Telefonaktiebolaget LM Ericsson (ERIC) 2005 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to today’s Ericsson Q2 Analyst and Media Call.

At this time I would like to hand you over to your host, Mr. Gary Pinkham.

Please go ahead sir.

Thank you very much operator, and hello everyone and welcome to our conference call for the second quarter 2005.

This is Gary Pinkham, Head of Investor Relations, and with me here in Stockholm are Carl-Henric Svanberg, the President and CEO of Ericsson, and Karl-Henrik Sundstrom, our Chief Financial Officer.

As you know, we will be making forwarding-looking statements during the call today, and these statements are based on our current expectations and certain planning assumptions.

The actual results may be different due to a number of factors, as there are risks and uncertainties associated with these planning assumptions.

These risks and uncertainties are discussed in more in our Annual Report and 20-F filings, and we encourage you to read them so you are familiar.

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

Carl-Henric?

Hello everyone and welcome to this call.

I’ll start with a more general reflection, now looking back to the 10 last quarters. 10 quarters ago we were looking at a 20% penetration of the world’s population in mobile telephony.

We today have a third of the world’s population has a mobile telephone and can communicate over the networks, and we’re heading more for 50%.

I think it’s a pretty interesting reflection of what happens.

And if we only look at mobile telephones, which is the Sony Ericsson business, Gartner just recently upgraded their forecast to close to 800m phones, that was 400m just a couple of years ago.

So, certainly things are happening here and things are accelerating in our industry.

Let me make a few comments on the momentum in the industry.

We are in the middle of a Wideband CDMA rollout as we all know.

Wideband CDMA is now the clear leader by far in 3G technology.

We have 28m subscribers.

It is growing and it’s also accelerating because of more attractive handsets.

Handsets that can do more and handsets that are more price worthy.

And I think in half a year or three-quarters or so, we start to see truly 3G handsets on par with 2G handsets when it comes to price and battery and standby time, and so on.

HSDPA is also on everyone’s agenda.

A lot of that will make a difference.

It’s, of course, important when we double data speeds when we go from EDGE to Wideband CDMA, but then stand to see if we can double it again up to 5, 10 megabits per second it makes an awful lot of difference.

There's a lot of momentum here.

It’s on every operator’s agenda.

It is forcefully driven, of course, by Cingular and I’ll come back to it.

But Cingular’s rollout throughout the U.S. of HSDPA with soft launches later this year, and launches next year is so forceful.

It’s the biggest rollout that we've seen in the industry, and it makes a big difference in terms of driving confidence amongst handset manufacturers as well as application developers.

We’re also seeing an accelerating demand for services.

We have a year-on-year growth of 25% and, in fact, if we also look at global services including network rollout, we grew over close to 35% -- 36% for -- sequentially from the first quarter.

And that has a bit of a diluting effect on the gross margin that I’ll come back to.

We have now 48 managed networks under our operation, 43m subscribers, which is close to what Cingular has in their total network.

And of all these savings that we thought we would experience, and where we leverage synergies between our own supporting organization and the network organization when we take over networks, they are truly demonstrated.

We have a strong track record and we’re delivering on all the promises we’ve made.

We’re also seeing a lot of new exciting development in the service offering, especially when it comes to hosting.

Where we are offering to host all the services and service applications, the content that any operator wants, and we set up contracts with the different content providers.

And the latest addition to that is Napster, which has, I think, gained a lot of momentum there and we get access to 1.2m song titles, digital song titles, from Napster.

If we look at the different regions, let’s go through them just in terms of what the trends are, and then I’ll talk more in detail of each 1 of the regions.

Well right now we’re seeing a little bit more of a flattish Western Europe, which is what we forecasted at year-end although the first quarter was a bit stronger.

And this has more to do with actually comparing to a tough year in 2004, which was inflated by the catch-up investment, and it all started really in the second quarter.

In Central Europe, in Latin America, these are really emerging market driven growth - new subscribers, new networks.

And we expect that to continue, maybe of course come down a bit percentage-wise but in absolute terms it will continue.

Asia Pacific is a bit in between with Australia, New Zealand, Japan, Singapore, Hong Kong and so on, but there are also all these emerging markets.

We also see that continue.

North America, and for that matter China also, that will be in Asia Pacific that we commented on after the first quarter.

They were a little behind in the beginning of the year.

Not in real activity level in the marketplace and rollouts but more in terms of invoicing, how projects completion took place and so on.

So both of those have rebounded and North America is, of course, much more activity, it’s especially on our side on the GSM.

The second generation and third generation in the GSM/WCDMA track, as the Cingular AWS merger is now in place.

But let me go through the various regions.

Western Europe SEK9.9b up, and I guess I've given enough comment maybe there but we have the 3G build-out.

We also see a lot more competition on the tariff side, which means increasing traffic and increasing need for infrastructure.

We’re also seeing a lot of focus on managed services, especially as operators with falling tariffs are experiencing not that impressive top line growth now for a while.

But still traffic is increasing and networks are expanding.

So everybody’s looking for any kind of model where they can gain efficiencies, and that’s where we come in to play here.

If we then look at Central Europe, Middle East and Africa.

This is now our largest region for the first time, and I think it’s worth mentioning.

And especially when we, for example, talk about in Western Europe it’s all about Vodafone and Telefonica and Telecom Italia, and Deutsche Telecom and T-Mobile, and so on.

These are all familiar names but when you come into Eastern Europe, to Middle East and Africa, we talk about Orascom and Turkcell and Vimpelcom and MTN and Vodacom, and all of these are not familiar to everybody.

But I can assure you that they are very powerful operators with very powerful rollout programs where we are well-positioned.

Expander plays an important role here because it provides even more cost efficient solutions in rural areas, and is really about providing a very affordable service to many people far out in the country.

If we look at Asia Pacific, we had a bit of a rebound there as we said.

In China steady subscriber growth and traffic growth.

A lot of new networks are being rolled out.

Expander is a driver there, and we are seeing 3G rollouts in trials throughout the region.

We are waiting for the telecom reform in China.

I think that is maybe the most important decision, then exactly what happens to the licenses we’re not that sure, and maybe it won't even be that triggering of an event.

Just as a matter curiosity, we saw licenses for 2G a couple of years into year -- the turn of the century, after 7, 8 years of rollout on 2G.

So the reform is more important to track here, and we expect that during the autumn.

If we then look at Latin America, this is the region that after the consolidation has really sped up, lot of network rollout.

It is all basically turning into GSM, and also here Expander is in focus.

We look forward to more growth there.

We have also successfully launched the mobile softswitch on 2G in Mexico a while ago, and this was very well received.

They work really well on a highly, highly loaded network.

If we then finally go in to North America.

We have a rebound there following the operator consolidation, especially in our 3G technology.

The network rollout for the Cingular network is really running well on plan.

It’s a very demanding plan but we’re well on par with it and, in fact, we ended up being a bit ahead there.

And as we mentioned in the press release, we had a couple of -- SEK 2b that we had planned more for Q3 that ended up being in Q2.

And, of course, that should be remembered when you evaluate our performance in the second quarter.

We’re also seeing the overall plan for the whole Cingular rollout is basically unchanged.

We’re also seeing a lot of focus on convergence.

This is a topic throughout the world but especially in U.S., where the cable operators are in competition with the traditional telecom operators.

And everybody is competing on as rich an offering as possible.

And Triple Play, with voice data and entertainment in the same offering, is a reality in many parts for a lot of people here.

IMS is a key enabler, and we have launched more IMS contracts than anyone else in the industry.

If we just talk quickly through the financial highlights.

Our sales were up to SEK38.5b, and with a comment of SEK2b from the Cingular contract.

Of course, everything counts here and orders fall in and out of quarters a bit, but that should be remembered.

That means that in constant currencies we’re 20% up.

Gross margin is 45.9%, and mainly that is an effect of the very strong growth in services, that doesn’t have as such higher gross margins with no R&D.

But still a healthy operating margin.

So with more services that puts pressure on the gross margin level.

Of course, also we had slightly less software in the period.

And we also had the extra SEK2b that came in from Cingular, that as every new network rollout tends to have lower margin than add-on business and so on.

So that’s a natural.

So I would say that, from our point of view, we judge the gross margin is well on par with where we had been before.

Income of SEK8.5b after financials.

I guess there's little to comment.

Operating margin at 21.6%, slightly up from the previous quarter.

Cash flow of SEK5.4b is affected somewhat negatively by the currency fluctuations.

But with that out of the equation, our inventory turnover is increasing, it’s improving, and days outstanding is well on target.

So, in spite of very strong growth here, we feel that we handle working capital reasonably well.

Net cash position of 42.4b, I think is an obvious point of strength and is after the dividend pay, with an equity ratio of 46.5%.

Just a word on Sony Ericsson.

After a bit of a softer first quarter, I think the Company came back well in the second quarter.

And, of course, not being as big as some of the biggest in this industry, we don’t have that many launches of products so each quarter may not be as strong.

But certainly we are back in good shape here in the second quarter.

Units shipped is 14% up year-on-year and 26% sequentially.

We had a slightly lower income than last year, €87m, and this is because of more R&D expenditure in investments, also in new markets.

We had a number of products that I'm sure you may have seen.

The K750 is a major success - the Sony Ericsson Walkman to be launched in the middle of August, and a couple of versions here.

We feel a strong demand building up for it.

So I think we’re looking forward to a pretty exciting autumn here.

When it comes to the market outlook, we are increasing the outlook from slight growth to moderate growth.

And I guess that is in somewhat rounder terms, for us slight growth is 5% or so, or below.

Where we talk about moderate growth rate, it is some 5%, or higher, some 6%, 7%, 8%, 9% or so.

If we try to measure the market growth in the first 6 months, I don’t think we have enough of the information yet.

Everybody hasn’t reported, and even when you report, we have to go somewhat deeper to understand all the different pieces in and what people are reporting.

But it’s obvious that the market is at least a couple of percent over 10% so far for the first 6 months

And we look forward to moderate growth for the year as a whole, and we are also facing somewhat more challenging numbers, to compare with in 2004 with a catch-up spend.

No change in professional service.

We continue to anticipate good growth there and I think, all-in-all, it’s obvious that we are taking market share in both those areas.

I’ll then hand over to Karl-Henrik Sundstrom here, who will just mention very briefly the numbers that I think you in principle are familiar with.

Good morning, good afternoon, ladies and gentlemen.

I -- With this slide I only want to highlight a couple of facts.

I want to emphasize the rebounding of North America and Asia Pacific.

I also want to emphasize the sequential, negative growth in Europe which was part of Carl-Henric’s presentation.

But very importantly, I want to highlight that more than 50% of Ericsson’s sales are coming from emerging markets.

These are our home markets.

We've been in many of these markets for over 100 years.

With the Group sales per segment here, I also want to emphasize the very strong growth we've had in professional services.

And if you combine that with network rollout, you will find that it has been a year-on-year growth of 31%, as Carl-Henric said, a sequential growth of 36%.

That is partly explaining the sequential change in the gross margin margin.

However, we have improved the operating margin, and I think this is the best second quarter ever in Ericsson’s history.

If I go into the cash flow, I would like to point out here that we had a very slight increase of basically SEK1.6b in working capital despite 22% sequential sales growth.

We worked very hard in this quarter on inventories and collections, which is demonstrated in the operating efficiency trends.

2 out of 3 key performance indicators are within target, and this is an area we are focusing extremely hard on.

Sony Ericsson gained market share in the second quarter by sequential sales growth of 25%, and the number of units up by 26%, and the profit margin is basically the same.

And they are launching a number of interesting models in the third quarter and the rest of the year.

With this, I would like to hand over to the Q&A session.

Thank you sir. [OPERATOR INSTRUCTIONS].

Our Today’s first question comes from Kulbinder Garcha of Credit Suisse First Boston.

Yes, thank you.

Just regarding the infrastructure growth rate that you're seeing in North America, and the pulling of revenues from Q3.

Is there any chance that this trend continues because of an accelerated rollout and increased demand for GSM?

Or are you really suggesting that your revenues could see a reasonably harsh decline going into the second half of the year?

Well, first of all, one very obvious conclusion is that, as it fell in to this quarter it doesn’t fall into the next one.

So whatever happens, it’ll be SEK2b less in the third quarter.

But the third quarter is another quarter and then I think we are generally in a positive momentum here.

But I would say though that if our activities with Cingular pulls more business, it is because we are in such an intense relationships and we get business from other areas.

Because the overall rollout plan is followed very accurately and there is no change there.

And are you still confident that you will start seeing WCDMA rollouts from them in North America in Q4, and really picking up next year?

Is that still your view?

Yes, absolutely.

We are not the only suppliers so we can only speak for ourselves, but from our point of view and from what we understand, there are no changes in those plans at all.

And then just finally. you're now approaching the investment grade, I think, again and the balance sheet’s got over SEK40b of net cash.

Do you have any updates on cash distribution to shareholders?

Well, I think so far we just feel that if you compare us to Cisco or to Nokia or so on, I think we’re all companies that are sitting on strong cash positions.

And I think having gone through such a troubled time, I think we have learnt that had we had a better cash position to start with, we would probably have taken more advantage of the circumstances then.

And as we've said several times before that, a higher than anticipated growth, or a worse than anticipated development, for some political reasons, risks or whatever, or even opportunities for some acquisitions, if not necessarily large ones.

All these may be very important to have a good cash position.

So I don’t think we are yet at the stage where we need to think aboutactivities other than those.

I’ll let Karl-Henrik Sundstrom have a comment here.

Yes, I think it’s important also to note we are in investment grade right now, and that obliges us to carry certain net cash positions.

Okay, thank you.

Thank you sir.

We now move to the next question which comes from Tim Boddy of Goldman Sachs.

Please go ahead sir.

Hi. thank you very much.

I’d like to ask a question about sustainability, both of gross margin and of this level of sales growth, which is obviously surprising expectations.

If we first of all think about gross margin.

I think a lot of investors are concerned that with Cingular being a very competitive contract, this would weigh far more adversely on your gross margins as we went through the year.

So is it safe to assume that now Cingular’s healthily within the gross margin, it’s unlikely we’ll see further meaningful downside in gross margins?

Secondly, in terms of sustainability of growth, this brings back the question of how long this can last, with emerging markets continuing to surprise expectations.

So are there any comments you can make in terms of sustainability?

Well, we don’t give particular guidance but I’ll still give yousome answers to your questions.

First of all, we are -- we believe we are in very much of a steady state when it comes to business.

We had ahuge turnaround and the very rapid improvement to margins, when we felt that we had to give somewhat more guidance because it was moving so quickly upwards.

I think we’re now in a good, steady state, and I do believe that there is at times an overestimation of the impact of particular contracts.

Because we have always new rollouts and extensions to old networks and so on, and I don’t think that is any change in particular.

We are more in a normal situation now, even with Cingular there.

So in that respect your comment is right, going forward.

If we go back, in all fairness, to 2003 when we had almost a full stop in this industry.

There were less new contracts and more extensions but I think we’re in a good, steady state now.

That doesn’t mean that margins are easily held.

We have to fight every day for them but we are confident that we can continue to do so.

When it comes to growth, it is growth of this kind, where we are 18%, 20% up, I don’t think we can easily say that they're reflecting an underlying growth.

They would have to be followed by a pretty substantial market share growth, and also there we are quite confident that we can take market share.

But also that is hard work every day and no success is ever given.

I think it’s also important to keep in mind, we are growing in services, where we are trying to be very explicit that the gross margin is lower but the operating margin is very competitive.

And I think for the last 5, 6 quarters, we have maintained an operating margin above 20%.

Thank you very much.

We now move to Paul Sagawa of Sanford Bernstein and Company.

The uptake of 3G service in Europe has been somewhat measured over the last year or so.

The service has been out there, Hutchinson a little bit longer.

There seems to be some rumblings that we could start seeing further investment in trying to stimulate that market.

Can you talk a little bit about European carriers, what they need to do in order to make the 3G service attractive to users?

Whether you think that investment starts now, or whether it really begins in ’06?

Also, if you could talk a little bit about plans to upgrade to HSDPA amongst European carriers, and when you really think that hits, and when HSDPA service might be launched in Europe?

That would be great.

Thanks.

Well I would say first of all that 3G is a more cost efficient technology.

So, irrespective of anything that would happen, 3G is the way to go, even if everything would stay as it is today.

So obviously 3G is happening.

In countries where you already have a 2G network, the pace in which we transfer over to 3G I think is also much dependent on the handset pricing.

And I think not long before now we will see handset prices of 3G on par with 2G.

So I think we are looking rather soon into a pretty good growth on 3G.

Another effect that we mustn’t forget here, is that Europe has average minutes of us of maybe 150 minutes per subscriber.

Whereas America has 500 or 600 or even more because of much more competitive tariffs, and this is a very price elastic service.

We are seeing tariffs now coming down and traffic is increasing.

So for operators it becomes very important to get traffic over, otherwise they have to rapidly build out 2G networks.

And that is obviously not the way that they would like to see things happen.

As you then get more subscribers, of course, content application developers are not just sitting there – there are operators and there are handsets manufacturers but they’re also independent, and that will accelerate as subscribers are growing.

When it comes to HSDPA that is of significant importance I would say.

There isn’t a single operator that isn’t very focused on HSDPA.

The thing is, however, that now it becomes a little bit more important which vendor you have chosen because you may have -- In our latest versions this is a software upgrade.

In our older versions of 3G it’s a stick-in card and a software upgrade.

Whereas you have other equipment manufacturers where you may have to forklift out the radio base station to get HSDPA.

And then if you're an operator that has only partly that type of radio base, you still have to do it, to launch it nationwide.

So there are quite a few legacy issues that you have to go through, but certainly we are speaking about HSDPA with every operator I would say.

Thank you.

Thank you.

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

Yes, hello. 2 quick questions regarding the geographical split of sales here.

Looking at the rest of Asia Pacific, sales were down 4% year-over-year.

Yet we heard at the press conference, Carl-Henric Svanberg referred to very strong growth in India, Bangladesh, Pakistan, etc.

Which markets have had a poor performance, if I put it that way?

And secondly, Western Europe, how do you see your own sales develop in second half in absolute terms, compare with the first half?

Thank you.

Well, when it comes to Asia Pacific, it is clear that in spite of a lot of activities and roll-outs in China, they rebounded in the second quarter versus the first, but they're still a bit behind.

And it is a bit of a peculiar reorganization and -- going from local to a centralized paying routines in China that have slowed acceptance a bit.

So there are more administrative reasons for that

Maybe also in India we have fluctuations a bit, although our position in India is very strong.

We have over 40% market share in the GSM area.

But that also fluctuates a bit depending on contract rollouts and so on.

But generally, of course, Asia Pacific is a growth market.

Your second question about Europe, what was that?

Yes.

Looking at Western Europe, how do you see the second half sales develop, your own sales, compared with the sales in first half?

Remember the catch-up spend that we talked about.

We started to see that clearly in order bookings that we reported last year in the first quarter, but it wasn’t until the second quarter that we started to see a really strong pick-up sales.

And that is what we’re comparing with now.

We actually said in the beginning of the year, that we see a more flattish development in Europe because of the tough comparison, although we won't see it in the first quarter, wherethe comparisonwas easier.

I think this is basically what is happening in Europe right now.

So flattish because of tough comparison but underlying traffic growth with falling tariffs, 2G enhancements, and 3G roll-outs going on.

Okay, thank you.

Thank you.

We now take our next question comes from Francois Duhen of CIC Securities.

Hello.

I've got in fact 2 questions.

The first 1, if you can share with us the impact of a potential further revaluation of the Yuan/RMB against the euro and dollar?

And the second one would be, whether you consider your business as being cyclical, or if the variation from 1 region to the other would make it a bit more like constant growth, going forward?

Thanks.

Well, I can start with the later one and I’ll let karl-Henrik obviously answer on the R&D here.

I ‘ll try to be as fair as I can be.

In our own view, this has historically not been a very cyclical industry.

And we are now heading from 2b to 3b subscribers and we’re adding new services and so on, and this tends to be less cyclical.

At the same time we haven’t really tested the industry after the deregulation in the beginning of the 90s, because first came the boom and then came the crash, and now we’re back into stability.

So what does a deregulated operator have [as yet], and of course one could foresee one can follow certain cyclical trends in the Western world.

I wouldn’t bet too much on it but from all historical facts this is not cyclical.

Regarding the RMB announcementtoday that they’ve gone from a pegged against the U.S. dollar to a managed float.The information I have is that it’s a movement of 4%.

It will have very, very limited impact on Ericsson.

Is it true both for sales and margins?

Yes.

It’s very, very limited.

On the balance sheet exposure it will be slightly positive, and we will have a slight cost increase.

But that’s also how you implement certain parts of it, the price formulas in the contracts.

So, we follow this every month and we have good control over this.

So we are talking $1m or $2m.

Okay, thanks.

We now take our next question from Tim Long of Bank of America Securities.

Please go ahead sir.

Yes.

It’s Jeff Walkenhorst for Tim Long at BA.

Thanks for taking my questions.

I'm wondering what percent of total radio access sales, EDGE and WCDMA contributed during the second quarter?

And then secondly, if you could discuss the trends in EDGE relative to WCDMA across the different regions, and how that might impact your sales as well as margins?

Thanks.

[audio break] When we talk about EDGE, we don’t mean necessarily just software upgrades of GSM.

Because a lot of GSM rollouts today have EDGE capability in its rollout.

So it is not just software it’s hardware as well.

And what was the second question?

I missed the percent of total radio access sales for the second quarter?

It was 54%.

What was your follow-up then?

The second part then, if you could discuss the trends in EDGE relative to WCDMA across the different worldwide regions, and how that impacts your financial?

Thanks.

First I would say that, different from what maybe it was described years ago, that WCDMA was a separate network, separate step and so on, very revolutionary.

This is much more evolutionary and there is hardly anyone that rolls out 3G networks, except the greenfielders like Hutchinson, that doesn’t do it as a reinforcement of their networks.

Which means that they will start up in larger cities, mid-sized cities, and they will follow up later in the countryside.

In spite of the fact that for a newcomer 3G is more cost efficient, but they already have a current network.

That means that as they launch, when you get out of the WCDMA coverage, you don’t want to drop down into GPRS.

And that’s the reason why EDGE is basically much more pulled by WCDMA business, than being an alternative.

Having said that, there is no-one that rolls out networks today that aren’t EDGE capable, of course.

That’s what you do.

So it becomes both a complement and a separate driver as such.

You will basically only have EDGE upgraded GSM networks throughout the world not before too long.

That would include in Africa, Middle East as well as Latin America, you think?

Absolutely.

There is no reason because when you roll it out in the first place there is basically no cost difference to roll it out with EDGE.

Of course you do that, it is happening.

We have rolled out in EDGE in Africa.

We have rolled out EDGE in Latin America, of course in Western Europe, in China and India.

Okay.

Do you think we’ll see a spike in potentially the margins again, like we saw in the first quarter because of increased software sales?

Or do we think that on a go forward basis, we’re still looking at mid-40s gross margins and high teens or low 20s up margins?

I think it is basically wrong to read anything into fluctuations between quarters.

If there was a reason we would advise you so.

We are now a little bit lower than the first quarter but we are higher than the fourth quarter, then again was lower than the third quarter last year.

It fluctuates a little bit back and forth, and everything we sell is always a combination of hardware and software.

And in the old days we upgraded the GPRS, and then came EDGE.

And these are words that means things to you, but if we tell you that we upgrade to 3.0 or 3.1, 3.2.

The constant upgrading of networks with releases coming every 6 months in every technology and so on.

So, that is a mixed bag of it all the time.

Okay, that makes sense.

The operating margin, you’ve mentioned high teens as the sustainable level in the past.

Does that still hold true, or do you think it goes a little bit higher or?

Well, a while ago when we came through a very turbulent restructuring here, and the margins were improving like 5 percentage points almost every quarter.

We had to give some sort of guidance.

We have moved away from that.

We think we hold on well to our margin.

We had to fight hard for our margin.

It’s tough competition out there all the time.

But we’re also successful in our redesigns and cost cuttings and new solutions and so on.

So we’re not giving any particular guidance but we think we’re holding on well, and we’re fighting hard for it.

Okay, thank you very much.

Good luck.

Thank you.

We now move to the next question which comes from Tim Luke of Lehman Brothers.

Thanks.

A question for Karl-Henrik Sundstrom.

Just on your investments in R&D and SG&A as seasonally.

How should we look at that?

With a revenue line which may be sequentially lower, would we expect the expenses to be fairly flattish?

Or how should we view the shape of that seasonally?

And then if you perhaps for - the other Carl-Henric - just on seasonality in general.

It sounds like with Europe, for example, slower in the second quarter, we would expect that to pick up in the second half.

And maybe after such a big second quarter in North America, should we expect that to be a little slower in the September period?

Or how should we think about the seasonality?

Thank you very much.

Okay.

Regarding R&D, I think we are increasing in R&D and previously we had said that we will end up somewhere around SEK22b, SEK23b on R&D.

I would say today, because we are gaining momentum and increasing investments, I would say - including capitalization of R&D - we’ll end up around SEK24b, slightly a little bit more.

When it comes to the SG&A, I think it will fluctuate along the business -- the level of business and you shouldn’t read too much into single quarters.

You should look upon it on a slightly longer period, a couple of quarters, and there you will see the trend.

But that will fluctuate with the business but not in any individual quarter.

What do you say about R&D again, Karl-Henrik?

Can you just repeat that?

Okay, I repeat it again.

Slightly more than SEK24b for the full year, including the capitalization of R&D.

Thank you.

That’s very helpful, and then on the revenue side and seasonality, to the extent that you can give us any help there would be great?

As we’re not giving guidance for quarters, I guess seasonality is in an inroad for guidance.

But if we look at seasonality as we've seen it over years, we have seen a second quarter being up on the first quarter.

And we've often seen in third quarter, with it’s holiday season and so on in many countries, being slightly down from the second quarter and then peaking in the fourth.

I think that’s a pretty normal trend and, of course, in this particular case for us, as we've always said, if contracts fall in and out of quarters, we can change that pattern a bit.

Of course, we've burdened the third quarter when we have higher invoicing from Cingular than in the second.

But I think there are so many dynamic things happening here, so I wouldn’t answer more.

But historically we've seen third quarter being slightly down from the second.

Thanks for this.

Good quarter.

Thank you.

We now move to ABN Amro and a question from Per Lindtorp.

The question is first for the U.S. market.

SEK2b was pushed from Q3 into Q2 and I guess that’s the California and Nevada upgrade that you won from a competitor.

How much is left to deliver on that contract?

Was that all of it for that region or is it more to come?

Because I guess that’s the market share gain with Cingular.

The other question is in terms of WCDMA.

How you see the capacity of WCDMA in the European markets at the moment, mainly in the urban areas?

How much room is there for growth as subscribers comes on to the network, given the higher capacity of WCDMA for the next 1, 2 years?

Is there enough capacity after this?

Well, if we start with the U.S..

We don’t comment on particular orders, and there is a number of activities going on with Cingular, and the 1 you mention is 1 of them.

But certainly our position with Cingular has improved from the past, and is very strong and promising.

When it comes to Europe and 3G, WCDMA has a good capacity and can absorb quite a bit of traffic.

But at the same time what operators, of course, have done is that they’ve started to build out a rather thin network and do, as anybody would do, as little as they need to do to be able to launch.

And then, of course, as traffic picks up they will have to invest more.

And today with -- when we’re seeing still just a small portion of all the subscribers being on 3G, and you just see it’s a quicker transfer from 2G, of course that will impact infrastructure investments going forward.

Thank you very much.

Thank you.

Our next question comes from Jeffrey Schlesinger of UBS.

Please go ahead.

Thank you. 2 questions. 1 is, much like you talked about Western Europe and the trends there, can you talk about the Eastern Europe, Middle East, Africa?

You’ve grown 24% in the first half of ’05.

Given some slowing in the second half, do you still think that you can keep second half growth in that area double digit, albeit obviously lower than 24%?

And second question on capacity utilization.

I think you referenced in the Annual Report that you were near capacity utilization in the fourth quarter, at 39b roughly run rate.

Giving the upside you’ve seen in the revenue, what are your plans on the capacity utilization side, internal and externally?

Thank you.

CEMA is a low penetrated region in many respects.

However if you take Russia, for example, and Russia is an interesting example, where 140m Russians with all kinds of income distribution, categories of income, purchasing power.

We are heading this year to a penetration that is close to what we have in Western Europe, and I think that opens also perspectives on where the world’s penetration could go.

But that means that Russia as one particular country, we’d probably not see the same growth in 2006 and 2007, although 3G discussions are starting up there now.

But on the other hand you have the Middle East, you have Africa.

First of all you have the neighboring countries, all the “Stan”countries - Ukraine and Belarus and Kazakhstan.

All these markets are rolling out networks.

And you have the whole of Middle East and Central Europe and Africa.

Up for the first time now on the top 10 list is Nigeria with 8% penetration.

So there I would say that the CEMA region is probably one of the more promising ones, when it comes to potential.

That will go on for quite some time.

And the exciting thing is that we’re talking 3G in many markets.

Turkey is a big market and so on.

When it comes to capacity, we have 25% of our production in-house, and that is not a bottleneck.

This is equipment that we make as new product has been developed, and to industrialize and stabilize the production.

And when that is stabilized we move it out and we can move it out quickly if capacity is needed.

When it comes to supply, we have a good supply chain with several suppliers and so on.

So I don’t think that, in spite of running at high capacity I don’t think we have bottlenecks around the corner here.

I think Karl-Henrik has an add on there.

I think it’s important to remember, these are areas that we are good in handling, and this is what we are paid for.

So we are very good at balancing the capacity utilization, and I would like to make another comments regarding the CEMA region.

Here is a number of regional players that have grown enormously during the last couple of years.

You have the Warid Group, the Wataniya Group, Orascom, MTN, Vimpelcom, MTS, Turkcell, etc.

And they are growing fast and they are running very, very low cost operation, where they can make money on an offer which is considerably lower than in Western Europe.

It’s very interesting.

A lot of the growth right now is East.

Just to clarify, you said 25% of production was in-house?

I would like to include a bit of clarification.

We use our in-house capacity as a buffer for fluctuations quarter-to-quarter.

So it can fluctuate from 50% outsourced to 75% outsourced.

Thank you.

Thank you.

Our next question comes from Ittai Kidron of CIBC.

Hi guys.

Congratulations on a good quarter.

I just had 1 question.

As you go into 2006, obviously in some regions WCDMA build-out is going to be at advanced stages.

What kind of cannibalization would you expect with regards to wireless carriers budgets, spending budgets, as they shift out more and more of their spending from 2G towards 3G?

I don’t see there is any cannibalization.

It’s almost as if it is coming the other way that maybe also one of the reasons that we have seen slightly better market growth than anticipated, is that a lot of operators are planning for 3G rollouts.

And they're rolling out the networks but in -- but at the same time experiencing, even if when they get growth in their 3G networks, they're experiencing more traffic than the 2G networks than anticipated.

And therefore they have to talk up 3G investments with also 2G investments.

And it is an interesting fact but I'm not sure we have mentioned it, but we saw in the world’s networks, on voice we saw an increase between 2003 and 2004.

That increase was higher than the entire traffic in year 2000, and I think this is something that we don’t often comment on but that is a fact.

And that is what drives also the infrastructure needs and the increasing curve is not leveling off.

Very good answer.

Good luck guys.

Thank you.

We now move to Exane BNP Paribas and a question from Alexandre Peterc.

Yes, hi.

Thank you for taking my question.

I’d just like to clarify again because didn’t quite get it.

The SEK2b that are being carried over -- forward from Q3 into Q2, are we going to miss those to any extent from Q3?

Will it have less than usual seasonal growth in Q3?

Or are you bringing the whole Cingular program forward, so there will be no disruption there?

Could you just clarify that for me, please?

We are not bringing the entire Cingular program forward.

So the SEK2b of upgrades in that sense the hole of 2 to 3 for the third quarter.

But at the same time I think we should also remember that there are always effects of this kind.

So there will be other things that fall in and out of the third quarter.

But as an isolated order, yes, it came there and it is not advancing the program as such.

And then just a very quick follow-up if I may on the T-Mobile Germany contract.

Was that also a little bit of a drag on the Q2 gross margin, or was it immaterial?

Thanks.

Well, that is just part of a normal mix of new rollouts and swap-outs and extensions.

So it doesn’t make any difference to our ordinary life.

Okay, thank you very much.

We now go to Richard Winslade from Dresdner.

Hello.

This is actually Per taking Richard’s slot.

I was wondering whether we could extend the horizon into 2006, it’s probably often good to do that before we come to the very end of a current year.

It seems to be much more than China that is warming up to 3G, if you take the confluenceof activities that I'm sure you and others are already involved in, in India, MTNL, BSNL, Bharti.

We have the Brazilian 3G spectrum on the way, probably end of this year, early next year.

Mexico likely to join very soon.

Russia; up to 2, if not 3 new operators in Japan.

To us, and perhaps increasingly to many, it seems to be a 3G bonanza in many markets next year.

What's your view on that?

Perhaps not the exact timing whether if all these countries are going to move in the same quarter, or whatever,but the bandwagon building behind WCDMA, and perhaps also how it seems to be crowding out the other alternative, CDMA2000?

Thank you.

First I would say that you're last comment there on WCDMA versus CDMA, that is very obvious.

The CDMA alternative is getting less attention and getting less growth than their installed base.

So it’s becoming a WCDMA choice, that is quite clear.

You're mentioning a number of areas here where I would say that, India, Russia as an example, we have a lot of discussions around 3G.

I don’t think we will see launches or rollouts of 3G in 2006.

There are probably more discussions, rollout in 2007 I would think.

At least that’s a more cautious thought because that’s where those countries are in with the regulators and so on.

But absolutely, there are a number of activities actually warming up and that’s part of the upgraded market outlook.

There are more of those than we've seen before.

Thank you very much.

Thank you.

Our next question comes from Mark Davies-Jones of JP Morgan.

Please go ahead.

Thank you.

Could I ask about any geographic differentials in profitability in the systems business?

If we put to one side the difference between network rollout services and follow-on equipment sale.

Just in terms of straight equipment sale, is there any reason why your margins should be lower in a lower ARPU lower GDP market than your traditional Western markets?

Not really because the way to capture economical for the operator ARPUs, to make it possible to run on 20%, 30%, 40%, 50%, 60%, 70% lower ARPUs are certainly not bargaining harder, or more successful bargaining on equipment.

It’s more to work on the operational model, and especially introducing the Expander solution and so on, to reachfurther out.

There are at times, we feel, a bit of a -- I'm not sure if misconception is too strong a word but it’s a perception that emerging markets can offer lower margins.

It is pretty difficult actually to work in emerging markets, and you don’t pop up one day and start to rollout the next.

It needs long experience and people on the ground and relationships, and capabilities and personalities, to go into Pakistan and roll out networks in at times not the most safest place in the world and so on.

So I think actually that on average, I don’t think one can conclude that there is a better or worse market area in terms of margins.

Then there are always differences between new rollouts and add-ons and so on, and that tends to be often a bigger difference.

Okay, sure.

Thank you.

One last question, operator.

The next question comes from Hassan Imam of Thomas Weisel Partners.

Please go ahead sir.

Yes, thank you.

I had just 2 questions.

First of all, could you comment on China 3G delays and what looks to be a smaller opportunity?

What impact that might have on 2006 industry outlook?

Well, I would say when it comes to China that we have a growth of 5m, 6m subscribers every month.

It’s a huge build-out that has to be absorbed in the networks somehow, and then -- Since 3G is a more cost efficient solution, even for just voice, it means that any rollout of 3G would of course, from an owner’s perspective, be more preferable.

However, you also have to build a new network.

So I would say, if they take a 3G decision or if they go with 2G, it doesn’t make a big difference to us.

However, we’re confident that they will go for a 3G rollout, that the decision is rather close.

The important thing to look out for, I believe, is the telecom reform because they are obviously concerned, or convinced, that if they could somehow find a way of maybe working with, say, 3 larger operators instead of 4, that would have less implication of network build-out, at least in the first place.

Over time networks will be full anyway, so the capacity will be needed.

That we believe is the triggering event, and that we believe is for a further rollout of technologies.

Licenses should follow rather soon after.

There was recently some trials on TDS-CDMA, the Chinese alternative, that didn’t turn out as successfully as maybe one had hoped.

And therefore, that may also cause changes in their strategy or delays, or whatever.

Just as a little interesting reminder, 2G licenses were awarded around, I think it was 2001 or 2002 and then they rolled out for about 8 years.

So it could very well be that we just see starting rollouts, and we have already very large trials going on that starts to be almost on par with their smaller rollout.

Thank you for that insight.

And my second question had to do with the competitive landscape in emerging markets, vis-a-vis the Asian vendors.

We've heard chatter at least that the Asian, and Chinese vendors in particular, have been very competitive on pricing in 2G/GSM in particular.

Are you seeing that, and what does that mean for your margins as emerging markets grow over time in volume?

Thank you.

Well, we have all kinds of competitors and to really play a role you have to have a very strong R&D force, and it’s an R&D game this very much to cope with all the challenges that is there.

Plus you need an equally strong position to make it work, end-to-end and to have the system integration capabilities in every market in every corner, and work with all the customers and work with standardization and so on.

The Chinese as engineers are, of course extremely talented and motivated and work hard, and we take them very seriously as a competitor.

When it comes to pricing, in fact, if we would move the entire Ericsson to China where our 130 or whatever sales would be this year, SEK a billion of sales.

The entire savings that we would make is probably 5%, 6%, 7% on savings from salaries.

Because so much of the staff that we have work out in the marketplaces with making it all work.

So I shouldn’t overestimate the cost advantage that they have, as long as we are ahead of things that we work as smart and as efficiently as they do, and so on.

When it comes to their pricing, I think they're doing what everybody would do when you are a newcomer in financial.

You would just go as aggressively as you can to get a contract, to show you what you think you do.

I'm not sure that the prices they're showing necessarily reflects where their costs are.

They need to get a foothold and show their capabilities.

There are areas where they have built a stronger position, in fiber optics and so on, where they have an advantage in terms of cost as we know.

Our quoting is not very different.

But it’s crystal clear that give them 10, 20 years, I think they will of course be a leading player in the industry, as well as we have European and American players.

Thank you, and congrats on your strong performance.

Thank you.

Okay that was the last question.

So before we finish today, I would like to inform you that our next Strategy and Technology Seminar is scheduled for September 7 in Shanghai.

An agenda and registration information is available on our website.

And regarding the Interim Report, if you have any more questions don’t hesitate to give us a call.

Thank you and goodbye.

Ladies and gentlemen, that concludes today’s conference.

On behalf of Ericsson, thank you for participation.

You may now disconnect.