is the result of 130 years of hard work.

We started off doing business in China and India, already in 1892, and in the early 1900s we were on our way to move our whole operations into Russia, where we had 3,000 employees in a factory in St Petersburg.

We opened up factories in the beginning of the last century in South America, so these are positions that have been gradually built over a long, long time.

Somewhere around half our sales is from high growth markets, and that is, I think, sometimes an underestimated position, where we have a large potential from driving the number of subscribers in the world from today's 1.5 billion into some 3 billion level, and there is a lot of roll-out, as you know, in many of these markets, whether it is in Latin America, or Africa, or Indo-Russia, or Middle East or Asia.

Our global position, with some 20,000 people in different parts of the world is really unparalleled in this industry.

Let me then say a few words on network convergence.

We are seeing here a convergence of networks and services with a focus on providing seamless services, whether the service itself is produced and fixed to mobile networks.

We as the users want to use our handsets, we want to use our laptops with our wireless downloading cards, irrespective of how the operator chooses to drive his traffic.

It's all about creating services that are easy to use, and as we all know, it means an awful lot when the service is easy to use, it is quickly picked up.

It's about being always best connected.

We know that this is very much driven from a technological point of view, from a fixed perspective, but from a behavior, a customer behavior point of view, much from the mobility behavior.

We want to use our mobile handsets.

That's why we have our contact books, that's why we can move freely.

This whole wireless convergence, we are seeing new revenue opportunities once we get into the all-IP world, where we can really start to produce multi-media services where we can listen to a five minute news update from the BBC, or whether we can stream music or download big data files, or what have you.

But all-IP opportunities also are there to reduce operators' costs, and that means that we have obvious efficiency gains from both the all-IP solutions and the layered architecture solutions that we are already basically selling in all our new roll-out networks.

Let me then turn to the next slide, and talk about business highlights, and especially the 3G status.

We're seeing now the pick-up of subscriptions.

We have today, on the WCDMA networks, we have about 7 million subscribers, another quarter of 60% sequential growth.

We have in the area of CDMA2000 1X, which has been around for a much longer time, about 100 million subscribers.

I think it's important that we all also understand that WCDMA is a natural evolution of GSM.

We're working here over the same core networks.

We're working on the same service application.

We have so far a third of the GSM market that is upgrading, which is basically all of Europe and parts of Asia.

Two thirds is the GSM, and will continue to be GSM for quite a while.

If we look at WDCMA and EDGE, the part of our total radio access sales, 30%, is coming from WDCMA and EDGE.

We are the main supplier in 21 of the so far 37 commercially launched networks.

We will see 46 networks at the year end, with Ericsson as the main supplier, and we will see all of Western Europe being launched before the year end.

As I said, we shouldn't forget about GSM.

The GSM potential, I think, is often underestimated here.

Two thirds of the whole footprint will stay GSM for quite some time, and this is where we also see a lot of the growth in emerging markets where Russia, for example, last year expanded from 20 million to 40 million subscribers and where India, this year, is growing from 25 million to 60 million.

Remember, that India has 250 million people that are living on a higher standard than Europe's, so this is not the roll-out of areas in poor countries or anything.

There is a high demand for these services.

You will find similar numbers in almost any third world country that you go to.

In this context, we have also had a handful of encouraging contract wins for Ericsson Expander, for when we roll out GSM in less populated areas, we can cover the geography with half the number of radio base stations.

And when we keep in mind that the cost for a total radio base station site is less than half, down to 30% of the total cost is the base station itself, and a lot of the other costs are driven from other site costs, that means that this will dramatically increase the potential for the number of subscribers that we can reach, to somewhere closer to 3 billion in the future.

We have also eight contracts in Managed Services and Hosting that we have announced, and that is a steady trend with increased focus on Managed Services, but also, a big opportunity, exciting opportunities in Hosting.

This is really where we provide the service layer software, and infrastructure to bring in different kinds of services.

Small and medium operators have the ability to come to us, and we provide them with a package of content providers, where we negotiate with the content providers, and they can basically buy the service from us, either on fixed prices, or they can either buy it on a pay as you go kind of arrangement.

This is an area with a lot of potential.

If we go to WDMCA Evolved, the next level of 3G equipment, where technology, which is also known as HSDPA, or even HSUPA for uplink traffic, this is the technology where we bring true mobile broadband to the handset, with up to 14 megabits per second of downloading speed, and typically 5 to 10 megabits.

This is what is going to bring the mobile service that you recognize from your fixed networks at your office or at home, into the mobile system.

This will provide opportunities for much more, much richer consumer experiences.

This is when we can start to basically stream music, stream music videos.

We can download our big data files from office, big Powerpoint presentations.

We can listen to news conferences or a five-minute update on CNN, or what-have-you.

In the Ericsson networks, this is already prepared for in the 3G supplied radio base station.

It's an easy upgrade with another software, and a couple of cards, plug-in cards, into the radio cabinet.

We are there with a couple of field trial systems, delivered in the field to operators that are testing, and we will have commercial launches during the second half of 2005.

If we then shortly go into some financial highlights for the second quarter, you already know that orders books and sales were up 17% and 18% over Q2 last year.

We have a gross margin that is now up to 47.8%, and that's another 3.1 percentage point sequential pick-up and that comes from a continued successful focus on cost of sales, and the way we build our products.

If we then turn further down in the P&L, we have income after financials of SEK7.5b, which means that we have an operating margin of 22.8%.

As I said, this means that we are raising our outlook for sustainable margins up to the high teens.

I don't think we should immediately draw the conclusion that we can stay on this particular level.

We can always have a bit of fluctuations here between quarters, but a clear lift to our performance.

Cash-flow before financing, Karl-Henrik Sundstrom will come back and talk more about it.

The cashflow from operations of SEK7.1b means that we are able to actually cope with a 17% growth with only SEK0.4b of increased working capital.

We're pretty proud of that, but we also have one-time effects from lay-offs of staff and investments in our Italian company, that takes SEK2.1b out of cash-flow.

We are now debt-free, as you all know, and we have net cash of close to SEK32b and a very solid financial position.

Sony Ericsson, I think, is well penetrated and known since the announcement, about 56% up in units sold, 34% year-on-year in sales, and an income of €130m, so a continued steady progress and there is no doubt that Sony Ericsson, step by step, is gaining market share here with a compelling product program.

Sony Ericsson has also upgraded the market outlook to now somewhere around 600 million units expected to be sold in 2004 versus 550 million in the previous outlook.

Then if we turn to our own outlook, we are slightly upgrading it, through the fact that we are saying that the steady increased traffic volumes - 20% up a year, basically doubling traffic every third year in the world's mobile networks, that should generate slight to moderate growth for us as infrastructure vendors.

But there is also an additional effect added right now, which we spoke a bit about in the first quarter, where we expected it to start to abate in the second quarter.

It has continued.

It will continue in Q3, and may even go into Q4, and maybe into Q1 next year.

That's something that's hard to say at this point in time, but there is a gradually abating effect from operators that have held back, maybe, a bit too much on their investments.

But we are certainly there now in steady slight to moderate growth period.

We also have good growth in Professional Services.

We had a slower growth after the first quarter, and we then also said that also here, we can have a bit of fluctuation between quarters, so we are pretty certain that we, after six months, will show that we were well back on track, and I think we are more than well back on track in Professional Services.

So all in all, in summary here, I think we can conclude that confidence clearly has returned to the industry.

Operators are not yet concerned with producing cash or improving margins, but much more longer-term visions, much more interest in discussing how we can develop our company going forward, how we can drive revenue, how we can focus on business development to become a stronger and better, more responsive operator here.

We are also on the way to true mobile broadband, and that will certainly expand the market.

That is an area where we are in the leading position, and by next year, when we introduce this technology, and 5 megabits per second speeds here, downloading speeds, I think that will be a break-point for the experience for handsets and mobile PC cards.

Also, finally, operational excellence is here to stay.

I mean, this is not an area that is a one-timer.

That is there for life.

We have clear ambition, and a clear target, to deliver Best in Class margins, but with only one great ambition, and this is to make sure that we have satisfied customers, and with the conviction that we can only do it through an inspired, motivated staff.

So, another good quarter, and we're looking ahead with a lot of confidence.

Then, I'll leave over to Karl-Henrik Sundstrom here to fill us in a bit more on the financial details.

Good morning, and good afternoon, ladies and gentlemen.

So I would like to start with Slide 1, the Financial Summary, and I wanted to point out that I think this picture describes pretty well the solid results that we delivered in the second quarter of this year, and I would like to point out a couple of things.

The operating income, as well as the income after financial nets, are excluding a positive one-time effect of SEK0.3b which has been taken out of this presentation due to the fact that it's just a movement between two equity accounts, that according to the accounting rules, has to be taken over the income statements.

It's in conjunction with the closedown of a subsidiary.

I would like to point out, like Carl-Henric said, it's at 17%, 18% growth.

Orders are flat compared to last quarter.

However, sales are up 16%.

If we move, then, to the next slide, I would like to point out that this is the second consecutive quarter that we are delivering a book-to-bill about SEK1b.

It is about SEK1b less than the previous quarter, but it also demonstrated what Carl-Henric took up in regard to our global presence.

As you can see here, that in the percentage of sales, that Ericsson is a truly global player, with a very widespread portfolio.

We have seen, now, for the second consecutive quarter, that the book-to-bill is more than one in Western Europe.

We see strong sales from CEMA.

We see very, very substantial increases in business activities in Latin America, and Latin America has gone from basically 5% a year ago, of Ericsson total sales, to now become 10%, and that is really a GSM story.

Asia Pacific continues with book-to-bill, the second quarter in a row, above one.

Could you please go to the next slide.

Systems are now having historically very high operating margins, in the 21% range, and that is the same level that we used to have during the high days in the 1990s.

You can see here that the sales are increasing, year-on-year, 20%, as well as 16% sequentially.

If we then move into Other Operations, we have now, throughout the restructuring of other operations, reached an operating margin of 20% and some impressive orders and sales increase of 13% and 15%.

I would like to say that this is a well performing entity across all the small businesses included, and I would also like to highlight that I don't think you should continue to calculate operating margins on this level.

I think it's an enormously good job that has been done.

However, I expect it to go down a little bit in operating margin.

If we then go over to the next slide, which indicates our strong financial performance, I would like to point out one thing.

We had a sequential sales increase for the total of Ericsson Group of 16% in the second quarter.

However, the working capital increased by SEK0.5b, and I think that that is a fact to be noted.

We have reached a net cash position of almost SEK32b, and equity ratios at 37.5%.

If we then move to the Other Operating Efficiency Trends, I would like to point out that I am very, very pleased to have DSO days below 90 days.

This is the first time since the early years of the 1990s where we actually have DSO below 90 days in the second quarter.

Inventory turnover has increased, from SEK4.9b in the last quarter, to SEK5.1b.

However, this is an area where you have tied up capital, and I would like to point out that this is basically a reflection of the increased business volume that we are doing right now.

If you go to the payable days, they have gone down two days, and they are still above the target of 45 days.

So if we then move to the Sony Ericsson slide, we have a sequential increase in units shipped, by 18%, and a sequential increase in sales of 12%.

But also, very importantly, we have increased the profit margin, which is net income over sales, from 7% in the first quarter of this year, to 8% in the second quarter.

At the time, we have also been successfully re-launching the new GSM series, the 700, in volume during the last weeks of June.

Then, if we move to the market outlook, it is, I think, Carl-Henric covered that quite well, so with that, I would like to hand over to the Q&A session.

Operator, could we have the first question, please?

Thank you.

Ladies and gentlemen, at this time, we will begin the question and answer session. [OPERATOR INSTRUCTIONS].

Our first question comes from Mr. Jeffrey Schlesinger of UBS.

Please go ahead.

Thank you.

Hi, could you give us a sense of production capacity, and where you stand now, and whether you plan to bring on additional capacity, whether this will be done through outsourcing, or do you plan on adding any internally?

If you can also give us a sense - you talked about other operations.

You wouldn't use the 20% going forward, a bit down.

Can we interpret that to be still in the mid-teens, and is the EMP business the primary driver of the strong performance in that business?

Thank you.

Well, when it comes to production capacity, we are upgrading our capacity as we grow.

Remember 17% and 18% of growth, and add to it the price declines that we have in our business.

You realize that we're sort of mid-twenties or something when it comes to unit shipped.

You should then, on top of that, realize that there are parts of the business that are declining, and parts that are increasing, as the product portfolio evolves.

It means that continued adaptations to higher volumes are part of our daily life, so we are upgrading our capacity, and doing that in close cooperation with our suppliers, because a lot of the factory work is actually done by sub-contractors.

When it comes to other operations, we are at 20%, and a main driver there is the success of Ericsson mobile platforms, that are successful in what they're doing, but there are also good contributions from all other areas.

I think it's a little bit the same thing there as with the 22.8%, that I don't think we should immediately anticipate that the number with each in a quarter is now sustainable going forward.

I think we're a little bit more cautious than that.

What would reverse that trend now?

If EMP is the primary driver, shouldn't that business keep ramping?

Well, that's an obvious conclusion to draw, but it also includes cable, and it includes the Defense business and so on, and remember that the Defense business is also a large project and can fluctuate a little bit between quarters.

But EMP definitely has good potential here.

Thank you.

The next question comes from Mr. Mats Nystrom of Enskilda.

Please go ahead.

Yes, hello, and congratulations to a Best in Class margin.

I have two quick questions.

How do you view the operating expenses developing in absolute terms when looking in 2005, and also assuming, perhaps, healthy revenue growth?

I mean, is OPEX increasing, or are you going to squeeze out more sales, based on the current OPEX structure?

Secondly, if I may, how soon will the weak North American order intake impact sales?

Are we going to see that already in Q3, or perhaps later?

Thank you.

Well, if we start with operating expenses, we are basically now running at a SEK33b run-rate, when we analyze the present situation.

We have earlier said that we thought we would be able to hang into that level for at least the remainder of the year, anticipating a somewhat lower growth.

Now that we have a bit of higher growth, I think we are getting to the point where we probably need to make some smaller additions there.

This is not going to be significant.

We still have opportunities to work more efficiently in certain areas, but there are also areas where we will, with added resources, drive volumes even further, both in terms of R&D, and in terms of our customer support in the market place.

But remember, that we don't foresee 17% or 18% of growth to be sustainable either, so there will be some additions.

They will not be significant.

When it comes to the order situation in the US, we should remember that this is almost like a technical temporary halt, because when a company like AWS is being acquired with an accepted offer over the stock exchange, it means that no management in AWS obviously have any motivation or reason to actually spend the future owner's money in different directions, and only will hold up what is necessary to keep the networks alive.

At the same time, Cingular as an acquirer do not have a legal right to get involved in the company.

For them, AWS stays in the category of a competitor until the green light is given, so you end up in a no-man's land for about six months or so, whenever in the fourth quarter when the green light is given.

That means that this is a true temporary halt, where we see our sales to AWS probably drop to half or something.

Once you speculate on the catch-up effect, I think at least we will, immediately after the green light, we will see them come back in old shape.

So I think with all that said, I don't think we will see much of a decline in sales in Q3, and then we probably will end up here somewhat below this year in terms of sales, but probably not much, and then we will be back in shape again.

Thank you very much.

Thank you.

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

Please go ahead.

Yes, I wonder if we could just explore this catch-up stand a bit more, although I know it's difficult to isolate.

I think you have suggested that, of the 24% growth you've seen in the first half, about a half to two thirds of that has come from this catch-up spend.

So I was just wondering if you are able to give us any indications as to how much came from catch-up spend along those lines in the second half, and whether you feel there is a risk that, as you go through the rest of this year and into next year, your year-on-year comparisons really get quite tough, or could you see underlying growth for the industry improving?

Well, I think first of all that if we try to make our outlook clear here, this is a business where we see an underlying growth of slight to moderate, and I haven't really said anything about a half to two thirds.

I don't know, that could be a bit of a backward reasoning here, because if you take the interpretation of when we talk about slight to moderate, and you take and deduct slight to moderate from the 24%, the remaining part of this is a catch-up, if that's the way we interpret it.

I guess it's somewhere there.

But remember also that basically, every operator will be willing to tell that they are not in a catch-up mode.

They always have very planned investments, but immediately agree that others probably have a catch-up effect.

This is hard.

If somebody wants to acquire another network and an enhancement of 100 base stations, you don't know whether that is an enhancement or catch-up, or whatever it is.

So this is a bit of guess.

The only thing we're saying is that the underlying growth of this industry, for us, of slight to moderate, is where we see is sustainable going forward, and this additional effect will abate over time.

I think we should also be quite clear that we do believe that we're gaining market share here, throughout the world.

We are in a strong shape with the company.

It is, however, not as easy as it is on handsets, for example, where you can claim that during a quarter, you have advanced a percentage point or two.

It is rather big orders, and you win or you lose an order.

It makes a big difference, but I think we're gaining market share also here and there.

Thanks.

Okay.

Your next question comes from Mr. Kubinder Garcha (ph) of CSFB.

Please go ahead.

Yes, thanks, just a question on medium-term growth.

I think previously, Carl-Henric Svanberg had said at the capital market there last year that you felt that 2004 would be flat, and that 2005 growth may accelerate on 2004 levels.

Do you still feel comfortable with that happening when you look at the fundamental drivers of the business going into next year, or do you think this upside you're seeing in demand is in a way borrowing from future periods?

Thanks.

I definitely don't think this is borrowing on the future.

I think it's catching up with the past.

I mean, remember that we have, since twenty years, I mean, we have a steady traffic growth in the mobile networks of some 20% a year, doubling traffic every third year.

So that's a very steady trend.

Remember also that we have a very steady trend on new subscribers getting into the networks throughout the world, and being in 140 countries, and 100 operators, and so on, this is not a business situation where everybody's suddenly acting in one direction.

This, of course, only happens when you have this big boom, and this big collapse, but now we're into more normal business, and I wouldn't say that there are any signs of borrowing on the future.

Thank you.

Just one follow-up, actually, on your operating margins of 20%, how do you feel about when -- because 3G in the mix hasn't been rising in recent quarters, and it's still 12% to 13% of mobile network sales.

When that does start to pick up, maybe later this year, and in 2005, do you still feel comfortable that you will be able to sustain the 20% operating margin, given that I'm assuming that that is a lower margin business still today?

Yes, but remember also that we have large economies of scale coming here as that product area advances, and I don't think we have any sense at all that 3G is less profitable, or more competitive than the GSM business.

We have always had new technologies and break-ins coming in, that starts off with lower profitability because lower economies of scale, and then as volume builds up, and experience curves develop, we're coming into the same situation again.

So I don't think we foresee any change in our margins due to the build-up of 3G.

We should also remember that, if you look at a third of the world's GSM networks being under migration, remember that in that migration itself, half of what we address as 3G sales, is call and service applications that are common to GSM.

This means that you're actually talking about a sixth of our total revenue that is related to new technologies here.

Okay, thank you.

Thank you.

Your next question comes from Mr. Wojtek Uzdelewicz of Bear Stearns.

Please go ahead.

Thank you.

I might try, from a little bit different angle on those operating margins.

I mean, in the past quarters, you've been a lot more conservative, and for good reasons, with your outlook, but you consistently keep out-performing and doing very well.

You mentioned that you expect operating margins to maybe be more in the high teens and that the current level is not sustainable.

At the same time, you mentioned that you still could squeeze a little bit of efficiency from operating expenses.

Is there any reason we should not think that you're just being conservative here with your high teens, but actually, margins could stay in those low twenties, or maybe even higher, as we go through the course?

Why should we not assume that those margins stay at the higher level?

I just think this is, as we've said, a dynamic, competitive industry.

Every gain that you've done in the past is important, but the next day is another day of continuing efforts and so on.

I think there are, in many ways, reasons to believe that we will continue to deliver great margins and it's certainly our ambition to deliver better margins than competition.

But I think at the same time, that it is important to be realistic here, and not too quickly get too carried away.

I mean, we will fight hard for our margins and we feel pretty confident when we're rising it from the mid teens to the high teens.

But just to clarify, is there anything specific that you see, over the next six to nine months, that you feel, okay, well we're kind of spending too little money here.

We've got to ramp up, or certain competitive actions or product mix that you'd say, you know what, that might be a little bit too high here.

Is there any specific thing that we should be thinking about?

No, on the one hand, it's nothing specific happening to us right now.

I think that is one way of looking at it, but at the same time, large orders, different contracts, different product mix, and different contracts, more software, less software - I mean, in that sense, you can almost say that every quarter is a bit of a unique quarter.

So you will always continue to see a bit of fluctuation between quarters.

We want to be a little bit on the safe side here.

Thank you.

Thank you.

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

Please go ahead.

Thank you.

I wanted to focus on the strong gross margin.

One of the three factors that you cited was the favorable product mix, and a previous question focused on 2G versus 3G with respect to that mix.

I was wondering if you could comment on that favorable mix, and maybe elaborate as to whether there was an impact between switching systems revenue versus radio access network, or any other attribute to the product mix you could comment on.

Thank you.

Yes, I don't think we said that we have any particular favorable product mix, no, but we more comment generally that the product mix can be more or less favorable between different quarters.

But I think we have right now a fairly good balance of new technologies, break-in technologies, break-in contracts, on the one hand, and on the other hand, add-ons to existing networks and general contract enhancement.

I think we are in a pretty good balance there, and I don't think we are in any specific unusual balance either of switching or radio.

I mean, we had, in the beginning of the capacity enhancement, it's an obvious thing that they start buying transceivers and then they buy whole radio base stations, and then it goes into the switching, and we get more of switch pick-ups, and so on.

I think it's still probably more noticeable, the enhancements on the radio side than on the switching side.

But remember, of course, that two thirds of our business is GSM, and it will continue to be, and this is a well-run technology.

We're well advanced on our experience curves.

We have a lot of volume effects, and everybody knows how to deal with the products, so that is a positive.

Thank you very much.

Thank you.

Your next question comes from Mr. Tim Long of Banc of America Securities.

Please go ahead.

Hi, thank you.

It's Geoff Walker here for Tim Long.

I was wondering if you guys could provide more guidance, or an outlook for emerging markets, and how that may impact your margins on a go-forward basis?

I know it's mostly GSM, and you've talked about, in the past, how that is favorable to your margin mix, but Professional Services, or any other areas that could impact margins for emerging markets?

I'm going to start off here, and Karl-Henrik can continue with the Professional Services as well, but in general, our position in the emerging markets is relatively stronger, versus competition.

I mean, if you go to the Western world, our market shares are not as strong as, for example, if you go to India, or if you go to Africa, or Latin America and so on, where we've been since a long, long time, and even if you are a very ambitious competitor, ten or fifteen years in these markets doesn't mean much when it comes to sustainability and being there.

Of course, in these markets, if we have stronger market shares, if we have a market where we have a 50% market share, and that is growing, obviously just mathematically we are growing faster than competition, that have their, maybe stronger footholds in other areas that are growing less.

I would say, on average, if you have the economies of scale that we have, this can at times be a very profitable business.

It takes a certain organization to build up certain organization to actually be in a market, but once you are there, and you have the size, you can defend your position well.

You would expect to see margins hang in there, and/or possibly improve on a go-forward basis?

We certainly don't see any reason why emerging market margins should be impacted in a negative way, going forward.

Right, and how important is Managed Services and/or Hosting Business, as you look out into 2005?

As we say, we expect to have good growth in Professional Services, and by especially in the area of Managed/Hosting, and that gives us unique capabilities compared to many of our competitors.

I would like to point out that by having Hosting, for example, you will be able to short-cut a lot of the time to market by being able to provide, on a service bureau type of business, a lot of new services in the existing mobile networks around the world.

This is very much thanks to our - especially in emerging markets, you can see, thanks to our global footprint, we are in 140 countries, and we've been there, Carl-Henric has said, for 100 years in many cases, which means that there are people trained locally, speaking the local languages, and being part of the local society, and very close to the local operator.

Right, thanks very much.

Thank you.

Your next question comes from Mr. Hasan Imam of Thomas Weisel.

Please go ahead.

Thank you.

My question was on the GSM side.

Nokia talked about the potential for increased pricing pressure as new competitors try to unseat incumbents with aggressive pricing.

Also, a significant chunk of GSM upgrades is coming from emerging economies, as you talked about, that tend to be price sensitive.

Could you comment on this, going forward?

Thanks.

I don't think we see any different trends than we've done historically, I don't really follow the comment actually, because this is an area where -- if any newcomers come into this business, they will try to get into the newer technologies.

I don't think this is the right time to do big investments, or try to break into GSM.

I must say, we feel quite confident about the trends in the GSM market, although it has always been a price competitive market, like anything else we do.

And then, I think Nokia was referring to some of the Asian vendors, particularly Chinese, who are trying to come into, with low and aggressive pricing on GSM.

No, but I mean, this is not anything new.

The Chinese vendors are there, and they have a favorable cost structure, but remember, we have in our supply chain in China 25,000 people, and Huawei have half that amount.

I mean, we are basically working on GSM on a Chinese cost structure.

There are always hungry, ambitious competitors that are willing to bargain a lot to make a break-in contract, but everybody knows, every operator understands that it's going into a ten year, fifteen year managed, and they need to have the service going forward.

So there are no free lunches in this industry either.

Okay, then, just one quick question.

What do you think is the timing of HSDPA beyond Japan, which is ahead of the curve?

Well, I actually think that now that so many operators are migrating into 3G, and are launching, basically, throughout entire Europe here, focus has basically jumped right on to HSDPA, because I mean, if you have an EDGE capability of 200 kilobits per second, and you can go to 400 kilobits, or 384 kilobits here on 3G, that is an important upgrade, but when you can go to 510, that really is a break-point, I think, from the service level that you're providing, and of course, once operators understand that other operators in their own territory will do their upgrade, I think we will get into a bit of a race of getting into those features.

Then again, you also see the importance of choosing your right partner, because we - well, we're not alone, but not everybody has a simple upgrade opportunity here, and we believe that we are first in line with the development, and it will just be a couple of speaking cards and a software upgrade, and you will be there, because it's all prepared for in the first place.

Yes, thank you.

Thank you.

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

Please go ahead.

Good morning, good afternoon, and congrats on your fantastic results.

Everything seems to be working the right direction.

I was interested in knowing whether you could relate your experience in the last six to nine months - I mean the vibrancy of demand evidently, where you see that filtering through, and perhaps for what reasons?

Arguably also, a general conclusion for all of us is that not only you have seen the massive amount in expansion in your mobile systems activities in the last six months, but also Nokia reporting 16% the other week, Motorola, overnight, 13% clean of a capital gain.

Could you relate to that whether you see this being more than cost cuts, i.e. your own activities?

I mean, something that is fundamentally happening in the market, mix shifts, or better bargaining positions with some of your entrenched customers?

Thank you.

Well, I think that there are a couple of things that one needs to keep in mind here, and one is that I believe that we do have, every time there is a break-in contract, there is a new network built in a country or so on, there is always a big fight on getting in there, and that may regulate prices for a year or two or three, but over time, I mean, these networks keep evolving over ten to fifteen to twenty years.

That's a very long period.

That means that we will always have a mix of highly competitive break-ins, but also just traditional build-outs and enhancements that are not as price focused.

There is also the other effect - remember that if you are living in a world, like we do, with say, 10%, or at times even more so, price declines every year, it is not just a matter of a level.

It's also where you are on the curve.

If you, as a provider, can be six months ahead of the curve, or if you are six months behind the curve, it means much, much more to your profitability than whether you bargain a couple of percent in the deal.

So I think it's also a matter of making sure that you are excellent in running your whole cost reduction programs.

Then, of course, I think we have, in Ericsson definitely, but also in other vendors, but also in operators, the 1990s was such a, of course, wonderful time, with big growth, and new technologies and so, but it also meant that focus was so much on expansion that we didn't really go deep enough in making sure that we ran efficiently, and that goes for everyone.

We see that clean-up now.

Thank you very much.

Thank you.

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

Please go ahead.

Yes, thank you.

I just wanted, maybe, just to get some clarification on 3G trends as you see them in the different regions.

You've talked previously about Western Europe, there being some hesitation amongst operators.

From the book-to-bill, it appears that that hesitation has now passed.

In the US, we've seen AWS just launch their network, but not in what you'd call a meaningful way.

When do you expect that shift to take place?

How soon can we look for that, given their need to respond competitively?

Finally, maybe just the eternal question of, what are you seeing in China with the 3G builds?

Thank you.

It's Karl-Henrik Sundstrom.

Regarding the 3G trend, it is that we see 46 networks being launched during this year, and there is actually, I would say, very much in Western Europe right now more about the performance related test of the systems, to see who is going to be -- so it's still fairly small networks being rolled out.

There are, like we said yesterday, around 7 million subscribers so far, of which over 3.8 million are in Japan.

So they are fairly small networks.

When it comes to the US, we have, with interest, followed the discussions and interest regarding 3G, and we actually have networks for WDCMA, test networks, in the US.

So that will come over time.

When it comes to China, I think it's important to realize that the Chinese authorities will put in a 3G licensing decision when it suits the Chinese, and I think they are preparing.

But our guesstimate, it's probably going to be around mid 2005.

Maybe I should say also that when it comes to the US that I think Cingular is now getting much closer to a decision to roll out faster, because I think they are also seeing competition from CDMA technologies and better data speeds there, so I think we will see, probably those plans accelerating.

That's extremely helpful, thank you.

Just as a brief follow-up, a lot of these contracts are likely to be extremely competitive, particularly in the US, where you have to defend a very high market share.

My sense, from the extensive discussions so far on margins, is that you're saying the scale that Ericsson has gives you a cushion to be able, where necessary, to be very competitive on price, whilst still maintaining these excellent margins.

Is that an accurate summary of the impression you're trying to give?

I think that's also what I tried to comment on as we go along.

We always have, every year -- the latest contract is always considered to be extremely competitive, and that is something that we've lived with forever, and three years down the road, you're saying, wow, we've got good prices on that contract.

I mean, that's basically the life when you are reducing prices with 10% a year on average, and of course, break-in contracts always lead the way there.

I would just say that scale helps you.

Thank you very much.

Okay, your next question comes from Mr. Matt Hoffman of Schwab Soundview Capital.

Please go ahead.

Good morning, and congratulations on the quarter, guys.

Obviously we've been talking about North America here, and your orders are down sharply, and you're suggesting an opportunity here with Cingular.

But I was hoping you could shed some light on your prospects in the CDMA business?

As you indicated, the operators there, Verizon and PCS are spending a lot, but do you think that you will actually get in, and maybe win some of that business?

Secondly, I was hoping that you could talk a little bit about countries outside of Brazil and Mexico that might be driving the Latin America results?

Thanks.

Well, I can start off here, and leave it to Karl-Henrik to talk about Latin America, which he is also responsible for, between him and me.

In terms of CDMA, we have clearly, strengthened our position, once we announced that we are now able to deliver the same hardware platform between WCDMA and CDMA. 97% is the same, it's just a couple of cards that have a bit of difference.

This means that we get the infrastructure muscle from WCDMA GSM to actually push CDMA.

That has increased our credibility, and everybody understands that we are there for the long-term.

The obvious thing, as a newcomer in that business is to gain market share outside of the US, because in the US, we have our main competition and everyone is well placed with the larger ones.

So we are having progress in, basically, all emerging markets, China, but also in India and Kazakhstan and in Bangladesh, and in Latin America, and in Africa, on CDMA.

Of course, we both have the ambition and reason to believe that we eventually will take positions in the US, but I think there, one has to be a bit realistic.

It's not something that you do overnight.

It may take a couple of years before we really build a better position in the US.

And when it comes to Latin America, it is very interesting to note that 80% of all subscribers in Latin America right now are divided between three players.

It's AmericaMoviles, it's Telefonica, and Telecom Italia, and that has created a very dynamic, competitive environment.

Of course, it's driven, as you said, very much around Brazil and Mexico, which are the dominating economies in Latin America.

However, we see growth in Central America, we see growth in Argentina, we see growth in many other markets, but you have to remember, that these three players are present and competing on a regional basis with each other.

America Moviles are present in Central America.

They are in Brazil, they are investing in a new network in Argentina, and the same goes for Telefonica, and to a lesser extent, for Telecom Italia Mobile.

Thank you.

Thank you.

Your next question comes from Mr. Thomas Langur (ph) of WestLB Equity Markets.

Please go ahead.

Yes, thanks for taking my question.

Could we go back to balance sheet and cash-flow please?

I think these are questions from Karl-Henrik with a K. Could you give us some sort of indication what your CAPEX levels will be in the third and fourth quarter, given that you're not capacity, and it might be there, and you do not want to outsource much more production?

Specifically, I'm also interested in the position called Other Provisions, as described in your 20-F.

You say that you want to utilize roughly SEK11b during the year, and I understand that utilize refers to a cash outlay, but I mean, maybe not.

Can you give us an update whether that statement is still valid?

Thank you.

When it comes to the CAPEX in investment activities that we had, we had a quarter now where we have a higher investment amount because of the acquisition of part of the minority interest in Ericsson SBA in Italy.

There was some increased investment in tangible assets, but I don't see a big increase in this area without being too specific.

When it comes to the other provisions, and that is as part of going and doing business normally, and doing the running of huge projects, it's important to remember that when we do that, we go through all the risk assessments of all the projects every quarter, making sure that they are assessed correctly, and they are supposed to be used, and that means that they will have cash outlays in the end.

And remember also that we have had in this quarter SEK1.5b of cash outlays for restructuring that we had as part of the restructuring last year, and we had SEK2.1b in the previous quarter.

Does that answer your question?

Not really, because this position, Other Provisions, really refers to provisions excluding restructuring, and I just want to get a better feel for whether this assumption of an SEK11b cash outlay during 2004 is still valid.

If we have put them as provisions, then they are being, therefore, used.

It's very strict rules in the way you can set up provisions, or not setting up provisions.

So that means those SEK11b will hit your cash-flow statement during the second half of 2004?

Is that correct, or is the timeframe not --

And then you also put in new provisions when you release, so it's a net amount that you have to go for, and we have not disclosed that.

It is not this one-time SEK11b.

You have to see the difference, and also the number of new projects coming in.

Have you utilized part of this SEK11b in the first half?

Can you repeat that question?

Have you utilized part of this SEK11b that I mentioned, in your 20-F, in the first half?

Yes.

Okay, thank you.

Thank you.

Your next question comes from Mr. Stuart Jeffrey of Lehman Brothers.

Please go ahead.

Great, thank you very much.

I've just got a question on Professional Services.

The book-to-bill has gone up significantly in the quarter, and I was trying to get a feel for how quickly those orders might turn into revenues.

Secondly, I have a quick follow-up on the EDGE situation.

You mentioned that you expect most European operators now to deploy EDGE and I was wondering if most means above 50%, or if you really do mean almost 100%.

Thank you.

Well, I think we'll start with the later one.

I missed the first part of your question, but first, if you take EDGE, the way discussions go around operators, I would say that after some time, I think we will only have -- with a few exceptions, only GSM networks with EDGE capabilities.

I think we will be close to a full upgrade, but there are GSM networks provided by suppliers out there that are not easily upgraded to EDGE, like ours, for example, where you can put in some cards or some software, and then you basically sit there with a full forklift for taking out the full equipment and bringing in new radio base stations or 2G.

That may not happen, but that is not sort of necessarily a wanted situation, but I think wherever you can, we will see EDGE upgrades sooner or later.

The first one I missed.

The first one was on the Professional Services, and how quickly the increase in orders might filter through into the revenues, and whether that happens straightaway in Q3, or whether that takes up in Q3/Q4 and into Q1.

The order intake for Professional Services, how long it will take to become sales?

That is the question, right?

Yes.

I would say that the order transition in Services is a little bit different from normal, because you have a great extent of short orders, which means there are additional services rendered when you are working with a client.

So I would probably say that it is 60% within 120 days.

Great, thank you.

Thank you.

Your next question comes from Mr. Brian Modoff of Deutsche Bank.

Please go ahead.

Oh, hi guys.

I have a couple of questions.

First off, with carriers starting to perhaps pull in some of the launches in Europe in WCDMA, you saw T Mobile and Orange launch the UK this last Monday.

We're seeing some more aggressive, perhaps launches, here in the States, Cingular, as you mentioned, perhaps getting more aggressive on WCDMA, Sprint pulling forward with VDO, Verizon rolling it out.

How could that affect your outlook on next year, relative to your growth for the industry?

Secondly, when do you see inter-operability issues on handsets in WCDMA handsets, such as compressed mode, being resolved to the point where we can start seeing some real volumes, of WCDMA handsets showing up in the market?

Thank you.

I actually think that in terms of inter-operability and handsets, and so on, we can do better as an end-to-end provider as one of the few in terms of making sure that there are handsets, at least, from us available, but I think we must always live with a bit of the fact that the handset manufacturers want to see the market before they really force their R&D, and at the same time, with little handsets, you don't push the market, so I mean, we are in a Catch 22 there, and we always are in technology upgrades.

But now we are there, all handset manufacturers understand that this market is a quick growing market, and everybody wants to be part of it, and now it's just lead times, and handset manufacturers are adding new alternatives to the market all the time.

We are right now, with the handsets coming out of Sony Ericsson and other manufacturers working out of the EMP platform, they are today at battery times, stand-by times, talk times, on GSM levels today, so I think that there are a lot of good alternatives there.

But it has been frustratingly, slow, I think we must admit.

I don't think that your first question about a lot of things being launched here changes the outlook for the next twelve months or so, but I think this is a driver going forward, because it means that we will both provide more services, and that would generate traffic, and generate also, infrastructure needs in terms of service application platforms, or what-have-you.

But also what I think is happening is that in Europe, this is also driving tariffs, and tariffs in Europe are the highest in the world, and have had a hold-back effect on traffic.

Now, we are speaking half as much per month, per subscriber in Europe as, for example, in China, or much, much less than that, maybe a quarter of the time that you speak in the US.

So I think that in that sense that there are some pretty significant factors here to try to understand going forward, and in the coming years.

Brian Modoff - Deutsche Bank - Analyst

But do you see, that point you just made, if you see that occurring, do you think that GSM networks can accommodate the significant increase in traffic that would occur if you were to start seeing something like the kind of rates that you see in this country, kind of bucket plans that you get in the US, or would that, do you think, force the shift over to WCDMA for voice capacity, and perhaps increase overall build in Europe as a result of that?

Carl-Henric Svanberg - Ericsson - CEO and President

No, it won't.

I mean, the present GSM networks can't go for that.

You either have to expand the GSM networks in terms of capacity, or deploy more capacity in 3G.

That is pretty clear.

Brian Modoff - Deutsche Bank - Analyst

Do you have enough spectrum, though, to go with the -- Europe seems to have limits in spectrum.

Would you have enough spectrum in GSM to do that, or would that force you to WCDMA?

Well, I think in Europe, it is very clear that no operator is planning to meet such perspectives with GSM.

We will see in Europe GSM continue to live there, and be part of rural areas and smaller towns and cities, but there is now a major roll-out of 3G, and that's where the effort goes in.

Okay, thank you.

Thank you.

Your next question comes from Mr. Richard Kramer of Arete.

Please go ahead.

Thanks very much.

For my questions, perhaps you could clarify the previous question on provisions.

You were asked if provisions were utilized in the first half, and you said yes.

Could you clarify exactly how much, and what the net effect of those provisions were, and perhaps also give some detail on these SEK3b reduction in other receivables.

Was there any one-off behind that, or where would that money have gone to flow through to the P&L?

Thank you.

And then in terms of a fundamental question, are there going to be milestone payments in the second half of the year, based on revenue recognition relating to 3G when the operators roll out those networks?

What size, roughly, can you provide for us of the 3G royalties that Ericsson might expect to receive, both for infrastructure and handset IPR that it holds?

Perhaps that could be put in context with another question that I believe you didn't answer on the Other Operations and what the margin outlook there would be.

Thank you.

Karl-Henrik Sundström: Okay, when it comes to these other provisions from the 20-F, I will not disclose, because this is part of any normal operation, how much, but it has had a significant impact on the P&L, as it always does when you roll out the infrastructure projects, because you need to make up provision for the costs that you know are known.

So that's one.

And then the other question was in regard to the receivables.

That is basically due to the treatment of FX derivatives that we have in our Treasury operations.

Then, when it comes to the question regarding milestone payments, it is a fact that, in early technologies, you usually have - like 3G, in the early phases - you have more types of milestone payments.

However, I don't have anything of significance in the second half that will be of significant cash-flow or interest rates for the results.

Then you have the revenue and the royalties.

I think it's important that the lion part of those royalty payments coming in are not part of Other Operations.

They are actually part of the segment Systems.

So the IPR that you would get from EMP would be relating not to Other Operations, but to Systems?

Karl-Henrik Sundström: Yes, because of the patents that we have, have been made by either the radio access guy or the core system guys.

Okay.

Perhaps, then, you could put in context, or give us some clarity on the guidance of Other Operations where we saw, clearly, a rather dramatic jump from 2% to 20% margins from the first to the second quarter.

What was behind the 20% margins there?

Karl-Henrik Sundström: Yes, I would say that all businesses have dramatically improved the performance, and that's why I say I don't want to guide, to not draw too big conclusions, because I think it will go down a little bit, but I'm very, very happy about the performance of other operations.

But the handset - any handset IPR royalties were not in Other Operations, they were in the Systems business.

Is that just to be clear?

Karl-Henrik Sundström: Can you repeat the question?

The royalties, or the IPR royalties that you received from any handset sales, either to Sony Ericsson or to third parties from EMP, those are sitting in the Systems business?

Karl-Henrik Sundström: Yes, but when we reported it by segment, they go in under Other Operating Revenues, and then we divide them into either Other Operations, or into the segment Systems.

The lion part of those are on IPRs, related to the infrastructure.

And is that expected to rise sharply in the second half when 3G handsets come out?

Karl-Henrik Sundström: I don't want to make any comments.

We have given, at the fourth quarter last year, that we said on average, it should be between SEK300m and SEK500m per quarter, and I don't have any reason to change that.

Okay, thank you.

One last question, please?

Okay, your last question comes from Mr. Richard Edwards of Citigroup.

Please go ahead.

Good afternoon, a quick one.

How many temporary and contract staff are you currently employing in your facilities in your offices?

How do you expect that number to vary as we go through the second half of the year?

And do you anticipate that that could impact your margins in any way?

Well, I can start off here, maybe.

I don't know if Karl-Henrik can give us details on the number exactly, but the temporary staff are only related to the fact that we have a production model in place since several years, where we are running up new products in our own factories, and whilst the production is stable, we move it over to low-cost countries.

In doing so, it means that, depending on the amount of new introductions and so on, it can fluctuate a little bit in our own factories.

This means that we may, at times, work with more temporary employees, but as soon as we know that they are there for the long-run, we employ them.

But it's more the fact that they are there to take our peaks, and obviously don't have any impact at all on the P&L.

Can you give us any sort of clarity on the actual levels in Q2?

In the amount of temporary staff?

Yes.

Are you asking for the whole of Ericsson or in the production facilities?

In the whole of Ericsson.

That's probably 1,500, maybe, but then you also have to remember that there are people coming in, depending on different countries, so I would say a big part of that is in the production that Carl-Henric Svanberg referred to.

And is the implication of your answer that you would expect that number to decline, or as you go into a seasonal peak of production, perhaps in Q4, that it would go up, even?

It is a thing that peaks, and it could be one quarter, a little bit more, and another quarter, a little bit less, depending on where we are in the process of moving things, and introducing new products.

And it is obviously not a situation that has any advantages, long-term.

Either you use several employers for peaks in factories before you move on production lines to lower-cost countries, or you may, at times, use also consultants in R&D and others, hire because you want to take off-peaks, but again, it is much better to have your own staff, so as soon as you know that you're going to run with it long-term, you employ the people.

Thanks very much.

Before we finish up for today, I'd like to let you all know about the Fall Capital Markets Day that we've planned for November 11 in San Diego.

We will post registration information on our website sometime during August.

Also, we're planning two regional summits during September in Asia Pacific region.

We have a half day session in New Delhi on Monday, September 20, followed by a half day session in Hong Kong on September 22.

More information will be posted on our website shortly regarding these events.

Regarding our second quarter report, if you have any additional questions, please do not hesitate to give either myself, or anyone on the Investor Relations teams a call, and we will be glad to try to help you out.

Thank you very much.