Telefonaktiebolaget LM Ericsson (ERIC) 2006 Q3 法說會逐字稿

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

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

As a reminder, a 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 this afternoon.

This is Gary Pinkham, Head of Investor Relations.

And with me here in Stockholm is our Chief Executive Officer, Carl-Henric Svanberg, and Karl-Henrik Sundstrom, our Chief Financial Officer.

Before we get started with the presentations, I'd like to remind you that there will be forward-looking statements made during the call today.

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

As you know, the actual results may be different due to a number of risks and uncertainties associated with these planning assumptions, and we encourage you to read our annual report and our earnings reports to get a better idea of what these risks may entail.

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

Go ahead.

Thanks, Gary, and hello everyone.

Let me go through our presentations fairly quickly because I think it's mostly known to you.

We had a -- in the quarter in short, it's a positive business momentum out there.

We are growing.

We're taking market share.

We're securing a lot of deals.

Just gave you some examples there of the already known Vivo -- Vivo rollout, the GSM swap we do in Brazil.

Warid, Bangladesh is another one where we also will do managed services.

Bharti in India, a major expansion where we will manage capacity.

Claro in Chile, where we are building out the core networks.

Polkomtel in Poland, where we do managed services.

We have T-Com in Germany and TOT in Thailand, where we do broadband access.

And MiTV in Malaysia.

These are just some of the examples.

Obviously we were also extremely happy to see Sony Ericsson's performance in the third quarter, which contributed more than it has been before to our profitability.

It was a good thing to do in the five-year anniversary.

We have also a quickly growing focus on mobile broadband.

And not only in mature markets but almost more so in the high-growth markets, where fixed telephony isn't available and this may be the only way to get to broadband connectivity and access to Internet.

And in terms of mobile broadband, that's the next slide, it is -- we all know how that enables mobile multimedia, from music, mobile TV, mobile office and all what we want to do.

It is great to see how we lead the HSPA rollout. 30 commercially launched networks so far.

We have announced another eight contracts in the quarter.

And, in fact, we actually have contracts in all continents.

We talked a little bit about the record fast rollout for Telstra in Australia, where we in only 10 months managed to cover 98% of the population, with a network that is capable of 3.6 megabits per second.

We had a wonderful quote there from one of the early users, who said that -- sent an email to say "Where do I begin!

This network is simply fantastic.

To give you geeks perspective, I've tried everything I can do -- I can to see its limits".

And he explained how he had downloaded his emails and listened to music and done banking business and what have you.

And he says, "There are simply no limits.

It's like having a PC plugged into the net in my pocket".

So that was a great joy and got a lot of attention, of course.

But there are several of these rollouts going on.

If we look at the next slide, the mobile data traffic, this is the slide from last time.

No change.

We simply wanted to give you some examples.

So if you turn the page again, we can conclude now from research that is done by outside analysts that 3G subscribers, the data usage is some 50 times higher than those using 2G.

We've seen a doubled data usage -- data was doubling over the last two years per user for 3G subscribers.

And also a 20 times higher data usage for those that are subscribed to flat fees, which may not be surprising.

But to give you also a couple of examples of that from around the world, 27% of the 3G subscribers in the U.K. are downloading, on average, four songs per month. 100 operators around the world have launched mobile TV.

If we look at the World Cup football event, it generated some $300m of revenues from data alone in those four weeks.

And, as a similar example, the American Idol [technical difficulty] of weeks generated 41.5m interactive SMS's from people who are voting for their different favorites.

And in a meeting I had a couple of weeks ago with the CEO of China Mobile, he just commented on the fact that they distributed 3b SMS's on the new -- Chinese New Year's Day.

So that was just a few examples to give you a feel for what happens.

We [quoted] on this thing about our leadership in services.

We have the largest force in the industry. 23,000 employees around the world, plus more than 10,000 partners in [technical difficulty] partners. 140 countries.

Or maybe even more important for you is that we have doubled our sales now in the last four years.

And two-thirds of the sales in services, in professional services, is recurring.

We presently now have 80m subscribers in managed networks.

We commented on our growth in Q3, which was 31% up over last year, year to date 39% up.

This is, of course, a stronger growth than we will see going forward because we're still comparing with months or quarters last year when both the two service contracts in Italy and the U.K. was not in the comparable numbers.

But anyway, strong growth there.

And we landed in the quarter some 21 managed services contracts, of which 14 was hosting and seven was in network operations.

We talked about the Q3 financial highlights, where we reached SEK40.8b in the quarter of sales.

This is -- this compares to a 12% year-over-year growth.

As we said in the Q2 report, we would see more seasonality, more pronounced seasonality, in Q3 than a normal year because we still have effects from Cingular, where they trimmed their 2G inventories.

But we would see a correspondingly stronger Q4, which means that we will have a good second half of the year.

And that is still -- there is no change there.

We are generally growing because market share, a lot of large projects where we've been winning more than our share.

Marconi has been added and Services is pulling strongly.

We also then, on the next slide, wanted to look a little bit at growth from 2003 to 2006.

And there we can see both the seasonality effect.

And you can see that the seasonality is slightly more pronounced here this year than earlier years.

But you can also see that, if we look at compounded average growth rate of sales, which is 15% in 2003, our OpEx compounded growth rate is 4%.

So top line's growing 15%, OpEx growing 4%.

A good part of that is from successful tight cost control and operational excellence work.

But also one part of it is because Services is growing more than the rest so far and that does not pull the same OpEx growth.

If we look at gross margin, we were at 41.8%, which is basically where we were from Q2.

We have SEK4b less of sales in this quarter than in Q2.

And that has an impact also on gross margin.

So, from our point of view, more or less stable there.

If we look at the comparable numbers from last year, it is the Marconi added sales and the strong Services growth that explains a good part of that difference.

Operating margin ended at 21.5%, which is more or less in line with last year but up 2.8% sequentially.

We are getting, as we said from -- in Q2, we are getting effects now from Marconi and Services.

But the big jump in gross margin -- in operating margin came from the strong contribution from Sony Ericsson.

If we continue on the financial and we look at the margin development -- the operating margin development over the years, you can see that we now, with the contribution from Sony Ericsson, are back on the level where we were for quite a while.

And still we have effects that I will come back to in a few minutes here from Marconi that will kick in in Q4.

At the same time, I think it's fair to say that Sony Ericsson may not have these kinds of quarters every time.

But we are on best-in-class margin levels, more so than even before, I would say.

And I'll come back and talk about Marconi.

If we talk about other Q3 highlights, the operating income reached SEK8.8b.

We have more as a coincidence the fact that we closed the deal with EMW, which the sale of the defense business, we created a capital gain of SEK3.0b.

And we also concluded the Marconi restructuring and the career change program, so we have a restructuring charge of SEK2.9b.

Of the SEK2.9b, SEK0.7b is from the career change program.

Of that SEK0.7b, SEK100m has been paid out so far.

The remaining part will be paid out as people leave.

We should not anticipate so much on savings there because this is, as you know, it's a way of giving a bit of room to hire younger graduates from universities.

So that will be covered in that way.

The capital -- the restructuring charge on Marconi I'll come back in a few minutes.

Cash flow was -- reached SEK6.6b, which is -- includes the cash flow effect of some SEK3b from the EMW sale.

Besides that, we have some SEK3.6b of cash flow from [technical difficulty], which is a good step -- a step in a good direction here.

Still we are building up working capital because we have more larger projects than before.

We have also more growth right now in high-growth markets, in Asia and Africa, where we have traditionally longer payment programs than we have in, for example, North and South America where we have sinking sales in this quarter.

We have an ambition here to see if we can close the gap to zero for the full year, which means that we need to generate some SEK11b, SEK12b in the fourth quarter.

Exactly where we're going to end up, I don't think we can say so precisely.

But that's at least a strong ambition from the management here.

We have also good growth on earnings per share, from SEK0.34 to SEK0.39.

If we then look at the different regions, we have to start with Europe here, where we grow by 19%.

That growth is [technical difficulty] [pretty much the same] and growing transmission business, but it's also from growing services business, whereas networks is more or less flattish at this point in time.

There's a lot of focus from operators on total cost of ownership and outsourcing in the battle now with -- the competitive battle with falling tariffs and falling roaming charges.

But there is also an increased focus on HSPA and new services.

And if we look at Western Europe into next year, we would expect more of the same, but also the fact that we're starting to see increased need for capacity upgrades.

The -- if we look at the CEMA region, 24% up.

So, all is much the same as before.

A lot of activities throughout the region.

A lot of network rollouts.

And also an increased focus on HSPA.

As I said before, mobile broadband is often the only way to Internet access.

So it's at least as much focus here on HSPA as anywhere else.

And we are involved in rolling out 12 networks here.

We expect much of the same here in next year.

Maybe not fully as strong numbers there but still it will be a busy region.

Next one, which is Asia.

Asia is 38% up in the quarter.

That is a fairly strong number.

It's a lot of activities in the region.

And it's a more diverse region than maybe the CEMA is, because here we have Japan, we have Australia, we have India, China, we have Bangladesh and all -- a lot of different markets here.

Strong growth but still strong potential.

We have some particular markets which we mention here but there is activities in basically every market.

And there are different ones that pick up in the different quarters.

We had, as I mentioned, the Telstra HSPA launch that has been -- created a lot of focus.

And I would say we look forward to another good year in 2007, maybe not at these high-growth numbers but certainly good growth in the Asian region.

If we look at Latin America, this is where we have a bit of a consolidation after the record strong rollout the last couple of years.

This, in particular, was a slower quarter for us.

I guess you can all figure out that we will have stronger quarters now going forward with the Vivo rollout.

But generally, still capacity and coverage needs in the region, so we will see -- we should see growing business in the next year and also an accelerating focus on wideband CDMA and HSPA.

If we then finish off the regional run-through with North America.

This is a quarter where we have -- where we last year had strong sales in the U.S., preparing for the rollout and for the 2G build out.

And now we have this famous inventory adjustment, where Cingular, after the merge with AWS, and the Cingular business and the trade off of networks to T-Mobile and all that, that happened a year ago, didn't have full control of all the 2G equipment they had in their inventory.

We actually -- it's a very -- it's a quite unusual situation that an operator has an inventory between us and the sites.

We normally ship directly to sites.

But here, they are trending down their inventory which means that we have had little 2G sales in Q2 and Q3.

We are now through that to a large extent.

We have also now seen the conclusion of the spectrum auctions, which of course now means that investments in spectrum will be followed by investments in new networks and new services.

We have the Marconi update here.

Let's talk about that one.

We are now through with the successful streamlining of the operations.

That means that before the restructuring charge in the quarter, we passed breakeven.

And now we have also laid off the 1,600 people; some of it is still in process.

But basically they're out of the operation, which means that the charge that is now taken, of SEK2.2b, will create a corresponding full savings effect in the yearly run rate from Q4.

We have still the supply chain savings to materialize in 2007 and that work is on plan.

We have a generally strong growth in transmission and good demand in transmission.

In fact, we have a stronger demand than we are actually delivering and we are therefore in the process of doubling the production capacity to meet demand.

Some of it will kick in in Q4 and we will have full effect in Q1 next year of more capacity.

And as just one example, we received this morning -- we announced this morning that Telstra is going to buy optical -- an optical network from us for an order value of $230m.

And I think that's just a good example of what -- of the integration of Marconi here.

I doubt that they would have landed that order on their own.

It's a combination of the companies that are great here.

So SEK2.2b in charge taken now in Q3.

The staff reduction is SEK1.4b of this.

There will be full savings effect from Q4.

IS/IT and facilities, these are premises and IS/IT subcontracts -- contracts that have now been terminated and are charged to the P&L.

They were prepaid at the closing, so there is no cash flow effect from the SEK0.8b.

So then let's have a couple of comments on Sony Ericsson.

I think it's all familiar to you.

So let me just say that we are steadily growing market share here.

We have seen successful launches, especially from the Cyber-shot -- with the Cyber-shot brand and the Walkman brand.

And that is not only paying off in good sales in the middle to high segment but it is also becoming popular for us in the entry level to get the entry version of, for example, a Walkman phone.

And that will be pulling -- we are seeing how we can pull both demand and price premium in the marketplace.

It was a bit of a coincidence, of course, that we ended up with a best-in-class margin also for Sony Ericsson.

I don't think we can conclude that this is going to be the case going forward because this was a quarter where everything came our way and every product was successfully launched.

But anyway, it was a moment of joy there.

If we look at the trend lines, we have a 37% compounded average growth rate in terms of units shipped over five years and a 30% sales growth rate.

So we are actually fairly close to the units shipped, so we have been able to keep our ASP number up with a focus on richer phones.

When it comes to the outlook, we obviously have no change in 2006.

And when it comes to 2007, we see very much of the same as we have seen for 2006.

That is similar growth, similar moderate growth there.

And for the professional service market, we expect to see continued good growth.

And in both areas, we are well positioned to capture market opportunities and continue to reap up the market share.

So thanks a lot and I'll leave it to Karl here.

Good afternoon and good morning, ladies and gentlemen.

I would like to start with my first slide, and that's a short description of the third quarter of 2006.

And we managed to keep the margins stable, despite an 8% sequential decrease.

And we also reduced the operating expenses between the quarters of almost SEK1b.

Together with the unusually strong result from Sony Ericsson, we managed to increase our operating margin from 18.7 to 21.5%.

I also would like to highlight that we have now reduced the tax rate in this quarter to 29%.

And we are expecting, as we mentioned, the last quarter aiming at the 28 to 30% tax rate for the full year.

I also would like to spend some time on this table here, describing what actually happened with the Marconi restructuring, the career change program and the divestiture of our defense business.

As you can see, it was a charge to cost of sales of SEK1.7b.

It was a charge to OpEx of SEK1.2b.

And of which basically SEK0.6b for selling and G&A and SEK0.6b for R&D.

This is the explanation of the changes on the cost side.

Then in operating -- other operating income we had a SEK3b capital gain from the sale of the defense business.

All in all, that means that we ended up with a 21.5% operating margin in the quarter.

I do also want to highlight that that's excluding the amortization of intangible assets.

We would have had a 22.5% operating margin in the quarter.

Next slide please.

We came in with a cash flow, excluding acquisitions and divestures, of SEK3.8b.

The cash flow was SEK6.6b for the quarter.

And we have then SEK3.1b in capital gain from the sale, the cash flow effect, and we have had an underlying cash flow of SEK6.5b.

Then you have to remember that in the quarter we also purchased Netwise for [4.3], bringing up the cash flow, excluding acquisitions and divestitures, to SEK6.8b.

I think also I need to explain the adjustment income to cash, why that is negative in the quarter.

And that's explained basically by two things.

In that is the adjustment for the capital gain for the sale of the defense business, as well as the increased result from Sony Ericsson, who doesn't bring in any cash in the way we do the equity accounting.

We ended up with net cash about SEK34b.

And we came in with a very strong equity ratio of over 54%.

As Carl-Henric mentioned, we are growing to a larger extent this year in markets where payment terms are a little bit longer than traditional in North America and Latin America.

We increased the DSO days by 3 days to 105, which means we will have a target to reach the 90 days for the full year.

Inventory, even though it remains the same, 4.4 year to date, it went down in the quarter to 4.2.

The reason here is that we are building out a lot of projects, big projects in a lot of markets.

And we are now pushing very, very hard to make conclusion of this.

We will see an increase in inventory turnover for the full year, but I'm not really [sure we'll make the 5.5].

There will be improvement.

Accounts payable days went up a little bit.

And you can see that also in the balance sheet.

It went up by SEK1.9b.

And that is a reflection of that.

We are taking our partners with us to finance our growth.

Thank you very much.

With that, operator, we are ready for our questions and answers.

[OPERATOR INSTRUCTIONS].

Detailed information is provided in the report.

And Ericsson Investor Relations and Media Relations teams will be happy to take additional questions and discuss further details with you after the call.

Our first question today is from Paul Sagawa with Bernstein.

Please go ahead.

Talking about the working capital, now you have set a general target.

And I think it's probably -- given where you are and all the new networks being built out, is unrealistic to think you'd hit them for 4Q.

But are those targets realistic for 2007?

And would that imply any change in the mix of these large new-build contracts versus the steadier business that requires less working capital in your mix?

Or would an achievement of those targets in 2007 mean more the result of just hard work on the balance sheet?

If you could just talk a little bit about that.

When will you achieve those targets, if not 2007?

Comes to the DSO, I think we will be somewhere around that target and that's depending on the hard work we're going to have.

I do agree with you that having a 5.5 on inventory turnover when we have been winning, during the last 18 months, so many big projects is a bit of a challenge.

On the other hand, I do believe we need to assess them for every year.

When we started this year, we did not plan to have so many huge projects as we had this year.

And if we change the target, we will do that at the end of the year, during Q4 report.

But I agree with you, on the inventory side it is a challenge.

However, we have over-performed and we will probably change the target also to extend a little bit when it comes to payable days.

Would you anticipate that the mix of new contracts, given what you have been winning, stays at this level for the foreseeable future, or does it moderate back to a normal mix?

We're talking about basically 16/18 months in advance now.

So if you please let me come back to that at the end of Q4, I will feel more comfortable.

Thank you.

Our next question --

Also maybe I should just say - Carl-Henric here - that we have -- we will always see a little bit of swings because it depends, as you understand, whether we see growth in Africa or Latin America or America or so on.

So that drives change.

But the big change that we have seen, from smaller to larger projects, that has happened.

We have now a mix of bigger projects and smaller projects.

So there is no fundamental change going to happen going forward.

Our next question today is from Edward Snyder with Charter Equity Research.

Thank you.

Is customer financing becoming increasingly important as you see more competition, especially in the 3G systems?

And also, outside of Latin America, are you seeing any indication of CDMA operators considering a move to GSM?

And just finally, it's kind of a housekeeping, the savings from Marconi, the restructuring, SEK2.2b, will those be evenly distributed by quarter, starting in the fourth period of this year?

Well, I'll let Karl answer the last one here.

But just the first one, customer financing is, for those of you that [technical difficulty] it's never going to get back to where it is because in the '90s, when there was a lot of greenfield rollouts from new startups, then financing was a necessity to get started.

These years, when you see new startups, greenfield startups, it's done by already cash-generating companies in that particular region, whether they are Maxis or SingTel or Orascom, or whoever it is.

So we don't have that -- all that push for it.

There are times when financing is still needed and also can be asked for as a competitive tool.

But it's unlikely that we will be able to come up with much better finance terms than they could do themselves.

So it's not a major trend but it's -- we have seen more interest in it.

On the CDMA side, the GSM swaps or [change] to wideband CDMA, I think it's quite clear that the market have understood that the future is much more on the wideband CDMA side and that there are CDMA operators that are reviewing their positions.

I guess it's known that following Telstra and Vivo in the sale of Telstra Australia that Reliance is openly discussing to swap their 30m subscriber network.

Following that, I guess you have -- and Sprint in U.S. have already taken their WiMAX decision.

Then you have China Unicom there.

I don't think that will change.

But I'm sure that there will be mid-sized operators that will still follow an upward pace and I wouldn't be able to say.

On the Marconi, it was like Carl-Henric said in the presentation, he said that once we have now taken out the SEK2.2b of costs out of the business in the charge, that will basically start to get through in the fourth quarter, if that was your question.

Yes, I was just -- you're looking at SEK2.2b [multiple speakers].

More or less evenly.

More or less evenly.

Okay.

Thank you very much.

Our next question today is from Kulbinder Garcha with Credit Suisse.

Yes.

Thank you.

I guess the first question I have is just that you mentioned you are seeing a very strong backlog, I think, for transmission products.

How should we think about how that impacts Marconi sales growth?

I guess you feel very confident of, in fact, double-digit or very strong sales growth for Marconi going into next year, given your double in capacity.

And then, linked to that question, does the very strong demand you're seeing for the wireline products change your attitude as to how quickly you want to get into that market, as in, do you think you can do all organically still, or is the demand so strong that you might have to consider maybe even larger acquisitions than you were previously considering?

And then the next question that I have is just on business mix.

This year, I think you made it clear that business mix for the overall business, especially including Services, was going to be worse than previous years.

Do you see that deteriorating still going into 2007 or will the business mix be about the same, do you think?

Well, on the transmission side, we are seeing a bigger demand.

Remember, when we talk about doubling capacity in transmission, it's not everything we acquired from Marconi.

It was two-thirds that was on the transmission side.

And if you have a growth of, say, 15% or so, you double every four years.

So these are capacity needs and there is a long backlog and there is -- there are opportunities for us to expand and grow.

This is important business to us because it is -- gives us new business relationships with the transmission networks that are needed for traffic, whether they come from mobile or fixed or normally handled by the fixed operators.

So it gives us new inroads.

And that is very important and especially important with Marconi's help outside U.S.

Their position in U.S. is not that significant there.

So I missed your second half of the question.

Just a follow-up to that, just the demand you're seeing in that area on the wireline side on transmission.

Does that, the fact that you don't have a U.S. position, just how strongly that progresses?

And does that change your view as to whether you can do this organically from here on in or whether you should consider larger deals going forward?

I think that -- we believe generally that when we can do things organically, it's normally a faster way to success, because integration and so on of companies are always taking time.

And we just successfully completed Marconi, so of course that's a way of jumping ahead a bit.

We are -- we have a strategy based on own development and so on in the U.S.

I think it will be interesting to see what we can do on the fiber to the home, [deep-band] rollout that goes on.

If we are a bit fortunate there, that is a way for us to get in more seriously with the operators in the U.S.

There are companies, as we've said, that have products or market positions that could be interesting for us as bolt-on acquisitions.

We're not dependent on it but it could be exciting to leverage such opportunities.

If I add on here, I think getting into T-Com on broadband access, as well as TOT and especially T-Com, I think is a clear sign that we have a very attractive portfolio when it comes to broadband access.

And just the follow-up on business mix?

Business mix in which sense?

Well, in the sense that this year you had a higher services content and you had higher new network rollout from that seems to some degree to pressurize your core wireless business in terms of margins, versus at least 2005 and 2004.

Do you see that business mix at this level going forward?

Could it deteriorate?

How do you think about that?

I would say that even if this is a highly dynamic industry, and things are moving fast, but the overall sense it would still take time.

I think mobile networks will continue to be a very strong driver for our business and lots of rollout that goes on, and the high-speed networks and so on.

I still believe, when it comes to converging networks and the fixed operators in that sense, there are more strategically important deals to get into now to position ourselves, but major sales in that area are still a couple of years ahead, so besides the transmission side, which is a growth area in itself.

Thank you.

Our next question today is from Jeffrey Schlesinger with UBS.

Please go ahead, sir.

Yes, thank you.

Two questions, if I could, just to go back to that working capital intensity.

Would you say that -- we've seen a steady increase, obviously, through the course of this year.

Have we hit a peak in that, given your comments on where you think you can take the inventory in terms of going forward and DSOs?

Would you say that, full stop, that we have hit a peak in that intensity based, particularly, on your order backlog that you see today?

And second question, if you stripped out Marconi, Western Europe in the Systems business, would that have been slightly down this year versus the 21% reported growth?

And do you think you can show growth in Western Europe next year?

Given your comments, there's not a lot of growth in the market.

Is there some market where you think you can take share?

Thank you.

Well, if we -- you were breaking up a bit.

It was a little bit hard to hear.

But if we talk generally about the working capital situation, we have gone from filling in capacity in networks to running larger projects, and followed that up with also more roles in areas with longer payment terms, and also to even larger than normal-size contracts.

That shift has happened.

And that means that we should be fairly stable now in the working capital situation in the prerequisite from the market side.

Then we can do better or worse in that, depending on how we run our business, and [with calendar] swings between quarters, between markets as well.

At the end of the day, that shift has been there.

So from that point of view we should have the cash flow going forward on a good ratio to where we have our profitability.

If we look at Marconi as it was added into the sales in Europe, it is clear that one part is Marconi-driven growth in Europe and the other part is Services.

It is so that Services is a major driver for growth in Europe, as so many operators both have -- are looking for savings and synergies and what-have-you, but also that they are preparing for a much broader scope of services and becoming much more of multimedia companies than just a voice provider.

And therefore, running networks may not be as key if we -- it is also correct that networks accept the transmission was more flattish.

If we have -- if we go into the next year, it is hard to say but our own judgment is that we will start to see more capacity and build-outs and upgrades in next year, because I think several operators are starting to be rather squeezed in their networks.

Thank you.

We now have a question from Tim Boddy with Goldman Sachs.

Yes, thanks very much.

I just wanted to clarify something on the Marconi restructuring.

And are you saying that, as of the end of the third quarter, you now see an incremental SEK2.2b annualized saving or a run rate of SEK550m per quarter, or have some of those savings already been realized as the business has moved to breakeven through Q3?

So the amount we should think about for Q4 and beyond is going to be less than an annualized SEK2.2b announced?

And then I have a brief follow-up question about the fourth quarter growth.

If you were to see a normal second half pattern, that would imply around 40% sequential ramp in sales into the fourth quarter.

Have I understood that properly or is there anything we're missing?

Thank you.

The first question is your first alternative.

You will see from the fourth quarter a SEK2.2b annual savings effect kick in that was not there in Q3.

On the second question, I think you're getting down to detailed percentages that I don't think we should answer on but, versus normal seasonality, we expect normal seasonality for the autumn as such.

And obviously, as Q3 was below normal seasonality, we will see that be compensated in the fourth quarter and we'll have a stronger than normal [fourth] quarter.

I don't think we should try to give [some specific alternatives] for a quarter because that's not -- that wouldn't be right.

No, that's very much understood.

Could you just help us with the key swing factors for the fourth quarter?

Are there any areas of risk or opportunity we should focus on?

It's more or less, I would say, that -- with a backlog of a company like -- the backlog for companies like us is probably more six months than three months, which means that whatever we should do in the third quarter is already [in book].

So it's more up to execution in that sense in a quarter.

That is of course not all true because there are always short orders coming in, and so on, that can create some extra growth or [you miss] at the end of the day, but there is no particular triggering effect.

The ongoing contracts that are there, and the conclusion dates and the completion dates and so on, they are already in the plans there.

Thank you very much.

We now have a question from Peter Dionisio with Morgan Stanley.

Thank you.

Just two questions, please.

On 3G, could you just give us a sense on how successfully you have narrowed the gross margin differential between your 2G and 3G products, especially as your 3G volume continues to increase?

And is there still a big differential between the gross margin of those two product platforms?

And the second question is that in Professional Services in the past you've talked about improved economies of scale you were expecting from your large contracts, such as the ones with Hutchison Italy and the U.K.

Could you just give us a sense as to where you are now in terms of these economies of scale?

Thanks.

I can answer the 3G and I would like to say the following.

Obviously the margins are not the same between 2G and 3G.

Radio access, remember that.

We have the same core right now.

However, quarter-by-quarter, the gap is getting narrower and narrower between the two pathologies.

And, over time, we don't see any reason why there should be a differentiation between 2G and 3G margins.

And I guess we're getting very close there.

On Services, the -- that is different from Marconi, where you have more of a step where we take out 1,600 people and we have a step in earnings.

When it comes to Services, it's more an everyday work with operational excellence and processes and methods and so on.

I think we've come quite far, actually.

And as we have stated many times, that the service package as a whole and the growth in Services is not particularly pulling down Ericsson's operating margins, although it has a lower gross margin, as you know.

But we have come quite far on the U.K. and Italian deal.

Great, thank you.

Our next question today is from John Bucher with BMO Capital Markets.

Thank you very much.

On the operating income by segment, the -- if you could just explain the trend from second quarter to third quarter.

I understand some of the category of unallocated is going to include some of the capital gains, losses, but systems trended down significantly there.

Could you just clarify that?

Thank you.

Question was the trends between Q2 and Q3 or?

No, but on the segment the operating margin is at 17, both in Q2 and in Q3.

It's the same operating margin, despite about 8% less in sales, if I remember right.

Yes.

The systems operating income declined from SEK7.2b to SEK3.6b.

I was just wondering if you could explain that in detail.

Yes, now I understand your question.

That is because, in that, we have included a SEK2.9b charge for the restructuring of Marconi, amounting to SEK2.2b, and the career change offer SEK2.2b, and that was -- SEK0.7b, and that was what my slide was trying to explain.

So the restructuring charges have all contributed to the system.

And then, if you look upon the capital gain, or actually at the corporate level, and it's not part of other operations.

Did that explain?

Yes, that explains.

Thank you.

That means that it's basically an unchanged operating margin between Q2 and Q3; it's 17%, adjusted for the -- if you take away the extraordinary charges of SEK2.9b.

Thank you very much.

We now have a question from Stuart Jeffrey with Lehman Brothers.

Hi there.

Thank you.

I've got a question on Marconi as well.

You're taking a SEK2.2b charge note, have that as an annualized saving from a breakeven in Q3.

So that would imply something like a SEK2.2b profit, operating profit, on revenues of annualizing, say, 12 to 14, giving you very healthy margins in the mid-teens.

Could you talk a little bit about how you see that developing?

Is there a risk that because you're that little bit smaller than some of your key competitors, that you have to step up your R&D on a selective basis and your sales efforts for Marconi, or for wireline in general, and that that operating margin gets squeezed slightly over the next 12/18 months as you try to gain more market share?

Thanks.

Well, I would rather have expected the other question, actually, from the other point of view, because we still haven't leveraged the opportunity for savings in the supply chain, which will kick in in 2007.

So we had, as we said in the beginning, we had ambitions to bring the operating margins to Ericsson level for the whole integration work, and I think that was perceived as rather bold a year ago.

We're almost there now with the savings we've done on overheads only, so I don't know why -- we haven't really had any such indications that we need to step up any particular investments or so.

So I would rather see -- I would rather expect that number to continue to come up, well in line or even better than we said when we acquired the company.

Remember that this is a dynamic industry, so we're getting into details here and over a longer time that is always hard to know.

But, principally, this has turned out as a very successful integration.

Okay, thank you.

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

Thank you.

Do you feel that the Nokia Siemens and Alcatel Lucent combination is creating opportunities for a share gain for Ericsson?

Can we potentially see some swapping by Ericsson as you attempt to increase your footprint during this consolidation period?

Well, let me just say, because it's always sensitive; we'd rather talk about ourselves than our competitors.

I'd probably say only things that you're already aware of, but it is obvious two things.

One is that, as we said, if you remember, when we started the Marconi integration, we said one thing for sure for 2006, don't expect much growth because we need to do the integration right here.

But I don't think there is any other way to get around integration work, whether it's we doing it or anybody else.

So only that would mean that there is energy lost in the marketplace and opportunity for us.

The other part of it is that -- which is also obvious, that we would have, in our calculations, that we acquired something large, is that there are operators out there that have -– that are sitting on dual sources, double vendors, where they happen to now be in the same camp and you basically are single sourced.

And that is something that wasn't planned by that operator, please.

So I think there are such opportunities that could arise and we have some such discussions going.

So I guess there are opportunities out there.

Okay, that's very helpful.

Thank you and good luck.

We now take a question from Per Lindberg with Dresdner.

Please go ahead, sir.

Yes, thanks so much and first congratulations.

We have just understood that you have now become the world's most profitable telecom equipment maker, not only in mobile systems but also in mobile phones, given Nokia's figures earlier today.

Coming back, perhaps, to the issue of industry-wide growth and your own market share aspirations, have they increased in light of Nokia's combinations with Siemens, Alcatel/Lucent/Nortel's mergers, and wideband CDMA, and also the clear fact that Motorola is now shifting almost all its R&D to WiMAX, i.e. that the number of independent players are now collapsing from eight to, say, between three and four?

Well, I think it is in a bit of maybe, I don't know, in a bit of a funny way, we could end up with basically only winners in the marketplace, because the losers are those that disappear and leave room -- better room for growth.

I think it's fair to say that we are a winner in the consolidation.

I think it's also fair to say that even new guys, like the Chinese, are also winners because part of it is looking for alternatives.

But I also think that the merging companies will also turn out to be winners from their perspective, because they are creating stronger, better companies that can do better in the long run.

Of course, then there are the Nortel and Lucent and Siemens that get absorbed and there'll be others as well that are losing out.

But I think that's probably a fair assumption.

I think it's also good that we get stronger companies that can help developing the industry, that are not struggling with R&D capabilities.

When it comes to WiMAX, it's a -- that's an interesting technology and it will play its role, obviously.

So far, to some extent, gathering maybe even more interest from those that have lost out a bit in the big race and therefore need to find disruptive ways of creating positions and so on.

Plus the fact that you see also an increasing activity from the IT industry, so it's also a bit of an IT versus Telecom view when it comes to what technologies to use and so on.

But at the end of the day I would say the old dynamics is not working against us.

It's rather working a bit for us, I would say.

Yes, thank you.

And not least in terms of long-term pricing, I would assume then, given that we could see a fairly concentrated supplier structure, especially in your track -- technology track GSM, wideband CDMA?

Yes, it's a little bit hard to know exactly how things are going to play out, but in -- you all know the price trends we have been living with for the last 20 years.

We did see an acceleration of price erosion a couple of years ago before the mergers took place, when several companies were sitting on sub-critical masses and just needed growth, and trying to buy market share was one way.

It didn't turn out very successful for any of them, I would say, and the mergers solved the problem.

But it also means that you don't go out and spend all that money and then go out and fight for additional market share, price-wise.

That doesn't make sense.

So I think there is a bit of sobering up there and coming back to more traditional terms.

And I also think that the Chinese have been aggressive all the time but they are getting more business now and then, plus and minus, but also [tied] up for them.

Thank you very much.

We now have a question from Mats Nystrom with SEB.

Yes, hello.

A question to Carl-Henric.

You are referring to moderate growth for 2007 in mobile systems and the report and what we got from you today so far expressed great confidence.

Does that mean that you expect further market share gains in mobile systems 2007?

And secondly, on network rollout, I recall perhaps [Totalia] saying that this number, in absolute terms and percent of sales, will be rather stable or decrease over Q1/Q2.

Does that mean that we should look for similar numbers, in absolute term and percent of sales, for Q4 like in Q3?

Or do you foresee any major difference there?

Thank you.

We start off with the outlook.

We have said today, as you know, that we expect a similar growth as we've seen in 2006 and that's been in the moderate span.

We have taken market share now for the last couple of years and there is just nothing, I think, in the market that says that we wouldn't continue to do so.

We are in good shape and we are focused on the market, and we're focused on the future, and said we will have other things to focus on as well in parallel.

So I think there are good reasons to expect that we can continue to gain, both on the network side and on the services side.

And when it comes to NRO, our network rollout, I would like to say that it's probably going to be similar to what you have seen in this quarter.

However, there are also a little bit more short orders in the fourth quarter and that's a little bit hard to predict actually how it's going to end up.

But -- so that's my answer right now.

Thank you.

Thank you very much.

We now have a question from Sandeep Malhotra with Merrill Lynch.

Please go ahead.

Thank you.

You've talked about '07 guidance for the mobile systems industry for moderate growth as being your early estimate.

Could you take us through what could be some risks in areas that moderate doesn't materialize and growth is actually slower than what you currently expect?

And also a follow-up to that, could you talk a little bit about -- there has been talk in the market about a potential break-up of Hutch and being sold to competitors.

What impact would that have on your managed services contracts?

How are they structured in the event there was some kind of change of control?

Thank you.

Well, let me start up by saying that, on the last one, first of all, I must say, I haven't come across any such rumors and I'm not sure how that would -- what would drive that but -- the break-up of Hutch.

But anyway, the managed services contracts which are related to 3G, they are offering considerable savings to Hutch.

And if anybody, which I think is very theoretical, if anybody would come in and buy those companies, it would be the last thing they would do was to go in and try to change that.

There are change of control clauses and large compensations and such things involved there, so that's not an easy thing.

But I don't think that would be a contractual matter, I just don't see the rationale.

That would be the last thing they would do.

If we then look at the market outlook where we see moderate growth, it's large projects that -- who knew that Vivo would be this year?

Who knows where a number of companies, operators, will be next year and exactly how they will roll out?

So if you talk about a couple of percent up or a couple of percent down, of course that could happen because a project is accelerated or the project is delayed.

But I also think that you have seen now over the last three or four years, with us being in basically every single corner of the world, we are at least probably the least dependent on particular events, of all the actors in the field.

We have no customers that is particularly large.

We have no country that is particularly large.

So I would say it's probably a rather safe bet that it will be in that ballpark.

Just a quick follow-up, if I may.

How much of that moderate growth that Ericsson might deliver next year would be dependent on Asia Pacific?

And do you expect -- what do you expect the competitive environment to be in some of these Chinese deals coming up, in light of some of the consolidation in the industry that we've seen?

If we start off again with the last question, I would say the -- any rollout that is an initial rollout of something that is considered, or anticipated, to be eventually large will have more competition, and that is why you see tougher competition in India, because of that.

Potentially it's a huge price erosion a few years and cost erosion a few years; it turns out to be quite good.

So of course it's going to be hefty competition in China but I don't think it's going to be any more -- any different from other large deals that are being made.

Asia Pacific right now seems to become more important to us, but not necessarily because of what we may only think about in Asia, that it's China and India and [Bangladesh] and so on.

These are all growing but it adds to it our growth in Japan, which is pretty significant.

And that's of course as valuable.

It's of another kind.

It's more like an America or an Australia or something.

A final follow-up, if I may.

So would it be fair to say that the pricing environment in Asia Pac for the larger deals really gets worse before things get better as a result of consolidation?

I think we've passed that point, if there has been one.

Okay, all right.

Thank you very much.

We will now take a question from Richard Kramer with Arete Research.

Thanks very much.

Just a couple of clarifications from Karl Sundstrom first.

You gave us last quarter what the sales for Marconi were.

Could you tell us this quarter and also tell us the currency impact on sales?

And then, perhaps for one of the two of you, you made several comments about Sony Ericsson, which is becoming a larger portion of your earnings, having an unusually strong quarter and perhaps not being able to maintain its current performance.

Can you tell us what some of the swing factors there might be and what sort of expectation you have for Sony Ericsson in terms of the profitability, and also if there are any plans in the future to improve the disclosure from Sony Ericsson, which I think by all measures is well behind all of its major handset peers?

Thanks very much.

When it comes to Marconi, as we have said already in Q2 and we also emphasized in this report, it is getting harder and harder to separate it because, for example, both the big deals with T-Com and with TOT in Thailand, it's a combination of our broadband offering and their broadband offering ending up in our new offering.

So it becomes theoretical and very hard.

The same thing is that one of the main parts in the deal was actually to replace their [point] microwave radios, and that we started really from the beginning with.

So we can't disclose that because the number is impossible to find.

What we do, however, is having a good grip on the cost structure, and now we've taken the restructuring charge of SEK2.2b.

Okay, and currency impact?

Of the Marconi?

No, overall on the Group in the quarter.

The currency impact -- [the average] currency or the U.S. dollar moved 3%, and this -- and [we had to] -- in the third quarter we had less than 50% in U.S., mainly because of the downturn in Sweden.

It's probably around -- in round figures, around a percentage.

Okay.

So, on Sony Ericsson, it is a little bit difficult to predict, more difficult, I would say, for us to predict than maybe the network side because it's so dependent with their position on exactly how successful they are with various products.

This quarter was a quarter when all their products did very well in the marketplace and that may not always be the case.

But it is wonderful to see their strong growth and their strong earnings.

So we shouldn't expect [technical difficulty] [15] going forward.

But it's also clear that all the large ones are gaining market share from the smaller, and also that Sony Ericsson now for a while have done maybe the fastest.

And if you do look, which I think is official, we have no particular information there, but if you -- because we do only basically GSM wideband CDMA phones.

If you compare that to, for example, Samsung and their position, and look at where they are on GSM wideband, then you'll find that we're actually catching up very close now.

And the position there for a number three is closer in reach than the overall number three position.

Are there any intentions to improve disclosure with Sony Ericsson, perhaps to give the sort of breakdown and detail that all of your other major competitors do?

Well, I think it's a fair comment when the company is getting so big and also starts to become so important to our profitability to -- not to talk about Sony.

It's also a joint venture, so this is a discussion that has to go between here and Sony Ericsson and also to Tokyo.

But I'm sure we will -- that is a question that should be addressed.

Okay, thank you.

Operator, that was our last question.

So, before we conclude for today, I'd like to remind you that our next management briefing is in Tokyo on November 15.

Agenda and registration information is available on our website and if you would like to participate, I encourage you to register as soon as possible.

With that, I'd like to thank you for participating in today's call and see you next quarter.

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

Thank you for your participation.

You may now disconnect.