Telefonaktiebolaget LM Ericsson (ERIC) 2005 Q3 法說會逐字稿

Welcome to the Ericsson analysts and media conference call for their third quarter report for 2005.

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

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

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

Thank you, operator.

And -- Hello, everyone, and welcome to our conference call for the third quarter of 2005.

We're starting a few minutes late today, because we wanted to make sure everyone was on board and there was a few late people dialing in, but hopefully everyone is there now.

With me here in Stockholm is CEO Carl-Henric Svanberg and Karl-Henrik Sundstrom, our Chief Financial Officer.

Before we get started, I'd like to inform you that we will be making forward-looking statements during the call today and these statements are based on our current expectations and certain planning assumptions.

The actual results may be different, due to a number of reasons, and the risks and uncertainties associated with these planning assumptions are described in our Annual Report, which we encourage you to read.

With that out of the way, I'd like to hand over to Carl-Henric for comments about our performance during the quarter and our plans going forward.

Well, ladies and gentlemen, welcome to this conference call, again.

Let me start by saying that this quarter was a milestone for our industry.

We passed 2b mobile subscribers in the world and I think we are aligned with other analysts in our assumption that we will pass 3b within five years or so.

That is a pretty fascinating thought for us as a Company with a vision of an all-communicating world.

It is driven by the fact that communication is a basic human need and mobile technology is serving this need best into every single village around the world.

The primary growth drivers right now is, of course, mobile voice and data, as we know, but also broadband in general, with a lot of new services coming on board and also generally increased minutes of use, much driven also by the intense tariff competition.

There is also strong momentum in emerging markets.

And it speaks for itself the fact that we, as an industry, thought that 2b subscribers was a goal and saturation level only a couple of years ago, whereas we now think we can go 50% higher than that.

Convergence is on everybody's agenda, especially in mature markets, of course, where we bring mobile and fixed telephony into one seamless network.

It's not going to happen overnight, but it's certainly something that is on the agenda for technology development and positioning for future business.

A couple of words on mobile broadband here.

HSDPA really offers a new level of services.

It is not simply that, when we download our mail, we can do it faster than before and enjoy the speed, but it's also that music downloads or music streaming or video downloads or even TV or enterprise services -- There are a number of services that are suddenly very attractive and possible on the HSDPA networks.

And that -- HSDPA in itself is not so much of a technology as a different way of handling the signal and the system in a much more efficient way.

And it's done by smart software, which means that it's basically the existing networks, if you build them smart, but you can update with the downloads of the software.

And we expect all Wideband CDMA networks over time to be upgraded.

And very little that is being sold from now on is going to be anything else than with that capability.

We're seeing a couple of million add-ons of new subscribers every month, in the worldwide Wideband CDMA networks.

Today, on 34m as a whole.

Our mobile platform company continues to be very successful.

You'll find a platform for 3G in the majority of all handsets outside Japan and present in the 10m of the handsets sold this year.

We are also seeing accelerating demand for services.

We have a 30% increase year on year, a quite impressive number actually, and certainly coming up as one of our -- the strong growth drivers in Ericsson.

There is a growing interest in all markets, all, from the traditional what we call support services, which is simply maintaining and updating and making sure that all the networks out there run efficiently, to hosting, is the offer we go to operators and set up contracts with different content providers and therefore, after a fixed fee down payment, an operator will pay as he grows with the usage of his subscribers.

It's also about system integration, where we have very qualified resources throughout the world helping operators to make everything work from end to end.

And there is quickly growing demand for that in the more complex networks.

But finally, also, managed services, where we are taking over running networks with quite compelling savings that we can make.

And this is an effect of that we can leverage synergies and overlaps between our own support organization and then -- and the network operation that the operator runs.

This is driven, on one hand, in the markets -- mature markets, where everybody's seeking more cost efficient models of operating, but it's also driven in emerging markets simply by startup companies, operators that need to focus on their customers and are very glad when they can offload any of the work to somebody else.

Let me then go through the regional update and let me then start by saying a few words on Western Europe.

Already, back in -- after Q4 last year, we said that we looked forward to a more flattish Europe this year, because we had so strong upgrades and the catch up investment that we spoke about several times last year, where we are comparing with pretty strong numbers last year.

It has been like that in the second and third quarter.

The first quarter, as you remember, was strong, but the catch up investment didn't start in the first quarter a year before, so that's more a relative difference.

This is, as I said -- it's an area of increased interest for managed services.

We see a lot of tariff competition in Europe.

And we're also seeing a lot of increase in data traffic.

But also - this is maybe jointly with the U.S. - a lot of focus on convergence and next generation networks.

You're all familiar with the BT 21C network, but we have similar projects going on in -- seeing similar projects in -- with KPN or France Telecom or Deutsche Telecom or Telecom Italia or Telefonica.

The CEMA region that grew quite strongly in Q2 has not seen as strong a growth in Q3, but the underlying business activity is stable, so there is more swings between quarters.

Strong subscriber growth and network expansions.

One particular milestone that we reached was 100m subscribers, now, in Africa, and there is a -- obviously a lot of potential in that continent as well.

We have also see -- We are also seeing 3G and HSDPA deployment getting started and of course we'll see more and more of that, as well, in this region.

If we then go to Latin America, that is our strongest growth region.

It is clear that GSM is the winning standard.

There is very little left of CDMA networks there.

And 40% up is a -- it's an inspiring number.

It's a lot of market share gains there, but it's a strong growing region.

Maybe numbers that -- we can't hold up those percentages numbers going forward.

That gets increasing difficult, obviously.

Brazil and Mexico are two countries that are pulling the growth strongly, here, and even Argentina is actually doing well here.

If we then go to Asia Pacific, that is a region where we see 20% growth, which is a healthy number, but we see a lot of variations in the region.

There is a high activity level in countries like Australia, India, Indonesia, Japan and so on.

But, at the same time, we're seeing China in a bit of a waiting mood.

We should remember, though, there is a bit of contradictions here, because China adds on still some 5m and will continue to do so, 5m subscribers every month.

Traffic is increasing.

You see almost all-time high pickup rates in new subscribers on some of the operators in China.

But everyone is waiting now for the green light to start the rollout for 3G.

And there will be 3G -- three licenses for 3G is what everybody expects, for four operators.

And [one] has to get that mathematics together and everyone isn't really sure what their role is going to be.

And therefore there is this -- a bit of a waiting mood.

We expect that to come in the, maybe, first quarter or so.

I guess we have been guessing over the years, have been wrong all the time, but I think we're getting closer and closer to the rollout green light there.

But that is also holding back a bit on the 2G side, because nobody wants to spend too much if they're going to go into 3G.

If we go to North America, we see a very healthy rebound after the consolidation there.

It is very interesting, now, to follow Cingular's 3G HSDPA rollout, where we are the lead supplier.

We just launched HSDPA commercially a week ago.

And it's a very intense competition there between, primarily, I would say, Cingular and Verizon, where everybody's fighting with service quality and service offering.

And with the new technology that Cingular rolls out, they will certainly be in a technology lead there.

But it's [all] a no questions asked, no doubt kind of project here.

It's really pulling the entire industry and pulling the handset manufacture and so on in the biggest rollout that the world has seen so far.

Just a couple of words on the financial highlights.

At sales of SEK36.2b, we are some 15% up, year over year and year to date, which is a -- quite a healthy number, considering where the market growth is.

We are clearly taking market share.

Gross margin is at 45.2%, which is 0.7 down from the second quarter, but primarily an effect of -- a mathematical effect from the growing service business that has a lower gross margin, but still an equally healthy bottom line.

So if we will continue to see services outgrow the rest of the Company, we will continue to see a similar mathematical effect on gross margin.

On the operating expenses side, I think we have -- we feel fairly satisfied.

We are 3% up year to date, in a year when we're growing 15 or 17%, even, in constant currencies.

And that growth, in itself, is smaller than the growth in R&D, which means that operating expenses excluding R&D is actually slightly down.

And that's the effect of continuous work on operational excellence and working smarter and more efficiently.

Then, if we look at the income, we are at SEK8b.

An operating margin of 21.6%, which is in level where we were last quarter.

Cash flow is minus SEK1.1b, and I'm sure you will have some questions there.

We have SEK2b that is a reported effect -- is an effect from foreign exchange differences that affects the reported cash flow but not really the -- has no real cash flow effect.

There is no money leaving the Company there.

We have also an increased proportion of large projects.

If we go back only two years, if we go back to 2003, when we were at the low point of this industry, there was basically a business of small additions, upgrading [cores], quick projects, quick installations, quick invoicing and billing.

Now, we are -- a lot of the growth is coming from larger projects, large rollouts of networks, longer projects, and therefore tying up more working capital.

That is simply a logical effect.

And to some extent, also, that some of these projects or many of these projects are happening in countries with -- where we have longer payment terms.

So that is simply a mathematical effect or a logical effect of the type of business we're running.

But there is also an increasing number of days outstanding, and that is something that we're not too happy with and we'll work very hard to get back into where we were in Q4.

Our net debt situation -- we are debt free.

We have a strong net cash position and an equity ratio that is now close to 50%.

A couple of words on Sony Ericsson.

We had a sales increase of 22%.

Sony Ericsson is actually -- We said after Q1, when we saw a bit of weaker development, where we had very few launches, that, because of few launches, there isn't really much growth.

But we said that, through second quarter, we'll start to launch some very attractive products.

And that has happened, with the walkman phones and the new 3G phones.

And it's been received -- Even if we had high expectations, it's been received well above that, so Sony Ericsson is really enjoying great growth, right now, and really popular phones here.

We had an income before tax of €151m.

And, for us that are working with this joint venture so intensely, it was really a milestone that we could pass positive -- the point of positive accumulated earnings since the start of the joint venture.

And those of you that have followed us for a while know that we struggled a bit in the beginning with pretty big losses.

So we're now on positive accumulated earnings.

When it comes to the market outlook, we expect -- and we're now starting to look into 2006.

We expect the global mobile systems market, in U.S. dollar terms, to continue to show moderate growth.

And we also expect the addressable market for professional services to continue to show good growth in 2006.

The outlook for 2005 is very much unchanged.

So with those words, I will hand over to Karl-Henrik Sundstrom, here, who will take us through some more details on the financials.

Yes, hello.

And good morning, good afternoon, ladies and gentlemen.

I just wanted to comment a little bit on the sales by the region.

And I think this slide here demonstrates, really, some of the key assets of Ericsson of having a very strong regional distribution of sales of basically one quarter of the sales in every corner of the world and compensating a flattish Europe by growth in Latin America, Asia Pacific, North America and CEMA.

I also would like to point out that, despite that we are having lower sales in China, it's well compensated by sales in Australia, Japan, India and Indonesia.

I also would like to comment a little bit by this slide -- to focus a little bit what Carl-Henric said before.

As you can see, the total of services, which is network rollout and professional services, has a growth year over year with almost 30%.

It is interesting to see that the growth in network rollout is actually 35% and that is exactly what Carl-Henric said in his previous presentation.

We are rolling out a number of huge projects in many markets, and that's why we've had a capital -- working capital increase in -- especially in this quarter.

When it comes to the operational efficiency trends, we are having, as Carl-Henric said, an increase in DSO days.

As you can see, the day sales outstanding have increased from 90 days in the second quarter to 102, which is both a function of that we have been having a lot of sales to emerging markets, where you in general have slightly longer payment terms than you have in some other markets.

Also, it is a huge quantity of network rollout projects with fairly complicated acceptance criteria.

But this is an area where we're putting a lot of focus on during the coming -- We need to improve our collections.

Inventory turnover is slightly better, from 4.4 to 4.5 sequentially, but we still have to work quite hard to make sure that we get close to the target -- reaching target of 5.5, which is the target that we have.

I don't want to make any comments regarding the accounts payable, because I think they're in line.

However, I would like to take the opportunity to make some comments regarding the Sony Ericsson.

Regarding Sony Ericsson, as Carl-Henric said, they had a very strong quarter.

They have a year on year sales increase of 22%, sequentially 27% and they reached a very healthy net income before taxes of €151m.

And I think this -- that we mentioned that the accumulated earnings is a huge milestone for the joint venture and for its owners.

With that, I would like to hand over for Q&A.

Thank you, sir.

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

As always, please limit yourselves to one question at a time, and please keep your questions at a broad level.

Detailed information is provided in the report and Ericsson's Investor Relations and Media Relations teams will be happy to take additional questions and discuss further details with you after the call.

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

Please go ahead, sir.

Yes, thank you very much.

I'd just like to pick up your growth guidance for 2006 and just ask if you wouldn't mind highlighting, on a region by region basis, how you see that moderate growth unfolding.

Also, whether you continue to expect to grow faster than the markets.

I'd also particularly like to ask about Europe, where I just was interested in whether you think there's some kind of pent up demand developing.

We did see, in the second quarter, a significant increase in the minutes of use in Europe, for the first time in a while, and it does seem surprising that operators, in that environment, are able to suppress CapEx.

Thank you.

Well, let me walk you through a little bit how we see things, although remember that we are early here and this is just our initial views on 2006.

And I think what we'll see is continued high activity level in U.S., especially on the [indiscernible] Wideband CDMA side, where Cingular is doing another rollout and where we are active, of course.

I think we will see Latin America continue with a lot of activities, although just mathematically it gets increasingly difficult to beat last year's numbers.

I think the growth numbers, in percentage, may come down a bit.

I think the CEMA region will continue much as we've seen this year.

It's a lot of growth opportunities.

And we can see that, on one hand, Russia is probably going to a -- the end of this initial 2G rollout.

And then they will start looking at rolling out 3G and so on and there will be [fill in] investments and so on, but not as active, maybe, as this year.

On the other hand, we have similar starting activities in the surrounding countries there, neighboring countries.

We have activity levels in Eastern Europe and Africa also.

CEMA region continues much as before.

A-Pac, I guess, we expect also similar development.

And, of course, we should have increasing activities in China and the longer things are waiting there the more pent up demand there is.

Europe is -- I think we have more of a flattish outlook right now in Europe, but I think your question is well put, because Europe has the position of having had the highest tariffs in the world and therefore also the lowest minutes of use.

Five times higher minutes of use in U.S. and a fifth of the tariffs.

I think this is a development that we will see also in Europe, over time, developing.

And as that happens, traffic goes up and capacity is needed.

The problem is, of course, that the operators are sitting there and seeing no growth on their top lines but increasing traffic and then capacity needs.

So they do everything they can on getting efficiency out of the networks and working as smart as they can.

Of course, that will, over time, be followed by equipment raise.

That's an obvious.

It gets the other effect, as well, and that is that services get even more in focus, because if you can get the savings that we provide, for example in managed services, then you have to go for that.

Every single idea to lower operating costs are in focus.

Your final question whether we can continue to take market share, that's obviously our ambition and we believe we should be able to do so, although I think one has to be clear that this is a highly competitive industry.

And, unless we are really working hard and doing our best in every single aspect of the business, we won't do so.

But we are optimistic that we can continue and gain market.

Thank you very much.

And just to follow up within that, 3G in China, how much of the growth do you think that would contribute?

How much are you relying on 3G coming through in China to achieve this moderate market growth?

Well, in reality, from a more overall point of view, not necessarily talking about the first quarter or second quarter or so on, but if they build out their capacity for more traffic through 2G or 3G doesn't really change the picture.

I think what happens, if you buy 3G, is that you may have some additional spend simply because you're rolling out another network and it positions yourself for more higher value added services and so on in the networks going forward.

But if you continue with 2G, that is less cost efficient technology and means more spend from that point of view.

It's not making a very big difference.

Tim Boddy;

Okay.

Thanks very much.

Thank you.

From CSFB, we now take our next question from Kulbinder Garcha.

Please go ahead.

Thank you.

Could you please give us a comment on how you see your positioning in your fixed business?

And in particular, there seems to be continuous speculation regarding potential acquisitions that you might make.

Do you think your fixed line business requires acquisitions in the long term or do you think you can organically grow that?

Or do you think it will remain relatively small in your overall sales?

Well, we have pretty robust ambitions, actually, on the -- I'm not sure whether one should call it the fixed side, more the converging side, with the new wave IP based technologies, where we will probably see the same core networks dealing with both ways of access and the same thing in transmission.

And as we're coming into converging networks, it's essential for us to play a leading role in that field.

And that is a field that migrates both from the fixed and the mobile, with a lot of the mobility behavior driving the services that people want to see.

But, at the same time, it's being much built on fixed network technologies and migrating from those platforms.

And our basic strategy is always to do the necessary R&D and build our position through internal growth.

We are well positioned to do so and, as you know, we took the BT 21C contract and we're taking a lot of contracts of that kind right now.

And I think you will see growth whatever we do in call it the fixed line side.

And because of our commitment to this strategy, we're seeing also more traditional fixed business coming our way, because we seem to be an interesting partner to be with.

Should we then do acquisitions?

Well, I'm sure that there are areas where products or technologies or even an install base customer relationships can add value, but we are certainly not dependent on doing such.

Okay, thank you.

And just one very quick follow up.

On your position within India, we know that there's going to be a very significant tender coming up.

And I know Ericsson have done very well so far in avoiding some of the very low margin contracts your competition have accepted.

Now, I'm just wondering do you feel the need to involve -- to bid more aggressively on that and could that have any -- could that inject any further volatility into your gross margins going forward?

Or are you happy with your market share in India today?

We have an over 40% market share in GSM in India.

We're the leading player.

We have more people on the ground and are stronger than anyone else there.

Because the tender that you talk about is an open tender, because that's the government business, that gives it a lot of attention, but that's just one part of all the business that goes on in India.

We are certainly not going to lead prices down in auctions or tenders on that kind.

That is not the role we play.

Remember, though, that we are a large supplier into that operator's network and still are, and even got quite a significant portion in the existing circles we're in, in the former tender that came out.

Okay, thank you very much.

Thank you.

We now move to Stuart Jeffrey from Lehman Brothers.

Please go ahead.

Hi there, I have two questions really for Karl-Henrik Sundstrom.

In the cash-flow, I'm still a little bit confused around the changes in other net operating assets.

I think Karl-Henrik mentioned that the SEK2b FX effects weren't leaving the company, so I was hoping you could perhaps go through a little bit more detail as to exactly what's happening on that line, how much of that is really coming out of the company and how much might come back in future years, or future periods?

The ForEx thing, it is the following, and what is happening is, under the IAS rules 39, you have to market-to-market valuate your hedge portfolio before the contract portfolio, which means that the balance sheet is increased and in that sense the counterpart in the funds flow will be the working capital.

But that explains only part of the working capital increase, and that's all in all about SEK2b.

However, in the other part, I said it is receivables, work in process, but also around these timing difference on the big roll-out projects, you are building up working capital, but we are working to get down in the fourth quarter when we get acceptance of a number of big networks.

So why then other operating net assets rather than inventories or something like that?

Because part of it is in other receivables.

Part of it is in, as you've probably seen also that we have taken costs against provisions, like you do in any big timing difference in any big roll-out project, and these are the things that add up, all in all, to the slightly more than SEK8b that you have in the total working capital build-up in the quarter.

So your net change in provisions is about SEK1.5b, is that the amount that's also gone through the cash-flow?

Yes, by the costs, yes.

The SEK1.5b?

Yes.

Thank you.

Thank you.

Our next question comes from Mats Nystrom from Enskilda.

Please go ahead.

Yes, hello.

Firstly, was there an element of increased pricing pressure in the slight decline in sequential gross margin?

And secondly, on R&D expenses, I heard from the press conference this morning that R&D costs may increase above the SEK24b target due to the U.S. dollar development, but how do you look at '06 there?

Should we model at least SEK26b there on R&D?

Thank you.

No, R&D is not exceeding its targets, and there is - I wouldn't say that there is any change in the price pressure.

I think that's rather stable, and if anything, I think over the year back or so on it, it was even more intense than it has been historically.

I think we're back on historical trends.

But how should we model then, R&D '06?

Will there be an increase in absolute terms?

In price pressure?

Okay, and maybe R&D costs in 2006.

Will that increase substantially over the '05 level?

Our overall ambition in R&D is two things.

We believe that we can do R&D work more efficiently, not because people are not working efficiently, but by developing our ways of working and our processes of workflows, as we've done in all other parts of the company, but R&D is slightly more complex, and we have an ambition to dramatically reduce our lead-times and get faster with products to market and so on.

That would free up resources, so if the only thing we did was that, we should actually see a decline in R&D expenditure without losing output.

That's our ambition.

At the same time, we have needs to expand and accelerate our investments in next-generation networks, and if we play it right here, I think we can keep R&D costs reasonably well under control here.

Okay, thank you.

Thank you.

From Exane BNP Paribas, we now move to Alexandre Peterc.

Please go ahead sir.

Hello, can you hear me?

Yes, please go ahead.

Yes, thank you.

I was just wondering if you could elaborate a little bit on India again?

You said in the last quarter you experienced some lumpiness in that market and I wondered how that was moving ahead?

And second question was related to North America, if you could explain how the Cingular contract is going to work out in the coming quarters?

Are we still going to see such strong traction or will there be some slowdown that you have predicted for this quarter for this region?

Thanks.

Regarding India, this is a market like China.

It has a very steady subscriber growth, presently, I think, around 65m subscribers, although that's a moving target, obviously.

The government wants to see 200m -250m within a few years, and it's certainly going to happen, and there is a steady activity level that's just steady growth.

Of course, that can still mean that there can be more or less of invoiced larger projects, in particular quarters, but principally, a steady growth and an interesting market.

When it comes to North America, the Cingular project is rolling well.

We are well on par with all our commitments and the major roll-outs are really still ahead of us, and we are coming into Q4 and next year they will continue to grow there.

Next question please Operator?

Thank you.

We'll take our next question from [Brian Moldoff] from Deutsche Bank.

Hi, yes, I was wondering if you could [course] your outlook both on '05 and '06 between your GSM and your WCDMA businesses?

Can you give us growth trends that you would see in both businesses this year and next?

Well, it gets increasingly difficult, actually, to comment on the difference, because I think we're seeing more and more of an evolution, actually, and we are where we are building and migrating the networks more step-by-step.

We're having more wide-band CDMA in larger cities and so on, and you are tying the efforts more closely together.

We're even introducing radio base stations where you can basically provide both functions and so on, so they are not that easy to split apart.

But basically, we see, continue to see good strength in the GSM market.

It's so far one third of the world's market have started the migration to 3G, and that will continue for more years, and we are more or less the only vendor that continues to invest in R&D and cost rationalizations and so on in GSM.

So I think we have a good outlook for GSM for somewhat more time.

On wide-band CDMA where we still are in an early phase of a new technology, small differences can make big differences in numbers here and percentages, and obviously our leading role in the Cingular contract alone, for example, which is the largest roll-out the world has seen so far is going to change the numbers in our favor.

And quickly, do you see an impact on your gross margins next year from HSDPA upgrades?

Thank you.

We're not giving any particular guidance on the gross margins, but there are no dramatic things happening here.

I think it's important also to remember - this is Karl-Henrik Sundstrom speaking, that HSDPA will be part of our WCDMA offering, but it will not be, so to say, an upgrade.

It's just like EDGE on our built-in tool, basically on our deliveries of GSM.

Next question please?

Thank you.

Our next question from Wojtek Uzdelewicz from Bear Stearns.

Please go ahead.

Thank you, one just clarification, and then more of a macro question.

In Sony Ericsson's statement on the Page 22, the sales to Sony Ericsson doubled year-over-year and royalties from Sony Ericsson also almost doubled.

But if you look at the Sony Ericsson sales, they were up about 9% sequentially, so I was just curious.

What would be the reason for such a significant jump?

And the second question, more of a macro level, I was in a meeting with management of Vodafone, and one of the things they are kind of insisting that over the next couple of years they will bring down the CapEx revenues below 10% and their share of spending will shift from 70% of base stations to more of 70% in a core, in the backbone of the network.

How -- would you see other operators trying to bring down -- how realistic do you think that the carriers can bring down the CapEx so low given that the traffic is growing?

And second, if that shift from the base stations is more to the backbone of the network, are you looking at some acquisitions, or are you shifting more of your focus on R&D more towards backbone?

Can you give us some sense of the direction?

Hi, this is Karl-Henrik Sundstrom speaking.

I will answer the first one.

The reason for that movement between Ericsson and Sony Ericsson is that we have signed a new [IPR] license and in the third quarter for Sony Ericsson it is actually two months included of - two quarters of IPRs, which is basically €15m, €16m, and then that will continue of a quarterly charge going forward.

When it comes to Vodafone, I think that particular comment, I guess, they should answer themselves, and I'm sure you ask them.

But in general, they are -- first of all they are the operator that have invested the most, so they have a new 3G network on the radio side, and they have some capacity that they can use there.

Obviously as in every technology shift, with more capacity, we soon come up with new services and learn how to use that, and traffic increases so, so there is obviously expansion around the corner somewhere.

But I think you're also right there that it is an interesting comment that you're making, and it's well in line where we are, that the heavy build-outs that have taken place, and are taking place on radio access, broadband access, is creating significant growth in the core networks and I think we will see a bit of shift in investments towards, or not necessarily away from radio.

There is a lot of potential in radio, but more investments in the core area and maybe even more so in the transmission area.

It is clearly an area of growth, and maybe an area of under-estimated growth here, so give it a few more years.

I would be surprised if our transmission area hasn't grown in significance.

Do you plan to invest or look into more acquisitions that would give you more like a fiber or more of a switching IP capability?

It is clear that, as we said, as I've said before, that our strategy is based on growing what we have to internal means, but it is in the transmission area and it is on the fixed line business where we can, where it is of interest for us to add the capabilities.

It is not -- this is something that is in our R&D plans anyway, but if something comes by, of course, we'll always evaluate it, and that's how we got internet speed and access it and so on.

That also adds value so yes, somewhat right there.

Thank you.

Thank you.

From UBS, we now move to Jeffrey Schlesinger.

Please go ahead.

Thank you, Karl-Henrik Sundstrom.

I just want to clarify a comment you made on your SEK2b because of the IAS rules 39.

Was there any impact in that?

You said it was all balance sheet, there was nothing on the P&L.

I just want to clarify that, but also go back to the provisions, the SEK1.5b that came out of provisions.

You said that was all on the P&L.

Is that correct, or was some of that in the cash-flow statement?

Thank you.

It's in the cash-flow because it's against costs.

Which were you referring to, the SEK2b or both, the provisions?

No, the provisions.

The provisions?

Okay, I thought I heard P&L but it was cash-flow.

Thank you.

Thank you.

Richard Kramer from Arete Research has our next question.

Thanks very much, a couple of quick questions.

First, since the start of the year on various websites, EKN, IFC, Hermes, we've seen that Ericsson's got well over $1b worth of export credit financing for its various customers.

Can you talk us through how that might impact both the P&L and overall profitability and perhaps soften some of the moves in working capital that we've seen?

And then could you comment at all about any plans for cash returns to shareholders in the coming months or into next year?

You're still sitting on a substantial amount of net cash on the balance sheet, liquid, it's effectively return on capital not employed.

Can you talk about any plans you might have for that, barring any major acquisitions or other uses for the cash?

Thanks.

Well, let me just start by a couple of comments and I think Karl-Henrik wants to add here as well, but financing is not as big a matter as it was in the 90s when there was a lot of operators starting up Greenfields with basically just an office and a bank account.

Most roll-outs are today done by profitable catch and rating operators.

It's not that big a deal but it is still a matter of importance, especially in emerging markets, and it has always been extremely helpful to our business.

It's fractions that we have lost over many, many, many years, because as networks are being rolled out, there is an asset that is traffic that is cash-flow, and if we don't get paid, we don't serve the networks, so we basically end up first in line when it comes to get paid, so that is very unusual that we lost anything, and it tends to be also in markets where profitability is not -- not every competitor is able to work and have established all the resources and so on that are needed.

So our proportion of the sales is -- we have higher market shares simply in those markets, so it's a positive.

So there are really no negative effects on the P&L there, rather the opposite.

But when it comes to our cash position, we are sitting on a pretty strong cash position, but it's well in line with [Notecase] or Microsoft is, or Cisco is, so I think it is a helpful position to have.

There are different things that could happen here.

Theoretically, the market could take off.

It's not our basic scenario but assume that new services come in and tariffs go down and traffic increases, and the market takes off, that would probably require some additional working capital investment.

It could be, if we have political problems or anything else unexpected, we could have a downturn.

Also there, a strong cash position, I think, has proven historically to help.

It could also be bolt-on acquisitions or so where cash position is also useful.

Should nothing of this happen, and we continue to generate profits and cash in the way that we're doing, of course, we're getting to the point where we have to talk about increased dividends or buybacks or something, but that's not really where we are right now, and it's also [board matters].

When it comes to the ECAs, or the world and in particular EKN, that is the way where we can give credit to our customers without taking any risk ourselves, and basically offload it with a guarantee from the ECA of the world and then put it in the bank world.

This is a great help for us and that has been fueling some of our growth in the emerging markets.

And what might be the profitability benefit that you would get from now having to attach risk provisions, for example, to business in those many markets, EKN helps you with?

It's actually depending on the customer profile.

So you can't talk generally, but I can only say one thing.

Both the EKN which is the biggest one, and Ericsson, has had very little credit losses in emerging markets, as Karl-Henrik said.

We have actually had bigger credit losses in the U.S. and in Europe.

Okay, thank you.

Thank you.

From CIBC World Markets, we now move to Ittai Kidron.

Please go ahead.

Hi, good afternoon.

I just had a follow-up question to Wojtek's on the transition to more core-end transmission.

How would that play into your gross margins?

Would that be a positive, at least from a directional standpoint, to your gross margins?

Well, no change really I would say.

Okay.

And a bit more of a macro question, there are some concerns about the macro environment specifically here in the U.S. going into next year.

What are the risks that you're seeing of the macro environment to your business?

The American situation for us in particular is very much now dominated by the Cingular business.

Other businesses that we have in the U.S. represent more opportunities to us and I would say there are very small risks for anything particular happening to us in the U.S.

That is such a forceful project going on right now.

Okay, thank you.

Thank you.

Peter Dionisio from Morgan Stanley has our next question.

Thanks.

My other questions have been answered but just a follow-up question, to what extent do you think Ericsson mobile platforms, outside of Sony Ericsson, can have an impact on Ericsson's operating margins over the next year?

And my second follow-up question is that could we assume that given the growth in your emerging market related sales, that we'll see a convenient lengthening in your DSOs as we saw in Q3 over the coming quarters, and hence a tying up of greater working capital in the future?

Thanks.

Well, on EMP, EMP is a very research driven organization that has therefore high gross margins on the deliveries they're making, so if they - I think in general that EMP enjoys a strong position and has great opportunities to continue to expand and grow as basically the only really big independent platform provider in the world.

They are still not incredibly big here, and whatever they do, has a positive impact but not dramatic on Ericsson, at least where they are right now.

When it - what is it for?

Oh, DSO.

I would say that what we are - we have come back maybe to, even though we think we can, but we have ambitions in basically every area, and we are a little bit irritated that it has gone a few days up more than we thought it should have gone, but we are more returning to a normal situation.

It was more of an unusual situation in 2003, with basically no big roll-out projects and more just capacity add-ons and so on.

Now we're back into more of a normal mix of larger projects, smaller projects, add-ons and services so I don't think there is a particular reason to expect that, to expand further.

I don't know what to say, Karl-Henrik.

No, we're going to work very hard towards our target, very hard.

Thank you.

Thank you.

From Bank of America Securities, we now move to Tim Long.

Hi, good afternoon, it's Jeff Walkenhorst for Tim Long at the bank.

A question on the other operating revenues and costs, we saw a huge spike this quarter, up 70% year-on-year and over 90% sequentially, and over 2% of your revenue or up margin.

Can you talk about the dynamics in the quarter and how we should think about this on a go forward basis?

What's the evolution and was there any impact from Cingular turning on their networks in the U.S.?

Thank you.

No impact on Cingular turning on their network, and it was basically coming back to Wojtek's question.

We had signed a new IPR agreement with Sony Ericsson where you actually get two quarters in one, and then, for the guidance that we have said before, between 300 and 500 on this item here, it's going to remain with a usual tendency of a little bit more in the fourth quarter.

Okay, and so on a more normalized basis, as you look out into '06, how should we approach that?

Thank you.

300 to 500.

Say it again?

300 to 500.

Per quarter?

Yes.

Great, thanks.

Thank you.

We now move to Ed Bell from Cazenove.

Please go ahead.

Yes, I've just got one question on the tax charge.

It seems to have been creeping up.

Why is that?

What's your long-term tax rate?

Is there anything you can do to reduce the tax rate going forward?

The tax rate is actually a little bit of a mix between the countries where we make the profit, and of course, we are trying, but it's a little bit hard if you get a lot of profit in a high tax country and a little bit low, so you shouldn't judge that really on a quarter by quarter basis.

We are trying to be good citizens, but also to make sure that we don't pay too much tax.

So what's the guidance for this year?

No, I think you should - you should have the round 30%.

Thank you very much.

We're ready for the last question, Operator.

Our last question comes from Mark Davies-Jones from JP Morgan.

Hi, thank you.

Sorry, can you hear me?

I just wanted to ask a question on the profitability of services.

I know you've always said that lower gross margins but comparable operating margins, but are you seeing any tougher terms on taking on new managed services businesses now, because you were clearly early to focus on that area but most of your competitors are now chasing business as well.

Are your operator customers getting tougher on the terms on which they let that business?

The margins that we are creating there are really dependent on how we can leverage over-last with our own organizations, and the fact that we can also utilize certain other revenue opportunities like we tend to have right-to-use sites where we take the sites of the operator and we have the right to with a bit of split of profit there, we can rent that side to also other operators, and there tends to be a big demand there.

There are many reasons for build-up to the margins beyond the radio operator can do it himself.

The fact that others go into this segment doesn't really impact us, because primarily, you operate networks where you are the main supplier or going to be the main supplier.

So the alternative is not another vendor, it tends to be more often the in-house alternative, and therefore I would say that if others enter into that market, it's probably more positive because it means that you increase credibility for this type of outsourcing.

Thank you.

Okay, before we finish today, I would like to inform you that our next management briefing is scheduled for November 10 in New York.

The agenda and registration information is available on our website.

If you have any questions regarding this interim report, please don't hesitate to give us a call, and thank you again for attending today.

Ladies and gentlemen, that concludes today's conference call.

Thank you for your participation.

You may now disconnect.