Telefonaktiebolaget LM Ericsson (ERIC) 2004 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen.

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

To view visual aids for this call, please log on to www.ericsson.com/press, or www.ericsson.com/investors. [Operator's Instructions].

As a reminder, replay will be available 1 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 for the third quarter 2004.

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

We will be making forward-looking statements during the call today, and these statements are based on certain expectations and certain planning assumptions, which are subject to risks and uncertainties.

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

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

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

Carl-Henric.

Thank you, Gary.

Let me start with our first slide here about leveraging market leadership.

We have another quarter of solid performance.

Sales is up 14% year-on-year, and in currency adjusted is actually 20% up.

Operating income of SEK7.2b means that we are steady on operating margin of 22.7%, and really operational excellence paves the way here.

It's been a very, very interesting and rewarding work here that we are going through, in focusing the whole Company on workflows and processes and efficiency.

And it doesn't only mean that we are building up margins, it also means that we are delivering faster than our more reliable, stronger partners.

So we're also gaining market share through that.

And I think it's obvious that, if you take our growth of 20% in US dollar terms, that is a higher growth number than any estimate of the market you see.

So we are taking market share as we go along here.

It us also encouraging to see that the GSM Wideband CDMA track sales is up 25%, year-on-year, and currency adjusted actually 30%.

So it is exciting to see.

Sony Ericsson's success continues and the latest introduction of the S700, the real camera phone, will I think be a big success and we'll come back and talk about it.

Let's talk about the 3G market, the highlights there.

It is -- We're seeing how the Wideband CDMA footprint is expanding, and it's encouraging to see that we will have a major deployment of Wideband CDMA in the US, driven by Singular in 2005.

We also are seeing strong global Wideband CDMA subscription growth.

We have another quarter of 30% up, and we have now more than 10m users in the networks.

And obviously 3G expands the market, it is not just about voice as we all know.

But it means that we get all of data, entertainment, basically Internet into the pocket.

And if we turn another slide here and talk about Ericsson here, the Wideband CDMA rollout for us continues.

We're now seeing how Wideband CDMA is quickly catching up on GSM sales, for example in Western Europe, and we are the supplier in the majority of the networks out there.

And we're also seeing strong demand for EDGE, and EDGE is a great complement to Wideband CDMA, bringing data speeds up to 200 kilobits per second.

And will often be a complement also, after rollouts of 3G in rural areas and so on, then we should expect most GSM networks to be upgraded to EDGE sooner or later.

We have a very smart solution there, so for us it's basically just a software upgrade, and we have so far been awarded 25 of the 35 now launched EDGE networks.

But it's also about the next level of 3G.

As GSM once was upgraded to EDGE, 3G is upgraded to 3G Evolve which, in our technical terms, is HSDPA.

Which means that we will have theoretical speeds up to 40 megabits per second, and in reality I think typically 5 to 10 megabits per second.

That's a giant leap.

It will be bring quite a different experience to the world and to the user.

We are the first in that field and we are -- we have ongoing field trials.

We're driving cars here around in the suburbs of our office here, we're also doing trials in Japan.

If we look at 2G, we shouldn't underestimate the strength of 2G.

The rollout continues, as China is rolling out 5m subscribers a month, Russia 3m, India 3m, Latin America, Africa.

There is a lot of rollouts going on, and there we should remember that 2G is paving the way from 3G -- for 3G.

And very often it's a high loyalty from operators when going from 2G to 3G of their existing vendors.

We have, and this is more for interesting, just to reflect on that we only this quarter have been awarded contracts for 6 new, entirely new, GSM networks.

So it's not just upgrading going on.

And Ericsson expanded here, where we can cover a geographical area with maybe 30 to 50% less radio base stations, is really a success.

It means that in many markets we can penetrate deeper and reach more people, and that is important, to drive economy in society that people can communicate.

We are also having good growth in services, and so far this year in local currencies, which is the way to measure services because it is local business, we are 16% up year-to-date.

And our managed services is gaining momentum.

We are more and more taking over networks and running networks for customers, for operators.

And there we have today some 35 networks that we've taken care of, with a total of 30m subscribers.

Let me talk about our regional update, how we're doing.

First of all Western Europe, that is where we've had the bigger catch-up effects, where we're seeing really strong growth.

We're seeing a rollout that, with operators and other competitors, we will have covered Western Europe by the end of this year.

We're also seeing EDGE upgrades starting to accelerate, and we're seeing these GSM enhancements, of course.

If we go to Central Europe, Middle East, and Africa, that is another area of good growth, and we're especially strong in Eastern Europe.

In Russia, for example, major rollout and many markets in Eastern Europe.

Asia Pacific - there we have continued strong subscriber growth, and a number of rollouts.

That is ongoing and will come.

India's particularly strong; we have strengthened our market share considerably this year.

We are seeing China is somewhat slower in the quarter, although that has more to be -- do with the fact that they tend to order rather large frame contracts.

And sometimes they are early in ordering them and sometimes they are later but steadily, with 5m new subscribers, this is a steadily -- every month this is a steadily growing market.

South East Asia is growing all over.

North America is -- has in -- overall a healthy development.

But for us, because we are main suppliers to Singular and AWS, that is a bit on hold because everybody's awaiting the green light for the merger.

And I think we should expect it very, very soon.

In terms of Latin America, that is our strongest growing region, and it's an interesting thing to reflect on.

Because there has been a number of operators in Latin America but all of it has been consolidated today, basically by Telefonica, Telecom Italia and American Mobilas.

And following that consolidation there are now upgrades and expansions going on.

So we are almost 100% up in Latin America.

Brazil and Mexico really in the forefront.

Let me then talk about the new communications landscape here.

A word that I'm sure you're familiar with, or will be, is the triple play.

What used to be in our business voice is becoming voice and data and entertainment, and we will all have -- it will all be about not only handsets and telephones, it's also about PCs and PC cards, and it's about TV, and video and audio.

And all of this is being brought together in what is often addressed as convergence.

But the important thing is that is not convergence for the engineers; this is convergence for convenience.

It's all about making easy-to-use services for the individual user.

And this is where we are seeing an increased focus on end-to-end because what this means is, what starts with convenience for us as users - easy-to-use, personal, reliable, secure.

What starts with those kind of services for the consumer means offering seamless services for the operator, irrespective of whether it's mobile or whether it is fixed.

And that, in its turn, put demands on us to really make it work end-to-end.

As a vendor, it's not just about deploying equipment and therefore, it is really making it work end-to-end.

Telecom in this context has the winning proposition, we believe, because mobility is a very, very crucial part of the consumer offering.

It is about bringing broadband to the mobile or bringing mobile broadband.

And telecom here is a pre-requisite, this not an industry for best effort.

This is telecom grade, 5 minutes downtime a year.

IP technology brings a lot of opportunities here but it has to be IP technology with telecom grade.

It must be -- have the reliability and the security and so on, that telecom grade has, but it's taking advantage of IP technology's cost efficiency.

And in this context, we can clearly see that not everybody can deliver end-to-end.

And therefore, we're seeing a clear trend that operators are focusing on fewer partners with true end-to-end capabilities.

And not only do we in Ericsson work together with Sony Ericsson, to make sure that we can deliver services that work between the networks and the handsets.

But we have also, I think, a bit of a hidden asset in Ericsson mobile platform, where we deliver the content, not to -- only to Sony Ericsson in the phones, the telephony technology into the handset of Sony Ericsson but also to many other vendors.

And we are, for example, delivering 3G platforms to 5 out of the 10 leading suppliers in 3G handsets.

Let me then quickly touch upon some financial highlights.

Orders booked is SEK29b, representing 3% growth year-on-year and some 7% currency adjusted.

We shouldn't read too much into the bookings because we have large orders and they fall into a quarter or out of a quarter or -- And it's like when we had very strong bookings in the first quarter, we also then said don't over-read this, and we're saying it again.

We're having -- we're looking forward to a fourth quarter which obviously, as always, will be the strongest for the year, both in terms of bookings and in terms of sales.

Sales is 14% up or close to 20%, currency adjusted.

Gross margins are basically stable around 47%, 47.1% this time.

If we look at income, we are at SEK7b and an operating margin of 22.7%.

Cash flow is SEK5.2b.

We have a bit of increase in inventories, which is basically work-in-progress in the field as we are increasing our business activities.

But still strong cash flow, and adding today a debt-free net cash position of SEK37b.

If we then look at Sony Ericsson, we're enjoying continued growth here; units are up 51%.

I believe we all enjoy some very, very attractive new product introductions.

The S700 is by many commented to be the first true digital camera phone.

It has -- on 1 side there is looking like a Sony Cybershot, with a menu handling that is the same as in Cybershot, and it's a regular phone.

So I think that is a true evidence of the successful merger between the capabilities of Sony and Ericsson.

Sales up 29% for the year, and income continues to rise and is now at €136m for this particular quarter.

So the product portfolio has a clear leading edge.

We are focused very much on the middle to high segment, and as we're building strength there we may be able also to continue to expand into other segments.

If we look at the market outlook, we are so close to the year-end now, so we can only conclude that this is a good year, including the catch-up spend.

But as we also forecasted already in the first and second quarter, this is now starting to abate, and we will see most of it being gone by year-end, I would think.

When we come into 2005, we are indicated a moderate underlying market growth, which is actually -- is actually a bit of an upgrade from the slight moderate we talked about before.

But we have also said that we must remember, following the strong growth in 2004 being inflated by old catch-up spend.

That when comparing to 2004, we expect slight growth which is, I would say, much in line with consensus of the market.

That is where Gartner is, that is where our main competitors have been.

So outlook for next year very much in line with the consensus in the market.

We're also continuing to see a good growth, expect good growth in professional services.

And that basically brings us to the end of my input here, where as a summary we're proud to see a continued solid performance, and I believe we are well positioned for profitable growth and for being able to grow somewhat better than the market.

We are also seeing how our role is becoming more and more strategic as a vendor towards our partners.

And that our end-to-end capabilities is really in focus here.

We also look forward to continue to deliver best in class margins, as a result of our economies of scale and worldwide presence and strong position.

Thank you and I leave it Karl-Henrik to comment financials.

Yes, hello.

This is Karl-Henrik Sundstrom speaking and I'm very happy to have you with us, and I would like to start with the first slide, the financial summary.

As previously said, we have delivered another quarter with very solid performance, and I would like to point out that the currency effects on orders booked are around 4%, and the currency effects on net sales are around 6%.

We have kept an operating margin basically at the same level between the 2 quarters, and also kept an EBITDA margin of basically the same, between the 2 quarters.

If we then move in to the second slide, about book-to-bill.

I think this slide very well demonstrates the very strong performance in sales that we've had.

Like up 26% in Europe, 33% in Central Europe, Middle East, and Africa.

North America is down 22% and that is what we have previously announced that we have seen, due to the merger between Singular and AT&T Wireless that we saw dry up in orders, and now it's reflecting in sales.

This has, though, been compensated with a very, very strong growth in Latin America.

And if we go to Asia Pacific, as Carl-Henric said previously, we've had an order intake that is slightly lower than previous.

But then we have to remember that the third quarter of last year was very heavy with order intake from China.

Because in the first half of 2003 we had the SARS epidemic in China.

What happened to us was that, especially in the second quarter, our staff could not travel and meet customers, and our service people in China could not do a lot of the work.

That's why we get a little bit of a strange picture in the third quarter of this year.

I also want to point out that the currency effect for Asia Pacific is slightly more than 7%.

So in currency adjusted terms there is a small growth in Asia Pacific.

And also I think it is important to point out that the book-to-bill year-to-date is above 1, it's actually 1.03.

Next slide, please.

Systems, which is the main part of Ericsson operations, we have seen an order growth of 3%, and a sales growth of 14%.

Currency adjusted that is a 20% growth roughly.

And then we have to remember that the GSM/WCMA track is up 25% which, if you adjust it for currency, as Carl-Henric said, that's slightly more than 30% up.

We had improved the operating margin compared to the last quarter, and that's basically because of our operational efficiency, as well as a very strong performance in the GSM area.

If we move into other operations, the next slide.

We continue to grow here, and the operating margin here has been affected with lay-off charges, mainly in the defense business of Ericsson.

And adjusting for that, we are still having a double-digit operating margin.

And then we move into our -- the next slide, which is the very strong financial performance.

We have, in this quarter, reduced debt by more than SEK10b.

We have repurchased bonds for slightly more than €450m, and we have paid off in accordance to the repayment schedules around SEK5.6b.

As you can see, the working capital has increased with SEK900m, and that is basically explained by the build-up of working capital that we've had in the fourth quarter.

Which is the reflection of the increased business activities that we're having.

We have also improved the net cash position to almost SEK37b, and Ericsson is having its highest equity ratio in modern history.

Next slide, please.

Going into the operating efficiency trends, I would like to point out here that we have actually reduced the accounts receivables, and kept the 88 days for DSO.

We have had an inventory turnover going slight -- basically back to the level of the first quarter, which is actually lower sequentially compared to the 5.1 we had in the second quarter.

This is, as I said before, due to the work-in-process build-up in our work-in-process out in the field.

This is an area where we are focusing quite a lot on, making sure that those projects are getting invoiced in the fourth quarter.

Accounts payable continues to be on the level of 52, 53 days, which is above the target that we had put up.

Next slide, please.

Sony Ericsson.

Sony Ericsson continues to improve both in volume, shipped units, net sales, and also improving the net income before taxes over sales.

That has improved for -- if you compare, for example, in the third quarter of last year, from around 3% to the second quarter of this year 7.5%, and it's now in the third quarter 8%.

Also it's worth to note that the ESP has increased, as was indicated by the Sony Ericsson management in conjunction with the second quarter report.

Next slide, please.

I don't have anything else to say that didn't -- that Carl-Henric didn't mention in regard of our outlook, and I would like to stop here.

Okay, thank you Karl-Henrik.

Before we go into the Qs & As, there's been one really big question, I guess, and that is regarding our outlook on a directional basis on -- per region.

And Carl-Henric, would you mind giving us a little bit of an idea what you're thinking there?

I can just give a few comments on how we see the development going forward in the various regions, and just shortly of course.

But first of all if we look at Europe, that is the region where we have seen the biggest catch-up spends and the rollouts.

So there we will see a slower growth or maybe even come down to flattish.

But that's an obvious.

At the same time in America, once the merger is approved then we should see some much better development in US.

Latin America will continue its good growth as all the rollouts continues but, of course, comparing to a year of 80%, 90% growth, we will not -- we don't anticipate such a year next year.

But certainly it will continue to be a favorable area for us.

Asia Pacific, I think all of what goes on there will continue to go on.

So we look forward to much the same in Asia Pacific as this year.

And if we then look at the CEMA region as we call it - Central Europe, Eastern Europe, Middle East and Africa - that is also a region that will continue to be favorable, as so much rollouts are going on there.

Fine.

Operator, we're ready to start the question and answer session now.

Thank you.

Ladies and gentlemen, at this time, we will begin the question and answer session. [Operator's Instructions].

Detailed information is provided in the report.

And Ericsson's Investor Relations and Media Relations team will be happy to take additional questions, and discuss further details with you after the call.

Our first question comes from Mr. Tim Luke of Lehman Brothers.

Please go ahead.

Thank you very much.

I was just wondering whether, with respect to the fourth quarter in suggesting that the revenue growth might be slightly less than the seasonal trend, which I think has been around the 35% range.

Should we be framing an expectation of potentially around the 20% to 25% range?

Is that the right framework?

And Karl-Henrik, I was also wondering if you could give us some color on how you see the gross margin and operating margin development, going forward?

Thank you so much.

I think what Carl-Henric said regarding the fourth quarter sales is enough.

When it's regarding the operating margin, I would say that I feel that they are robust at this moment.

And that's sustainable?

What we have said, well we are not giving a forecast for the year and for the next quarter.

And the only thing we have said is that the next -- that the fourth quarter is always the strongest for the year.

And we have no reason to expect anything else.

We look forward to the best quarter of the year.

Our earnings, the 22.7% and the 47.1%, we have earlier commented that we see the mid-40s and the high teens to be sustainable.

And, of course, in this industry you don't look that far out but, certainly, it's several quarters.

Thank you.

Okay.

We have several questions in the queue.

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

Please go ahead.

Thank you.

Could you just clarify in terms of catch-up spend?

First, are you now assuming you won't really see any in 2005?

Because I think a quarter ago you were saying that would continue - though it would abate - it would continue into 2005.

And also if you could just give us an idea of, when you say you're already seeing it abating, just where more specifically you see that happening?

Well, the catch-up is an interesting topic.

I think let's start but just agreeing that the 20% currency adjusted growth that we have so far, is not the underlying growth of the industry.

So obviously there is a catch-up spend.

It is a bit difficult because anything that anyone orders, he will always say that is a well-planned order and so on.

So you can't earmarked various orders.

But we are consistent in what we said before.

We have said that we will start to see during the autumn this catch-up spend abate, and maybe will end by the year, or we will see some in Q1.

We're not changing that.

But whatever comes in to Q1, if anything, it becomes so small and then they're looking at the whole of 2005.

So I think we're disregarding at this point in time.

We have seen more of it in Europe obviously because that's where the debt reductions and focus on cash flow was the strongest.

But the whole financial market was so focused on cash flow generation, and almost competition and how little CapEx spend you could live on.

And that also penetrated.

You can see signs of that also in China Mobile.

You can see it down in Africa on listed companies because they are all listed, and have been all focused, and they all want to perform.

So we have seen a bit of catch-up here and there but the majority of it has been in Europe.

And is that where you now see it slowing, or is it China or elsewhere?

Or are you looking ahead and thinking in the fourth quarter it will actually slow?

Yes, I think that is where we're seeing it slow.

Obviously, if you look at markets where you see, like China, 5m new subscribers a month, you grow into larger costs rather quickly.

So it's maybe not the same thing to have a continuous need for just expansion all the time.

And next year, if we do see a rebound in Singular and AWS spend, will you consider that to be catch-up spend?

Well that's an interesting one.

I -- We haven't ever thought about that as a catch-up spend.

I think in reality that there will always be some fluctuations.

So I hope in the future that we will not revisit this idea about catch-up spend.

It's more the fact that we went through such an incredible roller coaster, and had such an enormous debt situation, debt positions by operators, and many fought for their lives.

And, of course, that created an abnormal focus on cash flow and things that I don't think we will see going forward.

Then you will always have different operators having different agendas at different points in times.

Okay, thank you.

Yes, okay.

Your next question comes from Mr. [Ingar Hagdon].

Please go ahead.

Good morning.

A question regarding the guidance for next year.

You broke it down geographically and highlighting some of the markets but you're still saying you're seeing growth in most markets.

You're seeing Europe being flat to slow growth.

The Latin market, Asia equal to this year and US up, and still you're pointing to 5% growth in the market next year.

How's that aggregated together?

Are you being cautious or are you really believing that the market will grow 2% to 5% next year in terms of value?

Well, first of all I think it is important that we remember that the guidance we give, we give for the market.

And that when we are talking about activity levels in different regions, it's a little bit how we see our own activities following our own positions.

But remember that, when we are saying growth, 2% to 5% is one growth aspect or outlook.

And every time we mention growth it doesn't mean that it exceeds 2% to 5%.

But I think we are -- I think it is important to remember that we are giving this guidance in as good a way as we can.

We want to be realistic.

We want to remind you that we are comparing with a year with a strong catch-up spend, and especially in Europe that could be flattish, or 25% of our sales.

It could even may be then go a bit negative, I don't know.

Well, that means if, in the guidance you've given on the market of 2% to 5% is in US dollars on market.

So if Swedish kronor has continued to strengthen against the US dollar, and you probably gain some market share, you're stating.

That means your growth is probably in line with the numbers you've given or?

I won't give you any more guidance there.

But, of course, if -- The outlook that we're doing for the market is an outlook in US dollars, in today's exchange rates, assuming that there will be no other exchange rates developing.

And, of course, that will be because things are moving all the time.

But assuming a stable exchange rate, that's the guidance we give for the marketplace.

Of course, that will be in -- when Ericsson, where we had everything we do, when our sales achievements and market shares and currencies, Swedish kronor, that will have an impact.

But I think it is important to remember that with our position, I think we have a bit of a unique position to capture market share.

Both in several emerging markets, we are leading in HSDPA technology-wise.

We are gaining momentum and so on.

So we have an opportunistic view here on how we can take the Company forward.

Thank you very much.

Thank you.

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

Please go ahead.

Yes, thanks very much.

I just wanted to ask a question about, again, some of the assumptions within your guidance.

When you assuming 3G rollout as in spending begins in China, are you assuming -- It sounds as if you're assuming a pretty rapid move towards 3G in the US.

Could you just clarify those points?

And, as a follow on to that, in those major contracts that come up, how do you see margin progressing for Ericsson?

Are you still confident that you have the scope, and breadth, and scale in your business to offset possible margin pressure?

Thank you.

When it comes to the rollout first.

The -- For Singular AWS it is a very important, a very focused area to quickly rollout wideband CDMA, and quickly be able to launch HSDPA, to have a competing or even superior offer than their main competition has.

So that is a must for them, and that's a pre-requisite for a successful merger.

When it comes to China, of course, nobody knows because there is no public statements of exactly what's going to happen.

But it seems like the consensus in the marketplace is license decisions, somewhere around next summer.

And we are -- We don't know but we are -- I think we could expect rather quick orders and rollouts there.

Because the operators are standing there waiting for the rollout, and they feel that they are waiting for licenses.

We could certainly have bookings next year and rollouts start late next year.

When it comes to margins this business has always been about a constant flow of new orders, new contracts, breaking contracts, creating footprints at very competitive prices.

Than long-lasting, 10, 15, 20 years relationships, that build up economies of scale and build up margins.

So I don't think we see a dramatic change in that trend, although it's always very competitive when it comes to initial contract.

So your guidance doesn't expect, or does expect, some 3G in China?

I think the -- that in way, I don't think we will see that much of an impact next year actually from China.

And remember also that -- well, the guidance is for the market as a whole, of course, it's not for us.

But I don't think we will see so much of order intake.

Remember also that you have 5m new subscribers every month in China.

So they need to rollout equipment irrespective of what, and they are presently rolling out 2G to capture that traffic.

And then hopefully they want to rollout 3G and capture more of the growth in the 3G networks.

Okay, thank you.

Thank you.

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

Please go ahead.

Thank you.

In terms of -- The revenue sounds like this is a hard guess, who knows what the currency will do, economies and all this stuff.

So I actually would -- great, it's good to start conservatively.

Where you seem to have a lot more control and the inside is on the margins, and you mention that you expect operating margins to be in the high teens.

Currently I believe you're running at 22%, 23% run rate.

What do you think -- Should we look at it as that do you expect us -- Could you walk us through your assumptions?

What do you see is that you're going to ramp up the investments a little bit more?

SG&A marketing that will bring the margins down?

Or is that gross margins, because of the product mix shift towards - you mentioned Singular -- Lucent was talking about gross margins coming down for them because of the Singular Could you give us a little bit of how we should think what will drive those operating margins down to the high teens?

Well, our operating margins is always the result of a mixed bag.

It's about different products, different software, hardware.

It's about breaking contracts and add-on products.

It is not that we're planning for falling margins.

I think we are, to some extent we are a bit cautious because margins may always fluctuate a bit.

I think also that we may want to see investments in certain areas.

We -- especially on the R&D side where could see that it would be better and beneficial to invest somewhat more for further growth.

But overall I think it's more of a cautious outlook, and I make sure that they're able to deliver.

Thank you.

Thank you.

The next question comes from Mr. [Agit Owen] of Credit Suisse.

Please go ahead.

Yes.

Last year at this time, your guidance for 2004, or your outlook for 2004, was generally for a flat or flattish market.

But we see that your revenues, Ericsson's revenues, would be up over 10% this year, and on a dollar basis even more.

So, in terms of your guidance for next year, at this point how much confidence can we put in this?

And how much can we assume is being just a lot of conservatism?

Obviously the difference from last year to this year in terms of the actual numbers is quite large.

Why should we put too much more confidence in the outlook that you have right now?

Well, if you go back, maybe a year ago that we look forward to a flattish year.

It was hard to see last year because we were still at the back end of the roller coaster.

And you may recall that a year ago that - not that we take guidance from yourselves - but everybody was convinced that this was not going to be a lot of spend, and everybody was still a bit pessimistic.

Then when we came to the fourth quarter, that is when we said that already after the first quarter, we said, look, we should look forward now to a pretty strong first quarter because we're having some catch-up spend, but don't read too quickly too much into it.

And we were happy to say so because we were had a very strong book in the first quarter.

Then when we came through the first quarter, we said that the catch-up spend will last for longer, that's an obvious, and it will have effects throughout the year.

And that's basically what we're on.

I think we've just gradually come to understand the market better after the roller coast.

I think you should -- You shouldn't read too much over-conservatism into our forecast, that could lead you wrong.

But, of course, we want to be not over-optimistic, so.

Okay, thank you.

Thank you.

Our next question comes from Paul Sagawa of Sanford Bernstein.

Please go ahead.

This is one on the same lines actually as you've been peppering with -- you've been peppered with questions about your guidance.

But if we look at the finances of the major European carriers, or for that matter the major world carriers.

We have very rapid top line growth for them, as CapEx to sales as a historic low.

You have cash flows at an extremely high level, and you have rising competition with the launch of 3G services.

And everyone was -- with new services to launch and need to compete to take market share and such.

Yes, I know that the carriers are talking about how their spending constrained.

But in such a competitive environment, wouldn't a carrier who had neglected to invest in their network be at a competitive disadvantage in trying to sell these exciting new services?

Is it -- Aren't the initial 3G network build-outs still having very -- fairly light in-building penetration?

Don't they need to invest in new applications to put on these new networks?

Why would these carriers take their foot off the gas pedal, as a slight growth against a double digit top line growth that these companies would suggest?

Well, I think it's an interesting input and I think there are quite a few that are asking the same question.

And I think there are -- You can only see the fact that Europe is on almost 4 or 5 times higher tariffs, for example, than US.

And we're speaking 130 minutes a month, whereas US is speaking 500, in a very price elastic market.

So as tariffs come done, of course traffic will go up.

And it's interesting to see, I think still, that the cautious outlook that we're having here, I think is the right one to have.

And I don't think things would change very rapidly here.

But if you look at operator revenues over the last 20 years, you can see that it's been steadily growing, and it's been pushed by new technologies, new services, new opportunities.

But now that we're rolling out 3G, which is the most powerful technology ever that will really provide true mobile broadband, the consensus of the market is that operators' revenues and CapEx will flatten out.

I think that would be a -- It is a bit of a paradox there in the way we see it.

But I still think that that is the planning outlook that we're having - both we and our fellow vendors and also operators.

But I think, going forward, I think you -- there's a lot of interesting reflections you're making.

Okay, thank you.

Thank you.

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

Please go ahead.

There's several times you've referred to HSDPA and ongoing testing that you've got in Japan.

Outside of Singular, how important are the carriers telling you that HSDPA is in their prioritization of future features and services?

And at this point, when you would expect HSDPA equipment shipments to be material to your revenues?

Thank you.

Well, I would say that on a priority list of 10 items, it covers the first 3 items.

It's really major focus because this is not another equipment.

This is the capability of the installed 3G equipment that -- or that is being installed, with a software upgrade and a simple stick-in card.

And this really means that what we have today of GPRS of 50 kilobits per second, and EDGE 150/200 kilobits per second and 3G 300 or 350 kilobits per second.

When you take this forward and you actually look for 5-10 megabits per second, it's going to bring a totally different experience.

It's going to mean that you can download in seconds what takes minutes to do today.

It's going to mean that handsets with [great] MP3s will download music as quickly as you do in your MP3 player at home and the fixed line.

So why do you carry 2 devices?

It will mean that you can download anywhere you are - your PCs and synchronize your e-mails, and can you broadcast television.

So this is really something that is top on everybody's agendas.

It's -- That's the first thing we talk about with every operator in the Wideband CDMA track.

And your question is when it will be commercially launched?

We are doing trials.

We will start to do some soft launches end of 2005.

Commercial launch with PC cards first quarter of 2006.

And through the quarter we will start to see handsets with HSDPA capabilities.

And the testing is going fine so far?

Yes, we're driving around here in [Scheesplam] and showing to a lot of operators.

We're so far showing some 5 megabits per second.

So, I think we are -- nobody else does that.

So we feel great about the development.

Thank you.

Thank you.

Your next question comes from Mr. Mats Nystrom of Enskilda Securities.

Please go ahead.

Yes, good afternoon.

Returning for a second to gross margin, and you have previously stated that gross margins on 3G Wideband CDMA was more or less in line with 2G.

How is this situation there today?

Is the margin on par perhaps?

And secondly, if I may.

You received a very, very big contract from India yesterday.

As I understand it, [indiscernible] is confirmed this morning that this was the largest, or was said to be, the largest rollout, GSM rollout, in India ever.

What could you say, tell us about order bookings for Q4?

And how does Ericsson typically account in the books for that?

If the order is for x hundred million dollars, whatever, will you account for half of that in Q4, or how is the procedure?

Thank you.

Well, I leave to Karl-Henrik to go through the procedures of how we book.

But if we start with the margins.

We have had a great progress actually in our -- the way we cost cut on the 3G equipment.

And, of course, as volume comes up, we will see how the margins of wideband CDMA and GSM is merging together.

Of course, there is always so that newer technologies with the less economies of scale are -- coming -- lagging behind and coming up.

It's also so that break in orders or new contracts, new footprints, are always taking the more competitive levels.

But clearly Wideband CDMA, as it expands, will come to normal Ericsson levels.

When it comes to India, I think it is maybe important just to say that, there are several large order -- networks being rolled out in India.

And in this particular case, it's an order for basically the whole rollout.

There are others that close their price there.

But as a single contract, it's a big one.

What we see -- I'll leave it to Karl-Henrik to talk about how we record it.

And I think it's important to remember that this an agreement and a contract on a total network, as Carl-Henric says.

However, the booking will be when we receive purchase orders, and that will be over time.

Okay, thank you.

Thank you.

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

Please go ahead.

Thank you.

Just a couple of separate things.

Firstly, could you give an indication of what proportion of systems revenues you expect to 3G in 2005?

And then could I just quickly check on OPEX.

There was a quite big upward tick in R&D and downward tick in G&A this quarter.

Were there any special factors in either of those moves?

Well, maybe you should start to talk about OPEX, Karl-Henrik?

I think it's important that, when you look upon the OPEX levels and the different quarters on different accounts.

Remember we've gone through a downsizing exercise.

We also, in regards of R&D, we have also said at the end of the Q2 report that we will do selective investment in certain R&D areas, especially around the 3G, Evolve, HSDPA, [ND], etcetera.

So, don't draw too many conclusions regarding the level of R&D, that there is an increase, and this is what we say a long quarter.

And in the administrative area, we are now on a different cost level.

So there is a downward trend there because our reduced likely costs and less personnel costs in this area.

However, that will continue to fluctuate as we have fluctuated historically.

Thank you.

When it comes to the proportion of Wideband CDMA sales, I think it's -- we made earlier on several years ago, when the expectation was that the world would basically all go 3G at once.

We said that a third of our sales would be 3G when it came to 2005.

That is not going to happen, simply because the GSM business has expanded and developed so successfully.

And we must remember that right now we are only migrating 25% of the GSM footprint into 3G.

If we include United States and we include China, then we're migrating 45% of the GSM footprint into 3G.

But the growth has been so strong in Latin America, and Africa, and India, Russia and so on.

So, that has somewhat changed the picture.

We are right now at 15% of our total system services of Wideband CDMA and some 32% of our radio sales is Wideband CDMA.

And those 2 numbers you will continue to see creep up here as we go into 2005.

Okay, thank you.

Thank you.

Your next question comes from Mr. [Nicholas Von Stackleburg] of Sal Oppenheim.

Please go ahead.

Yes, thanks for taking my question.

On the cash hoard that you've billed and the strong cash flow generation.

You've hinted in the past at the possibility of starting to pay out a dividend.

Anything you might add on that?

And then going back to HSDPA.

Siemens is suggesting that they will actually be first to market with commercial deployment of HSDPA in half 2.

Thanks.

Well, we look forward to that.

When it comes to the cash flow, we are obviously - and I'm sure we're going to propose to the -- the Board will propose to the general shareholders meeting this spring to pay dividends, that's an obvious.

It is also an obvious that we should be rated at the [investment grade] when you look at our earning and our growth, and our cash position.

And it's strange that rating institutes haven't still caught up with that.

But as long as we know that it is important to hang on to that cash.

Should growth become higher than we currently plan for, then of course, again, cash will be important.

It could also be interesting with some bolt-on acquisitions in certain technology areas.

So for that reason, and other than that I wouldn't ask more.

I think we have to come back to that question once the rating institutes have caught up with our reality.

And on Siemens?

May I just say I look forward to that.

I think we will be ahead of them but this is -- the industry is always a competition.

But I -- we feel pretty confident that we are the only ones that are driving in cars, doing 5 megabits per second right now.

Thanks

Operator, we can take one last question, please.

Thank you.

Your next question then comes from Mr. Richard Edwards of Citigroup.

Please go ahead.

This is question on Sony Ericsson.

On page 6 of your release, it seems that the sales to Sony Ericsson so far this year, are roughly half the level that they were up until this point last year.

I was wondering if you could just explain a couple of dynamics of that reduction in sales?

Because presumably most of that is technology platforms or reference designs, and they seem to be releasing as many new products now as they have been.

So perhaps you could just explain the nature of those sales, and why the level is half?

As you remember, that this used to be part of Ericsson, and there has been, in fact, a lot of separation over time.

So in reality this number here reflects what we sell in mobile platforms.

But it also constitutes a fairly big number of other services.

We've been doing the accounting for them.

We have been doing partly other works like we -- they bought out, as you remember, in the second quarter the factory in China which -- from us, which was the joint venture we had.

So that number will over time, as long as the separation into completely separate unit, that will diminish over time.

And then in the end it will basically only be [ENP] and other related products, part of that sale.

So you're getting a little bit of the history of the separation in those numbers.

And what would these sales to ENP be of that number this year?

That we don't disclose.

Well, worth trying.

Thanks.

Thank you.

Sir, do you wish to take any further questions?

No, thank you.

We're ready to close off.

Thank you operator.

But before we finish today, I would like to remind everyone that we have a Capital Markets Day planned for November 11 in San Diego.

If you've not done so yet, you need to register as soon as possible if you're planning to participate because seating is limited.

The agenda and registry information is available on our website, or you can give us call and we're happy to send it over to you, if you haven't received one yet.

Regarding our Interim Report, if you have any more questions, please don't hesitate to call either myself or anyone on the Investor Relations team.

And thank you once again, and good bye.

Thank you, ladies and gentlemen.

That concludes your conference call for today.

You may now disconnect.