Telefonaktiebolaget LM Ericsson (ERIC) 2006 Q2 法說會逐字稿

Welcome to the Ericsson’s analyst and media conference call for the second 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 of Investor Relations, will now open the call.

Please go ahead.

Thank you, operator, and hello, everyone, and welcome to our conference call today.

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

Before we go into the presentation and questions and answers, I need to let you know that we’ll be making forward-looking statements during the call today, and these statements are based on current expectations and certain planning assumptions.

As you know, the actual results may be different due to a number of factors.

And these risks and uncertainties associated with these planning assumptions are outlined in our Annual Report, which I encourage you to read.

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

Carl-Henric.

Thank you, Gary, and hello, everyone.

Let me say a few words then on the sent out material.

I’ll be rather brief, because I trust that most of you have listened in to the press conference.

But nevertheless, we started this conference this morning by talking about the milestone for GSM, where we now have for the GSM technology reached over 2b subscribers, of course something that makes most everybody very proud in Ericsson since we were a major inventor of that technology.

We are presently growing by 1,000 new users per minute.

It took 12 years to get to the first billion and 30 months to go the second billion.

And if we look at mobile subscribers in the world as a whole, we keep reaching higher levels for saturation penetration.

It’s also so that GSM paved the way for 3G and HSPA and so on.

And so, it’s -- the footprint is important when it comes to drive new business for us.

GSM wideband CDMA is the winning track and on -- we have 690 networks throughout the world in 200 countries.

And we have now about 100 wideband CDMA networks.

We spent a little time on how mobility is developing and the fact that the latest forecast for the next five years is pointing at beyond 4b subscriptions, maybe up to 4.5b, but of course there is a saturation level somewhere.

And that’s why we also wanted to highlight the forecast for traffic growth with all new services that comes into play here.

Mobile Internet, well, lots and lots of people round the world would have a chance to get Internet wherever they are, even if they don’t have a fixed connection or a computer.

We also see strong growth in mobile office, in TV streaming, video telephony and also music downloads and other downloads.

So, traffic is anticipated to continue to grow, even as subscriptions over time will start to saturate.

We also showed the expectations of where wireline traffic will develop and that’s on the next slide.

Where today we have voice -- a steady portion of voice, of course, in the wireline networks including Voice over IP, that has a bit of growth.

But the overall growth in wireline networks will be from Internet and from IPTV.

And we actually are seeing forecasts now of wireline traffic growing from some 15m terabytes up to 250m, pretty hefty growth, IPTV being the majority of that.

And those forecasts are built on assumptions that some 50m households within five years will basically get their TV programs through the telephone network.

So, this is simply the effect of all these very powerful networks that are being rolled out on the wireline side and, over time, also on the wireless side.

We talked about -- a bit about then the consolidation.

This is something that we see as a natural process for reaching critical mass.

We have grown quite substantially over the last couple of years and only over the last two years or so grown as much as Lucent’s entire wireless infrastructure sales.

And as that has happened, it has become obvious, I think, to several vendors in the industry that they need to merge if they want to be still full range product vendor supply -- vendor with end-to-end solutions, or others have to choose to go to more niche segments.

Through this whole process, it is obvious that still global presence, to have the right competence and resources on the ground throughout the world wherever the customers are, to invest enough in R&D and drive technology leadership and also develop operational excellence, which have been our three key words for our success, they will remain key for the future development.

Our own strategy here remains.

It has been based and is based on organic growth with bolt-on acquisitions and that’s how we will see it going forward.

There will obviously be opportunities for us while these larger mergers is going on, when focus may be elsewhere for some of the vendors.

And for us it will be important here to balance long-term growth opportunities with short-term profitability.

But generally we -- I think we will see a more healthy business environment developing over time.

If we then take a look at the various regions here, Western Europe is growing by 26%, very much driven by added Marconi sales and strong service growth, whereas the wireless infrastructure is more or less flat.

We continue to see tariff competition driving down tariffs.

We’re also seeing now falling roaming charges, partly because of pressure from the regulator -- the regulators.

And in this environment obviously operators come under pressure for top and bottom line, and there is a strong focus on cost efficiency and a strong focus on introducing new services to drive sales.

It is clear that as we go along with these falling tariffs that there is an increasing need for more capacity.

Not much, maybe, that we will see particularly this year, but going forward traffic will continue up and need for expansions.

If we look at -- then take the next one and we look at what we call our CEEMEA region - Central and Eastern Europe, Middle East and Africa - it is presently -- with SEK12.9b is our strongest region, 24% growth, a lot of activities all around the region.

We have also 3G rollouts in several markets.

And, in fact, we are in -- throughout the region we are in the process of rolling out HSPA in 12 countries.

And this is the region where we foresee continued positive development.

If we then turn to Asia Pacific, this is a region also with a lot of new subscribers, a lot of new networks.

We’re rolling out HSPA in Australia and Japan, big scale, big projects that are running well on plan and at full speed.

We also had in this particular quarter extra strong sales from China, simply because we had more invoicing there than maybe representing the rollout.

Invoicing does fluctuate a little bit between quarters for reasons beyond our control a bit.

This has to do with approval processes and awards for final acceptance certificates from the authorities, which is a bit of a traffic process.

But nevertheless, Asia Pacific is a strong region, lots of opportunities and good development to look forward to.

If we then go to the next area, which is Latin America, and Latin America is a softer market this year after the very, very strong rollouts that have -- we’ve seen over the last couple of years.

And operators are a little bit catching breath here, I would say.

But for those of you that travel in Latin America, I think you all experience and we all see that there are still coverage needs and there are quality needs, and you will easily drop your calls when you’re there and so on.

So, there are more investments to come.

It is also in this region where we see some of the potential CDMA migration to GSM wideband CDMA, and we expect such to materialize rather soon.

So, it’s still an interesting region with several opportunities.

If we then go to the last region and look at North America, we have a bit of a peculiar situation.

Cingular’s HSPA rollout is great on plan and so is also their 2G expansions.

In fact, if you did listen into their telephone conference, they described how they’re -- according to plan, they’re rolling out 1,600 sites the first six months and they expect 2,000 sites in the second half.

And we are their prime vendor and if anything we’re gradually growing market share with them.

But we have a particular situation where we -- last year in Q2 we were asked to deliver equipment to their inventory extra in the second quarter of SEK2b for tax reasons, and both us and Cingular were clear to announce that.

And that makes the comparison more tricky, but the rollout activity is steady there.

It is an unusual situation that an operator has an inventory of that kind.

We normally deliver to site to roll it out, but that’s the way they run it and they’re large and have many suppliers.

In this quarter, on the contrary, they have now come to the conclusion that they can trim their networks.

So, we haven’t delivered much in 2G for them in the second quarter and we may have similar effects in Q3 before they’re back on track again.

But besides that, everything is developing well in the United States.

We have also a little bit of effect from the upcoming spectrum auctions, where several of the operators are seeking more spectrum.

And once that is dealt with, that will open up for further opportunities.

If we look at services, the area -- the activity is continuing strongly.

We have a growth of 31% year over year.

Managed Services continues well and, as we said in the first quarter, we have an effect now starting in Q3 and Q4 to kick in from the synergy work on the large Managed Services deal.

So, we will have contributions to Ericsson’s margins from those activities in the second half here.

We have the biggest telecom support organization throughout the industry with a 24 by 7 supervision of 725 subscribers and, in general, a good platform for continued leadership and growth.

On Marconi it is running well with the comments we had in the first quarter.

We have this second quarter with the integration work running according to plan.

We are laying off some 1,600 people before year end. 1,000 is to be notified in Q3 and an additional 600 by year end.

So, when we leave the year we will have completed the downsizing of 25% of the entire workforce.

And the restructuring of the supply chain continues and that’s where we bring -- where they today have 75% of their added value in high-cost countries and we’re moving it to low-cost countries.

Generally, a good business momentum.

We are building backlog and it’s going well for us here.

On the financial highlights, a couple of quick comments before I hand it over to Karl.

Sales is up 15% year over year.

And obviously we -- you have to adjust for that SEK2b last year and the inventory SEK3m in the U.S. this year.

On the other hand we were stronger in China, so maybe that is the worst we see in the trimming and China there.

Gross margin of 42% is -- the drop from last year is basically related to the higher proportion of services and the shorter-term effects from the Marconi sale.

If you look at the drop of 1.3% from the first quarter, those are more fluctuations between quarters.

These are more driven by product mix, depending on what exactly products and the amount of software that we have delivered.

So, there is no reason to read anything in particular into that.

Operating margin of 18.7% came in higher than, I guess, the market expected.

We have still no effects from Marconi and service contracts.

Those will kick in in the second half.

We have -- if we look at it sequentially, we have improved our bottom line with SEK1.7b, of which SEK1.1b is from our operations with a continued success in operational excellence activities and a generally slightly better business climate.

We have about SEK0.6b, which is with SEK300m from better contribution from Sony Ericsson that had a very good result in the second quarter, and some SEK300m from a higher level from IPR income.

And that is a level that we will see continue.

And just for the record, if you exclude the amortization of intangibles from Marconi, we are now running at 19.6%.

So, you get a measurement of where the operations are.

If we then look at the next slide here and operating income, we are on par with last year, SEK8.3b before tax.

Earnings per share is SEK0.01 down or -- bottom line and SEK0.01 up if you exclude the Marconi intangible write down.

Cash flow from operations is negative SEK2b.

And that is coming from -- mainly from two effects, which is increased customer financing with SEK1.5b.

There is a somewhat growing interest for customer financing that has always been a good competitive tool for us and been very successful for us over many years.

It is not at all coming back to where it was in the 90s, when operators were being established in -- especially in emerging markets.

These are now healthy -- general healthy operators that expand in their territories.

But there is a somewhat increased interest in customer financing.

It is also the fact that we had strong invoicing in June that brought up receivables in general with about SEK3.5b.

At the same time, days outstanding is coming down with six days.

So, we have no issues with collections, but it’s simply the fact that we had strong invoicing in June.

If we look at Sony Ericsson we could see sales of 40% up, actually growing faster than units that were 33% up and I think shows the characteristics of Sony Ericsson.

Lots of exciting phones and actually increasing ASP here.

And the success of the Walkman phone is followed by now a successful introduction of the Cybershot phone and the smart phones.

Income before tax is up to SEK211m, actually representing the strongest quarter ever for the company, so in general a positive outlook and development for Sony Ericsson.

If I then should end up here, before Karl, with the market outlook, we have -- previously, as you know, we have given the outlook for the entire mobile infrastructure market.

And there we have forecasted moderate outlook for the entire market, equally moderate for the GSM wideband CDMA track as for CDMA.

We -- since we are not active any more in CDMA and therefore don’t interact with customers and don’t have the same visibility into that track, we feel it more relevant and appropriate that we track where we are and that’s the GSM wideband CDMA track.

And we continue to see a moderate outlook for this track.

There is no change at all in the way we see this track.

Then it’s another phenomenon here that there is a losing -- diminishing interest in the CDMA track.

And that adds opportunities for -- as operators are quite carefully studying how they can migrate from CDMA over to the GSM track.

So, we will probably see businesses there.

No change in the market for professional services.

We expect to see continued good growth.

And I believe we continue to be well positioned to capture market opportunities.

So, with that, I will hand over to Karl for his financial comments.

Okay.

Good morning, good afternoon, ladies and gentlemen.

I will be -- try to be as brief as Carl-Henric.

So, on this first slide I would like to point out a couple of things.

We grew sequentially 13% in sales and we dropped 1.3 percentage points in gross margin, and the operating expenses increased 5%.

That came to this SEK1.1b in improved profit from the operations.

On top of that, other operating revenues increased with SEK0.3b and the area that increased was licensing.

The licensing has previously been between SEK200 and SEK500m per quarter.

We have now seen that increasing and what we see now is a level of between SEK500 and SEK700m per quarter.

And then we had the improved profit from Sony Ericsson.

That, all in all, explains the SEK1.7b in increase in operating income.

That really makes it a move from the 16.9% to the 18.7%.

But if you adjust for the amortization of the intangible assets, we move from 17.9 to 19.6%.

Next slide please.

On this slide I would like to highlight the tax rate and I would like to inform you also that, because of the estimated and the sale of the Ericsson Defense business, the tax rate for the full year will be somewhere between 28 and 30%.

The other area I would like to highlight is that the earnings per share is also affected by this amortization.

So, if we would have excluded amortization of intangible assets, the earnings per share would have been SEK0.38 instead of the SEK0.36 that’s reported.

Next slide please.

If you look at the cash flow, we had a working capital build up and -- during the quarter.

But -- and that consists basically of -- inventory was basically flat despite that we grow sales by 13%.

We are running a huge number of big projects that are having an average duration time of six to nine months.

And as Carl-Henric mentioned, we had sales coming in late in the quarter explaining around SEK3.3b in increased accounts receivables.

And we also had customer financing for SEK1.6b in addition to that.

We also had, which is normal when you run big projects, we also liquidated or used provisions against cash, which is on the reported other of SEK2.8b around SEK2 to SEK2.4b, ending up in a negative cash flow for the quarter of minus SEK2b.

However, we are running a business now with a higher solidity or equity ratio in the history of Ericsson, almost 54%.

Next slide please.

As Carl-Henric mentioned, we -- the collection went in the right direction.

We drew down day sales outstanding by six days to 95 days.

And we now believe that we are in the range of being -- to reach our target of 90 days.

The inventory turnover increased and it’s about the same level as last year.

We still have a lot to do to reach the target of 5.5.

And the payable days remained around the level as last year, a slight improvement compared to the second quarter.

And with that, I hand over to Gary.

Thank you, Karl.

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

Thank you. [OPERATOR INSTRUCTIONS].

Our first question today now comes from Edward Snyder from Charter Equity Research.

Please go ahead.

Last conference call you pushed out your expectations for Marconi merger being neutral to earnings for the second quarter of ’07.

Is that currently your assumption, or has that changed since we last spoke?

No, it hasn’t changed.

That has not changed.

Thank you.

Our next question today comes from Stuart Jeffrey from Lehman Brothers.

Please go ahead.

Hello, thank you.

I’ve got a question for Carl-Henric.

You mentioned the business environment seems to have improved over the last few months.

And I was hoping you could go into a bit more detail as to whether that’s operators looking to do more with -- in terms of putting out contracts or if it’s also tied into perhaps seeing less vendors or less pricing power -- less pricing pressure in the market?

Thanks.

Primarily I would say that the comment was more meant to describe that we are seeing somewhat more activities, somewhat more spending, somewhat more projects coming to the market, without necessarily changing the outlook as such, but it’s slightly more than we’ve seen before.

Also, when it comes to the price pressure, I guess over the many years, and also through the years when I’ve been in here, we have always said that the price pressure and the price erosion is a normal part of our business life, because of smarter electronics and more slow and higher -- more scale and so on.

And we haven’t really commented on it, that it’s accelerating.

We said in the last quarter that we felt a bit more pressure over the last quarter or two.

I think we are, right now, more or less back into business as usual.

So, that doesn’t mean that it’s gone away.

It’s there, but it’s where it has always been, I would say.

Great, thank you.

Thank you.

Our next question today comes from Tim Long from Banc of America.

Please go ahead.

Thank you.

If you could just comment on some of the developments that have been in the press in the emerging markets, particularly in Brazil with Vivo and what’s gone on in India with some of the carriers with GSM potentially gaining some favor.

If you could just give your views on that and what potential opportunity that could represent for Ericsson over the next year or two, that would be great.

Well, I think what we’re seeing is that since a while operators in the CDMA track have been a bit wondering where -- really where their future would take them, because there are fewer in this track.

Handset pricing is higher and handset variety is lower and roaming is less easy and so on.

And from that, I think we have started to see less growth in the segment and more operators considering to migrate from CDMA over to GSM wideband CDMA, also because of a more maybe attractive long-term roadmap.

And this has actually happened now and it’s accelerating.

And Vivo, as you mentioned, is one of those that we can all read about how they seriously consider this change.

And you have others in India doing the same.

And I think it is likely that you will see such things happen.

And since we are well established in this market since a long time, it certainly adds to our opportunities.

And I would say sometimes even more than normal business, because these are cases where if you have a network like the Telstra one in Australia that is already up and running fully loaded with subscribers, that means that you need a very, very efficient network rollout and a sweet cut over.

This is not something where you can -- where it is not life and death whether you’re a month or two late.

This has to be just spot on time.

And with our strong rollout resources locally and so on, I think it represents opportunities for us.

And you said roadmap - is it safe to assume that these carriers in the emerging markets do have WCDMA on their timeframe?

And I would imagine, because they’re not going directly to it, is it safe to assume it’s several years away before they’re even looking at taking the next step?

Well, I think, actually, there is an exciting comment to make on that.

But first you have to say that different from where maybe we were three or four years ago, I would say that we have today 3G equipment that is more or less upgradeable to wideband CDMA and you can use a lot of the same -- more or less upgradeable and use a lot of the supporting equipment around it.

So, it is well prepared for it and they need to take their future roadmap seriously into consideration.

Right now, prime focus is, in many of these markets, is cheap voice.

But the network as such is not more expensive to build in wideband CDMA technology than in GSM.

The -- how fast wideband CDMA come -- will come I think is very much driven by where handset prices are and they are quickly coming down.

And we mustn’t forget when we rollout HSPA into our markets around the CEEMEA region as an example, and in Baltics, Estonia, in Asia and it’s very much because that is the only way our people out on the countryside can get to the Internet.

So, I think it’s not -- wouldn’t be the right conclusion to draw that high-speed networks is something for mature markets, whereas in emerging markets we look more for GSM.

Over time that will not be the case.

Okay, thank you.

Thank you.

Our next question today comes from James Crawshaw from Blue Oak.

Please go ahead.

Thanks very much.

A couple of questions, if I can.

Firstly, there was a question earlier today in the press conference about your estimate for the number of net mobile subscriber additions during the quarter.

I wonder if you’ve had any time to reflect on that.

In your press release you talk about 200m.

That’s up from 100m last quarter and 105m last year.

If you’re sticking to your target of 500m subscribers being added this year, are you implying that in each of the next two quarters we’d only add 100m?

Just wanted to see if you’d had time to check those numbers since that question was raised this morning.

And then, secondly, on your wireless infrastructure market forecast you’re excluding the CDMA portion from it now.

I think Lucent’s revenues are down something like 20% in the first half of this year compared to last year and they’re primarily a CDMA vendor.

So, the question is if you were to include CDMA in your market definition as you have previously, would you be reducing that guidance from moderate or 5 to 10% to perhaps a lower figure?

Thank you.

Well, let me start by the number of subscribers.

The right number of subscribers for the first half is 220m.

And there was a rounding error that created a typo there in our press release.

So, the write down for the first half is 220m, for the second quarter it’s 120m, and those numbers have been rounded.

So, that’s where we are and we expect to be somewhere 450 to 500m subscriptions for this year, which would be a record growth year, by the way.

When we look at -- to just make that -- the outlook very clear there, GSM wideband CDMA, we have expected moderate growth and we continue to expect moderate growth and with no change other than that, as I said, actually a slightly more positive outlook.

The CDMA track is actually starting to decline as we speak and half of that we take it out.

But obviously, if we included it something -- it would matter something.

But from a more philosophical note, the traffic in the world’s networks are actually growing about the same.

The question now is then more, as you get doubts in the CDMA track, if everybody would swap very quickly it would add growth to GSM.

If everybody would sit and wait and think, of course you have poor growth in the CDMA track and nothing happens to the GSM wideband CDMA track.

I think we’re somewhere in between.

We continue very much as we have expected not to get some add-ons from swapping operators.

Thank you, that’s very clear.

Thank you.

We will now move to our next question from Has Malik from Citigroup.

Please go ahead.

Thanks.

I had a couple of questions.

First of all, do you still see your revenue mix in Mobile Systems improving substantially as we go into the second half of 2006?

And then the other one was can you give us an update on the management situation at Ericsson Mobile Platforms after the departure of Sandeep Chennakeshu?

Thank you.

I have to ask you to be clear what the revenue mix in Mobile Systems is?

Well, in terms of the mix between network rollout and more capacity upgrade.

This was something that I understood you talked about at your Capital Markets Day, where you were -- one of the reasons you gave for a potential outlook for stable margins in Q2 was an unfavorable mix continuing, but something that would improve as we go into the second half of the year.

I would say in general that the portion of network rollouts has increased and, actually, it’s coming back a little bit to where it was before the crisis.

That is, before we had the big downturn in this industry we used to take care of a -- of more or less the projects more on turnkey basis.

We have seen a trend during 2003 and ‘04, both with more capacity increases and with less rollouts, and also that operators wanted to take care of part of the rollout activities themselves.

I think everybody hasn’t been so successful with that, and we’re seeing it come back to where we take more responsibility for the whole thing.

And that is fine, because that is a competitive tool for us.

We have more expertise there and it’s profitable business, not every time, maybe, as profitable as the business is in general, but it’s profitable business.

That trend is there and is there to stay, I would say.

What was the second question?

Okay, the second question was on E&P.

But were you happy with the first question?

Could you perhaps expand your answer on the first question to an impact on your expectations on the trends in margin, as a result of that more sustained, high level of network rollout?

Well, I think we are already at a high level of network rollout, so we’re not increasing it from here.

It’s more when you compare backwards that you see a difference.

But we are where I think we expect to be in the mix, as such.

And margin forecasts we don’t give for the Company, but it is clear that everything else the same we will have added contributions from the synergy work and the services contracts, and from Marconi.

But we are in a steady state when it comes to rollout portion.

When it comes to E -– are you happy with that?

Absolutely, thank you.

Then, when it comes to Sandeep, I think it is -- Sandeep is a great engineer, and he has added tremendously to the design activities and technical activities of Ericsson.

However, this is a large area with 2,000 highly qualified engineers and an extremely strong team.

So I think we feel quite comfortable with the management change there, although of course we would have liked him to stay.

But still, I don’t think that E&P as such has weakened, and I think we had a chance also to strengthen maybe then a little bit commercially.

So E&P is looking good.

Thank you.

Thank you.

We will now move to our next question from Peter Dionisio from Morgan Stanley.

Please go ahead.

Thank you.

Could you just clarify the comments you made earlier on vendor financing?

Given that your emerging market business continues to grow and given the big build-outs that are occurring there, do you expect to see major changes in your vendor financing levels over the next six to 12 months?

This is Karl-Henrik Sundstrom answering.

We have said for a while that there is an increase in customer finance.

However, we are also working, since we are not a bank, we don’t want to be a bank, but sometimes things are parked for a while in our credit portfolio.

And in those markets, emerging markets, it usually works with ECA, which is export credit agencies, and where you get guarantees.

So, in reality, you will see some increases, because there are a need for customer finance.

But as Carl-Henric said in his presentation, it’s not like it was in the 90s.

And this was a big increase, and it can sometimes be lumpy between quarters, but it also changes since we are letting off and selling off credits when they are bankable.

I think it is important also that we do understand the difference in business environment from the 90s, because then new operators were born, and customer financing was their way to get started and build up an operation.

Today there’s hardly a network in these markets that, at the end of the line, [all the] line isn’t owned by, whether it’s RAScom or whether it’s NTN, or whether it’s [Etisalat] or [Maxis] in Malaysia and so on.

So there is a cash-generating parent at the back end.

So then the financing becomes just one part of many competitive tools here, and it will not grow to the levels it once was.

Great, thank you.

Thank you.

We now have a question from Inder Singh from Prudential.

Please go ahead.

Yes, thanks very much.

I wanted to just ask about your philosophy on doing the bolt-on acquisitions that you referred to in your press interview earlier.

Marconi has been the biggest one that you’ve done so far.

Do you see yourself doing similar size bolt-on deals, or are you more willing to do larger deals as you go forward?

Some of your vendor competitors, obviously, will probably be distracted over the next couple of years with the very large deals they’re doing.

Is it fair to assume that you don’t expect to do anything that large, but then do you see yourselves doing perhaps Marconi-sized acquisitions?

Well, when we talk about bolt-on acquisitions, I would say that we’d probably talk about companies from the small NetSpeed or [inaudible] up to the Marconi-size companies, or thereabout.

Because these are companies that, even if we tend to talk a lot about Marconi here, which is of course exciting, but remember it’s 8% of our total sales.

It means that the energy -- where we focus the energy is still on the customers, and where it should be, on technical development and so on.

And I think that has been an advantage to our strong growth over the last couple of years, and we wanted to stay our strong advantage.

And as you, I think, point out, that some of the other guys will be quite busy on their integration work, and that is an advantage to us that we don’t want to lose.

So I think where you would see us do acquisitions is -- should be less likely on the wireless side unless some smaller asset would come up very favorably or something.

But I wouldn’t expect too much on the wireless side, but maybe more on the converging IP technology networks.

There -- maybe there could be products or so that could add value or speed up the alternative of internal development.

Thank you.

Thank you.

We now have a question from Phil Cusick from Bear Stearns.

Please go ahead.

Hi, thanks for taking my question.

Comments earlier indicated that seasonality in 3Q would be a little stronger than typical, so I’m thinking that 3Q will be a little -- off a little more than typical and yet you still have confidence in the year.

Can you give us an idea as to what you’re seeing that should swing things back up in the fourth quarter?

Are there regions that you expect to get better, or are there contracts that are coming through?

Can you give us an idea there?

Thank you.

Well, first of all, we have a pretty good situation when it comes to the contract flow.

We have also tended to write some of more larger contracts with longer lead times than maybe we’ve had in the past when it was more capacity enhancements.

The Q3 comment is more related to the fact that we will have still continued inventory trimming with Cingular, and that is something we know.

But, as always, we don’t give guidance, so the third quarter is still there to happen.

But everything alike, there will be an effect from the Cingular inventory trimming for yet another quarter.

But the whole outlook for the second half is good for us.

So I just want to make sure I understand.

If it were not for the Cingular inventory trimming, things would be -- you would see stronger than typical seasonality from first half to second half?

I would say that, primarily because of the Cingular effect and somewhat also you could have a bit of fluctuations for China here.

They are a little bit unpredictable, although the rollout pace is very predictable.

But, at the same time, the second half is -- looks good overall, so you could have somewhat a stronger finish, if everything was all the same.

I want to make sure I understand your China comment.

You mean for 2G the rollout is very predictable, or are we thinking about 3G?

Yes, the rollout that goes on, and that’s all 2G.

And the rollout in China is very steady and the delivery of equipment and the build-outs are very steady.

But for administrative reasons and the way they have centralized their purchasing, it becomes a very bureaucratic routine, and it’s sometimes a little bit unpredictable exactly when invoices cannot take place.

And that’s why we’ve got that small invoicing in Q1, and suddenly large invoicing in Q2.

It very well might be a little bit softer in Q3 and then strong in Q4 again.

That’s -- just we have to accept it’s beyond our control.

That’s great.

Thank you.

Thank you.

We will now move to our next question from Per Lindberg from DrKW.

Please go ahead.

Yes, thank you very much.

I was wondering, your comments regarding the fall off in the interest in CDMA, whether that can also be applied to the [Tanis] technology at TD-CDMA as an argument against that in subsequent phases.

And then I have a separate follow-up, if I may.

The reasoning being that we have learnt in the past from PDC, from CDMA, that you take a very big risk, as an operator, if you go with a more limited technology.

Isn’t that an argument against TD-CDMA in China?

Well, I think that what you see in China is a little bit related.

It has a slight political dimension.

I don’t think we can look away from that.

There is a country that is similar to the U.S., but maybe they were more market driven, like Japan and so on.

Here is a market, here is a country, here is a nation, that wants to build their own technology and wants to create a room for their own IPRs and so on.

We believe that, as you do, that it won’t be easy to get this -– to drive this to a very successful business because scale may not be good enough, and because of spectrum issues there probably won’t -– we won’t see any TD-CDMA outside China.

And if you also come back to scale on handsets and so on, but it’s a fact.

It will happen.

They won’t go away from that, so there will be a license or so and a network rollout.

But I would doubt in five, 10 years, that that’s going to have proven to be very successful.

Thank you.

And then I have a separate question, if I may.

You seem to have a strong order momentum, as you indicated, but one can also argue in relation to your inventory that you had a very big backlog of revenues yet to recognize, especially since a lot of that is really installment of base stations in or on customers’ premises.

Is that the correct conclusion?

Yes, it is.

Okay, thank you.

Thank you.

We now have a question from Kulbinder Garcha from Credit Suisse.

Please go ahead.

Thank you.

Could you -- Karl-Henrik Sundstrom first.

Could you please just clarify the reduction in provisions?

Can you just confirm that there was no P&L impact from that?

And also can you just explain why they went down by over €2b -- SEK2b sequentially?

And then the second question, I guess for Carl-Henric Svanberg, regarding visibility and contracts that you signed, I notice that Japan didn’t show up in your top 10 markets.

And I would assume, that given the sizeable upgrades in networks that are going to happen at Softbank and with eMobile rolling out a very substantial network, both of -- your position is quite strong, so that should meaningfully accelerate.

Is that something that’s going to more help 2007 revenues or should we see an impact from that later on this year, do you think?

It’s Karl-Henrik, Kulbinder.

The first question is that we had no impact, no material impact.

And that’s why I was so clear when I described the cash flow, because these are mainly related to big projects and project risks that happen to -- that you then take against cash.

That’s what it’s in the cash flow.

Okay.

On Japan, I think the list would have had to be extremely little more, just a little bit more and you would have seen Japan there, and I think you’re right that Japan will rise in that league.

But should we see the impact of a material up-tick in your Japanese revenues this year, do you think?

Well, you will start to see it a bit; they will gradually build up.

We are increasing activities, and actually with several operators, not only with eMobile, but you will see it grow a bit.

And finally, just one final thing, just on the benefits you should see from improving services, efficiency and Marconi cost savings.

Am I right to assume that’s really a year-end issue for Q4?

Could we see any benefit from, for example, from Marconi cost savings even sooner than that?

Well, you will see everything else alike, and we’re not guiding margins as a whole.

And remember that Marconi is still a smaller part of our business.

But effects from services and from Marconi will start to kick in in Q3.

But it’s also right to say that they will accelerate in Q4, but they will start to kick in in Q3.

Okay, thank you.

Thank you.

We’ll now go to our next question from Gareth Jenkins from Deutsche Bank.

Please go ahead.

Yes, hi.

Just two points of clarification, if I could.

Firstly, on the Vivo contracts, I think they’ve just announced a $500m contract and I think it’s split between you guys and Huawei.

Could you just give us a sense of firstly whether you’ll be doing the core or the access for them?

And secondly, it sounds like you’re expecting a slightly smaller revenues but higher margins on these types of contracts going forward?

And just a second point of clarification, you seem to imply that the net working capital move may reverse, given the strength in invoicing in June.

Can you actually state whether that’s correct or not?

Can you just clarify the last question?

Yes.

I just want to try and understand whether you’re saying that the actual net working capital will see a reversal in the next quarter because of the strong invoicing that you’ve had in June?

I think, just to start on that note, the strong invoicing in June should normally, of course, have resulted in lesser working capital, but I think it was -- Per Lindberg is right in his assumption that the activity and the build-up of backlog is quite important to understand here.

When it comes to Vivo, I guess I have to trust you there, on the announcement.

We haven’t seen it ourselves, but it is clear that they were expected to announce it actually today, as we speak.

And they have -– they are announcing there, I assume, that we have 100% of the core and the majority of the radio.

Thank you.

Thank you.

We’ll now move to our next question from Mark Sue of RBC Capital Markets.

Please go ahead.

Thank you.

Just a follow-up on the M&A, and specifically as it relates to the upper limits of your acquisition.

We understand that it will be on the wireline side.

Would you consider something as large as Juniper Networks or should it be more smaller components for your IPTV portfolio?

Well, I don’t think we should comment on our roadmap for acquisitions here.

Can we talk about your focus on driving opportunities in IPTV?

We understand you have this [IMS rolling off of] that?

I think it is clear that IPTV -- what happens in the networks here as they get upgraded to be quite some substantial capability is that we will see more of triple play and true entertainment coming into the telephone networks, and IPTV will probably be the strongest driver of all [practice in] wireline networks.

Obviously our focus is very strong in that field.

Okay, that’s helpful.

Thank you, Carl.

Thank you.

We’ll now move to our next question from Sandeep Malhotra from Merrill Lynch.

Please go ahead.

Thank you.

Could you please comment on the impact of the ongoing consolidation with yourselves and Nokia Siemens controlling about two-thirds to 70% of the market on pricing going forward?

What have some of the discussions with the operators been, and is there some concern about supplier concentration?

A second question has to do with the impact of longer-term contracts and customer financing on working capital going forward.

Thank you.

Well, I would say that, on market shares there, I think you were probably overstating the share that Nokia Siemens and Ericsson will have.

But I think you are right there that there will be fewer stronger players that will be able to invest more and contribute more to development and new, exciting technologies.

At the same time, I think we haven’t really seen yet.

It will take so a long time for Siemens Nokia and for Lucent and Alcatel to actually go through their mergers.

So I think we may have to wait another couple of years to see where we are in terms of market share.

But I’m sure also that it will be tough for smaller guys to survive in that environment.

That is probably a conclusion one can draw.

A quick follow-on to that.

Do you then expect that Nokia Siemens and Alcatel Lucent will actually try to go for footprint expansion, putting more pressure on pricing in the interim before there is what one would call more stability in pricing?

I think they have tried for a while to see if they could do that as an alternative to merge.

I think that is what we’ve seen over the last year or so.

And I think that they have drawn a conclusion from that and ended up by merging.

At least I wouldn’t find it logical if I sat there and had done this huge acquisition to add to that price pressure.

I would probably rather like to get my synergies right and enjoy the bigger scale that I’ve already got.

So it doesn’t seem logical to me, but I think it’s a good question for those guys.

And I’ve got a question on working capital.

Given the length of the contracts is going up and vendor financing longer term, what is the impact on working capital?

We’ve seen that get progressively worse.

What do you expect going forward?

I think we have to -- we need to understand that, with larger contracts, we are seeing a higher working capital.

That is a fact.

I think we maybe have seen most of the growth because we have seen the shift from capacity enhancement to larger contracts now.

So it shouldn’t -- the trend shouldn’t continue much longer, but it is tying more capital when contracts become bigger.

Thank you.

Thank you.

We will now move to our next question from Paul Sagawa from Bernstein.

Please go ahead.

Okay, thank you.

First of all, I think there’s a lot of concern in the marketplace when they look at the subscriber growth that, given the world population of 6b, that we’re going to run dry of [inaudible] and that sort of thing.

One thing that comes up, I think, is that a lot of those subscriptions are just SIM cards where people are arbitraging rates, etc.

I’m wondering if you could talk a little bit about how much longer, how much further do we think subscription growth can really go in the marketplace, and maybe allay a few of those fears?

Also, we talked a little bit about the players immediately right behind you with regard to the mergers of Alcatel Lucent and Nokia Siemens taking the next four players and making them two.

What about the players buying them?

I think there’s some turmoil out there.

You’ve had in certain cases Nortel and Motorola and Hauwei willing to really be price spoilers in for deals.

Do you think, given the financial woes of Nortel, etc., that some of that aggressiveness has died off, or what are you seeing in the marketplace with regards to bidding for new deals?

I would say that all their situations haven’t changed other than that they got bigger, stronger competitors and their ability to price fight.

Remember that all the contracts you take, you still do it, you go into strong relationships that will last for 10, 15 years, and it’s very important to have a reliable partner that you can stay and grow with throughout that period, and migrate to newer technologies, and so on.

So this is not an industry where you bargain yourself to single occasional contracts here and there.

So I think in that sense that things have not changed for the worse in any way.

I would rather say it’s changed to more stability.

When it comes to subscribers, your point is important here because obviously we can discuss whether we will grow our subscribers or subscriptions to 3.5, 4.5b, but we will get to a point where we’re starting to add maybe low traffic subscribers with not even a live SIM card, or what have you.

But the important thing to keep track on here is traffic.

And I think the fact that we have [followed] subscribers comes from -- as an industry, comes very logically from when it was no mobility and therefore that was the number to follow.

But as we go along, we will follow much more closely the traffic in the world’s networks.

And there just as a couple of comments, remember first of all that we, for example, in Europe, we are speaking 150, 200 minutes a month.

U.S. is at 700 minutes a month.

And lots of offerings there are at 1000 or whatever.

And we see a similar trend throughout the world, cheaper -– when you speak a couple of hundred minutes a month, it means that you talk seven, eight minutes a day.

That is -– we still have the vast majority of the calls are made in fixed lines and the transition there has only begun.

Then we shouldn’t either forget the growth of Internet into the mobile.

So I think as we go along, and I’m not going to make a big speech here, but as we go along and into capital market base and more towards presentation, it will be important to try to create a better understanding what actually drives traffic, because that’s what is, at the end of the day, what drives the need for infrastructure.

Thank you.

Operator, we’re ready to take our next question.

Thank you.

Our last question comes from Tim Luke from Lehman Brothers.

Please go ahead, sir.

Hi.

Just to clarify, if I may, last quarter with respect to the margin outlook.

It didn’t appear to come across in terms of where the street went vis-à-vis what you were expecting.

And you reset the guidance for margin at the Analyst Day, and subsequently it seems to have come in a little better.

Perhaps you could just clarify some of the key swings there.

But, more importantly in terms of the question, with a seasonally lower revenue in the third quarter and then a seasonal up-tick stronger than you had previously expected in the fourth quarter, what should we think are some of the issues framing margins for the second half?

I think previously you said directionally it will be up, with services and Marconi in the second half, but infrastructure will be the same margin.

Now, having had a slightly better than expected second quarter, should the third quarter, with the seasonally lower revenue, be expected to be flat or lower, or what is -- I know you’re not providing guidance [clearly] but just in terms of framing the issues so that we come out in a place that you feel comfortable with?

Well, this is obviously a favorite topic.

I can certainly understand that.

We do not give guidance, and I think everybody can clearly see where that takes us if we start to do that.

But it is clear that for the second half, as a whole, we expect normal seasonality or better, with maybe a somewhat stronger focus on the fourth quarter than on the third quarter.

And any loss or add to a normal quarter will of course have its incremental effect.

Then every quarter is a new quarter, and it depends on the particular product mix and it depends on the particular contracts we take.

So there are always variations there, but you have seen that over many, many quarters.

Then, in addition to all of this, everything else the same, we will have additions kicking in from the third quarter from the service contracts and the Marconi integration work.

Do you still expect a stronger progression in the margin as you move through the year?

You will have the effects from the service integration work and the Marconi integration work, yes.

For the rest, we are not guiding.

With lower than seasonal third quarter -- or you’re not saying it’s a lower than seasonal period in the third quarter, but stronger than a seasonal fourth quarter?

We are saying that the third quarter we will continue to see effects from trimming efforts in Cingular, and that in itself is an -- will [become part] or build up the third quarter.

It is -- you need to realize that it is difficult at this point in time to give a precise opinion about where the third quarter is going to be.

But on top of normal development, you will have that effect from Cingular.

So look for the margin improvement more focused on the fourth quarter than the third quarter, clearly?

That must be the right conclusion.

Thank you so much.

Good luck then.

Thank you.

[Inaudible] inform you about our next management briefing summit, which is scheduled for November 15 in Tokyo.

We’ll post an agenda and registration information on our website within the next few weeks, so keep an eye open for that and hold the date.

Regarding our interim report, please do not hesitate to call me or the Investor Relations team if you have any further questions.

Thank you and, once again, goodbye.

Thank you.

That will conclude today’s conference call.

Thank you for your participation, ladies and gentlemen, and have a nice day.