Telefonaktiebolaget LM Ericsson (ERIC) 2007 Q1 法說會逐字稿

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

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

[OPERATOR INSTRUCTIONS].

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

Mr.

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

Thank you, operator.

And welcome to our conference call for the first quarter results for 2007.

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

Before we get started, I'd like to remind you that we will be making forward-looking statements 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, so therefore we urge you to consider any of these forward-looking statements with caution.

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

Thank you, Gary.

Ladies and gentlemen, we have had a good start of the year.

We're seeing a lot of -- take the next slide please.

We -- I'll see if we get some slides rolling here.

Just want to make sure that we have the first slide up here.

We want to make sure that we can flip through the charts in a good way here.

What do you say, Gary?

Should we get started?

Let me just start and see if we can get the computer to work.

But the important thing, I guess, is the presentation, as such.

We are now approaching 2.9b subscribers in the world.

But what is more exciting is the data traffic that we actually saw tripling over the last 12 months, data traffic in the world's networks.

We actually even saw doubling in the high-speed networks over the last six months.

This is exciting.

That means that there's a strong indication that multimedia is happening now.

Fixed broadband connections are up to 280m.

We had from Ericsson a solid performance in the quarter.

We had 8% growth which also should be seen in view of the weakening dollar, with 11%.

So either way we calculate in -- as a Company or in networks of the mobile systems, we would be in double digit with the constant currencies.

As I will show you also as we go forward, we have a tough comparison in the U.S.

with the Cingular rollout.

And I think you are aware of that.

I think we have the pictures up and running now.

Then if we look at the -- we have a new organization in place, Networks, Professional Services and Multimedia.

I think you are all aware of that so I won't go too much into it.

I can just tell you that it is a good organization.

It makes, creates much more clarity for customers, clarity internally and so on.

So there was a good move.

We will, if we go another page, we will now follow this in our new reporting.

Networks also includes the rollout.

And I will not comment on the details here, I will come back to the details on later slides.

But you can see here how sales is basically split in between 30b on Networks, 10b on Professional Services and 3.5b on Multimedia.

You can also see the margins, how they are distributed, and you can see growth.

And let me come back to the bits and pieces.

When it comes to mobile systems, just want to make one clarification there because this is how we have guided the market previously and showed -- giving you data.

Mobile systems is the mobile part of Networks.

It is, in Multimedia, the multi -- mobile multimedia systems, prepaid and other such products.

And it's for Professional Services part of the system integration for doing that -- those multimedia systems.

All that builds up mobile systems.

And there we have a Q1 sales growth of some 6%, again with a stable dollar would have been double-digit.

We will continue to report mobile systems, at least to 2007 for comparability.

If we look into the next slide, to the Q1 financial highlights, we have Group sales of SEK42.2b.

I think you know that by now.

Again, a growth of 8%.

I've said enough probably about the U.S.

dollar.

We had also the peak of the Cingular rollout in Q1 last year.

So that adds also to the tough comparison.

Gross margin was actually up sequentially 0.8%, which was good because gross margins are normally higher in the fourth quarter when we have bigger utilization of the resources.

Operating margins was up significantly, of course, to a good degree because of Sony Ericsson, but also continuous operational excellence work.

If we continue on the highlights, operating income was SEK8.2b, which is up 23% year over year.

EPS up 28% year over year.

And operating cash flow was SEK4.6b.

That includes the dividend from the Sony Ericsson.

And that was done in a prepaid arrangement this year.

That whole part was because we always paid the Sony Ericsson dividend in the first quarter.

But Sony this time asked us to do it in the second quarter, which is another fiscal year for them.

And we accepted that as long as we get the payment in normal ways.

That's why it was called prepaid.

I will come back and mention a couple of comments on the cash flow on the next slide.

But we've had increased working capital of SEK4.7b [sic - see presentation] due to large projects.

Net cash of SEK29.1b after the acquisition of Redback and Entrisphere, and also some shares that we have been buying in the acquisition process of Tandberg.

Let me make a couple of comments then on the next slide on cash flow, because I think it's important that we all understand what -- how our business is driven.

There are two types of contract.

The upper contract which is where we run separate contracts for shipment and installation.

We ship our products, could be into warehouse for the customer or could be onto the site, and then we return back when the customer tells us to go and install our stuff and commission it.

This is typical for Europe, for America, both actually in North and South America.

Then we have the turnkey projects.

Those are typically in CEMA region and Asia Pacific, where we take the whole responsibility, may even acquire the sites, put up the towers, put up air conditioning, put up everything, and obviously build up working capital as we go along.

We obviously do get the progress payments of various kinds, but not offsetting the buildup of working capital.

But this is typical for a turnkey project.

So if we then go to the next slide and look at how has the development been then over the last years in Ericsson.

Well, turnkey projects are growing in importance all over the world, but primarily in APAC and the CEMA region.

60% of our total growth from 2003 to 2006 was turnkey-driven.

70% last year.

If we then do another cut and again look at our total growth, CEMA and APAC, where turnkey projects are prevailing, we had 65% of the total growth from turnkey from CEMA 2003 to 2006, and 75% in 2006 alone.

If we then look at the next slide and just conclude a couple of things about these turnkey projects, remember that if we roll out a project, be it in Nigeria, be it in Japan, Pakistan or Bangladesh or India, our capabilities to run such large projects, they are as important as our technology leadership in driving market share and driving growth.

And we have gained market share more in these markets than almost anywhere else.

Of course, this builds up working capital.

That we understand.

But we are well compensated for it.

These are projects with healthy margins, that keep up our margins, not only for the projects but for the way we tie up the capital and capital costs we have.

Remember also that collections here have never been an issue.

Obviously when we get in balance here, and we have as much turnkey one year as we had the last year, the year before, we will get ina balance -- better balance with cash flow and income.

But, as long as we grow, the stronger we grow the more we will have to wait a bit for the money.

Still, we should remember what says on the tagline at the bottom, through the whole '90s, from 1990 to 1999, we generated SEK3.7b in cash flow.

Over the last four years we have generated SEK70b.

So, from our point of view, our capability in handling large projects is a asset that we're happy with.

If we then say a couple of things on the three segments.

Start up with Networks here.

We have 5% growth.

In fact, as you probably figured out, we were -- in this particular quarter network rollout was down 4%.

So -- and that is included here, so networks, ex-network rollout was actually higher.

But here is where we are hit by this Cingular comparison with last year.

If we exclude the Cingular effect, growth outside U.S.

amounted to 14% for Networks, quarter over quarter, year over year, which is a pretty impressive number.

Operating margins are stable at 17%.

Continued -- DSM continues actually quite inspiring, with good growth in many markets.

And I will come back to the various markets.

And also mobile broadband starting to happen in a bigger way.

Last year was really a big breakthrough for mobile broadband and that is also what we're seeing now, with data doubled, data traffic doubled over the last six months in the HSPA networks.

We're also in the process of integrating the acquired companies, obviously.

And that is an exciting project in itself, where the Redback company, Tandberg, Entrisphere is a smaller one, but Redback is a great add-on and a lot of, lot of excitement in that company, I must say.

We then go to the next one and look at the Professional Services.

Here you can see the margins of services being stable around 15%.

Growth is here 15% as well.

But in services, this is all local business.

So here we can do an easy calculation of growth.

And in local currencies that was 20%.

Managed services grew 11%.

And for the same reason, in local currencies 15%.

And managed services obviously growth depends a little bit on how larger contracts comes in here.

As you know, we had this larger contract with Vodafone which was a very innovative contract, I would say, where they, for the first time, signed a contract from global for their OpCos.

Normally they sign individual contracts in the various OpCos.

But this is really leveraging synergies for handling spare parts for all their different vendors in one setup for the whole of Europe.

We're now supporting 1b subs in networks.

And we have 120m subs in the networks that we actually run.

If we then go to Multimedia, strongest growth, 19%.

Operating margins here of 8%, up from 3% a year ago.

A lot of growth right now from EMP and from what we call revenue management.

That's where you have prepaid and subsystems as well.

Good margin improvement.

Because we have here EMP, and we have revenue management, we have Enterprise, we have IPTV Solutions and Multimedia Solutions.

Depending on how growth will happen in these smaller units, it could be the profitability and margins for the unit as a whole could very well vary a bit as we go on and we have to learn how that looks.

Tandberg was obviously a great addition.

We acquired the company yesterday.

That's all in place, and it adds both an exciting crew of skilled and competent people and also adds products.

And this little -- you can see on the animation there, that picture from the press conference when we acquired it, when we announced the acquisition, how we are actually the only player in the industry that can provide a full solution from in-house in IPTV.

We will then have a couple of quick comments on the regions.

Europe was up 9%.

As we have said several times that we're starting to see bottlenecks in networks.

And we said last time in Q4 that we saw a potential upside in Europe.

We're seeing how investments in mobile networks is growing, this time especially in Southern Europe.

We're also seeing how the accelerating data traffic is creating transmission bottlenecks.

And we have a continuous strong focus on managed services.

So much the same story as before, but slightly better, I would say.

If we look at the Central and Eastern Europe, Middle East and Africa, 9% up, underlying business from [inaudible] before when we have seen somewhat stronger growth.

But we had a bit slower quarter.

A lot of activity, especially in Sub-Sahara -- lots and lots of rollouts there.

Middle East was a bit slower in the quarter, but good business momentum with new licenses in both Saudi and Egypt.

And we're seeing Russia that is preparing for 3G, as a couple of comments.

If we then go to APAC, we come to the strongest-growing region in the quarter, 36%.

I think you're all familiar with the various projects that are going on.

But we had Japan where we had major rollouts, lots of activities there.

Bangladesh, Indonesia is two quickly growing countries.

India has taken over the position as the -- in terms of subscriber growth -- the fastest-growing country in the world, now added I think it was 6.8m subscribers in the last month, slightly ahead of China but, of course, from a lower level.

They are now at 160m subscribers and they are heading for some 500m.

The BSNL court case has been ended.

And the award of contract is now going on with high intensity.

We shouldn't forget though that BSNL is just one out of four or five large -- equally large operators where [Maxis] and [Hajj] and Bharti are in the similar expansions.

Finally, we have China where TD-S -- where the decision was taken by authorities to start a major trial of TD-SCDMA, the Chinese standard, in eight cities.

And we expect 3G licenses not to be awarded before that trial is over, and is probably going to take the remainder of the year, or more so.

And that has started off investments in 2G again, where there is a pent-up demand.

So China should be a pretty interesting year.

Then if we go to Latin America, where we are 9% down.

This is -- remember now that Latin America in 2005 was 100% up.

And we saw a bit of a catching breath last year.

And we're starting to see more momentum again.

There are a lot of [odd mix] in those networks there.

We're also seeing how Telefonica and America Movil are now preparing for 3G.

And even ongoing discussions also there for managed services.

Finally, if we go into North America.

This is where we faced the tough comparison Q1 2006 with a big rollout for Cingular, which we indicated already in Q4 that we wanted you to be aware of.

So the 41% down here gives a little bit of an old comparison.

And you will see already in Q2, when the rollout was ended last year, that the comparison starts to be much more normal.

Quite an interesting market.

Lots of triple-play focus and rollout of fiber to the home, and new spectrums and so on awarded, that should generate business.

And we have there strengthened our position quite considerably through Tandberg and Entrisphere and Redback, that has been clearly noted by all the American customers and will help us going forward in generating new business.

If we then look at Sony Ericsson, I think this is all familiar to you -- 63% up in number of phones.

Their 'Wow' product, as they call them, drive very much their success.

Also in the entry segment, the whole idea is to take the successful Cyber-shot phone and Walkman phone and with entry variants make sure that we enter further down in the deeper segments with a price premium being the premium brand in every sub-segment.

We're not at all approaching the lowest part of the segment, but gradually seeking where there is profitability to be captured.

And this was done with stable margins.

You saw the ASP come down a bit in the quarter because the mix shifts to somewhat more entry phones.

And also the fact there was less new introductions in the quarter.

If we look at the numbers, Q1 sales was up 47%.

Profit almost were up 139%.

And strong growth primarily driven by Europe, Latin America and Asia Pacific.

Actually an exciting 110m music-enabled phones have been sold today, an interesting comparison with any provider of MP3 players.

If we look then finally at the market outlook, we haven't changed really anything.

We see a mid-single-digit growth for the market in this year, Mobile Systems.

And we believe we had that already also in Q1.

And for professional services, we continue to expect good growth from the market.

And in both areas, we expect to continue to grow market share.

That was my input.

And then I will ask Karl-Henrik to comment more on the financials because we have the questions.

Okay.

Thank you.

Good morning, good afternoon to you, ladies and gentlemen.

If I go to my first slide, financial summary.

I would like to point out that we had an 8% increase, if you exclude the divested defense systems that we sold out in the third quarter last year.

The other area I would like to point out that has increased the operating margin, both including and excluding Sony Ericsson.

And we have been able to increase our EBITDA margin compared to the same period last year.

Basically we generated an increase of profit of SEK1.6b in this quarter compared to the first quarter of this year, which SEK0.9b is coming from Sony Ericsson, and SEK0.7b from our increased sales, which is by 8% compared to an increase of OpEx of only 3%.

If we go to the next slide, I think you all have noticed that the tax rate is 29% in the quarter, compared to 31% last year.

And we still believe that we will be around 30% for the full year.

And I also would like to point out that we are now having an equity ratio of almost 57%, which is a very strong balance sheet.

And if we then go to the cash flow analysis, I think it's a little bit important here that you understand, and I can explain, that last year we had a dividend of SEK1.2b coming from Sony Ericsson, which is then booked under the adjustment of income to cash, as you can see.

This year we received a prepayment which is part of the explanation in the report, of SEK3.5b.

This means that we built up working capital of SEK4.7b in the cash flow in the first quarter of this year, compared to SEK5.4b last year.

We are slightly better than last year when it comes to working capital management.

However, we still need to work in this area.

But it's also a reflection of the stronger growth in a lot of the big projects that Carl-Henric mentioned.

We made acquisitions of SEK15.7b.

And if you deduct that from the net cash of SEK40.9b at the end of last year and you add back the cash flow in the first quarter, you end up with a unit cash position of SEK29b.

And then if we go to the last of my slides, which is operating efficiency trends.

DSO days has increased by 6 -- 7, by 7 days compared to last year in the first quarter.

And that is mainly driven by the huge growth, especially in APAC, when you traditionally had longer payment terms.

When it comes to inventory turnover, you have the same inventory turnover as last year, the SEK4.2b, and we are now starting the big journey to get to the SEK5.5b, which is the target for this year.

When it comes to payable days, we are now for this year changed the target.

Was previous 45 days.

We have now changed the target to be over 60 days.

We managed to get 67 days in the first quarter.

And this is an area where we need to work hard on, because when it has to be reflected in the terms and conditions when we do turnkey, we need to bring our partners along.

And, with that, I hand over to Gary Pinkham.

Thanks, Karl-Henrik.

Operator, we are ready to start our Q&A session now.

[OPERATOR INSTRUCTIONS].

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

Please go ahead.

Hi.

So, probably over the last number of quarters you've had an increasing amount of these turnkey solutions and that's having an impact on the working capital.

I imagine also the [inaudible] preponderance of new build turnkey-type solutions also has some impact on margins.

Is that fair to assume that the turnkey -- new build turnkey solutions do affect gross margins and the overall operating margins of the business?

And as we look further into 2007 and to 2008, do you anticipate that that transition to new build either stabilize or even shifting back in a cyclical form to a larger preponderance of higher-margin, less working-capital-intensive upgrade and expansion-centered business.

If you could just talk about the shape of that business, because people are really concerned about [inaudible].

Well, first of all, turnkey projects versus more ship and install in -- of a new network, turnkey projects tends to defend our margins better because we have unique capabilities there.

Operators are less tough on bargaining on the contract if we loan off them the whole matter.

So turnkey projects are working in our favor.

However, we should remember that turnkey projects or the ship and install, the other alternative, they are both new network rollouts.

And, in that sense, they are more price -- competitively priced than an expansion project later on.

So in that sense you are right.

So I think you need to keep track on both those aspects.

Of course, when we have -- when we're coming to a time in life where we have more additions in expansions rather than new networks, then you are right.

Then that balance shifts a bit.

And this depends a bit on where the market is going.

But I think we tend to be surprised on how much new business that comes simply because phones and equipment and services becomes more and more affordable.

We're now looking at 4.5b of people that are looking to have a phone and it could even go beyond that as time goes.

Then, of course, it drives new business.

And that is great add-ons that we don't want to miss.

But obviously, over the longer period, it will become a bigger portion of expansions, with the effect that you're saying.

Thank you.

Thank you.

We will take a question now from Hasnain Malik from Citigroup.

Please go ahead.

Thanks.

I have two questions.

The first is given the cash flow performance and the ongoing growth bias to emerging markets, at least probably over the next year, do you think that the prospect of a substantial increase in return of what might be considered excess capital in your balance sheet, do you think the prospects of a substantial increase have been reduced?

And the second is more of a kind of market question.

How close do you think we are to a phase of European 3G capacity upgrades and what sort of impact do you think that would have on your margin structure?

Thank you.

I think that I would ask -- I would answer the second question first and then I'll just want a clarification on your first question.

But I think that we are -- it is easier to say that there is capacity in the 3G networks.

But, in reality, with the tripling of traffic and quadrupling pace in the mobile broadband networks, because you can really do all the great things you want to do, all from a mobile, music downloads or what have you.

Of course, quadrupling for a couple of years, that is certainly pretty massive.

I think there could also be, and we see examples of that that operators overestimate what capacity they have because the real traffic cases don't come as even or as well as you would like them to be.

So you reach ceiling.

So you don't want to have a network where your subscribers don't get the quality they expect.

So we have indicated this for a while where we have both indicated the bottlenecks in transmission coming first and then, secondly, talking about Europe with the potential upside.

We saw in our network increased spending in Southern Europe now for the second quarter as the first example.

So I think we're gradually moving into that space.

Your first question, I didn't exactly get your point.

Well, I suppose another way of asking that is you've always talked about net cash on the balance sheet as a strategic asset, and the near-term memories of what happened three or four years ago persuade you -- have always persuaded you that it's important to retain a strong net cash position.

Given what we've seen in other parts of the equity market, and even within tech, with willingness of some companies to raise debt and some companies having debt forced upon them, do you think that's altered your own perception of the amount of net cash or, indeed, the amount of net debt you'd be willing to take on?

Thank you.

Well, we said when we had SEK50b of cash that that was not a bad position to have considering all the various aspects that you said, and preparedness for whatever of [recent].

And since then we have used cash for some strategic acquisitions.

So I don't think we have changed our position since then.

And because we have used cash for acquisitions, the matter of this point has not been a major topic on the agenda in Board discussions.

This is more [an honor] issue and so on.

So I think there is good reason to have some preparedness.

But obviously, over time, we should generate good cash here that may need to be discussed.

But we're not there now.

Okay.

Thanks very much.

Thank you.

We've got a question now from Mats Nystrom from SEB.

Please go ahead.

Yes.

Hello.

Two questions if I may.

Firstly, you talk about trebling of the data traffic in mobile networks and so on.

But the question, is is Ericsson already benefiting from this in terms of revenues and shipments, or is this more something to come from your perspective, so to speak, or bring opportunities going forward?

Or are you really seeing this in your numbers today?

And secondly, I think you present a very good slide and explanation of the difference in contracts in emerging markets versus the western world.

But, having said that, there should have been large turnkey projects also in the end of '05, early '06.

And shouldn't they have kicked in, so to speak, in the current numbers in the cash flow in terms of reversion of working capital, or am I doing the thinking wrongly here?

Thank you.

First I would say that on the data traffic side, we are seeing some -- in the big scheme of things, we're seeing some smaller numbers because we have bottlenecks in transmission, in networks and so on, but generally, not yet in the numbers.

But certainly it's quite interesting when you talk to the large CEOs, they will all say that it is happening now.

And you can read it in TeliaSonera's recent report.

You can read about it in Cingular's report.

You can read it about in the reports from Japan and from Telstra and so on.

But everybody would confirm it, that it's happening.

You are obviously from a -- some point, you're right that it should be seen in 2005.

And I guess it was.

But it was really starting to happen then.

The reason other phenomena are here also is that when in 2003 and '04 that we had recovery from the downturn, operators that were in difficulties there, they started to buy their separate pieces in the projects themselves because they thought they could bargain harder.

And that is also reverse trend where they have come back and said it's much better you do it all.

We're not gaining anything by trying to do the bits and pieces.

So the bigger effects have been there in 2006.

But there was also some initial effects in 2005 obviously.

Okay.

Thank you.

Saw that clearly in Q2 -- Q3 2005.

Thank you.

We've got a question now from Kulbinder Garcha from Credit Suisse.

Please go ahead.

Thank you.

Two questions.

The first one is on are you implicitly telling us that given the turnkey contacts that are going to grow this year, your net income to free cash flow to conversion won't improve?

Or is it your target to improve it?

And do you recognize that last year was a particularly average year in that regard?

That's my first question.

And if free cash flow is going to improve this year, when might that be?

Is it near term?

Is it the second half?

That's my first question.

The second one is, you mentioned in your press conference, your press release on India how the BSNL contact and there are several other contracts.

Just in terms of magnitude, the BSNL contract I think is $5b.

The Reliance one is maybe as much as $7.5b.

And then there's a $2b contract with HSR.

Now, in that context, there's maybe $15 to maybe $17b worth of contracts in India to perhaps be awarded in the next six months.

Is that something that you see in active discussions?

Are we getting the right kind of magnitude in terms of the speculation in the Indian press, or is it much smaller than that?

Well, I think the BSNL contract is quite well captured.

And that will last for now for several years.

And we will get our share of it, we hope.

It's not awarded yet.

The others are in similar magnitudes going forward over the same period of time, some of them by -- for half a year or a year at a time, some others by major bigger contract at BSNL.

But it is higher activities.

Let me say, and I think that is important that the reason why we bring up the turnkey projects and so on in this particular press conference, is not that we want to warn for any new situation or anything.

This is -- we go on in business as usual.

And, of course, if we grow more we will have more of those effects.

If we grow less, we would generate more cash flow.

That goes for most businesses.

Why we bring it up is because we have felt that there is a lack of understanding on quite a few hands on what it means, how -- what is it actually that builds up the working capital and what are the effects.

And that presentation we could have done equally well one or two or three or four quarters ago.

We just want to give some extra information and understanding to it.

I guess just one to follow up, do you think your free cash flow conversion this year will improve versus last year?

I'm not asking for a particular quarter.

Do you think year to year it will improve?

Well, I think that it depends actually on the growth.

So it's a moving target a little bit.

And if the market is slower, I guess that should be the conclusion.

If the market is accelerating, it may not be the conclusion.

But let's also remember that we do have turnkey projects, as such, in a stable situation where it's as much every year doesn't have these effects.

It's more the fact that we have a disproportional high growth in turnkeys.

It depends on which markets and so on that the growth is going to come from.

Okay.

Thank you.

Thank you.

We've got a question now from Alexandre Peterc from Exane BNP Paribas.

Please go ahead.

Yes.

Hi.

I have two questions.

Firstly, can you maybe tell us a little bit, there was a lot of talk about network sharing, what impact that would have on vendors.

And clearly Europe still looks quite good.

So is it too early to see any knock-on effects from that?

Or is it much ado about nothing?

And then secondly, if you could come back a little bit on the selling and other expenses in Q1, if you could explain why that progressed more than the rest of the fixed costs.

Thanks.

Well, let me start with the first one and let Karl answer about the second one here.

But network sharing is a matter of -- with certain complexities.

First of all, we -- it has a small impact on us in terms of selling equipment because any two networks that we want to share don't tend to have overcapacity in terms of voice, for example.

That wouldn't be smart to build a huge overcapacity, which means that you will -- the major saving is that you can reduce down to one site into one of everything that is site related.

Whereas, the radio equipment, for example, that will be needed as it was held by both parties.

So that wouldn't be a big change.

Of course, that could be in less dense areas, and so on, where you could get away with less equipment.

But these effects are marginal, so I wouldn't say it matters so much from equipment sales point of view.

But it does matter a lot for in terms of sharing sites, and all the costs related to that.

It is, however, also a bit difficult with sites with network sharing, because when you go into especially multimedia and all that, what is it that triggers what kind of an expansion, and who are going to pay for what expansions?

And which business case is the one you want to drive?

Who wants to do more of a mobile broadband early roll-out and be first, and others want to be second and go slower?

So we have -- there is a lot of interest in network sharing, but it's also more hesitation among those that actually share.

There are several of them are trying to get out of the arrangement.

That doesn't mean that there aren't going to be successful cases, but they need some serious consideration I would say.

Lots of interest, but not very much concrete deals, as we see it yet, except the one we see in U.K.

I'll hand over -- is that fine with you or --?

Yes thanks [inaudible]

Then I'll let Karl --

The selling expenses are up higher than the 8% growth in sales.

And the reason for that is that you might have, between quarters, fluctuation.

And this is a reflection I think of the high activity that we having in a lot of markets with driving cost and a lot of pre-sales activities.

And this will go back to normal patterns over time.

It's a little bit unusual quarter.

Okay, thank you.

Can I just have a quick follow-up on TD-SCDMA?

You were mentioning China Mobile having extensive tests there?

Can you tell us what is your position on that technology, and to what extent you would be involved in that?

Thanks.

What we do in --

[Inaudible]

Yes?

On TD -- TD-SCDMA.

Yes, TD-SCDMA.

No, what -- I mean it's quite clear, and I think everybody understands, and we've said it a few times, that TD-SCDMA will play its role in China.

They want to build up their Chinese standard [to get roamer], IPR's and so on, and competence.

It is hard to see that that would play any bigger role as TSM has a much more natural migration over to wideband CDMA's.

So, once they go for building up 3G, I think we will see wideband as we have expected, although we [can't] always expect it to happen sooner than it does.

On TD-SCDMA, we are -- we got awarded a smaller piece [of it], the only foreigner that actually that got that.

This is a trial system in eight cities and, after that trial, we will see more what happens to it.

As time has gone by we have actually done more in that field, so we start to be fairly well equipped should the time come and there should be interest.

It's because it's a standard with much lesser economies of scale you can't be that -- it's not going to be -- operators will have to pay more money for the equipment simply because there is those effects.

And if the prices are good we can participate.

It's still going to be a bit of sidetrack for us in China.

Okay, thank you very much.

Thank you.

We've got a question now from Stuart Jeffrey from Lehman Brothers.

Please go ahead.

Thank you very much.

I've got a question on margins.

If we strip out Sony Ericsson and go back to last year, we started the year at 15% margins.

And part of the explanation for that was the integration of Marconi and also some [of the] lower marginal services contracts [muchson].

And, as those faded out, so the margins improved as you went through 2006.

And my question now is, as we look at the start of 2007, margins in Q1 are only about 40 basis points higher than they were in Q1 last year, so is there anything unusual suppressing margins in Q1 of this year?

And are there any specific drivers, such as we had last year that will give us that margin uplift as we go through the year?

Or is it really revenue determined, revenue driven, that gives us the margin upside on a sequential basis?

Well, I mean, first of all, we have got the effects out of the Marconi restructuring as we expected, as we have said.

So that has had its positive effect on the margins.

And let me first say, so we don't read too much into particular numbers because there are, will always be, reasons for margins going one way or the other, a little bit up or down between quarters.

But, still, also the quite substantial, if you will remember, market networks outside U.S.

growing by 14%, that is clearly above market growth, as you all understand.

A lot of that is market share driven.

And when we grow market share it will always involve, not that we go out and bargain with the prices and such, but when an operator is interested in looking at a change-out situation and so on, it will always involve some upfront cost and re-changings and equipment and so on.

And that has its effect.

And it's obviously a little bit the same with -- on the services side where growth remains very high.

So even if you get effect, expected effects, in the old contracts you start up new ones as well, so I think that is probably the bulk of the explanation.

So, just to explain it, is there a sense that there's perhaps a higher level of swap-outs going on in Q1 this year than [since those] last year?

Yes, I mean 14% networks growth outside U.S.

is clearly more than we've -- clearly higher market share driven than we've seen before.

Okay, thank you.

Thank you.

We've got a question now from Tim Boddy from Goldman Sachs.

Please go ahead, sir.

Yes, thanks very much.

Just to touch on those share gains, obviously as your competitors finish their process of consolidation, or begin to make traction, we've started to see some contract wins, particularly Alcatel-Lucent, and Nokia Siemens maybe are a bit further behind.

But how durable do you think your market share gains are?

Can you see them stretching out into 2008?

Or, are we already seeing the first signs of more competitiveness in the market, as your competitor who've merged start to use some of those synergies to improve their market position?

Thank you.

Well, I -- first of all, we should remember that we have picked up market share I think all the years since 2004.

So, in that sense, 2006 was not unique.

2007 maybe, but I -- you can't draw the conclusion so much one-to-one and say we had more market share gains in Q1 and that was because of the mergers.

There are many reasons behind why you can win market share, but your explanation [isn't] a significant one.

I think it is hard to speculate.

We still think that even beyond the mergers we think we have a healthier, somewhat healthier margins, with stronger, more long-term players that have invested tremendously for building a long-term, successful business.

I think it was more unhealthy a couple of years ago when you had many small ones that fought quite desperately for a single contract.

So I think that we look forward to a more healthy and well-balanced market.

What we are keen on doing here is build as much strength as we ever can.

And I think we're doing it well, so we can continue to be strong leaders here.

You're not seeing any indication that some of these players are coming back to market more aggressively now they've got some synergies to help them with their pricing?

I -- I mean I think they have fully paid for those synergies, so they need the synergies to [withstand the business] that they made, but -- the deals that they made.

But I'm not sure that -- I'm not sure what you particularly are thinking about?

Do you have any particular examples you want to share with us?

Or --?

No, it was just interesting.

You might take Alcatel-Lucent winning at SFR or in Softbank in Japan.

It just seems there's a little bit more aggression, but I could be wrong.

It's [as a far as home turf] for them, so I -- that I think they -- is very low.

Because Softbank, I'm guess, you may be referred to their Indoor Solution, is that [the] --?

Yes.

[Inaudible] No, but I mean we remember that as we are still, if we have a market share of 35, 40%, we would still [lose the bulk of] business in the world, if you look at that way.

Yes.

No, very good.

Thank you.

Thank you.

We've got a question now from Per Lindberg from [DKIB].

Please go ahead.

Yes, thank you very much.

I would like to hear your perspective on the market environment because, from your report today, as well as Nokia Siemens, Alcatel-Lucent, one can easily discern not only that you are gaining market share at their expense, but also, quite enlighteningly, that the margin difference between you and the rest is expanding.

And also for the Network division, clearly.

Could you comment on that and how you see the situation progressing?

Have you discerned any change in the pricing environment that could lead to your competitors catching up in terms of the margins later on, i.e.

that it would be in their specific interest to behave in such a manner?

I think we, what have said a couple of times is that we saw more desperation back in 2005 in the deal-makings then, before the merger took place.

And, of course, that penetrates through in terms of sales into 2006, at least in the beginning of the year.

That is not really there as much.

I don't think that we -- we cannot necessarily see -- I mean their deterioration on margins I think is something one has to ask them about.

It's not easy to see why it happens from our side.

But I think, also, in this whole situation, that coming back to what this is all about, being a partner and vendor for a 10-year, 15-year perspective with operators, I think our position in that sense has improved over the last periods where we are a fairly safe bet.

Okay.

Thank you very much.

Thank you.

We've got a question now from Matthew Hoffman from Cowen and Co.

Please go ahead.

Yes, hello.

Karl-Henrik, it looks like North America was a significant delta, negative delta, on the quarter, but [I think you have] recently indicated it added a 2.5m new MTS subs.

And, based on what we're seeing in [the chain, now 3G's are much larger part of the handset] [inaudible] than it was.

So, with a singular wind-down [at] strategic review on the network deployment side of the vendors there, do you expect to see some sort of spending increase [taken] in 2Q?

And, if so, do you see any shake-up with regard to the market share picture [that account]?

Thanks.

Well I think it's difficult to have opinions in that short time-frame, but it was clearly encouraging to read what they wrote in the report.

And, obviously, that is what the -- [that all the sellers saying] to us in our own business meetings with them.

But it was interesting that they wrote about it.

I mean there is a lot of excitement, and obviously that should eventually lead to such effects.

But, I mean a first roll-out will always create some capacity that will hold up for a while.

But it is encouraging to see the trends, and it is so in also among the other competitors in U.S.

The mobile broadband business is clearly picking up and it's quite a lot of exciting things happening.

Okay, and in that vein, I know you'll give the book-to-bill, but can you comment on the 1.3 book-to-bill that Alcatel-Lucent had in the -- just indicated in their earnings release?

Is Ericsson seeing any sort of trend along those lines?

I think it's, again, we shouldn't comment too much on competitors here.

[The] -- but I think it's well known that Lucent has always, and everybody does it their way, they've often packaged up a lot of business that they have, and especially with their American customers in bigger framework deals.

I mean we are doing the same thing at times with our larger customers that you put a big frame contract, then it's up to every vendor how much you want to publish of that.

But it's -- so I think it's hard to comment.

I don't think that is necessarily reflecting an activity [never].

Okay, great.

Thanks.

Thank you.

We've got a question now from Edward Snyder from Charter Equity Research.

Please go ahead.

Yes, a couple.

If I could go back and touch on the Sony Ericsson issue, back to the point if you take out Sony Ericsson's contribution year-over-year, you have only moved up 40 basis points.

But, more troubling, if you, as you've pointed out, they're moving more into the low-end handsets, which is clearly pushing down their ASP and will probably effect margins.

Is that factored into your growth prospects for EPS in the coming year?

And, then, to your other point where you're talking about a tripling of data traffic in a lot of the broadband networks.

If you look at Vodafone's results, even though they have grown in this regard, you're still only talking about less than [6%] of their ARPU is coming from non-messaging data several years after deployment of 3G.

So, even though the units or the packets that you're seeing traveling to these networks may be increasing, is it a little bit misleading?

Isn't the value of the growth much lower than that?

You're surely not seeing traction in some of the European carriers?

Well, first when it comes to ASP, I think when it comes to Sony Ericsson and so on, their ASP is moving a bit up and down, depending on how they introduce new phones.

They always introduce new phones at a certain price level, and then that comes down over the lifetime of that phone, matched by cost cuts, so they have stable margins during that period.

If, then, they have more introductions of new phones or less, that moves [the] ASP a bit.

The other reason for the ASP to move is -- and then, when that moves it doesn't really impact margins.

The other reason for the ASP to move down is because more success in the [entry] segment.

But, as you see, the margins are stable.

And Sony Ericsson does not have an ambition to go in and make a major attack all over the entry segment.

But, actually, gradually move down into the upper part of the entry segment and move down and see where there are profitable business to make.

Because, there is always a price premium to be captured in every subs segment for a more exciting phone.

And, so far, that has worked well.

The question whether we have included that in our ASP guidance, we haven't guided anything on ASP, so that I have really no comment to.

But I must say that we are -- we're quite confident [and] on what Sony Ericsson is doing.

They have been able to leverage their skills in doing attractive phones so far, and we're quite optimistic what they can do.

When it comes to Vodafone and their data, I think it's actually an interesting comment you make, because -- and, first of all, we should remember that 3G has been around for quite a while.

But 384 kilobytes per second doesn't really -- is not a basis for an exciting multimedia service.

So one really needs to look at it from the time they upgraded to HSPA, and that is when you see the traffic increases kick in.

The aspect you bring in is how do they translate traffic increases into revenue?

That's another discussion.

And, of course, there are operators out there, carriers that offer a flat rate.

And, then, somebody starts to pump YouTube through the networks, then you get a lot of traffic increase that requires networks expansion.

It doesn't mean revenue for the operator.

So, here, I think we are on an early learning curve also, how the -- how should the carriers actually set up their business models and charge for different services?

That's another theme.

But it's the traffic growth that drives the expansions on networks.

But would you agree that it's got to be necessary for the carriers to actually derive substantial value to this in order to pay the CapEx, to expand the networks?

They're not going to throw additional funds at a network that they're not getting any return on, correct?

Well that's the same on fixed and mobile.

That's the same thing.

But I actually do believe that we have entered into a phase.

We have many carriers have come [out there] and we have been used to offer Internet at a flat rate.

And it's the same thing on the fixed side.

That is easy to do when the data services are not very demanding.

But then when you start to [run], like voice-over IP, it's a terribly demanding application that has to come through at real-time and so on, and you start to have IPTV and so on.

So, business models will be developed and go hand-in-hand with technology developments.

Thank you.

Operator, one last question please.

Okay.

We've got a question from Ed Bell from Cazenove.

Please go ahead.

Yes, hello there.

Thanks for taking my question.

Just in terms of your comment earlier.

You made a point that market shares were having some -- market share gains were having some margin impact.

Can you give an indication of what kind of margin impact you would consider to be acceptable to grow market share, to make the most of the current situation with your competitors?

Are we talking about 100 basis points, 200 points?

And a second question on the provision line.

We've seen that line falling sharply for about 18 months.

When can we expect to see Ericsson report stable provisions quarter-on-quarter and stable growth margins?

Is that going to happen at some point this year, or will we have to wait till 2008?

Thanks very much.

Well, if we start with the market share gain, this is not something that -- that we'll look at case by case and customer by customer.

You could have a customer that you know is going to do hefty investments for the next five years.

Then, it's of course quite interesting and you can stretch quite far to go in and create that growth platform.

You have other operators, where, that will love you to come in and take over as a prime supplier with where there's [local cost], but [it's lump side] and then you're not interested at all.

So I think you have to look at the business case customer by customer, situation by situation.

But I mean there are some pretty exciting opportunities in many situations where you get in and you create the platform for many years of good relationship.

So you're very happy with a one-year margin impact to make the most of the current situation?

Well I don't think it's easy to make a guideline of that time.

But I don't think neither we or you would make a different analysis in that situation.

I think you're sitting down and say is this going to drive profitable business for us?

Then, of course, it is something we should do.

If it's not we don't go into it.

So, and I think one has to be also -- we have learned that you cannot drive market share gain or swaps by throwing money at the customer.

That doesn't work.

It has to start with the customer that he feels that I'm not sure I have a reliable partner here, or that I have a partner that will be a good partner for the future.

And, therefore, I'm interested because, either way, even if you compensate him in many ways he will still have disruptions in his networks and so on.

So he has to be quite motivated to do the change.

And then it's a -- you need to sit down and see what are we willing to do [and change out] cost and so on?

And then, of course, the beauty comes in [the] over time then.

And the provision question?

Yes, when it comes to provisions, there are different kinds of provisions, and we need to understand that.

And we did a major restructuring, as you know, in 2003, that still have provisions that are being consumed by coming cost.

And it's the same thing when we did the Marconi and the career change program, then we took a reserve, that everybody knows, and then we're consuming that as we go on.

Then, when it comes to the normal provisions, besides that extraordinary provision, they are just following the normal developments of business.

But this is an expertise field for Karl, who should maybe add something.

[No], and I think in the Annual Report on [Note C18], we have given some sort of indication how the utilization of the provisions will end up during the year.

And we see no reason to change that right now.

And you have to understand, like Carl-Henric said here, they are extraordinary, but it's also related a lot to the big projects.

It's not a fixed percentage over sales or out of sales.

It's moving, depending on the certain way how you see the situation at every end of every quarter every month.

So you can never have it as stable because, for example, warranties might go up or warranties might go down, depending on the how well our products are performing in the customer networks.

Okay, when would you expect it to start going up?

I cannot tell you that because that's depending on how we see the business situation.

Okay, thanks very much.

That concludes the question and answer session today.

At this time I would like to transfer the conference back over to you for any additional or closing remarks.

Thank you.

Thank you, Operator.

And before we finish today I would like to remind you that our next Management Briefing will be at our Capital Markets day here in Stockholm on May 9.

Agenda and registration information is available on our website, and I encourage you to sign up if you want to participate.

With that, I'd like to say if you have any more questions about the Interim Report, don't hesitate to give us a call.

And we'll see you on May 9.

Thank you and goodbye.

That will conclude today's conference, ladies and gentlemen.

Thank you for your participation and have a good day.

You may now disconnect.