Telefonaktiebolaget LM Ericsson (ERIC) 2005 Q1 法說會逐字稿

Welcome to the Ericsson’s Analyst and Media conference call for their first quarter report for 2005. [OPERATOR INSTRUCTIONS].

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

Please go ahead sir.

Hello everyone, and welcome to our conference call.

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

As you know, we will be making forward looking statements during the call today.

These statements are based on our current expectations and certain planning assumptions.

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

There are risks and uncertainties associated with these planning assumptions which are discussed in more detail in our annual report and 20-F which we encourage you to look over.

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?

Well, ladies and gentlemen, let me take you through the slides that we have here.

First of all, we are seeing from a general point of view for the industry a second wave of 3G building momentum.

We have as an industry covered most of Europe, Western Europe.

We see the new contracts coming in to roll-out in Eastern Europe.

Of course, parts of Asia, Japan, New Zealand and Australia, but we’re also on our way to see major roll-out in the U.S., as you know, Africa and also beginning plans for Russia and India.

So it’s an exciting time and subscriber pick-up of about 2m a month.

We have also HSDPA coming into play here which, with its 5-10 megabits per second of downloading data speed, will create a totally new experience for the user and bring mobile broadband into levels where, or beyond where, fixed broadband is today.

But at the same time, even after U.S. has taken the decision to roll-out Cingular there, 2/3 of the GSM footprint is still not yet migrating to 3G, and there is an awful lot of expansion opportunities there, where last year we saw 300m new subscribers in a record growth for the industry, and that creates a lot of momentum, new roll-outs and opportunities for network expansions in emerging markets around the world.

The services business continues to develop also in an exciting way, and we as a company, Ericsson, we signed our largest deal in any kind of business that we’ve ever done in the H3G deal in Italy where we, for SEK15b will run the networks for H3G for the next 5 years.

All-IP is also offering opportunities here, in terms of convergence of services between fixed and mobile networks and bringing opportunities for triple play, bringing voice, data and entertainment TV into the offer here and IP also offers increased cost efficiency.

But to do all this, IMS plays a very key role here to bring IP technology to telecom grade and the type of quality levels that we need, that is, 5 minutes downtime per year as an example.

And Ericsson has a leading role in IMS.

If we look at on the next slide, if we look at market and business highlights, we continued to see a solid financial development, with the Best in Class margins, well in line with what we had before, and I’ll come back and talk more about the figures, but our continuous focus on customers, making sure that we do understand in this world of richer technologies more consumer opportunities, that we do understand what consumers want, and we do understand what operators want from us and how we can be of better support.

On technology leadership, where we are in the forefront, and intend to stay in the forefront and on operational excellence, to make sure that we work as efficiently and as effectively as we ever can throughout the whole company.

These 3 factors have helped us strengthen our market position.

And we have gained market share, in 2004, 2% or 3% market share gain, irrespective, actually, how you measure between different standards or different measures.

And we continue to do so.

We have also, in terms of strategic achievements, we have demonstrated our leadership in HSDPA where we have live shown in Cannes and then in other occasions, HSDPA capabilities of 10 megabits per second.

And if I then bring you through a bit of a regional update, let me first just say that our well distributed sales position throughout the world, throughout 140 countries where China and U.S., 10%, respectively 11% of total sales are the biggest markets, but followed by a large number of markets with good positions, to aid stability for us where certain markets can be slower than others, you can offset that by being more positive in the particular quarter.

We shouldn’t read too much into the quarter figures here because they can vary a bit up and down, and we must remember that we can find explanations to strong growth or less strong growth also as much in looking at what happened in the quarter last year.

But let me start by a few comments on Western Europe, where we had 26% growth, where we see growing confidence among operators.

We see the introduction of new 3G services.

We are seeing minutes of use increases in basically every market.

And we’re also seeing an increased interest for seeing how we migrate into the next generation networks with the fixed and mobile convergence.

As examples, where we see Telecom Italia acquiring TIM and bring the companies together.

We see France Telecom acquiring Orange, bringing it together, and so on, and this creates a lot of exciting opportunities.

We said at the end of last year when we announced full year figures that we expected the year in Europe to be more flattish, and we could very well see a more flattish scenario from here and on, simply because we last year had such a pent-up demand which brought investment to a high level, and just by staying at that level is a great achievement, we believe.

However, those pent-up demands didn’t really come through into sales before the second quarter and the third quarter, so we are comparing with a slower first quarter last year, but nevertheless, 26% represents a bigger growth than we had anticipated, but the number should come down.

On the next slide there, when it comes to Central Europe, Middle East and Africa, we have a 20% growth.

This is a part of the world that is still low penetrated.

It’s strong subscriber growth.

It is network roll-out.

It is upgrades of 2G, to 3G, to EDGE, and it’s also an area where we see the first 3G roll-outs happening.

We are involved in Hungary.

We are involved in Turkey, we are involved in Africa, and so on.

So a lot of exciting opportunities and we expect to see a continued development of that kind in the quarters to come.

Then when it comes to Asia Pacific, the 4% growth you see there is a combination of also very encouraging growth throughout the region outside China, but also, actually a slower sales in China versus last year.

These are just normal fluctuations between quarters where we have major roll-outs ongoing all the time and invoicing can happen in a quarter or in the next quarter, and you will see a considerably better second quarter when it comes to China.

So Asia Pacific numbers should come up through the year.

We have also, as I mentioned, we have 3G trials and evaluations in India.

This is still early and it will take a while before we’re there, and India is a 2G market with a large expansion, and lots and lots of activities right now.

We’re also seeing a license coming up on 3G in Japan where we expect the license to be awarded at the end of the year, and that again creates good opportunities.

If we then take a move to the next slide and talk about Latin America, this is a region where we saw a big consolidation happening over the last couple of years, and Latin America is dominated by 3 operators today, and as a result, there are large investments and roll-outs going on.

The activity level as such will continue on a steady pace, although we will see the comparable number, the growth number comes down through the year simply because we had an accelerating growth last year.

And then finally, if we go to United States, or North America, there we have also a situation with the temporary halt that we have talked about before.

We are down 24% simply because we are in between 2G business and the roll-out of 3G.

And we’re in the middle of a very intensive phase now with the planning and designing and preparing for the roll-out of the Cingular network, and the roll-out will start in Q3 and accelerates quite dramatically in Q4 and be very -- and be significant in 2006.

So in light of actually the slow start in U.S. and Asia Pacific, I think we are pretty satisfied with the growth number.

And if we then go to the financial highlights, sales up to 31.5 b. does represent a 12% growth year-on-year, and in fact, as high as 17% when we look in constant currencies.

And that is clearly a number that is impacted by continued market share gains here.

The gross margin of 48.5% is a strong number.

It is the result of a continuous focus on operational excellence, and it also, to some extent, is impacted by a favorable mix with more software sales, and EDGE upgrades is an example of such, and software sales.

We said after Q4 where the gross margin came down a bit, we said that there will be fluctuations between quarters and so it still is, but it’s certainly a strong number.

Income after financials of SEK6.7b, then we have an operating margin of 21%.

We should remember that IFRS has an impact of around 1.5%, so this is basically on par where we ended -- where we had the run-rate at the end of the year, but clearly ahead of last year.

We are making some R&D investments in selected areas, primarily in the field of HSDPA and IMS and next generation networks.

When it comes to cash-flow, we see cash-flow from operations of SEK1.8b, and that has been impacted by SEK0.7b from cash outlays for remaining parts of the old restructuring program, so straight from operations it’s more like SEK2.5b.

We are seeing increased work in progress basically because there is a higher activity level out there in the various regions.

And inventory here is really mostly work in progress out in the field.

Our net cash position is SEK43b as of now, and we have an equity ratio of 46.5%.

We believe we are somewhere where we need to be, when we look at the different opportunities and the dynamics of the industry.

And it is very encouraging to note that we have returned to investment grade by all the 3 credit institutes.

That is an encouraging sign, and of course, an effect of our performance but also the industry outlook, and it helps us to actually improve our position further relative to our operators.

When it comes to Sony Ericsson we had a softer first quarter, much impacted by distributor de-stocking in Europe, and also some sense in Europe with more focus on -- for this quarter on prepaid customers and more low-end phones.

But certainly Sony Ericsson has a very exciting product portfolio going forward and the company continues to invest in R&D and selectively in markets.

And the interest for the Sony Ericsson walkman is clearly very, very high.

The income that decreased from SEK97m to SEK70m is basically the effect of stable gross margins but higher investments, as I said, in R&D and marketing.

When it comes to the outlook for the year as a whole, this outlook is for the market as such and it is in U.S. dollar terms, and we haven’t seen any reason for changing the outlook of a slight increase.

We see an underlying stronger development, but we are comparing to a very, very strong year in 2004, and that is why we forecast slight.

Our own performance is well ahead of that in the first quarter, that’s quite clear, but it’s also quite clear that we are gaining market share and we expect that we should be able to continue to gain market share.

So by that comment, I will hand over to our CFO, Karl-Henrik Sundstrom here.

Good morning and good afternoon, ladies and gentlemen.

I would like to start with a slide regarding the Group sales.

I think this is a slide that is very well representing the strength of Ericsson right now.

We are able to compensate a somewhat slow start in China as well as almost a quarter of a reduction of sales in the U.S. and come up with an increase in sales of 12% in Swedish Krona and in constant currency, 17%.

If we move to the next slide, you can see that we have improved the gross margin, both sequentially and also year-on-year level.

We are basically on the same level of operating expenses as we had a year ago, and in that operating expenses, there is a slight increase of R&D and we are maintaining a slightly reduced OpEx level compared to the same period a year ago.

However, on a sequential basis, it is stabilized here.

The improvement of SEK3b on an income after financial item, giving us a strong EBITDA margin of almost 26%.

Next slide please.

Just growing by 11% in Swedish krona and around 16% in constant currencies, or basically having the same operating margins sequentially, which I think is a sign of Ericsson’s strength in the system area, but also attributed to the positive product mix that we have in the first quarter.

Next slide please.

Here I have a simplified cash-flow analysis.

We ended up with a negative SEK6.5b in cash-flow before financial investment activities.

However, in this is a movement of SEK8.3b of cash and it’s basically the same amount of pension obligations over to the Swedish Trust in Sweden, which is a reduction of cash.

If you take that out, we’re coming to a cash-flow of almost SEK2b in the quarter, and I will come back to the reason why we had a slight build-up of working capital in the quarter, but as Carl-Henric said, it’s also including SEK0.7b of cash outlays in conjunction to the previous restructuring.

Next slide please.

As you can see here, there is an improvement in the DSO, compared to last year of the 102 going down to 97 days.

Inventories, including work in process, which is the main part of our classification of inventories, were up, and that is basically a sign of increased activity levels out in the field.

Of course, we can always do better but it’s important to remember it’s a reflection of what’s happening out in the market.

The payable days came in quite a bit over the target level of 45 days, and we are focusing very, very much on these efficiency targets for this year.

Next slide please.

I don’t want to make any more comments because Carl-Henric covered the Sony Ericsson, but it’s important to remember that it is still an increase in volume.

And very much we’ve been affected in the first quarter now due to the de-stocking in Europe as well as a tendency of moving down into a greater number of low-end phones, due to the fact that handset subsidies are being investigated and worked through by operators, especially in Western Europe.

Next slide please.

And with that I would like to hand over to Gary for the Q&A session.

Thanks, Karl-Henrik.

Operator, we’re ready to start our question and answer session now.

[OPERATOR INSTRUCTIONS].

We will now take our first question from Tim Boddy of Goldman Sachs.

Please go ahead.

Yes, thanks very much.

I just wanted to ask a question about cash generation, operating cash generation, and use of cash in the future.

Should we think about your progress in the services business and the use of, effectively outsourcing with contracts like Bharti in India as structurally driving, perhaps, higher capital intensity in your business, or is this really just a kind of seasonal fluctuation we’re seeing in inventory in Q1?

And then I guess the associated question, of course, is when do you think we might be able to see Ericsson start to return some of its substantial cash balance to shareholders?

Thank you.

The first question is, the answer is really no.

It’s more the fact that it’s typical that in the beginning of the year you start a lot of projects and you start roll-outs and you tie up more money in work in progress, and then at the end of the year, there is a large invoicing of the completed projects, and that’s why you see, actually, the number SEK10b of work in progress there when you have record invoicing.

That comes to a sort of an all-time low there.

So it will materialize and come through throughout the year and it’s not at all related to services.

When it comes to our cash position, as I mentioned, we have just gone through our base case, and what we will share with you is of course just a stable and continual growth.

We’re back into a healthy period for this industry after the telecom collapse here following the IT bubble, but of course when we realized how well we could have gained even further strength if the market takes any particular turns, if you have a stronger financial position I think that we won’t forget that in the first time of the board.

I think also we could see a situation where we could have bigger, faster than anticipated growth, which is not our scenario, and then again we need cash.

We could also, I think, need cash for smaller acquisitions.

It could also come up a position with a different credit climate where vendor financing could be a really strategic asset and competitive tool in many parts of the world.

So I think where we are right now in terms of cash position, we don’t see as negative at all and we’re just in the process of distributing the dividends.

So I think we can probably continue another year or so but if we continue to generate cash as we expect to do, then of course we need to think about how we’re going to distribute that.

And I might add here another thing.

It’s important to remember, now when we have received investment grade, with that comes certain obligations about certain liquidity and cash balances that you need to protect and it is important for us to be an investment grade because it sends a signal to our customers that we are a strong and healthy company.

And I think that all of those arguments make good sense.

I suppose the question is, what do you think is enough cash for Ericsson?

I don’t think we have a very precise number in our heads but our position is very much the same as the ones of Nokia and Cisco right now and I think it’s a good position to be in, actually.

Okay, thank you.

Our next question comes from Jeffrey Schlesinger of UBS.

Please go ahead.

Thank you. 2 questions, if I could.

I know Ericsson stopped reporting orders, but can you give a sense if the book-to-bill in the quarter was in line with what we’ve seen seasonally in prior years?

And then my second question is on the inventory.

You mentioned that the majority of that is “in the field.” First of all, I take it that means finished goods, and then if you could give us a sense of what’s the conversion time of that inventory to revenue please?

Thank you.

Well, the first 1, I guess we took it away, not to comment on it, so I won’t comment on it, but we give end guidance in terms of the regional outlook, and telling you a little bit of how we see different parts of the world.

When it comes to work in progress, it’s of course a difference if a customer orders an upgrade of transceiver cards that are being shipped and sent to a site and just injected into an existing radio base station.

So whether it is like in Pakistan where we’re rolling out in very difficult conditions up in the mountains and on the countryside, building concrete houses for every single radio base station and so on, it does take a lot of time.

And so it could really vary, but this is all finished goods.

This is goods in transit and goods on the site, waiting to be deployed and finally to be invoiced.

And as Carl-Henric said, more than half of it are actually out in the field, and as we have stated in the target, it is that we are aiming at getting to over 5.5 in inventory turnover and with that, I think gives sufficient information.

If I could just follow up, then.

Your revenue in Western Europe in the quarter was stronger than what we saw in the second and third quarters a year ago when we have all the “catch-up spend.” Are we at almost maintenance levels now, just keeping up with the minutes of use growth or was there a lot of 3G footprint just getting built in Western Europe?

I know you mentioned Eastern Europe and other areas.

Can you give us a sense of what’s driving the strength post the “end of catch-up spending?” Thank you.

Well, the catch-up spend, first of all, so we understand the profile of the sales last year, really came in the second and third quarter.

We saw it in bookings right in the first quarter, but second and third was when we saw invoicing, so we are comparing with a slower quarter.

When it comes to today’s situation, I think every operator is struggling between being as rational as it can with its capital and capital expenditures and all that bag, but at the same time, compete with quality, and I do believe that there is no network out there that has any over-capacity or is unnecessarily over-invested or anything.

Everybody is just there where they need to be, and there is a constant need for upgrades.

There are upgrades still on 2G and we are by the way about to roll out a basically new 2G network for T-Mobile in Germany where they have extended their license to 2017, so also in 2G there is a lot of activities going on.

But also on 3G where the first very thin roll-out has started, but there are still needs for a continuous upgrade, and then of course, managed services activities and so on.

Thank you.

We will take our next question from Edward Schneider of Charter Equity.

Please go ahead.

Hello, Mr. Schneider, your line is now open to ask a question.

Thank you very much.

The merger of your 2 largest North American customers last year, Cingular and ATT Wireless obviously reduced your revenue from the U.S. by about 40% by the year-end last year.

How much of that do you expect was delayed demand due to the merger and how much do you expect will return this year once the organization is in place and that company is back to a normal run-rate?

And also, do you have any estimate of how much of your revenue was wide-band CDMA related this quarter.

Yes, when it comes to the Cingular AT&T merger, that, I would say, the bulk of it is really just delayed demand.

And I’m sure you saw when Cingular came out they said they would reduce CapEx as a result of the merger.

They came out 6 months ago and said they will keep the CapEx level and now a week ago they came out and said that they will accelerate the CapEx quite considerably to fight Verizon and their quality levels.

So I think all in all that this is all a matter of delay, but every time something isn’t done it isn’t done, but this is really not lost.

When it comes to the amount of wideband CDMA equipment, we are finding it actually increasingly difficult to split it out simply because the steps aren’t as big step or revolutionary as one may think.

They are more evolutionary.

We’re working off the same core networks.

We are working off the same service layer applications and so on, and we are combining (?) networks with hand-overs to 2G in rural areas and so on.

That is why we are following the EDGE/WCDMA part of radio access sales where we can follow it more precisely, and that was 42% in the quarter versus 30% last year.

So did your growth guidance for this year then include the assumption that Cingular ATT will return to a run-rate level equal to what they were both spending prior to the merger?

Well, I shouldn’t answer that in great detail because we don’t even know exactly where they’re going to be, but certainly, the investments from Cingular will accelerate quite a lot here during the autumn and into 2006, but as you must remember, that the guidance we do give is for the market as a whole and whether they do a little bit more or a little bit less doesn’t move the world market figures.

Next question please, Operator.

We will take our next question from Tim Luke of Lehman Brothers.

Please go ahead.

Thank you very much.

I was wondering, Carl-Henric, with respect to the – with the inventory being higher at the beginning of the year, should we infer that that would suggest that your visibility going forward into the second quarter would put you sort of comfortably in line with the normal sequential trend, or slightly above that, perhaps, given your improved visibility of up around 8% or 9% sequentially?

Well, I won’t give guidance particularly for the second quarter obviously, but the inventory, the work in process can basically increase for 2 reasons. 1 is that we don’t have the control we want to have, or that we have a higher business activity, and I think it’s more of the latter.

And so which regions might be looking somewhat stronger seasonally as we move forward?

I understand, for example, that Latin America and China might be expected to improve in the second period?

I would say that, coming back to my regional update there that I think we have steady development in the CEMA countries.

We will have some upturn, I would think, in the U.S. probably.

We have Latin America going steady but the comparable numbers are getting increasingly tougher.

But the biggest improvement beyond seasonality, I would say, is probably China.

Perhaps you could give us some expectation with respect to the reorganization there and when that might happen?

Well, this is a tricky one because we need to understand that we are all sort of spectators looking at and trying to interpret and second guess what happens, but on the same side, and same time, I think we’re pretty close to it happening, and I think there is a likelihood that they may bring 4 operators into 3.

And maybe that telecom reform which is expected to happen is in the more important step than the 3G licenses themselves, because once that reform has happened, the 3G licenses will follow very naturally versus the technologies that we have.

And we do expect wide-band CDMA to be the logical choice for the dominating GSM standard.

Thank you.

Our next question comes from Richard Kramer of Arett Research.

Please go ahead.

Thanks very much, a first question for Karl-Henrik Sundstrom.

If you take a look at the customer financing risk exposure, which has been coming down quite steadily, it was actually down by about SEK2b this quarter, could you tell us if the reduction of that risk exposure has an impact at any stage in the P&L, i.e. are you able to release any provisions related to that?

And then maybe a broader question about the mix of business that you had, and how it might have impacted margins?

If 42% of the business in radio access is WCDMA EDGE and by geography, about, well over half of the business is emerging markets related, is that to assume that all of your developed market, i.e. Western Europe business, is now WCDMA EDGE and that for the most part, the Legacy GSM business has ceased in those developed markets?

Thanks.

Onto the customer financing, the answer is no.

And when it comes to the mix, GSM continues to be rolled out in Western Europe, but at the same time, EDGE is being rolled out across a number of the emerging markets as well, so it’s not that, so to say, WCDMA EDGE is only coming into Western Europe and in stop of GSM.

Referring backwards to Carl-Henric’s comment here regarding T-Mobile, at the same time WCDMA and EDGE is also being rolled out in the emerging markets, and there have been a number of contracts announced.

And perhaps you could just help us understand, there were some comments about mix in the quarter impacting positively the gross margin.

Can you help quantify that at all for us?

I don’t want to quantify but it is that it was a favorable mix when it comes to EDGE and other software products.

Thank you.

Our next question comes from Mats Nystrom of Enskilda.

Please go ahead.

Yes, hello and congratulations on a great quarter.

Looking at the OpEx, it was flat year-over-year while sales were up 12%.

How do you see OpEx and OpEx to sales developing for the full year?

Thank you.

Well, it was flat versus last year, but in all fairness, we were still under restructuring so if you go from Q1 into Q2 and Q3, it continued to come down a bit, so it is actually a bit up versus the run-rate at the second half of the year, and that is all related to R&D investments where we have done some investments in selected areas, primarily being EDGE, HSDPA, IMS and next generation networks.

And I would say that overall, considering that we basically kept our OpEx ambitions since we were selling at SEK115b, SEK118b and are now on a much higher level, I think we have leveraged most of what we can do on the existing OpEx level, and therefore should expect to see OpEx grow a bit as we grow sales.

However, when it comes to R&D and so on, I think that’s a huge area with 16,000 employees and spending over SEK20b a year.

We are in parallel also looking as much at what we should do, and also how we can do it, because I think we can be as innovative in our way of working as we are in the (?) technologies, and that could free up some room for more output without necessarily expanding R&D expenses.

Okay, thank you.

Our next question comes from Matt Hoffman of Moors & Cabbot.

Please go ahead, sir.

Yes, thanks and you answered the question earlier on the 3G margins, or 3G mix in gross margins.

To help us understand the outlook for the year for gross margins, or maybe you can guide us in terms of mix, what you think what we might see there?

You said in the past that WCDMA would negatively affect gross margins.

Should we expect a ramp there, and how would you be thinking about gross margins if you were us?

And second, on the OpEx, or the operating margins for Sony Ericsson, should we expect to see a little bit of improvement there during the course of the year with some of the new products ramped?

Thank you.

Well, when it comes to gross margins, I think we have commented several times that this is a constant battle.

There is a pressure on prices all the time.

At the same time, we have an equally intense pressure on ourselves to reduce cost of sales, so I don’t think we have reasons to give any particular guidance other than those, and you know we have said also that on the overall, that margins could probably rather come down a percent or two rather than up a percent or two.

But we said that for a year, and our margins held up well, so I think they’re in good balance.

When it comes to Sony Ericsson, I must say that we believe very strongly in their product portfolio, and that they are keeping their prices well, although there is also very intense price pressure there.

They are focusing on the middle to high end and they have a lot of exciting products coming around the corner, so I think we’re confident that they will continue to do well, and we see a better development in the second quarter than the first.

Coming back real quick to the gross margin side, you suggested operational excellence was one of the things behind the first quarter spike in gross margins.

How much of that should we expect goes on?

Have you moved the base up a little bit on gross margins from some of your activities?

I don’t think we would – we said after the fourth quarter that the 45.6%, we said don’t read too much into that.

It declined a percent or so and we’re saying the same thing.

Don’t draw too much conclusion now either.

It will fluctuate a little bit up and down depending on the product mix and particularly contracts being invoiced and so on.

Thank you very much.

Thank you.

Our next question comes from Nicholas von Stackelberg of Sal Oppenheimer.

Please go ahead.

I noticed that the other operations increased the employee numbers by 11%.

Can you just fill us in on what that is down to?

Yes, part of it is in EMP.

As we know, we have actually doubled the sales and it’s looking really good in the 3G area.

And then it also is in regards to some of the other operations that do fluctuate up and down in headcount.

Can you give us some numbers on EMP?

What were sales, and how many people do you employ in that unit by now?

No, we don’t disclose that, but we doubled sales.

It’s a strongly growing business, and it should be fairly high margin, so maybe you can reconsider disclosure regarding this business going forward?

I’ll take your point and I’ll note it down.

Thank you sir.

Just a clarification, Italy came out to be your second strongest market.

My understanding was that the H3G contract has not yet impacted sales from Italy in Q1.

Is that correct?

Correct.

Thanks.

We, at some point in time, we thought we maybe even have booked H3G in the fourth quarter, and that would have brought Italy to the number one position for a unique moment but it didn’t come through that way.

Our next question comes from Per Lindberg of Dresdner.

Please go ahead.

Yes, thank you very much.

I’d noticed with great interest that as you mentioned also, you kept your systems operating margin in the first quarter compared with the fourth quarter both IFRS amended.

Nonetheless, in the fourth quarter, you seemed to have had about 27% higher sales and certainly that means that the business mix must have been quite materially different as you pointed out.

The software was much higher in the first quarter.

Now, given that shift in the mix, which mix shift or which mix do you see more representative for the coming quarters and perhaps the coming years, i.e. the fourth quarter clearly was affected by your rolling out 8 new networks and in the first quarter, helped, apparently, by a big push of software apparatus?

Thank you.

I think firstly you are right there that considering how strong sales were in the fourth quarter it shouldn’t have been able to keep the system operating margin as we did, and that was of course enabled by the 48.5% in gross margin.

It’s not the margin as such in the first quarter.

It’s not an extremely unusual volume of software or anything that explains that whole thing, but it’s partly explained by a software and a slightly more than a normal quarter.

But again, we must remember before drawing to the conclusions that there are always a bit of fluctuations here between quarters.

Okay, and the mix that you see hereafter, do you think the software proportion for the whole of Ericsson in the medium-term perspective could increase, or that the proportion that you currently derive from software is representative?

Well, this is a slightly more complex matter than that, because I don’t think that we will see any significant trends where continuously we increase software and we could draw conclusions from that.

Secondly, software as such may not necessarily have a better operating margin.

It’s more that, as we all understand, that it’s more fixed R&D expenditures in the first place and then each single upgrade generates a higher gross margin as such, but not necessarily over time that the bottom-line margin.

But it is of course, the more software we have, the bigger abilities we have to leverage our R&D efforts.

That is clear, but no dramatic trends, I would say, for a year’s time or so.

Thank you.

Our next question comes from Brian Modoff of Deutsche Bank.

Please go ahead.

Hi, yeah, a couple of questions, one on, in terms of your work in progress in Cingular, given that their intention is to launch 20 markets by the end of the year, say November of this year, are you already – are we already seeing the build-out occur there?

In other words, does that explain some of the growth in work in progress that you have?

And then secondly, you mentioned in WCDMA that you’re just seeing a very thin layer of build-out there.

Can you talk about what you see as the peak years of the build-out in WCDMA?

Thank you.

Well, the first question, the answer is yes.

There is a build-up of work in progress in Cingular already and secondly, we introduced GSM 13, 14 years ago and we are still seeing all-time high roll-outs of GSM last year, and we will see an all-time high again this year in number of radio base station transceivers being rolled out, and price erosion plays a role here on what happens to sales.

But remember that as the 13, 14 years, it’s still all-time high, and the same goes for 3G.

We have just had it thinly covered, covered the market yet and we are seeing already 3G efforts in Europe starting to be fully loaded.

Excellent, thank you.

Our next question comes from Wojtek Uzdelewicz of Bear Stearns.

Please go ahead.

Thank you.

Just, in the past you indicated some of the currency hedging impacts or currency impact on some of the profit margins.

Just, was there – can you give us a little bit of a clarification if there was any impact on that, 1 way or another?

Also the provisions line item declined by, I think, SEK1.3b.

Can you kind of explain what was the reason for that decline and any of that for P&L or was it all these adjustments to the balance sheet?

And just more philosophical question, as the business starts stabilizing, a lot of companies such as Nokia, Cisco, Motorola, the list goes on, all the major players like you, are giving us fairly specific kind of assessments of what they see the next quarter and overall for the growth margin structure and so on.

It helps us to gauge how they’re seeing the market and also yardsticks for us to judge how they’re performing versus those expectations.

Why Ericsson would not give a little bit more specific guidance on the next quarter, especially given that pretty much almost all competitors do that?

I’ll start with the impact of the currencies.

As stated in the release, if we would have had the same currency rates that we had a year ago, the result would have been SEK0.9b higher, because we are losing when the dollar is getting weaker.

If you’re referring to the effects from the end of year where the dollar has gained 45 ore against the Swedish krona, there has been impact or material change in the income statement on that, if you’re referring to hedge reserve.

That has been basically cleaned out because of the currency movement.

When you talk about provisions, there have been no one-off hits in the income statement because of the movement of provisions.

And when it comes to the specific targets, I hand over to Karl-Henrik.

It is an interesting question, and we’re always struggling with the question of how much guidance we should give.

But I must say when I’m talking to – at times when I – this is a typical subject that to exchange, if you bump into the heads of the other organizations as you mentioned, that we do on CTIA or Cannes or whatever.

It is, I would say, rather the comment is, how do we get away from the amount of guidance we give, because we tend to go wrong all the time?

And I would say, if you take as an example this particular quarter, as we said in the press conference, we came out of this quarter stronger than expected.

We didn’t expect in the beginning of the year that we would improve 17% in this quarter, year-on-year in the market scenario, the market environment that we have right now.

So if we had given you guidance when we spoke last time, either you would have been disappointed that we guided you too low, or we would have come out with a mid-term warning or something.

So this is the constant battle of trying – if we can add value to your life, we would be glad to, but we don’t want to misguide you either.

I understand.

Thank you.

Thank you.

Our next question comes from James Lindsay of Morgan Stanley.

Please go ahead.

Hi, thank you very much.

Just a question, just going back to operating margins once again after this, obviously you’ve had strong first quarter margins, and you’ve also now moved to IFRS.

Could you update us on your view of operating margins over the next few years?

I mean, are you still looking at high teens under the current situation with IFRS?

And just a second follow-up, really just on how much IFRS is likely to impact operating margins this year?

You talked about one and a half percentage points of negative impact in 2004.

I think we’d all expect less of a negative impact this year.

Can you maybe help us to quantify that please?

Thank you.

If I take the first part of the question, I have nothing more to add than I’ve said before.

It is a constant battle to fight for the margins.

I think we do well.

We have reasons to believe that we can leverage our R&D strength and so on.

We’re fighting with product rationalizations and so on.

We have said that it’s probably more likely, over time, that it could come down a bit than come up, but we’re holding on well to our margins, and we won’t give any further guidance.

And I think it’s important when it comes to IFRS that what we talk about here, what we can know is the treatment on the capitalization of the R&D and how you treat the goodwill.

It is very important that you realize that the treatment, how we are going to end up every quarter when it comes to the IAS39 is something that we cannot speculate going forward, because we don’t know what exchange rates will be in the future.

I want to make that very clear.

Oh no, I understand about the IAS39, but in terms of the stuff you do know, obviously you give us the details of the U.S.

GAAP very clearly of how largely amortization balance is higher than capitalization.

You obviously didn’t see that coming down, so if you could help us to understand what – I guess it’s an incrementally year-on-year positive impact on margins, given that amortization is decreasing from the prior year?

Yes, but that’s also how much we’re going to capitalize every year, because then we have to – every quarter we go through all our R&D projects to know how much we can capitalize, how much we should, etc, etc, so I think the material we have provided as an addition to the release is quite good if you study that, and the bridge on the equity side, etc.

Okay, thank you.

Our next question comes from [Francois Duhen] of CIC Securities.

Please go ahead.

Hello, it’s Francois Duran.

Could you maybe share with us where you are on the CDMA side?

You mentioned that you’d probably gain market share 2% or 3% in 2004.

Maybe you can still do something like that this year?

What about CDMA contributing to that please?

The CDMA is in itself an interesting topic to discuss a bit.

I think it is clear when you look at CDMA that is the – that holds half the market in the U.S. and does that in a good way.

But outside the U.S., we have not seen CDMA grow maybe as much as the standard as we maybe thought a couple of years ago.

Lack of roaming abilities and more expensive handsets and so on are issues that played a role here, and if you look at the number of subscribers in the world, with 1.7b subscribers, you have actually some 15% of that being in CDMA whereas if you see the growth rate for CDMA is more than 12%, so CDMA is gradually losing a bit of its ground, and you can see even in China Unicom, however, which is the large CDMA player in China, that they have bigger growth in their own GSM networks than they have in their CDMA network.

And it is still the markets outside the U.S. that we have our position.

We have taken some 20%-25% of all the CDMA contracts over the last couple of years.

We have not been able to break into the U.S. yet but that’s the position we’re in, and we are, of course, affected by a slightly lesser interest in the CDMA standard outside the U.S.

Okay, thanks, and maybe another question about competition from Chinese players?

I know that several times you repeated that we shouldn’t be too optimistic about what those guys would be able to do.

Do you see any change to their strategy being more aggressive?

We saw some [bonder] financing by [indiscernible] recently.

What do you see there, especially in India and China?

Well, it is – I think we need to be extremely observant and very, very respectful for their capabilities longer-term here and as China will grow to one of the, if not in 5 or 6 years, the biggest industrial nation in the world, it will be as logical that they have very qualified players in our business as it is that we have American or European ones.

I think they are still in an early phase, and so far I think we’re just seeing their wishes to establish themselves in the international market and buying market share and getting in to show what they can do and so on.

And for some reason, they have been especially active on the CDMA front.

We haven’t seen them so much in other wireless standards and on broadband access, but they have a lot to learn, but they have also a lot of hunger and eagerness.

Good, thanks.

We will now take our next question from Richard Windsor of Nomura.

Please go ahead.

Hi, good afternoon, just 2 quick ones if I may.

You mentioned there was an SEK8.3b cash transfer to the pension fund.

Could you perhaps say, is there any more coming and how should we forecast further payments for the pension fund?

And secondly, if you could talk briefly about where you are?

You’ve mentioned your winning market share.

Where have you won it, perhaps, and which geographies?

Thank you.

This is Karl-Henrik Sundstrom.

I will answer regarding the pension fund.

The pension fund was for the defined benefit in Sweden, and we’ve done that transfer and I don’t see that we have any plans for additional funds.

The second one, I hand over to Carl-Henric.

Thank you.

Well, we’re basically gaining market share in all areas, not of course in every particular country, but I’ll guide you through it.

Last year, in local currencieswe grew 14% in global services and this year so far we’ve grown 13% and still not recorded the H3G deal, and I think everybody’s estimate is that the growth in this segment is probably around 10 or somewhere, so we’re constantly gaining market share there, and I think everybody agrees to that.

In terms of second generation equipment GSM, we have a larger market share in emerging markets than we have, for example, in Europe, where we have all our – where our main competitors have their home turf.

That means that when you have emerging market growth, we just mathematically also rise in our overall global market share, so we are moving also there and we have stayed put throughout the crisis.

We’ve never pulled out to the market, never left a customer behind.

And we have a strong position in these markets around the world.

Thirdly, I think we’ve come back as a very strong, viable partner in 3G in newer technologies, strong financial position, leading in the technology side with HSDPA and so on, so we have become a more obvious choice for leading operators in the Western world.

So I think we’re actually gaining a little bit here and there.

Great, thanks very much.

And Operator, we’re ready to conclude our Q&A session now.

Okay, thank you.

That will conclude today’s question and answer session.

I’d now like to turn the call back over to you for any additional or closing remarks.

Before we finish today, I would like to remind you of our Capital Markets Day planned here in Stockholm for May 10.

And we have technical sessions on the following day, May 11.

So if you haven’t done so, you need to register soon if you’re planning to participate.

And if you haven’t received an invitation, please don’t hesitate to give us a call and we’ll send one over to you.

With that out of the way, I’d like to thank you once again for participating, and see you next quarter.

Goodbye.

Ladies and gentlemen, that will conclude today’s conference call.

You may now disconnect.