Telefonaktiebolaget LM Ericsson (ERIC) 2006 Q1 法說會逐字稿

Welcome to the Ericsson analyst and media conference call for the first quarter report for 2006.

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.

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

We will be making forward-looking statements today.

And these statements, as you know, are based on our current expectations and certain planning assumptions.

The actual results may be different for a number of reasons.

And these risk factors and uncertainties associated with these planning assumptions are described in our Annual Report and I encourage you to read them, so you have a better understanding.

Also, before we get started, I would like to advise you that the table on page 19 in the report that shows the related party transactions with Sony Ericsson has incorrect information in the table.

The accounting was correct.

It’s just that when the table was populated someone transposed the numbers.

A press release will be issued shortly that will provide the corrected information.

I would stress that, again, the information was incorrect, but the accounting was correct, so there is no effect on our reported numbers.

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

Hello, everyone.

Let me start with a couple of comments on the industry.

And I must say it’s a pretty exciting time that we’re going through.

We have the evolution to mobile broadband, the high-speed networks that really bring mobile telephony to a new level.

When we can get our mobile offices or music downloads or mobile TV or whatever, we’re getting into the performance or even better than we’re used to in fixed broadband.

There is a consolidation continuing among the larger -- among the operators, where the big gets bigger.

And a lot of that is, of course, a seek for economies of scale, but it’s also a preparation for convergence and triple play among some of the operators.

All that consolidation is focusing on scale, but it also drives the focus on total cost of ownership, where CapEx from our side is not the answer to everything, but actually what does your equipment do in creating complexity in operational expenses and so on.

This is, of course, a major focus for all these acquired and merged companies, but it’s equally important to those that are standing on the side to make sure that they stay competitive.

We have a continued subscriber growth that keeps exceeding expectations.

And while we saw last year 450m adds, we will probably see even more this year.

We expect the 3b mark to be passed already in 2007 in reported subscriptions.

And that, of course, is fascinating.

It’s only a few years ago that we thought that 2b was maybe a saturation level.

Now, we know that 3b will be passed and continued growth will come.

All of that is not primarily, I would say, because we can’t estimate the market.

It’s more that as we grow and solutions get more cost-efficient, whether it’s handsets or networks or operational models, making -- that is all making the operational costs and the services much more affordable and therefore can penetrate deeper into the marketplace.

Anyway, it gives a lot of opportunities.

If we then look at then our position, on the next slide there, which we call extended leadership in the first quarter, we have demonstrated and are daily demonstrating our capabilities in the high-speed networks, HSPA.

We are rolling it out, as I’m sure you are all aware, in the U.S., in Canada, in Australia, in Japan, in a number of markets in Europe as well.

And in fact, right now, we are involved in launching some 30 networks and that will be the form in which we know wide-band CDMA in not too long a future.

We have also a lead that we are extending in the area of softswitch, where we have 85 customers right now, networks that -- where our softswitch are working.

And this is -- here, we have some quite exciting opportunities for the operators, with switches that are considerably -- with considerably lower upfront investments but, since they are more software based, continuous upgrade opportunities for more features and capabilities going forward.

We have also, in the area of services, we are expanding our position.

This is where we are -- even if we exclude the Marconi acquisition, we are up 58%.

And we are simply the biggest force in the industry.

We have 21,000 employees in 140 countries and it is an area where we can offer more support for more complex networks but also more cost-efficient solutions.

So I would say that our fundamental position, with a strong global presence and our clear technology leadership and also our work for operational excellence, that that are giving us growth opportunities in many areas.

If we turn to talk a little bit more on the next slide on professional services.

This is, then, excluding network rollouts.

And in this field we -- our sales is SEK7.2b, representing a 48% year-over-year growth.

Also, that’s excluding Marconi.

And of course, that is a pretty exciting growth and it mirrors the opportunities that are there.

We are growing, as you all know, in managed services, although of course we have also support services and system integration and advice and consulting and so on.

But in managed services, growth accelerates.

You all know about the large contracts we’ve taken and we have, today, 30 managed operations where we run networks for operators, with a total of 60m subscribers.

And that is a pretty hefty number when you think about it.

I think Cingular and Verizon have around 50m each in the U.S., so this is a big number.

We have also the hosting services, 50 contracts, where we provide the infrastructure and the software that an operator needs to start to grow and offer his content.

And we can also, for the operator, negotiate the content when he so prefers.

And that means that he can get his content up and running very, very quickly, and we will charge him as he grows.

We have some interesting recent wins;

Vodafone Netherlands is an exciting one, because that’s the first incumbent network.

We have three in Hong Kong.

We have also SunCom in the U.S., which is a Napster-related company.

And then, finally, another interesting one is Acea in Italy.

Acea is a power electricity generating company, and they have a division for metering and remote electric metering, where we are running the operations in that particular division.

That’s just one exciting opportunity that is arising and there are some pretty firm discussions in the E.U. to make it compulsory to provide for remote metering in the entire E.U.

And in general, also, we mustn’t forget the biggest part of the services, which is just general support, maintenance and support, where we have -- where we are supporting some 700m subscribers 24 by seven.

And that’s a very important part of our service business.

What we shouldn’t forget when it comes to managed services is that not only are those opportunities interesting by themselves but, when you get in and establish yourself as the operator of the networks, it also brings the rest of the services business along, such as support or system integration or hosting or advice.

Let me then spend just a few minutes on the regional update.

Europe is a region with -- where we have most of the operator consolidation.

And that holds a little bit back the activities, because that tends to always put investments and activities a bit on hold, and merger activities get in focus.

It’s also a region where we have the shortest falling tariffs, and we talked a lot about it.

And we all understand that that will drive traffic and it will drive a need for further investments in capacity.

And especially in Europe, where it’s obvious that operators want that increase to happen in the 3G networks and not in the 2G, so they need to build those out first before they move subscribers over to the 3G networks.

That will happen.

We don’t expect too much of it this year, but the future looks quite good for Europe, from our point of view.

The growth is, so far, primarily driven by services and added Marconi sales.

And this is also the region where we will see most of the –- most of the wideband CDMA networks will be upgraded to HSDPA very soon.

Next one, if we look at the CEEMA region, this is, actually, right now, with [lesser] services, is our largest infrastructure region. 21% up is very much what we saw also last year, and the outlook looks great.

We have a number of network rollouts that goes on and there is a strong subscriber growth that continues.

It is not only 2G networks.

It’s also 3G accelerating.

Right now, we have some 25 operators in 14 countries that are preparing to launch or have launched 3G networks.

Also here, we started to see the regional consolidation, all from players in Russia through Middle East and also some African players.

So we have some consolidation here also.

If we then go to Asia Pacific, this region we expected to pick up during the year, and it has done more than that.

We are 44% up.

Again, a strong subscriber growth.

And this is, as I think everybody’s aware, this is the region that will provide the largest numbers of new subscribers over the next four or five years.

Here, we have HSPA rollout in both Australia and Japan for Telstra and eMobile.

So it’s a combination of 2G growth and 3G growth and HSPA growth, and all of this despite the fact that the Chinese 3G decision is still on hold.

And there, I guess, one should say that the fact that the 3G decision is on hold there means that sooner or later, either we get the decision sooner or we will see upgrades in 2G as well.

But what is happening in the meantime, with the big subscriber growth that is there, we have today close to 400m subscribers that are already onto the GSM standard and will have to migrate into wideband CDMA, whichever license decision will be taken.

A couple of words, then, on Latin America.

And this is a region where we’ve seen such a phenomenal growth over the last couple of years.

And I guess the operators are a little bit catching their breath right now and focusing on performance and trimming the networks.

If you’ve been there lately, you will probably have found that the quality is still not perfect, because it’s still thin coverage and more investments need to be made.

But nevertheless, it’s slower this year.

Brazil, for example, with its 92m subscribers, is the fifth now in the world and actually, last year, with 25m new subscribers, even outpaced India.

That was a couple of million less.

Planning for 3G has started.

We expect licenses to be awarded and maybe first decisions this year.

Then, when we look at the United States, this is the strongest growth region, percentage wise, for us, of course because of a lot of activities around Cingular, but there are many opportunities also going forward there.

There are spectrum auctions now in this summer, where a number of the operators are eager to get additional spectrum so they also can launch 3G and mobile broadband networks.

This is also where –- I am sure nobody has missed the big consolidation in the U.S. market, where SBC, primarily, now is buying BellSouth and getting their answer on Cingular and also AT&T.

And then, on the other side, we have Verizon, Verizon Wireless, and MCI.

So a lot of consolidation, primarily, I would say, triggered for building a position for mobile -- for triple play, but also for mobile triple play.

If we then have a short update on Marconi, the acquisition is very well received by our customers and the business development, in many aspects, is better than expected.

We have sales of SEK2.9b in the quarter and a number of early wins here.

The integration is running well.

We are a little bit more cautious now that we have enough with what we want to achieve, because all those savings are identified and in the pipeline and will happen.

And we have a very clear plan for how that’s going to happen over 24 months, but we are a little bit cautious of not pushing too quickly on moving the supply chain and so on, because of the stronger order inflow.

We have, so far, no significant savings.

A lot of activities and we will see accelerating activities in the second quarter.

And you will start to see effects in the autumn on the bottom line here.

One aspect that is important to remember here is that, had this been the acquisition of a company, we would have produced goodwill here from the over values that would not have been depreciated.

Because this is an asset deal, we get the opportunity to amortize intangible assets over -- which we do over 10 years, which means that it becomes tax deductible and therefore is CEPS enhancing.

And that comes in here with SEK0.4b per quarter.

Whether, in fact, some of you had missed that effect.

Then, just a couple of comments on the financial side.

We have sales of SEK39.2b, which is 24% up year-over-year.

And also, if we exclude Marconi, we are 15% up.

Mobile networks as such are 14% up and professional services are up some 60%.

If we then look at the gross margin, when we compare the 43.3% with last year’s 48.5%, we should just remember what we pointed out quite clearly there in the first quarter last year, that we had an exceptional effect from strong software sales, which boosted the margins with a couple of percent.

But more importantly, maybe, to look at where we are sequentially, where we are about 1% down.

And that is the effect of the strong service growth and the Marconi sales, which both operate with lower margins, lower gross margins.

Having said that, we still, and we have stated that today, that in old Ericsson, where we are about 20% in operating margin, we are probably around 1% or so lower than last year, which is an effect of the competitive environment.

Not so much of the price erosion as such, that continues much in line with what we’ve seen historically, but compared to a couple of years ago, there is a large number of big business opportunities where everybody wants to be part of it and it’s competitive, which paves the way for many years of good business.

If we then look at the operating income, we are at SEK7b before the amortization of the Marconi intangibles.

Looking at earnings per share, we are basically flat with last year.

But again, of course, if we exclude the amortization of Marconi intangibles, we are about 6% up to SEK0.31.

Cash flow is at minus SEK6.1b [sic – see slides], of which SEK7.6b [sic – see slides] is the Marconi acquisition and the cash flow is about SEK1.5b.

And Karl will come back and talk more about that in a couple of seconds here.

Net cash is at SEK33.7b.

And that is before the SEK7.3b dividend that actually was effected and paid yesterday.

Just a couple of words on Sony Ericsson, which is a clear positive here in the first quarter.

Sales of €2b, where units are up 41% and sales is up 55%.

So in fact, we have an increasing average sales price, which is part of what is bringing the income to €151m, which is more than double from where we were a year ago.

And all in all, I must say that it’s an impressive product portfolio that we are developing in Sony Ericsson and it’s really paving the way for a lot of growth here.

And it is -- we’re also aware that the peers have also had a good quarter, but clearly Sony Ericsson is strengthening their position.

And we mustn’t forget here, when it comes to Sony Ericsson, that even if they are at 7, 7.5% world market share, it is -- they’re not in CDMA and they’re not so much in the lower end of the market.

So the share of the market in value is more 12%, so their position is good.

The market outlook is unchanged.

We expect the global mobile systems market to show moderate growth, which for us is some 6 to 9% or 5 to 10%, somewhere.

The addressable market for professional services is expected to show good growth and we have estimated to be around 10% now for a number of years, which of course then also in addition have room for managed services deals.

So if I would just summarize the whole situation, with our strong position, with our global presence and technology leadership and operational excellence, we have, after these years of restructuring and building a strong platform, we have an opportunity to invest in and expand our growth.

Firstly, in mobile systems, where we are today a strong preferred partner.

We get a lot of opportunities to come in and take on then the roles also with operators we haven’t had before.

And such opportunities always include some start-up costs and so on that makes the first year maybe not that profitable.

And then, we’re back into continued deliveries for many years.

We have also next generation converged networks, where we are accelerating our research and development.

And we are so far very successful when it comes to the mobile softswitch and fixed softswitch position.

And we have the broadband and transmission networks, where Marconi is now in and paving the way.

And this is -- especially on the transmission side, that’s where we have a lot of the bottlenecks in the world’s networks, with all these broadband capabilities being provided for customers.

And then we have the professional services area, where we can bring in large contracts, as we do, and again create a strong platform to grow from.

So I would say that of course we are determined to continue to deliver best-in-class margins, and we are doing so, but it’s also interesting for us to accelerate the growth when such opportunities arise.

So, with that, I would leave over to Karl-Henrik Sundstrom.

Good afternoon, or good morning, ladies and gentlemen.

I would like to start with the first slide, the financial summary.

And I would like to highlight a couple of things here.

First of all, we have had a growth of 24%, which is 15% excluding the acquired Marconi operations, coming in with a gross margin that is down sequentially of 0.9%.

Then, as you can see in the slide here, I have an adjusted operating income, which is excluding amortization of the intangible assets that were acquired in the Marconi deal.

This brings it up to SEK7b for the first quarter, or 18%, which is an increase by 6%.

And that also has a flow through effect.

If we would have bought this, as Carl-Henric said, as a pure equity and no amortization, which brings up the earnings per share to SEK0.31 instead of the SEK0.29.

And I would like to go over to the next slide, which is a little bit of an explanation of how the deal of Marconi has impacted Ericsson.

So the Marconi operation that has been acquired is having a turnover in the first quarter of 2.9 and having an operating income of minus 0.2.

On top of that, we have Marconi amortization of intangible assets, which are basically divided 80% in R&D and 20% in selling and general administration OpEx.

Then, what we can call the old Ericsson is basically generating an operating margin of 19.9%, which is, like Carl-Henric said, down 1% or so compared to previously.

If we then move over to the financial performance, the cash flow, we generated, as Carl-Henric said, a cash flow before taking the Marconi acquisition into consideration of SEK1.5b, of which SEK1.2b is coming from dividends from Sony Ericsson.

I also would like to point out that the cash flow from the ongoing for the first quarter Marconi operations is between 400 and 500m negative.

This is basically in line with the cash flow of last year and this is an area where we are putting a lot of focus.

Moving over to the operational efficiency trends and the DSO and the inventory turnover as well as the accounts payable days, we landed with 101 days.

But this is important to remember – the way we acquired Marconi was an asset deal.

So we acquired SEK2.4b of accounts receivables.

If you adjust that, we are slight -- you would have to reduce a couple of days from the 101 days.

It’s the same thing with the inventories.

We acquired in the deal SEK1.8b of inventories.

This is an area we are putting a lot of focus and I assure you that this is an area where we have to improve during the year.

Thank you very much.

With that, operator, we’re ready to start our question and answer session.

Can we have the first question, please?

Thank you.

Our first question comes from Has Malik from Citigroup.

Thank you.

I’d like to ask a couple of questions around the fixed line businesses.

First of all, can you confirm that the organic or the old Ericsson fixed line business seems to have come in –-?

[Inaudible].

Hello?

Our next question comes from Edward Snyder with Charter Equity Research.

Yes, thank you very much.

A couple of questions.

First, regarding Marconi and the savings that you anticipate.

I know they won’t kick in for the second half of the year, but do you have any –-?

I’m afraid we can’t hear the question.

Hello?

Hello?

Hello?

Can you hear me now?

Mr. Snyder, your line is now open.

Okay.

Can you hear me?

Hello?

Can you hear me at all?

Shall we try another one, operator?

Hello?

Operator, are we having some technical problems?

I do apologize.

Edward Snyder, your line is now open.

Thank you.

Can you hear me now?

We can hear you now.

Thank you very much.

Regarding the Marconi acquisition, I know most of your savings will occur in the second half of the year.

Do you have any guidance at all regarding how large those will be and where you’ll focus those in terms of the operating line?

And then, also, in terms of the contribution from Marconi to Western Europe and then to Central and Eastern Europe, Middle East and Africa, can you just give us some guidance on how they contributed to the year-over-year performance in revenue in either of those two geographies?

I appreciate it.

Thanks.

To start from the back end, the majority of the Marconi sales is coming out of Europe.

So, that we’ve been pretty specific about.

When it comes to the savings, we are, as you’ve seen -- basically, the 200m operating loss that you see in the company is where it was when we took it over.

And then starts all the restructuring activities that are supposed to lead to -- bring it up to Ericsson margins in 24 months and should be there in run rate when we leave 2007.

Although the activities as such are basically a constant run of activities, the effects on the bottom line will, of course, start later, because there are costs associated with every activity that is there.

You will see accelerating lay-offs, for example, in the second quarter and the third quarter.

And then, you will start to have effects.

So we will -- you will start to see some more effects in the second half and then, of course, even more so when the supply chain gets in place in 2007.

The lay-offs of staff will be dealt with by the end of the year and it will take a little bit longer to get through all the different activities around the supply chain.

Thank you.

Let me only add to that question that we are laying off some 1,500, 1,600, 1,700 people.

And that is somewhere close to SEK2b of savings, which basically will be there in the run rate by the end of the year.

And then, it depends a little bit on local accounting and local union contracts and practices how we actually do the deals and whether they are paid up front or they work during the notice time or so on.

But it’s SEK2b of savings that we will realize in run rate before the end of the year.

We’re ready for the next question, operator.

We will take our next question from Has Malik from Citigroup.

Thanks.

I was cut off earlier, so I apologize if this is a repeated question.

On the fixed line businesses, can you confirm that your organic fixed line business seems to have come in very weak in terms of revenues, perhaps even as much as 50% down year-on-year in revenue terms?

If that’s accurate, could you explain what the drivers are behind this?

And then also, then, just on the Marconi side, can you confirm, given the loss we’ve seen in this first quarter, that you still believe the acquisition will be earnings neutral for the year ’06 or at least in the next four quarters from now?

Thanks.

Well, when it comes to the -- again, starting from the back end there, we are -- because the business flow and the reactions from the customer have been more positive than we actually expected, it means that we have quite high pressure in the supply chain.

And therefore, we want to make sure that we don’t start and mess up this new-won enthusiasm.

All the activities will be made, but we want to make sure that we do it in a good way.

That means that we will be a quarter or so late.

To say a breakeven position a year from now, that’s a good anticipated assumption.

When it comes to the existing fixed business, I would guess that you are aware that -- what it says in the report, that some 0.5b of Marconi sales is recorded in professional services and in fact another 100m elsewhere.

So we are -- the rest is recorded.

But it is true that our own sales dropped in the first quarter.

We still have old fixed equipment sales that are decreasing in parallel, so that the new generation equipment is increasing.

Of course, one should remember with such small volumes that we talk about here, the swings can be a little bit bigger between different quarters.

It’s not always easy to draw conclusions straight off.

Okay.

Thanks for that.

And just to confirm, then, on the earnings neutrality point, you are saying that you’ll be at an earnings neutral run rate in a year’s time.

You’re not expecting to have an earnings neutral outcome over the next four quarters.

The latter.

Okay.

Thanks very much.

Thanks.

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

Thanks so much.

I was wondering, with your inventories being up to 104, would that infer that you had a pretty healthy bookings period in this beginning of the year?

And if you have any comment you might be able to share as to whether there’d be any reason we wouldn’t see a fairly normal seasonality as you move through into the June period, or whether in fact, given better bookings, there might be slightly better than normal seasonality.

Any color there would be helpful.

Maybe also you could just comment a little bit on the accounts receivable, which obviously were up as well, and where you’d like to take that.

Thanks so much.

When it comes to the inventory, as I said in my presentation, it’s up SEK4.3b, of which SEK2.4b is acquired inventory as part of the Marconi deal.

So that is a reflection of our business activities.

When it comes to any kind of guidance of the sales for the next quarter, we don’t give that.

The only thing I would like to remind you of is that with Marconi and a bigger professional services content, historical indicators or trends might not be totally correct.

But you would expect a fairly normalized inventory level going forward from here?

Over time, yes.

Do you have any comment just on the nature of the activity and the bookings at the beginning of the year?

We don't disclose orders booked.

Do you want to say whether they're healthy or [inaudible] eMobile?

Or maybe you could say if some of the more important details in your opinion, and obviously you had a big deal -- piece of business in Japan, you had some activity in India?

I'm just saying that really we have a healthy business activity.

Okay.

Any other reason for anything other than normal seasonality in networks?

No.

Good, thanks.

[While] recording accounts receivables.

We came in, as I said, a couple of days, four days over last year.

And partly that is explained by the acquisition of the Marconi, where we had 2.4.

We are working hard on this and the goal of below 90 days for the full year remains and we're going to work very hard for that.

And the 5.5 on the inventory remains as well.

Thanks so much.

We now move to Tim Long from Banc of America.

Thank you.

Just -- if you could just talk a little bit about the pricing environment in the wireless infrastructure space.

And as a follow-on to that, if you could just talk a little bit about some of the consolidations that are going on and some others that are rumored, whether or not you think that is impacting the market in either a good way for Ericsson, because there might be some uncertainty around other vendors, or in a negative way where some other vendors might now have a better global position?

Thank you.

I would say that the pricing environment is fairly much the same, hasn't really changed much.

But it is also clear that if you go back, for example, a couple of years, where it wasn't much of network rollouts but more of just feeding in additional capacity in existing networks.

That is one environment.

When you then have a lot of new opportunities where bets are placed for many years, of course everybody's eager to be in there.

So following with larger deals, you can have a tougher price environment.

But that's part of the game and isn't really changing from historically.

You can just have clusters of deals.

And I think that is what also impacts us a bit in the first quarter, as we said.

When it comes to the larger deals, there is -- it is interesting how things have changed a bit because if you go five, 10 years back, there were half-a-dozen of players or so that were rather equal strength.

I think we were in a situation there we had a clear lead, some or more is fairly strong and you have others that are quite weak.

And it's -- the strength of the players, the vendors, have come apart quite a lot.

And that is triggering, I think, thoughts around mergers and consolidation.

From our side, with the strong position that we do have, I must say that it's an advantage when we can put all our energy and focus on our own development and on our customers.

If you look at only our growth in the last 24 months from the end of 2003 to the end of 2005, we have grown more than, for example, Lucent's entire mobile infrastructure sales.

And I don't think we would have grown that much had we done a major acquisition.

So I think from our point of view we're fine.

I think what we see here are these not driven so much about the strong players picking up smaller, but rather weaker ones in different fields that need additional economies of scale and increase their platforms.

There may come other such.

I think principally for us it's fine that there is a reduction of number of competitors.

Eventually Lucent Alcatel, for example, will get strong in certain fields.

When it comes to the biggest field for us, the mobile infrastructure, there I don't think the merger is making a huge impact.

But it does grow their strength in fixed business.

Okay.

Thank you.

We will take our next question from Alexandre Peterc from Exane.

Hi.

I'd like you to tell us maybe a little bit about the business development that you had with Marconi.

Since the merger, what are the major deals that you could highlight?

And then a second question regarding North America.

Q1 last year was a very favorable low point, so therefore we have such high growth in the reported quarter.

How do you see that growth developing over the rest of the year or will we see some slowdown there?

Thanks.

Well, first if we talk about the Marconi situation, we were encouraged by the fact -- by the reactions from customers where several of them come to us and say it's great you acquired this company, it's great products, great competence, great people and we're glad they're in a strong company that can develop their capabilities.

That has also led to some deals with Vodafone, with Telecom Italia, with Telefonica.

It's basically where they already have ongoing business and the operators are happy with this merger.

I think there will be a lot of opportunities here for us, especially since there are such bottlenecks in the transmission networks where they have a strong product program.

We -- when it comes to the U.S., we have started well.

And this is a year where the rollout of Cingular just continues and that will go through the whole year and into next year also.

Then we shouldn't -- sometimes you hear reflections that what happens after that.

It's not a relationship with a client like Cingular will just continue.

There will be lots of sales, lots of networks build-up and capacity enhancements and so on for many, many years.

We have also new opportunities arising in the U.S. where, as I said in respect to [inaudible] where other players like T-Mobile or O-Tel or -- all these companies are looking for how they now will go on into the next generation of networks.

So a lot of business opportunities for us in the U.S. but it's clear that, of course, it's a strong market with Cingular now.

Okay.

Thanks.

We now move to Jeffrey Schlesinger from UBS.

Yes.

Carl, can you -- given your visibility through the year, new big contract wins that you've had, what should we expect in terms of SG&A going forward?

Is the 12.2% of sales that we saw in the first quarter, is that the peak, do you think, and that will drift out slowly over time?

Or do you think that level will be maintained, given the business you have in front of you?

Thank you.

I think that there are two aspects of it.

I think your conclusion is basically maybe right.

In fact, I would rather like to see it trimmed a little bit, simply because the growth that we are achieving in the services side certainly shouldn't accelerate sales in the SG&A and OpEx in the same way.

So, simply because services is growing, we should have -- OpEx shouldn't grow correspondingly.

At the same time, it is also so that, as there are quite a lot of opportunities here, we also are working on market growth that still hasn't happened.

So that needs some investment as well but certainly shouldn't come up.

Thank you.

Our next question comes from Kulbinder Garcha from Credit Suisse.

Yes.

Thank you.

Just a quick question on network rollout, and that obviously grew very much year-on-year and it seems to be having some impact on gross margins.

It seems that, with the network rollout deals you've got ahead of you, whether it's Japan continued, rollouts of Cingular, whatever might happen in India in the next quarter or two, it seems that's going to keep rising in your mix.

So would it be fair to assume that even the business, if you exclude Marconi, year-on-year gross margins could continue to trickle down, or could this be the low point?

And the second question I have, do you still believe your R&D will be -- sorry, are you still aiming and targeting to keep your R&D on an underlying basis flat despite the sales growth and the top line growth you're seeing?

Well, let me take the last question first and I'll let Karl answer a little bit more on the network rollout side.

That is clear that that's on the R&D side our principal ambition is to see if we can keep the R&D flat, because we believe that we have an operational excellence improvement opportunities there.

And -- but as I said many times, there we are sharing our own ambition and view, so it's not a promise in that sense but I think that's where we're coming from.

We believe we can do more with the existing crew there and achieve a higher output, which we want to have.

Regarding that, I think we have said flat on [old] Ericsson and that, if you include Marconi, including the amortization of the intangible assets that are classified as R&D, it would have been somewhere around 29 to 30.

But the mix, I would like to say that we believe we will have the same kind of business mix in the second quarter as we had in the first quarter.

Thanks but I'm just thinking even beyond that.

Could the -- wouldn't network rollout continue to rise up?

Wouldn't that mix continue to go against you as there are other factors, capacity extensions round the corner, that I'm not thinking about?

Not giving any quarter on this one.

Usually what happens is that [inaudible] reversed.

Right.

Because when you've got the electronics out there and the capacity demand increases, then you fill in into the electronics more capacity enhancement and software upgrades, etc., etc.

So, over time, it goes the other way round.

Okay.

And then just one final quick follow-up.

On organic sales growth of 15%, what was the year-on-year currency impact?

Now, I have to be very clear with you guys because the accounting models and also how you price things.

So this is an extremely theoretical thing because most of our competitors price in euro, or euro-based companies or similar, like Sweden and -- [are part] of the euro.

So that's one part of it.

Another part is that when you have market-to-market valuation on all the foreign exchange derivatives, it is very -- almost impossible to actually compare to what would have been the impact if you had the same currencies today as a year ago.

So a very rough estimation is about 3b.

It helps you by 3b year-on-year, you think?

Yes.

On a very rough estimation.

Okay.

But it is obviously quite theoretical because invoicing that we do now is for deals we maybe took during the autumn or whatever, which were taken in another currency environment than currency exchange rates a year ago.

Because we're selling out of our country into third countries and often U.S. dollar countries, so it's very -- it becomes quite difficult.

Thank you.

We now move to Sandeep Malhotra from Merrill Lynch.

Thank you.

I have two questions.

The first one has to do with the consolidation in the telecom equipment industry.

You've talked about making acquisitions in the fixed and IP space.

Currently you have relationships with Juniper and Cisco.

How do you expect that competitive dynamic to evolve as you make more acquisitions in the IP space and as you become more competitive with these companies, especially on the edge?

Second question has to do with Alcatel and Lucent.

You've talked about how that combination, which the two companies claim will be number two in mobility, will not impact your mobile infrastructure business.

Why do you believe that?

Could you give us some insights, especially given that you have a common customer in Cingular, and what the impact in China might be from the Alcatel/Lucent combination?

Well, let me start again from the last one.

And I think you are probably spending more time on following the details of both Alcatel and Lucent than the merger, so you are as good as us to judge here.

But if you look at Alcatel, they were gradually going -- moving away from the mobile infrastructure area.

They hardly had much on 3G and they were slowly disappearing in 2G as well, and building and focusing their efforts more into the broadband area and the fixed business and converging networks and so on.

If you look at Lucent on their side, they are focused, as you all know, on CDMA business and basically has one real project only in the wideband CDMA, and that's their smaller part of the Cingular rollout.

So even if their numbers, when you add them together, makes a good number, it's still quite a while before they can really leverage that in bigger sales.

We -- at least for quite some time we would expect other competitors to be more fierce.

But this is a combination that I'm sure can leverage opportunities once they're through with the merger.

When it then comes to acquisitions, we are seeing, as the IP technology provides a lot of opportunities for us and where the converging networks is rising and developing and so on, that there are a number of products here that we are developing ourselves where we can make acquisitions as an alternative.

If we spot companies that have the products we want and we can get it and we think the products are good enough and we can keep the key people, then that could be a quicker way to proceed.

But you can also make acquisitions and you lose key people and the technology is not stable enough, and then it's less great to make the acquisition.

With regard to Cisco and Juniper, of course they are important here.

But principally what IP technology means to us is you get IP capabilities into every single product.

That doesn't mean that we become head-on competition with them.

We are in certain areas but mostly not.

And they are more partners to us.

We are working with Cisco on the fixed networks, where we take full responsibility and do system integration and so on.

And we have a similar role with Juniper.

So for us I think it's more about growing together.

Thank you.

We will now take our next question from Paul Sagawa from Bernstein.

Hi.

Thank you very much.

Karl, this is probably for you, a question adding onto the working capital question that came in earlier.

So if I back out the additional working capital that's coming from Marconi, it still looks to me that on a year-over-year basis and certainly on a quarter-over-quarter basis the working capital increased.

Yet at the same time your services business was very, very strong.

And I guess my belief is that the services business ought to require considerably less working capital than systems.

Which leads me to the idea that perhaps your mobile systems business is requiring more working capital today than it was a year ago or even a quarter ago.

Is this reflective of the working capital needs of new network build-outs in the mix?

And if the mix of -- which you spoke about relative to margins, if the mix were to shift back towards expansions, enhancements, then we might see some release of cash out of working capital?

Or is it just simply you guys got to work harder to keep your working capital down?

Your analysis is correct.

Services need less capital and in many cases it's prepaid, advance payment.

The other thing is also correct that on the mobile infrastructure we are rolling out a number of really big networks.

And without giving any quarterly specific guidelines, it is that over time, when these networks are released and we are getting past all the important milestones, the next business on those networks will be additional fill-in of electronics.

That is absolutely correct.

Okay.

So we would expect, as the mix shifts, that the working capital would release cash into your cash account?

Yes.

Inventory -- it's not inventory, it's work in process.

We have to remind you, we are building, like in Australia for example, 9,000 sites.

So it’s a huge thing that we're doing out there.

Okay.

Thank you.

Our next question comes from Richard Kramer from Arete Research.

Hi.

Thanks very much.

If I could ask, and perhaps this is part of a correction you're going to issue about the Sony Ericsson figures you mentioned on page 19, there's a very large royalty payment of 922 in the January quarter.

Could you tell us where that might be reflected in the income statement, if that indeed is the correct figure?

And also, could you talk us through the revenue recognition of IPR?

Does it come one quarter in arrears from both external and Sony Ericsson sources?

Second, if you could touch a little bit on the provisions, which went down by 1.7b this quarter, how those might be reflected in the income statement and whether there were additional Marconi-related provisions taken or is that something we'll see coming later on?

And then perhaps a question for the CEO.

Many of your peers in the industry offer a much greater level of detail in their financial reporting and to the extent that operational excellence is reflected somewhat in transparency of accounts.

Is there any consideration for Ericsson to start providing a bit more detail, perhaps gross or operating margins by the different divisions, as some of your peers do for its -- their larger divisions?

Thank you.

If you take the table on related [public] transactions, all those figures are -- will be changed to be corrected.

And the 922 that you talk about for royalties is way too high.

It will come down.

Okay.

But you should look for the press release when it's out to see the corrected numbers.

Okay.

Where might that royalty income be reflected in the income statement?

Other operating revenues.

Okay.

Thank you.

When it comes to IPRs, they are recognized basically month by month.

Then we try to reconcile them quarterly, both internally or half internally with Sony Ericsson and the other one.

Then we also perform audits with the ones who are paying us, to make sure that the right number of units or whatever is the basis for the revenue is correct.

When it comes to the provisions, all the provisions has been against incurred costs and the net of provisions has actually not positively affected the result.

Okay.

Just a comment on your question about level of detail, I think it's an interesting one.

Maybe if you look at peers and you talk about Motorola or Nokia or so, then obviously they have the mobile business, the network business and so on.

We all do networks business and that's a little bit [inaudible] that it is hard to break things apart, especially maybe you can do it for one year.

But it's important with all the dynamics that you can stay stable with it for a while, which is really separate businesses, otherwise it doesn't serve much of a purpose.

We're not going to change anything this year but, as the service business is growing so strong, I think we will come to the point where I think it could really add some value for everyone to actually follow the [inaudible] separate from infrastructure and do it all the way [inaudible].

Okay.

Thank you.

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

Thanks very much.

I just wanted to follow up on some of the discussions from the last quarter on the potential for services and major outsourcing contracts.

You mentioned that, at that time, that no major operator was ignoring this opportunity.

Could you give us an update on where your customers are at, and at what time and over what period we could see further contracts on the scale of, for example, 3 Italy?

Thank you.

Well, I won't really give you a very precise guidance on that and I guess you wouldn't -- you didn't expect that either.

But it is clear that this is an opportunity which everybody evaluates.

It's also clear that if you take start-up companies, whether you take eMobile or such, are much quicker to jump on these opportunities because it is something that is just one less thing to worry about if you do it.

Whereas among the incumbents these are related to fairly huge legacy discussions or culture discussions or union discussions and so on.

So they don't change that quickly.

And, in that sense, even if we here address Vodafone as an incumbent, they certainly are but not to the same degree as Telefonica or Telecom Italia and so on.

That will probably follow additional later.

But it is clear for them all that from a business point of view this is something they should seriously look into and it is hard to look away from the opportunity over time.

Operator, we have time for one last question.

We will take our final question from Mark Sue from RBC Capital Markets.

Thank you.

I'm just trying to get a better sense of why growth will still be moderate this year, particularly if the competitive environment may have intensified and also share gains get a little bit more difficult.

Is there some thought that maybe the visibility that you're seeing in the first part of this year might be some catch-up spending and that it might not repeat itself during the back half?

That's not an assumption that really has come natural to us.

I must say there is a lot of activities and I think we're doing a rather robust estimate here on where the market is growing.

I don't know if you have any particular thoughts behind your question or --?

I'm just trying to get a better sense of your pipeline and I guess, since you won't give us bookings thoughts, but I would -- I guess on the projects you still feel these are very healthy near term?

Don't forget here that we saw last year 450m new subscribers.

We're probably going to see north of 500 this year and it's going to go on for quite a while.

You have mobile broadband with HSPA, which has really created another type of experience where everybody wants to be on that bandwagon as well.

You have all the upgrading needs in the transmission networks and so on, bottlenecks from broadband build-out.

So, I must say generally I think we are at a pretty robust estimate here.

Okay.

Thank you.

Good luck, gentlemen.

Thank you.

That will conclude today's question and answer session.

I would now like to turn the call back over to you, Mr. Gary Pinkham, for any additional or closing remarks.

Thank you, operator.

Before we finish today, I'd like to remind you all that our next management briefing, our capital markets day, is scheduled for May 10 and 11 in New York.

The agenda and registration information is available on our website.

So please register if you intend to participate.

Regarding our interim report, if you have any more questions please don't hesitate to call either myself or one of our members of the investor relations team to discuss further.

Thank you all once again and see you next quarter.

That will conclude today's conference call.

Thank you for your participation, ladies and gentlemen.