Telefonaktiebolaget LM Ericsson (ERIC) 2004 Q4 法說會逐字稿

Good afternoon ladies and gentlemen.

Welcome to the Ericsson Analyst and Media Conference Call for their fourth 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 INSTRUCTIONS].

Mr. Henry Stenson, Head of Corporate Communications, will now open the call.

Thank you very much operator, and hello everyone and welcome to our conference call for the fourth quarter 2004.

My name is Henry Stenson, I'm Head of Corporate Communications at Ericsson.

I will be filling in for Gary Pinkham who's sitting here on my left side with a terrible cold.

So that's the reason I'm taking over being his voice.

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

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

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

The actual results may differ -- be different due to factors mentioned in today's press release and discussed 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 would like to hand over to our CEO for comments about our performance and plans going forward.

So please Carl-Henric Svanberg, the floor is yours.

Well, hello everybody.

Please bear with me a few more slides than we normally do since it's the year-end, and we want to give a bit of an overview.

But I will be brief and to enable all your questions, time enough for all your questions.

This has been a great year in many ways.

First of all, it's -- with 300m subscribers new in the networks in the world, it's the biggest growth -- subscriber growth ever.

Brings it to 27% of the world's population now being able to being on their mobile phone.

It is also breakthrough year for 3G, where we now have 16m WCDMA subscribers in the network - 5m up from only the last quarter, and we have, I think, 18m as of today.

So it's really a breakthrough year with a lot of rollouts having taken place in 2004.

We also have HSDPA capabilities that are -- will be launched later this year, and I would think that rather soon WCDMA networks will have a Wideband -- will have HSDPA capabilities of 2, 3, 4 mps of real, perceived feed.

But we should also remember that of the total GSM footprint in the world, even if we include the roll-out in US, it is still only a third of the total footprint that is on migration to WCDMA.

And GSM has great growth opportunities also going forward.

We have only in this year, we have 16 new GSM countries that have come aboard, a lot of them being in Latin America where CDMA is migrating into GSM.

And of course, as everybody knows, it is the GSM footprint that paves the way for EDGE and Wideband CDMA.

If we then look at Ericsson's key achievements, we've had a great year.

Mobile network sales throughout is up 20% over 2003, and it's actually 26% if we look at in constant currencies.

And when we compare that with the anticipated market growth of 15-20% for 2004, we can easily see that we have gained market share in almost every part of the market.

Our Professional Services 8% up, in constant currencies it is 14% up, well ahead of where the market is anticipated to grow some 10% or so.

So we have strengthened our market position all over the place.

Our income after financials of SEK28.4b represents the highest profit that Ericsson has ever reported, with the exception of 2000 when we had some extraordinary income from large -- extraordinary income from sales of -- sales in other companies.

This brings us to an operating margin of 22% for the full year, and I'll come back and talk about the quarter.

We had a solid financial position of SEK43b in net cash, no debt.

So there is no doubt that the Company is back in strength.

Book-to-bill is now basically 1 for the full year - 1.01 actually.

And having followed now a year with a strong order intake in the first quarter, where we had a lot of discussions trying to make everybody understand not to read too much into an over-strong quarter, we had a third quarter with weaker order intake, where we again had to try to explain that that did not indicate a falling trend, and I think you are seeing we're back into a full year 1.

We have decided to implement as to what everybody else does in the industry, to not report bookings going forward.

We think it actually creates more misunderstanding than gives an understanding of the marketplace.

If we then look into the different parts of our business.

In 2.5G we have, in fact, strengthened our position basically in every part of the world.

We have had a particularly strong year in emerging markets, and I'll come back and touch upon the different markets.

But the largest GSM contract ever we signed in the first half of the year in Guangdong Mobile, that was over $800m.

So, all-in-all, I would say that 2G, what I said before, with two-thirds of the GSM for example been not yet migrating has an underestimated potential, and is really the key to doing communication for all.

When it comes to 3G, in general the WCDMA footprint does expand.

US have taken this decision as you know.

It is being rolled out in Central Europe.

We're also seeing it in Africa, and in that context we have taken a -- first we have the end of the year, we have taken a large number of contracts.

We're the sole suppliers to MTN in South Africa.

We are the sole suppliers to Telecom Hutchison in Australia for a number of years.

We also a breakthrough with T Mobile, we're doing their 3G network in Hungary.

We're doing networks in Poland, and on and on.

Besides, of course, the Cingular contract where we play a strategic role and we're, of course, excited to be in that position.

We are presently a supplier in 35 of the 56 launched WCDMA networks in the world.

And in addition to that, there Ericsson Mobile Platforms play an increasingly important role, with a 30% market share in WCDMA has been sold.

And a stronger position than that actually outside Japan.

And I would say that Mobile Platforms plays a very strategic role as with richer services, whatever is possible to do in the networks might be possible to do in a handset.

So the answer and solution becomes more and more important.

If we then look at HSDPA, the next evolved level of 3G.

We believe we are leaders in that development.

We have a number of ongoing customer trials.

We are the first to demonstrate HSDPA over live commercial networks.

We have breakthrough contracts with Cingular and with Telstra, as an example.

In both cases they will go straight to rollout of HSDPA.

If we then look at Services - this has been a good year, especially if you consider we had a slower start in the first quarter, and we reported underlying good growth, and I think we've demonstrated that as we've gone through the year.

And, as you saw, we are 14% up in constant currencies.

This is really an area for constant currencies because this is measuring in each individual country the local activity.

We've been involved in the building, expanding or migrating technology by more than 400 networks in the year.

We have 550m subscribers that we support daily worldwide, where we follow the -- every move in the networks as we speak in our monitoring centers.

We have 35m subscribers in networks that we do manage and that is, of course, an interesting number, when you think about Cingular, for example, having 45m.

So we do a lot of network management and it is increasing.

And in that context we should see the largest managed service contract to date, and the largest contract that Ericsson has ever entered into, when we were taking over and running H3G's network in Italy in the next 5 years.

That was reported after year-end but we are clearly well-positioned in that market.

Let me then briefly touch upon the different parts of the world and let's start with Western Europe.

In Western Europe we were -- we reported sales of SEK40b, which represent a 12% growth.

This was a strong year with pent-up demand, where we saw both GSM enhancement and handset(ph) upgrades, but also the first major rollout of 3G.

And we're now enjoying an accelerating subscriber growth.

Following this year of pent-up demand, where the most of the pent-up demand has been in the Western Europe region, we will see a lesser of growth, flattish or could even be, for example, so decline probably in Western Europe in 2005, compared to the balance sheet 2004 number.

If we then continue and we look at Central Europe, and we can there see a really encouraging development, 23% up.

Local new network, lots of new subscribers.

An area where Russia had a strong year, Africa's only started. 3G is being built up in Eastern Europe - this is an area where we much are in the beginning in a number of countries, and we will look forward to another year of good growth and good development.

If we then go into the next area which is Asia Pacific.

That's an area where we've had of that quarter of the total pie, is some 10% of the business is coming out of -- of Ericsson's sales is coming out of China, that have had a little bit of a slower market waiting for the 3G decision to be taken.

Although China came, actually, quite strongly in the end of the fourth quarter.

We also saw some quite interesting deals just around year-end where we also got the exclusivity for Samsung and the build-out in Australia, together with Hutchison -- in co-operation with Hutch.

We're also - have strengthened our position in India quite significantly in this year.

So Asia should be a year of better growth in 2005, and it'll be exciting to see now the bigger decision coming in in China.

If we then move to Latin America, a country where there -- that part of the world -- a region where we've enjoyed particularly strong growth.

That has followed after the consolidation in the marketplace, where Telecom Italia and Telefonica and America Mobilas basically have split up the market between themselves.

And following that consolidation, there is now a lot of activities to build our networks and offer our services, and our year has really been great, 46% up.

We look forward to another great year but first, in relative terms comparing to 2004, you don't expect to see at all the same growth level.

That was maybe more of a one-timer but we will still see growth in Latin America.

North America is certainly -- will be back in growth now that the Cingular-AWS merger is dancing.

There are also a lot of other consolidations going on in the marketplace, although we are not to the same extent launch entirely into those consolidating networks.

So 2005 should be back on a growth pace.

We should, however, remember that we will do singular rollouts throughout year in an accelerating way but the major roll-outs will happen in 2006.

But certainly North America should be back into a better position.

If we then look at some financial highlights in the quarter.

Bookings were SEK38m, and there was a number of key wins in the fourth quarter, as I think you've all seen, including the great order with T Mobile in Germany, where we will basically change out a huge number of regulators and fill their network.

T-Mobile has just prolonged their license to 2017 for GSM, and I think it's an interesting action in a market that is migrating to 3G.

I think GSM will be -- we will see a lot of GSM for many years.

Sales reached SEK39.4b, which is 9% up year-over-year, and an encouraging number in a strong quarter.

Gross margin of 45.6%.

There are 2 effects that is behind the [indiscernible] recorded than the third quarter.

One is the -- that we're now starting to see the effects of the falling dollar.

And the other part is really that, since this has been a strong year with a lot of new networks, we have a good part of the stronger Q4 sales versus Q3, as new network rollouts.

And new networks always have a lower profitability in the beginning of the networks, and then you increase profitability as you live and expand the network going forward.

If we then go to income after financials of SEK9.3b, it's really a record profit.

We have an operating margin of 24%, both reflecting the slightly lower gross margin but also continued reductions in the OpEx cost structure.

Cash flow is at SEK5b we -- the fact that cash flow in such a strong sales quarter doesn't reach the level of income after financials, is obviously because you leave a quarter with so much built-up receivables.

But in spite of more receivables as such, the days outstanding is now at 75, which is a record low for Ericsson.

So we are happy with the cash flow, and that has led to us a net cash position of SEK43b.

We have a strong financial position obviously, and we're back into dividends.

At least what the Board will present, the proposal, to the shareholders' meeting who will finally decide a dividend of SEK0.25.

I think that dividend is slightly lower than we have -- historic levels of dividend, if you go back 10, 15 years.

But I think it does reflect also that the Board wants to be a bit cautious coming out of this troubled time, and still awaiting the investment rating from the decisions from the credit institutes.

If we now look at Sony Ericsson - Sony Ericsson have also had a great year.

Really exciting portfolio being launched on the market and in the pipeline - design, new safety imaging, all of this is exciting parts of the new handsets coming out.

And there's no doubt that Sony Ericsson has improved their position and their perceived abilities in the marketplace, by both operators and users.

And it is reflected in the market position, where we have sales up 40% year-on-year and units are actually 56% up.

And we do enjoy the highest average sales price of all the competitors in the handset market.

We have an income before taxes of €140m, confirms their continued strengthening position.

We will see, because we're now at a higher than 7%, I believe, in our 3 estimated market share.

And we will continue to see investments in marketing and R&D for further strengthening that position.

If I then let me say just a few words on the market outlook.

There is nothing changed in the market outlook from the last quarter.

We are forecasting a slight growth in global mobile systems market in US dollar terms.

Of course, we had the pent-up demand in 2004 that makes that comparison challenging, and that is why you see slight growth.

However, the underlying activity level is healthy in the industry, and we look forward to a good future here.

In Professional Services we continue to expect good growth, and I would say overall that we are, we believe in Ericsson, well-positioned to capture market opportunity.

We are building our position around technology leadership, operational excellence, and do everything right and -- in the best efficient way.

And staying very, very close to our customers and listen to their ideas and thoughts, and how we can help them forward.

That concludes my presentation, and now Karl-Henrik Sundstrom will add some comments around the financials before the questions.

Thank you.

Good morning, good afternoon ladies and gentlemen.

So I would like to start with the first financial summary.

I would like to point that this is a year with a very good performance.

It's the best performing year when it comes to operating margin.

The previous best year was in 1991.

It's the best performing quarter, and it's also compared to the fourth quarter of 1997 and 1998.

We managed to produce an income after financial items of SEK9.3b, and an EBITDA margin of 27.1% in the fourth quarter.

Next slide please.

We ended up the year with a book-to-bill of 1.01, totaling SEK133b in orders book.

And I would like to point out that in constant currencies you should add another 6% on top of that, and do the same for the 132% in sales to adjust it in constant currencies.

As you can see we had a strong order intake in the fourth quarter, and particularly strong in Asia Pacific and in Western Europe and CEMA.

As you also note, it is that North America is back to a book-to-bill about 1, and there has been a slowdown in Latin America, which is natural after that total year-over-year growth on sales of 47%.

Next slide please.

The segment system demonstrates operational excellence in every sentence - sales, order intake, logistics, supply, installation and support, and we are delivering best-in-class margins.

And this is the strongest system operating margin ever in the history of Ericsson.

Next slide please.

If you look upon the other operations, I would like to point out first is the one-off effect of reversal of a provision in the fourth quarter of SEK100m, which means that the operating margin adjusted for that is around 15%.

But this is a business that has now turned from a loss in 2003, and it's now continued to have good performance throughout the year.

Next slide please.

Ericsson do have a strong financial performance.

We managed, despite a 24% sequential increase in sales, to generate a cash flow in the fourth quarter of SEK5.3b.

And included in that is an increase in working capital of SEK2.6b and SEK1b related to cash out, in conjunction with restructuring that was finished in 2003.

We ended up with a cash position of SEK76.5b and a net cash position of SEK42.9b.

Equity ratio reached 42.8%.

Next slide please.

One of the drivers behind the strong cash flow is the focus on operational efficiencies in working capital.

Ericsson reached in the fourth quarter the best ever DSO days of 75 - an improvement of 4 days compared to last year.

Inventories - we reached above 5.5% but not to the same level as last year.

The reason for that is, as Carl-Henric pointed out, the number of new networks being built during the fourth quarter.

Accounts payable days reached 46, slightly above the target of 45 days.

Next slide please.

Sony Ericsson - Sony Ericsson has basically gone from loss 2003 - a loss of €130m - to an income before taxes of €486m.

A strong quarter with growth in volumes of 56% year-over-year and 40% in sales.

I also would like to point out that the revaluation of the allowance of deferred taxes it's not something that we lost forever in the joint venture.

It's just a temporary adjustment to the reality.

So with that, I would like to go over to the IFRS changes and they are basically in 4 areas - amortization of capitalized development costs, and there is no more amortization of goodwill under IFRS.

There is a different definition compared to US GAAP of share-based payments and how you evaluate financial instruments.

The net effect for 2004, if applying IFRS, would have been SEK1.5b on net income level.

Going into 2004, due to lower capitalization -- amortization and capitalized development costs basically moving from minus SEK2.7b - because we are finishing amortizing a number of projects - to SEK1.1b.

The net effect, excluding financial instruments, will be between SEK0.2b and SEK0.4b for 2005.

Next slide please.

I have nothing well else to say from the outlook, that's Carl-Henric's percentage, so I hand over to the Q&A session.

Hi operator, we are now ready to open up for questions and answers.

Thank you .

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

Your first question comes Mr. Inge Heydorn of Deutsche Bank.

Please go ahead.

Good afternoon gentlemen. 2 questions if I may.

I'll start with the first question which is really, Karl-Henrik Sundstrom, about the cash flow.

Looking at cash flow, the net changing cash flow -- the net changing cash in the quarter was SEK4b.

But if I look at your target and I look at the cash generated, if I play around with the fact that you don't pay tax, so the tax will be around SEK3b in the quarter.

So am I understanding correctly that, if you would pay full tax, if you didn't have the carry forward losses, you would have made in the best quarter ever reported SEK1b in cash?

No, because we do pay cash -- tax.

And the reason for that is that they loss carried forward, the tax credits we have are in certain markets, and there we don't have tax credit in all markets.

So we pay tax in certain markets.

The other thing is that the working capital was increased by SEK2.6b, but you get a little bit fooled because it also includes the revaluation of Verysis(ph), basically for [inaudible - line interference] So the cash flow is SEK5.3b.

Okay, thank you very much.

And the second question on -- is more Carl-Henric Svanberg really.

But the margin was in quite a negative in this quarter, due to the fact that you had a currency effect, but also the fact you had a number of major wins in new markets and new rollouts.

But if I look forward here in 2005 and 2006 for Ericsson, I can see a lot, a lot of new rollouts, meaning new rollouts at 3G.

Which is really, really new wins, because you have to go into to bid for them, as you say it's new contracts.

Looking at your aggressiveness in the market, which has been lately winning a lot a lot of business lately, into new operators.

Should we model that you guys are going to continue winning quite a lot of new businesses, and the business mix of new rollouts is going to continue to be quite high going into 2005?

Well, you -- I wouldn't really express like that because there is always -- there has been and has that been that element in our previous quarters.

And in Ericsson's history always because this is a normal part of business behavior.

It's more that -- if we take the sales of SEK130b and make it very rough, you could say that we have invoiced SEK30b, SEK30b, SEK30b, SEK40b between the quarters.

And the higher fourth quarter here, the top-up - the extra SEK10b there - is, of course, more of a top-up in a new contracts being concluded in the quarter than that the quarter as such is going versus our total sales.

So it's somewhat more an effect of that.

I would say though that, at the same time, and you know that we have talked about margins now 22% for this year, that we have talked about high teens.

This is not something that we're planning to go down to but, as you know, if we try to indicate longer-term where could our margins go.

Would they go up or would they come down a bit? and if it does come down a percent or two from where we are now, it will be a -- it will come out of corresponding drop in the gross margin.

So it's the cost structure we're basically under control and that would not expand.

Okay, thank you very much.

Next question please.

Thank you.

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

Please go ahead.

Yes, thank you very much.

I wanted to ask a question about cash returns to shareholders.

Obviously in the fourth quarter there's been a number of exceptional items but in general, you're now generating substantial cash every quarter, have a huge net cash position, some SEK3.00 per share.

Clearly we've seen in the dividend today, which I'm sure is welcomed, we've seen a lot of your competitors begin to do share buybacks, and you're in a position to do this.

I suspect you're being held back by the fact you're waiting for your credit rating to improve.

But would you expect in the future to see a much more aggressive return of cash to shareholders?

Thank you.

Well, I think we enjoy a financially sound and strong position today.

I think a Board that have seen many industries development over 20, 30 years and so on, and see what happen in the dynamics in the 90s - not just to our industry but to lots of industries in a hi-tech business.

I think we are all in agreement that a strong financial position is a good one to have because, should there be things happening in the market, you can capture even more opportunities if your not immediately constrained.

The fact that we don't have investment grade obviously will also hold back the whole situation.

And I think that grading discussion seems to be more held up by the credit institutes, rating institutes, you in the industry.

It obviously can't have much to do with us anymore.

We expect that to happen very soon.

Once it happens I'm sure that we will -- they will start to think about different options.

But we certainly haven't discussed at all any buybacks or anything at this point in time.

Okay.

Next question please.

Thank you.

Your next question comes from Mr. Jeffrey Schlessinger of UBS.

Please go ahead.

Thank you.

Carl-Henric, you talked in your press release about something in lines of Ethernet [G plan] shipping.

And it sounds like Ericsson is -- frankly you're still looking to participate in next generation technologies on the fixed line side.

As recently you announced the [Fiber-to-the-Home] alignment with a Canadian company.

Is that right?

Are you looking to participate a little more aggressively now on the fixed line business?

And do you think you have sufficient scale to do that, whereas you have obviously great feel in the wireless side of the business.

But I would say a lot less feel, [indiscernible] if you will on the fixed line.

What do you think you have to do to really be competitive on that fixed line business?

I think I start off but I'm sure Karl-Henrik would also like to add something here.

I think first of all we are heading towards, I think, in somewhat a longer perspective, some earlier and some later probably, but more of a converged world.

Where IP technology creates the ability to actually converge fixed and mobile networks, especially core networks.

And therefore, I think maybe the split between the fixed and wireline will a little bit start to fix away.

And we're also seeing consolidation being done in the industry, even between the fixed and mobile while the trend was the reverse some years ago.

And I think in that respect we shouldn't forget that we have some 130m lines worth of installed base out there, and that is where we once came.

Of course, we let the focus go for quite some years while the mobility expansion was so high but absolutely we have the ambition to be in there as this development happens.

And it is exciting to see the broadband wins that we are having.

The 2m lines represent somewhere 15% of its own market share, and it's Ethernet's capabilities that will be needed as you start to introduce Superplay and broadband.

First generation broadband won't have that necessary capability.

So absolutely we will be there, and I don't think one should -- one shouldn't rule out that we could add some business on some company somewhere, not talking bigger stuff here.

But some technology supposition has to be of value we would certainly look at the color of something more --

I think that are you well aware of that.

Most of the deliveries of next generation broadband would be based on your installed base.

Because usually in a fixed network you are working with 2 or 3 generation of system.

So, by having like 13% basically of the world's installed base of fixed lines that gives us, and still have an advantage for converging those lines to the next generation IP broadband access.

Okay.

Next question please.

Thank you.

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

Please go ahead.

Yes, hello.

Starting with your cost structure, a question from that a few minutes ago but OpEx to sales.

I'm looking at your current outlook for 2005 sales.

Would you see OpEx growing a little bit slower than sales or rather in line with sales?

And secondly on CDMA, compared with the situation 3 months ago as your Q3 report, are you more or less optimistic on your opportunities in CDMA infrastructure for 2005?

Thank you.

Well, to maybe just start in the back-end of that.

We have not had any breakthroughs on CDMA in US.

That I think we'll have to be more patient and look at it more long-term, because that's -- that is of course very important for the long-term success of CDMA, since the market in CDMA is very focused on US.

Outside US, we've actually had, I think it's 29% wins in contract, and I think we have -- we are -- we're dong what we are expecting to do.

But, of course, that is an area where we want to see growth happen.

In terms of OpEx, in general terms we will not expand quicker OpEx levels than top line balance because we think we're -- well in balance there.

And then, of course, in every single year when you talk about comparisons versus this year and an outlook of slight(ph), and of course into player -- mathematic player here with a few percentages here and there.

But certainly the OpEx level I think we have well under control.

Okay, thank you.

Next question please.

Thank you.

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

Please go ahead.

Thank you very much.

I noticed that in the press conference in Sweden this morning, you did indicate -- I understand that there could be, or even should be, a re-acceleration in industry-wide sales 2006.

Could you perhaps elaborate on that and what would -- gives you that confidence?

I presume that 3G rollout could play a role.

In that regard also, given the very robust - at least from our perspective - order intake in the fourth quarter, you were seemingly up in the mobile networks. 40% in American dollars in the fourth quarter, year-on-year.

Regards any impetus apparently from so-called catch-up spending, isn't that a signal that at least you would have plenty of scope of exceeding the holding(ph) rate that we have set suppliers all combined for 2005?

Thank you.

Well, I think first of all when it comes to 2006, that what we are describing, is here we're trying to paint a picture of how the industry's developing, should we exclude the ramp-up demand in 2004.

Should we have had no ramp-up demand 2004, then we will look ahead to much better growth in 2005, and similar growth in 2006.

Of course, when the pent-up demand of 2005 versus 2004 becomes a challenge for 2006, we're back on track.

And that is what we try to describe when we are at times talking about underlying growth and pent-up demand, and so on.

So I think it's more business as usual going on from 2005 and onwards.

You are right that it is clear that we have strengthened our market position in 2004, and accelerating so I would say through the year.

And when we have in constant currencies a 26% growth in mobile systems, where the market is growing somewhere 15-20%, I think that represents that well.

And that is what we're also saying, that we believe we are well captured to -- well-positioned to capture growth opportunities.

I believe that following this short downturn and shape up of this industry, maybe everybody isn't in the same shape as we are.

And we think we have a chance to -- we have an ambition to grow a bit faster than the market.

But the outlook is slight for next year and we take it one quarter at a time here.

Thank you.

Next question please.

Thank you.

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

Please go ahead.

Thank you.

In terms of little bit more of a follow-up question on the profit margins, and margins -- gross margins outlook for '05.

One of the things I'm trying to understand, not only you had low, weaker margins, but we're seeing fairly weak gross margins across the board from some of your competitors.

Going all the way from Alcatel, Nokia on a network side, all the way to Cisco's commentary yesterday.

So it seems to be fairly broad industry trend recently.

Especially in a context that we're hearing about some of the Chinese vendors also coming in fairly aggressive.

There's plenty of articles from -- Wowway coming in, wining some CDMA business.

My question is, we look at this year -- we did all probably hear - it's almost public knowledge.

Cingular talks about he -- they will able to squeeze vendors, with 5 vendors playing there, and it looks like the margins were very aggressive pricing for that Cingular deal.

That's going to be a big part of your growth this year.

You mentioned Western Europe which probably -- that's the highest margin, is going to be relatively somewhat more muted.

And then India and other places will come in stronger, and in CDMA and so on we saw there was very aggressive pricing.

And you acknowledged that maybe gross margins could be a little bit weaker.

Do you see that -- With that mix changing, how do you assess -- would you see the gross margins coming down?

And then related to that, if I look at operating margins, you're already lean -- run an extremely lean company.

With already HSPDA and CDMA ramp in R&D and so on, can you squeeze more?

Where would you -- Where could you squeeze more of the operating expenses?

Can you give us more of a big picture?

There seemed like that there is a trend, not only among you, but a lot of other of your competitors talking about the margins being weaker.

Well, I would say what you're seeing in terms of price pressure is what we have always seen.

We can all -- I can come back and talk on the Chinese in a minute but it has always been like that.

And when you -- And when, for example, Cingular chooses their vendors, of course, they choose for the vendors for 15 years.

And what looks like a tough margin in the first year is a better margin the next year, and so on, and you grow into the contract.

It's always been like that.

Of course, when there is a technology shift then it's a bit of a restart in a number of markets -- in a number of situations, and that creates a lot of deals to talk about.

Some of our competitors on the same basis, all of them as they have shorter lifetime in this industry, tends to have a more focused maybe position in markets, where a lot of that migration takes place.

Whereas we are more balanced and basically in all parts of the world.

So I think we see all the different situations happening at the same time.

I think there's always been that price pressure, so I wouldn't say that's different but certainly everybody's hungry, everybody's eager.

Everybody wants to be part of it.

When it comes to the Chinese, I think it's -- I think you need to see in a couple of dimensions.

First of all if I would bet on who would be still in the business in 10, 20 years, I think the Chinese will be there.

But this is soon the largest industrial nation in the world, and they will certainly be in such a strategic important business as telecom is.

There will always be Chinese, there will always be Europeans and Japanese and Americans in this industry.

They -- What you see right now, I think they do what I would do if I were them.

And what we have done historically is that, if you want to go out there and you want to show what you can do, in the big concept it really doesn't matter what you get paid, as long as you get a footprint, you get a way of showing your abilities.

So one thing is what they do to get in there.

Of course, they have a cost-efficient cost structure to go from in China, but we have from our part more than two-thirds, over 75%, of our whole manufacturing base is in low cost countries like China already and so on.

So, I think we are reasonable brand(ph) position, and one should remember that when we do the work for an operator, it is one part to send boxes and equipment.

It's another part to actually make it work, where a lot of the system integration activities and running the networks, and doing a very customer-orientated R&D that we basically do with people on the site and close to the customer.

So I think you will see, while we build our positions in technology capabilities but really make it work and happen all over the world, that's a long journey.

So I would say an intense competitive industry but not dramatic conditions than before.

So you don't see any major -- any margin deterioration in the next -- this year at least from the previous -- last year's level?

We do not forecast as of such.

I won't answer your question, and I will remind you also that we have said that, we think that longer-term high teens is a good guideline.

And of course that, as I said, reflects more of a gross margin pressure than it reflects a cost in that.

So there is a bit of an element like that but as we don't see that as dramatic as you assume(ph) [indiscernible].

Thank you.

Next question please.

Thank you.

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

Please go ahead.

Yes.

If you consider that a number of the projects that you're -- sizeable products that Cingular and possible projects like Chinese 3G, might be concentrated towards the back half of 2005.

And given that the catch-up spending that you've noticed really was concentrated more towards the first half of 2004.

Is it reasonable to think that you might have a more back-end loaded year than you've had in the last few, with growth rate relatively slower at the beginning of the year and a little bit faster at the end?

And the second piece of that too, is to add on to some questions you've had on 3G.

If I look at the market shares, I see 6 rather healthy competitors for new GSM contracts.

So really most of the 3G orders have been going to the top 3 suppliers over the last couple of years, with some of your former 2G competitors really not performing particularly well on those bids.

Does that in some way make the 3G business less competitive than 2G did for new greenfields [up to these] emerging markets, etc?

I'll just have that.

Thanks.

I think you're -- a lot of what you're saying is making sense here.

And one thing that I think sometimes leads thinking wrong, is that although America and China is very important they do represent some 10 -- 10% each of our total sales.

When you then also remember that a lot of the business that goes on in service business and add-ons and extensions, and what have your.

Then you can see that the expansions as such are not that dramatic.

And sometimes we talk about the world as if it was -- that was the world.

There's so much activities all over the place.

You are right that it's probably more back-end loaded [indiscernible] for those reasons but at the same time, as you've seen, we've landed a lot of orders in the first quarter.

So -- in the last quarter.

So that has a balancing effect.

So, I think a lot of what you're saying makes sense.

Thanks.

Thank you.

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

Please go ahead.

Thank you.

You indicated that the operating margin was benefiting to some extent from licensing, and it looks like the other operating revenue increased about 10% or so year-on-year.

Do you think that there will be better than corporate growth in that area, as your deployments migrate to 3G and some other next generation wireless technologies?

Thank you.

I would say - this Carl-Henric Svanberg speaking- I would say that it is -- it has the seasonality effect, and I wouldn't change the modeling that we have done previously.

I would like to keep that I think because a lot of the clearance of these kind of licensing is done in the fourth quarter and so forth.

So it's back-ended.

Thank you.

Next question please.

Thank you.

Your next question comes from Mr. James Lindley(ph) of Morgan Stanley .

Please go ahead.

Hi, thank you very much.

Just 2 questions.

First of all just on the Cingular system with 3G.

Is that happening slightly later than you first anticipated because I think back in October you talked about major deployments in 2005?

And second question, just following up the gross margin side.

Obviously in the fourth quarter you have mentioned these new network rollouts in the quarter, and you very helpfully helped us understand the SEK30b, SEK30b, SEK30b, SEK40b, split.

But have these contracts actually now finished in 2004, or should we see the impact of these new network rollouts also affecting the first half of 2005?

Thank you.

Well, the last question first.

When you do -- I mean SEK30b, SEK30b, SEK30b, SEK40b is just a way of describing that -- a bigger finish and this -- because of seasonality in this industry.

And obviously, when you do the SEK40b of the additional SEK10b, you don't have the same peak of Professional Services or extensions, or what have you.

It's typically that you finish off projects that have been started early in the year.

So I wouldn't say that the split is so much different than before but, of course, in a growing market there is a bigger portion of new network sales than in a stagnating market - that is, of course, clear.

When it comes to US and Cingular - the whole rollout plan is nothing changed whatever since the contracts were signed.

They are both on target, although of course it's so early to say, it would be sad if there were not yet, and everything looks just great.

They will have, and maybe we - I don't know how we have we have expressed - but the sales are the same, but they do -- will lower services at the end of 2005.

But still the major rollout in terms of quantities from us as a vendor is really coming in 2006.

Thank you.

Can I just follow this up on the new network roll-outs?

I appreciate the SEK30b, SEK30b, SEK30b, SEK40b split was just indicative but more just the contracts you have referred to there.

Should we still see those having an impact going into the first half of '05, or have all the orders now been booked?

They've had the same impact in every quarter in 2004.

It's only that there are more of them in the fourth quarter, and they will have the same impact going forward as well.

Okay, thank you.

Next question please.

Thank you.

Your next question comes from the line of Mr. Tim Long of Bank of America Securities.

Please go ahead.

Hi, thanks for taking my question.

This is Jeff Walkenhorst for Tim Long.

I'm wondering if you might be able to talk about the Professional Services segment.

So your mobile network's revenue is up about 20% year-on-year, yet your Professional Services was 8 -- up 8% and your bookings for Professional Services were up -- were actually flat.

Yet you've talked about big growth for Professional Services on a go forward basis.

Are you seeing more pricing pressure?

Are you having to give away the services in order to win the infrastructure deals or?

Could you please provide detail there?

Thank you.

Karl-Henrik Sundstrom speaking.

First of all, you should look upon services in sales.

You should not look at too much about bookings because the way service contracts might be -- it's slightly different from how book infrastructure project.

That's number 1.

Net growth that was talked about in global services for the full year of 2004, is currently adjusted because this is local business that you do locally.

So you can't really judge it in Swedish krona, especially with the movement of other currencies and the Swedish krona.

So that growth that, as Carl-Henric said, is 14%, which is growing faster than we estimate the total market to grow with some -- because we estimate the market to grow some 10% per year.

Okay.

Operator, we have time for 1 more question.

Thank you.

Your next question comes from Mr. Edgenard(ph) of Chartered Equity Research.

Please go ahead.

Thank you.

Putting back on the licensing revenue, looks like you had a glut of it this quarter.

You said this was back-end loaded to the fourth quarter of the year.

In a bigger picture, when you moving to 3G systems which seem to be making a large portion of your mix, can we expect that licensing will become a higher percentage of the network rollouts that you've already seen?

Will that mix increase?

Or, as you pointed out, we will have the same level through '05 that we've seen through '05, back-end loaded to the December quarter?

This is about how well our technology and other -- with other suppliers will work, and I would like just to say the statement as I've said before.

This use the same assumptions that you done previously, and probably will time back-end loaded when you usually settle those licensing arrangements for the year.

Thank you very much.

Thank you operator.

Before we finish today, I would like to invite you to our Spring Capital Markets Day, planned for May 10 and 11 in Stockholm.

We will post more information on our website shortly about this.

I would also like to remind you of our announced upcoming events.

The Ericsson briefing hosted by our CEO, Carl-Henric Svanberg, on February 15 at the 3GSM World Congress in Cannes, and the annual Sony Ericsson investor briefing on March 10 at the CeBIT Hanover.

If you have not done so, you will need to register soon to attend this one.

The agenda and registration information are on our website.

Regarding our Interim Report, please do not hesitate to call the Investor Relations team if you have any further questions.

And then, once again, thank you very much and goodbye for today.