Telefonaktiebolaget LM Ericsson (ERIC) 2007 Q2 法說會逐字稿

Welcome to Ericsson's analyst and media conference call for their second quarter report.

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

(OPERATOR INSTRUCTIONS).

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

Mr.

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

Thank you, Operator.

Hi, everyone.

This is Gary Pinkham.

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 may know, the actual results may be different for a number of reasons, and we urge you to consider any 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 and plans going forward.

Carl-Henric?

Hello, everybody.

Let's get started here.

We had a pretty interesting and eventful and exciting quarter.

We passed 3b subscribers, subscriptions in the world, which is obviously a milestone for anybody in this industry.

We see accelerating data traffic.

In fact, if we look, particularly in Sweden, we have had a quadrupling of data traffic over the last 90 days.

We have had a solid performance ourselves, 8% growth with stable margins, still with the dollar decline hitting us, and I'll come back to that.

But we have continued to take market share in basically all our important areas.

You will also see, and I'll come back to that when we talk through the regions, how we get some fluctuations because of large project completions.

If we turn the page and go to the success of mobile broadband, that's pretty exciting.

Today, mobile broadband is becoming part of our daily lives and it will, over time, it will exceed fixed broadband.

We have in Sweden an interesting example here, where the 3G cards sold by Telia exceeded every other mobile device in the month of June.

You can hardly open a newspaper without reading interviews with people that are using mobile broadband, or reporting from their summerhouses or sailing boats, or what-have-you.

164 networks worldwide today, 117 in HSPA, up to 3.6 megabits being upgraded right now to 7.2.

We are in the vast majority of the HSPA networks, not just in mature markets.

Wideband CDMA is now in 73 countries around the world and growing quickly.

This will obviously have a huge effect over time on how to close the digital divide, as many people will experience the Internet over a mobile phone the first time and maybe always.

So this is a lot about Internet, any time, any way.

And in that context, devices that come out now, and services that are being introduced, are very much web-centric.

This is what many of us talk about Web 2.0, web-centric devices.

It's much about to how to get to Internet and how to use the Internet.

One button search, or one button clicks for any kind of service, I think is extremely important when it comes to handsets.

And we show on a chart here what happened in Vodafone KK's network in Japan when it was sold to Softbank, which is also Yahoo in Japan, where the first step -- thing did was to introduce shortcuts into Yahoo, and the second step was to introduce a one-button click handset.

And, rather quickly, searches was up 50-fold.

A lot about user-generated content.

This is a different development than the industry thought some years ago.

We have as much demand for up-link as down-link.

HSPA is really a prerequisite.

If you don't have fast networks, it doesn't really fly.

A lot of, of course, business development around business models, how to charge for data and drive data revenues for the operators.

But, all in all, an exciting development.

If we go into the financial highlights, we -- as I said, we were 8% up.

2% of that was acquired, 6% was organic.

To be seen in light of an 8 -- 9% dollar decline year over year.

Half our sales is in dollars.

Obviously there isn't a pull-through of all that, because some of this is quoted at different times and adjusted for currency fluctuations.

But we would clearly have been into double-digit numbers had we had a stable U.S.

dollar.

The gross margin was stable sequentially, up 0.4% from last year.

The operating margin, at 19.4%, is up 1% year over year, and it's up 0.9% sequentially when we look away from Sony Ericsson.

And we need to follow the margins ex Sony Ericsson here, as they -- we do with the equity accounting, so to understand Ericsson's underlying performance.

If we look at the operating income, SEK9.3b in the quarter, SEK1b up.

That is 12% increase year over year.

This is also, as I think you've read in the report, we had SEK0.1b negative impact on the P&L from net provisions.

Operating cash flow was SEK4.2b, to be compared to SEK0.2b last year.

This is an area of a lot of focus for us.

We continue to see faster-growing turnkey projects in emerging markets.

But clearly a lot of focus from the Company on this matter, and we expect the cash flow generation to continue to improve.

EPS-wise, we are at SEK0.40 versus SEK0.36 last year, which is 11% up.

If we then look at the different segments, Networks grew from -- grew with 7%, a stable growth, and increasing margins, actually, from 17% to 19%.

Also quite encouraging is that we grew faster now in fixed networks than we did in mobile networks.

So far, very much driven by transmission projects -- products, transmission -- they are also from Marconi.

Over time we will see growth also there driven by broadband -- IP broadband.

And we had a breakthrough on IP broadband with AT&T in the quarter, with an order there for their big fiber-to-the-home rollout.

Obviously this was an important project as such.

It will be fairly large over time here.

But it was also a vote of confidence on us as a supplier, as they're seeking a strong second parallel supplier for Alcatel-Lucent there.

We've had record GSM volumes.

We have delivered our millionth radio base station.

This is an area where it's about technology leadership, to be in the forefront or to be the preferred partner.

But it's also a lot with scale and operational excellence, and we are gaining market share every quarter here.

Professional Services, so the 11% growth, 14% in local currency, which is more reflecting the activity level.

Margins are staying stable, 15% sequentially here.

Managed Services is up 24% in local currencies.

Still 11 new deals in the quarter that are not yet in the numbers, and actually also several deals in the first quarter, including the Vodafone [start-up] management, and deals in Holland, Belgium that are also in the quarter.

So a pretty good outlook there for coming quarters.

We have in Multimedia, as you have already seen, we had a slower quarter.

This was very much due to a couple of delayed projects in prepayment.

And as we said also in the first quarter, performance in Multimedia will vary between quarters.

It's a segment in its early build-up and it's fairly large projects versus the relative size of Multimedia.

This is also an area with more software-intensive products and solutions, which means that downfall on the top line, actually, has a pretty big effect on the bottom line.

But the overall outlook is stable and exciting for Multimedia.

We have acquired Mobeon, Tandberg and Drutt.

Tandberg is consolidated since May.

LHS is the world leader in post-billing.

We have put in a public offer there which, together with our leading position in prepaid builds a foundation for leadership in converged charging, which is happening now.

If we look at the regional update, we start off with Europe.

That had some encouraging growth in the first quarter that -- where we had effects here in the second quarter from consolidation talks in Italy and in the U.K.

I think we could very well see several consolidation initiatives in Europe for the years to come.

We have 40/50 operators in Europe, versus 4 or 5 in the U.S.

And such consolidations are basically good, we think, for the industry, creating stronger and fewer operators.

But whenever such talks happen, it tends to put on hold to investment, although the need for radio capacity and telecom equipment as such isn't affected really, long term.

We have strong accelerating data traffic.

We have the same bottlenecks in transmission that we've talked about.

We're starting to see some early investments also on the radio side.

A lot of management services discussions, and several of these you know of, since we have disclosed them.

But it was a particular quarter with a 0% growth.

If we then go to the CEMA region, we had the same 0% growth, which is more -- which is not reflecting the activity in the region at all.

There is a lot of high -- a lot of activities in -- throughout the region, with the exception of Russia that is down now since a lot of build-out has been made for 2G.

They, on the other hand, are now preparing for 3G rollout, several of the operators.

But, generally, lots of activities, lots of large projects.

Africa is at 140m subscribers, a potential which is up by double from only a year ago, 500m potential here.

So this is more fluctuations between quarters due to completion of larger projects.

If we then go to Asia, Asia was up 32%, continues growing strongly, lots of activities in many markets.

Japan continues, where we are prime supplier in several networks.

Bangladesh, Indonesia, we could mention more countries there.

India is particularly strong.

We just received, as you've all seen, the $2b Bharti deal, US$2b Bharti deal.

And BSNL, after lots of delaying matters and decision -- bureaucracy there, seems to be in its final making, and I think we will get clearance there very soon.

And we are well-positioned there.

We won both the commercial and technical evaluation.

We have continued strong growth in China.

The 3G -- Chinese 3G trials is ongoing and will not be concluded before year-end.

So any 3G decisions are not likely this year, but the strong subscriber growth of 6m, both in India, for that matter, and in China, continues and drives expansion needs in the marketplace.

If we then go to Americas, starting off in Latin America, we predicted the turnaround in Q1.

It is happening.

We are 7% up, continued build-out for 2G networks through the continent, but also starting 3G rollouts in many markets.

And services -- 3G services have already launched in Chile and Argentina.

This is also now an area of growing interest for managed services.

And then finally, the U.S.

North America is now 18% down, which is an improvement from the 42% that we had in the first quarter.

And, as we said, we will continue to close the gap as we go through the year, partly because of easier numbers to meet from last year and partly because more activities.

We have secured the IP broadband agreement with AT&T, as we said.

We will see little of it this year but it will gradually start.

And, as I said, it will be fairly large over time.

Cingular is about to accelerate their 3G build-out.

It will still, however, take time before it comes through to invoicing, so it's doubtful how much we will see of it this year, but their ambitions for next year are quite much up.

We have also strengthened our position here, more than probably anywhere else, through the acquisitions of Redback and Tandberg and Entrisphere.

So a positive trend in North America.

If we just make a very quick run through of the acquisitions, where we are, we have now completed everything around Marconi.

The last piece was the supply chain changes and those are done and the integration is complete.

And, as I said, we also had increased growth there, which was encouraging.

Redback, we have aligned on the supply side with Ericsson, which means that Redback can leverage the Ericsson supply agreements with better purchasing conditions there.

And we are in the phase of aligning the sales channels, which is a matter of switching from their old sales channels to Ericsson's, and build up scale and competence within the Ericsson market unit.

But we've already secured several contracts in combination, where probably Redback wouldn't have won them alone before.

Entrisphere, I've said -- talked about AT&T there.

We've also had other GPON contracts outside the U.S.

Tandberg is consolidated from May, and obviously since only a few months little to report, but they are certainly an exciting add-on to the Company.

Mobeon and Drutt have both been acquired and, in fact, integrated, since that is a simple thing to do.

Both of these smaller companies have already been part of our offering and our competence, so they are basically already in place.

The LHS public offer has been made.

We have got over 75% acceptance, which is important here.

On Sony Ericsson, Sony Ericsson we are 59% up in the second quarter to 25m phones year over year.

This is an encouraging development.

Not only is Sony Ericsson enjoying a good position in the mid to high level of the market, but we're also expanding into the entry segment, but seeking there premium positions in the various sub-segments and leveraging our strengths on the Walkman and the Cybershot phones.

And this is, so far, successful.

We have an ASP.

That of course comes down with this changed product mix, but we're holding up our margins well.

So if we look at the sales were up 37% to EUR3.1b.

Net income before tax is up 55%.

That is down some EUR30m, from EUR360m to EUR327m.

This is basically the effect of increased parent royalties, partly because we're aligning more with royalty payments we have to other external parties, partly because we pay more royalties than Sony Ericsson through Sony, because of the use of their Cybershot and their Walkman brands.

We have continued to gain market share.

We're now at 9.6% in units, and if you compare it in value, it's better than that.

And we're not too far away in value from where Motorola and Samsung actually is.

So when we look at the outlook for the year, we haven't changed our outlook, which is to reflect where we see business activities around the world.

We continue to believe in mid-single-digit growth and we continue to see good growth in services.

So, from an outlook perspective, market conditions around the world unchanged and we are well positioned to continue to take market share there.

So I will leave it to Karl to make financial comments.

Good afternoon, good morning, ladies and gentlemen.

If I start with my first slide, I would like to say that Carl-Henric said, and I think, it has been a very solid performance, and we have some encouraging margin development.

Growing sales by 8%.

We also have been able to increase both the operating margin as well as the EBITDA margin, both sequentially as well as year over year.

The operating margin, both the EBITDA and the operating margin excluding SEMC, Sony Ericsson, has increased.

And I think that's a good sign that operational excellence is paying off.

If we then take the next slide, income after financial items has increased, year over year, 12%.

The tax rate was slightly higher in this quarter compared to the previous.

And the reason for that is that we have a slightly different distribution of where we're making the money in this quarter.

Earnings per share, up 11%.

And the equity ratio is down by 2.2%, and the reason for that is that we have made a dividend of SEK8b, as well as we have acquired goodwill and intangible assets for about SEK9b, explaining the slightly lower equity ratio.

And if we then go to the cash flow analysis here, I would like to explain a little bit what has happened in the quarter, compared to what happened in the first quarter.

In Q1, you will remember this slide, we received a prepayment from Sony Ericsson of SEK3.5b, equivalent amount of what we would have received if the dividend were paid in the first quarter.

In this quarter, we have received a dividend from Sony Ericsson but, at the same time, we have also reduced the prepayment of all the services and products being delivered from Ericsson to Sony Ericsson of SEK1.4b.

So the net effect of the Sony Ericsson in our cash flow in the second quarter is SEK1.1b out of the SEK4.2b.

Working capital, excluding the prepayment from Sony Ericsson, has increased to SEK6.4b from SEK4.7b, and it's actually considerably better than a year ago, of SEK1.7b.

And if we go to the next slide, this is a cash conversion analysis, and we managed, in this quarter, to reach a cash conversion of 49%.

And I will be very clear here, in that is included, in the SEK8.8b, is included SEK4.6b of dividends and prepayment from Sony Ericsson.

And we've started fairly well this year with cash conversion, a lot better than last year.

And I would like to remember you all that we believe that the cash conversion will be better this year than last year.

However, we also know that the second half usually has a stronger, and we expect it to continue, cash conversion, because of the way we terminate projects and get final payment, usually linked to a lot of the big operators' budgeting processes.

If we then go to the last slide, operating efficiency trends, we ended with a DSO of 106, one day better than last quarter.

Even though we grow a lot more in markets with longer payment terms, I think here the Ericsson team did a very good job.

Inventory turnover is increasing, both compared to last year and to the first quarter.

We've got a little bit lower on payable days, but we are still above the target of 60.

This is an area where we are working on a long-term target to be able, through operational excellence, to improve the way how we run turnkey projects.

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

Thank you, Karl-Henrik.

Operator, we're ready to start the Q&A session now.

(OPERATOR INSTRUCTIONS).

We will now take our first question today from Edward Snyder from Charter Equity Research.

Please go ahead.

Thank you very much.

If you look at your distribution by geography, it's clear that Western Europe is still looking at a lot of data traffic in terms of accelerating data traffic, but we don't see a commensurate increase in value, it looks as if.

And a similar trend seems to have been working in the U.S., where you've certainly seen a slowdown in rollout of 3G networks for Cingular.

And although their data traffic is starting to pick up, we don't see it bumping up against capacity or the value of that traffic looks like it's not increasing significantly.

I guess the real question is, we've talked about 3G for a while here, and we certainly are seeing an increase in traffic but it doesn't seem to be translated into either capacity requirement increases or necessarily in higher value.

In other words, carriers may be discounting in order to get that traffic.

What's your long-term vision of this?

Is 3G going to generate significantly more revenue for the carriers and that flows through to U.S.

CapEx, or are we going to see an adjustment by the carriers so that they can load the networks, but it's not going to get to the point where we're going to see a lot of follow-on spending?

Well, I think there are differences here between U.S.

and Europe, because Europe, there is an initial coverage that has been done.

And, so far, the network capacities are basically being dimensioned by the voice traffic volumes.

So if voice traffic increases that are driving further expansions.

And voice tariffs in Europe are coming down and traffic is generated, so of course that will happen.

But, underlying, there's a much faster-growing data volume, and here you have unutilized capacity in the network still that will be filled first.

But there will come a moment when data starts to be the dimensioning factor and not voice and that will, of course, happen at different times and different networks.

It has already happened in Japan, as an example, and we've started to see some of it in some markets in Europe.

If you come -- if you look at the U.S., it's a different story, because there we've done initial coverage in some markets.

And there you will see next year accelerating spend again from the carriers, basically just to continue to cover the market.

What we see in Europe, though, is quite some excitement around -- among users of data services, and there's hardly a newspaper where you don't read about it.

It's a real breakthrough here on what people can do on their mobile networks.

But in terms of your business, should we look to minutes of use for voice as an indication of follow-on spending in 3G or, as you've quoted here, should we look at data traffic as the metric?

Well, I think it's -- in the U.S.

it will be coverage for quite a while, actually.

And you will see -- and you can look at the subscriber pick-up in the networks and minutes of use in the networks.

But, over time, clearly it will be data traffic.

And here, if you think about the networks on data, they are fairly little traffic when people are coming from 2G, doing SMS only.

And then you can see when they start to do a YouTube application, or a video application, and almost immediately jams the network.

The data acceleration is pretty dramatic.

But it goes hand-in-hand, obviously, with what kind of services that the operator introduces, and what kind of handsets they are supporting, and so on.

Thank you.

Thank you.

We will move to our next question today, from Francois Duhen from CIC Securities.

Please go ahead.

Hello.

My question would be about gross margin.

Can you share with us whether you believe the 43% level is a sustainable level for the second half of the year or potentially any leverage, based on the volume effects we could expect from H1 to H2?

Well, I think, as we've said several times before, the gross margin as such, we're not guiding precisely on the margins, as you know, but we are quite comfortable with where the margins are.

We will always have the mathematical effect from -- if service businesses is growing much faster than networks.

That will be an automatic dilution, because services have lesser gross margin but also lesser overheads.

But, beside that point, I think we're fairly comfortable with where margins are, but it's a fight every day.

That's hard competition.

And it's unusual that we come spot on, on the previous quarter.

That can always fluctuate up or down half a percent, or a percent or so, as you've seen it do over the last several years.

Okay.

And if we take [your last] position from Redback to Tandberg, when should we expect a very significant increase based -- for that phase, based on the fact that they joined the Ericsson Group?

Well, both of the companies already had good growth before they -- actually strong growth before they joined Ericsson.

And obviously joining Ericsson is an advantage, with the opportunity to accelerate growth but also to maintain it, because they were both coming to such situations that it became difficult for them to drive a $300 or $400 company in hundreds of markets.

It simply doesn't fly.

So they needed to join a worldwide organization.

These are companies that run with high growth but obviously, when you compare $400m or so to the whole of Ericsson, it takes a while before it has a major impact on Ericsson from a revenue point of view, but from a total offering it's strengthening us considerably.

Okay.

Thanks.

Thank you.

Our next question comes from Alexandre Peterc from Exane BNP Paribas.

Please go ahead.

Yes.

Hi.

I would like to ask a question regarding the royalties paid by Sony Ericsson to Sony.

I'd like to know what exactly your take was on that.

We haven't exactly been warned of that happening beforehand, and so I was wondering how these negotiations with Sony go.

Is Sony going to stop here with the royalties, or would they increase if Sony Ericsson is even more successful with Sony brands?

Maybe also comment on whether, with the PSP phone coming out at some point, would that also be subject to similar royalties?

Just a little bit of color on that.

Thank you.

Well, I can start off there, and Karl has been -- are the one that is in contact with Sony Ericsson, his colleague in Sony, in dealing with these matters.

But principally, when we started up Sony Ericsson, we were charging somewhat less for our technologies than they were for their brands, and so on, than maybe prevailing market conditions would call for.

This was a unit that was making basically losses, and we're making some -- they are still small, but we are just making some small modifications to come better in line with other external partnerships we have, and that has been the whole idea.

There is another element, and that is the royalties that Sony Ericsson is paying for, Cybershot brands and Walkman brands and so on, they will accelerate with those sales successes.

I think it's also from the Sony side very clear in the agreement when we signed it that it was kind of a step-up function.

And also it's important for Sony Ericsson to pay for, when they use a brand, as Carl-Henric said, that is successful, as well as pay when they use radio technology and IPRs that's coming from Ericsson, that they pay for it, so it's not for free.

And that has also to not only that it's important, but it's also for tax reasons.

Okay.

But was that predetermined, or did Sony come back to you and say, hey, we would like to charge more for these very successful brands?

It's a little bit pushed by Sony here in the beginning of the year, but it was sort of in its making, but they were more urgent on the matter than we were.

Okay.

Thank you very much.

Thank you.

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

Please go ahead.

Thank you.

In Western Europe, you've talked about the negative impact on telco spend of network-sharing negotiations in the U.K.

The question is, why would this CapEx pause not extend to other European telcos, as they also consider potential network-sharing deals, and hence impact your market growth expectations for Europe, and indeed for the rest of the world for 2007?

Well, I think it is important to understand that our equipment normally is fairly fully leveraged.

If you have a network with 5m subscribers, you have radio capacity and others for 5m subscribers.

So it's not an overcapacity there.

That means that if you merge two networks, you will save that kind of capacity.

So, in the longer run, consolidation of that kind doesn't have a major impact on us.

But remember that, when you deploy a network, more than 85% of the cost is everything around the radio equipment and the telecom equipment.

It's the towers, the land, the batteries, the feeders, the antennas, the air conditioning and all that, and that's where you make the savings.

So the reason why it looks a bit short here is more that, when you go into such a discussion, you're not really sure if you're going to go through with it and around whose network, if you're going to move your base station from your site to another site, and let the one you had go.

All these matters are then suddenly open matters.

And that means that the desire to make further capacity expansions in that phase is slowed down, and basically ends up with a pent-up demand.

If you're not in the particular talks, there is no reason whatsoever, because there is no potential saving on our equipment to be made.

Yes.

Carl-Henric, outside of the U.K., are you seeing an acceleration in terms of negotiations among telcos in terms of network-sharing deals?

Well, the -- basically, in -- with the fragmentation that we have, I think we will see operators search various forms of leveraging synergies and consolidate, whether it's a takeover that Telefonica has made several of, whether it's network sharing, or whether it's managed services, where we would, in the managed services field, we would leverage this capability of letting others into sites.

And you would have almost all of the savings, even through such a deal, but you would still own your own network.

So it will take different forms.

The network-sharing discussion, as such, creates some -- quite a lot of attention here and there.

But one should be aware that that means that two operators are sitting with the same network and have to agree when to expand, and whether one should go into different build-outs in technologies or this and that.

And we see, actually, as much enthusiasm among potential such discussion parties that is.

There is equally frustration among those that do network sharing and are wondering how to find ways out of it.

So I think there are many opinions here.

Okay.

Thank you.

Thank you.

Rod Hall from JP Morgan has our next question.

Yes.

Good morning.

I've got a couple of questions.

The first one is with regard to the faster-growing fixed business.

I'm just wondering, you're giving us the mid-single-digits growth on mobile, and I wonder if, from your point of view, is the fixed market, the portion of it that you're exposed to, growing faster in your expectation than that mobile market?

Well, the -- it is a difference between mobile and fixed in the way that in mobile we tend to deliver the complete network, or at least complete core or radio network, whereas on the fixed side these networks exist and you go through a gradual build-out or migration, which means that different parts of the fixed business is growing faster than other parts.

And the parts that we are in, like the Edge routers from Redback or the IP broadband access or transmission, they are growing faster.

They are parts of the network that are growing faster than what we predict for mobile networks.

We have a smaller position but it's pretty promising.

Okay.

And then also, in Asia, the growth was obviously pretty high this quarter, and the proportion of revenues, if I calculate it right, has moved up pretty significantly, to 35% from about 29% in Q1 or something like that.

Yet your margins are amazingly stable, at 43% at the gross level.

And I guess the question is, there's been, I think, an assumption that the margins in these emerging markets are lower than the Group average in networks, and I wonder if you could just comment on whether that's still a good assumption and give us any further color that you might be able to on that.

We have repeatedly got the question whether margins are lower in emerging markets, and we always state the same, that we don't -- that it's not, and I hope this proves it.

Right.

And then, lastly, just a boring cash flow question.

Your DSOs are well over target now.

It's the second quarter that you're running high, and I realize that it's still -- you're doing a good job, given the turnkey revenues you're selling.

But is that 90-day target still realistic, given the success that you're having with turnkey?

You should look at it at year-end, because that's a major cash-in period, for various reasons.

But I'll let our cash flow manager talk about it.

Okay.

I would like to say that it is a tough target.

But if you look upon the DSO development last year, we also went up a bit, and it is usually a big flush of cash in the fourth quarter.

But it's a tough target and we are working very hard.

And remember, we have met the target every single year since 2003, when we put it up the first time.

But I'd say this is a tough target.

Okay.

And then there's one last quick one, and that's your -- the cash conversion distribution between 2005 and 2006 is clearly much different, with it being much more back-end weighted in '06.

Which of those two years is '07 likely to be like?

Are we looking at an '06-type year, where we got heavy weighting toward the back-end, or -- I'm just trying to get a feel for what the proportionate split is likely to look like, from your point of view.

It will be back-end loaded.

More like '06?

Yes, but I don't want to be so precise, because then you're going to hang me if it doesn't go exactly that way in any way.

But it's back-end loaded.

Okay.

Okay.

Thank you very much.

Thank you.

We'll move to our next question today, from Matt Hoffman from Cowen.

Please go ahead.

Yes.

Good morning.

It seems like the infrastructure business was more or less in line, maybe a bit short of normal seasonality, but you did maintain margin guidance for the full year.

You also spent a good time here this morning outlining the 2H opportunities, and it seems like you're talking about a back-end-loaded year.

How should we characterize the visibility and how solid those opportunities are?

Are we talking about solid bookings and signed contracts which are driving outlook, or is it more of a forecast?

Then, second, on gross margins, in Q2 they went up without the expected contribution of the Multimedia unit, which is heavy software with high margins.

Does this suggest that pricing in infrastructure is getting better, or is it the cost of sales that is improving?

Thanks -- cost to build that's improving?

Thanks.

The margins there, the cost of sales and so on, that's a constant battle of cost rationalization and pricing in the market, but the total equation hasn't really changed from before.

I would say it's very much the same conditions as before.

A bit of a desperation from a couple of years ago has left the market.

It's somewhat more stability there.

When it comes to the second half, basically what is going to be delivered in the second half is in the books already.

Average lead time for projects is a minimum half a year or so.

At the same time, when we look at the numbers as they come out, whether we are half a billion down or half a billion up, or this and that, creates a lot of discussion, as you know, in the market, and there can still be short-term service orders in the last quarter -- in the last month.

So, on the final numbers, it's not in the making yet.

But, basically, it is in the books.

So I would say that one thing that one maybe should keep in mind is that I think we will have, if we talk about seasonality, probably slightly more like last year, probably a bit back-loaded, as with larger projects tend to have more of completions in the fourth quarter.

But the autumn looks fine.

And in terms of the regions that would give you that sort of contribution, should it be roughly what's -- does the back half look like the front half in terms of where you would expect it to come from?

Thanks.

Well, I think, actually, that we had a bit of an odd situation in the CEMA region.

It doesn't reflect the performance or the activity levels in the region, so that should not stay at that level.

I can always -- Asia is steaming on.

Whether it's going to stay exactly on that level is maybe difficult to predict.

And we should have a bit of a closing in the U.S.

Great.

Thanks.

Thank you.

We'll move to our next question today from Kulbinder Garcha from Credit Suisse.

Please go ahead.

Pardon me.

Our next question comes from Anders [Winberg] from RAM.

Hello.

It's Anders from RAM.

The costs in your P&L have fallen the most.

It's actually the new provisions you made.

You made about 9%, 9%/10%, a few years ago of sales.

Now it's down to 0.2%.

If you could comment a little bit on that?

And second, also if you could explain how other liabilities can be transferred into provisions?

I think you've done a little bit of that this quarter.

Thank you.

Anders, as we have talked a number of times, is that we have consistently, from every quarter since 2000 -- first quarter of 2003, have had net increases in net provisions, of bigger and smaller amounts.

And it's important to remember that the amount of provisions that you put into the balance sheet is reflecting what kind of risks you look forward to.

And right now we are at the level of risk provision that we believe is adequate.

And it has to do also that, during all this period we have introduced in volume 3G, we have gone through a lot of deliveries [huge], so the reason why we have a level of provisions that we feel are adequate.

When it comes to the tax provisions, the movement, it's a classification coming out of Brazil of how you should account for certain, if it is a -- either a liability or a provision.

And we have discussion with the auditors, and they have come to the conclusion that this is a provision and not another liability.

It has to do with indexation of certain items in Brazil.

Okay.

Thanks.

Secondly, on Sony Ericsson, what is -- I understand you got a big prepayment from Ericsson of tax funds.

What is Sony's view of that, that you are getting prepayments, very attractive payment transfers on Ericsson?

Is there any issues or discussions there?

I don't know if you recall the story but it is much more straightforward.

It was -- the total Sony Ericsson dividend is supposed to be paid in the first quarter.

For various reasons Sony asked us to do an exception this year and pay it in the second quarter, through capital redemptions.

And that was fine with us, as long as we get the money flowing the same way.

And it's also, Anders, good to remember now, as Carl-Henric said, in the second quarter it was a dividend.

The remaining part, which is SEK300m to be divided between the two parties, will be in the second half of this year, being paid as a capital redemption.

So this is -- has been a Board decision in Sony Ericsson with all parties included and found a good solution.

Okay.

So on top of the dividends you received you still have received a little bit of prepayment for Ericsson mobile platform, so is that not correct now when we have closed the second quarter?

This is what we said versus the dividend paid of SEK2.5b, we are actually right now SEK1.1b ahead, the payment scheme here.

That's the effect of how the arrangement (technical difficulty).

Okay.

Thanks.

Thank you very much.

We will now move to our question from Kulbinder Garcha from Credit Suisse.

Please go ahead.

Hello.

Can I be heard?

Hello?

Can I be heard?

Please go ahead, Mr.

Garcha.

Yes.

Hi.

It's Kulbinder from Credit Suisse.

Sorry about that.

I've got a couple of questions by region.

First of all, on North America, are you saying that year-on-year declines will lessen, or do you actually expect that region to return to growth?

Because it does seem that Cingular spending levels are very depressed in the first half.

So, my first question is, is your North American going to actually start growing, or is the year-on-year decline simply going to lessen?

The second thing is, in terms of this disruption in Western Europe around network sharing as the carriers decide what to do, is that not a multi-quarter issue?

So shouldn't that affect Western Europe throughout the second half?

And then the third and final question is on pricing.

You've said consistently, I think, for the past six or nine months that the excessive pricing from a few years ago has gone away.

However, most of your major competitors seem to be complaining about the pricing dynamics, specifically identifying Ericsson as the price aggressor.

And there is also BSNL now, where it looks like the price hasn't quite turned out as hopeful as you may have thought six or nine months ago.

So, are you still confident the pricing environment isn't deteriorating, or isn't about to deteriorate over the next 12 to 18 months?

Starting with North America, that is, of course, a good question whether we are just going to close the gap to smaller minuses or whether we are going to make it all the way up to the pluses this year.

I don't think we can actually answer that question precisely, but it's in the reach to go into plus numbers.

Cingular is planning for an acceleration.

It's more doubtful how much they can get things going before year-end that ends up with sales.

But remember that we have lots of other customers in the U.S.

as well.

So we are somewhere there on a -- getting closer and closer to last year's figures, so we may make it over on the plus side.

When it comes to network sharing, remember that the development in the networks continues also during talks, so you end up a sort of pent-up demand.

There is no way that you get away from the spending that you will need to make.

It's only that it's harder to make decisions when you are not really sure, are we going to -- am I going to run your networks, are you going to run my networks, are we going to create a new co, run it outside, a third party.

And what kind of needs do we see, and so on.

So I think it's more sort of put us a bit at a standstill.

It doesn't really affect, long term, build-out on radio equipment, which is the majority of it.

Of course, you can find some combined core networks and so on.

When it comes to the pricing pressure, let me just say a couple of things.

The BSNL, as an example, hasn't moved since the bids were handed in.

And you should be a little bit careful with drawing conclusions on all the information that comes out there.

The different numbers that you can see quoted on us and other bidders, the Minister's ambitions and so on, tend to be basically differences in scope, how much is included and how much is not included.

So far, nothing has really been addressed on pricing issues, and this was the bidding that took place and has been publicly opened.

We do not see that the pricing environment has changed, although remember that it is fierce all the time.

But obviously, if you have smaller scale and lesser capabilities there, you will find that it is tough.

Ericsson is -- we are the leader in terms of both technology leadership and local competence and so on.

So we are not the price aggressor.

We are the one that typically gets a premium and the others price against us.

We know that, in the battle and the shake up that has taken place, there are smaller players that are not coping with the trends, and they are being replaced.

And obviously, with such market share gains that we have, we are typically one that comes in and replaces, and they get disappointed.

But I would say the overall environment is basically constantly fierce.

Okay.

Thanks.

Can I just clarify two things there?

On North America what you are saying is that you are not sure whether for the full year you see growth, but there should be some sort of recovery in the second half.

Is that correct?

Yes.

If we talked quarter on quarter.

Let's say year over year in the second half of the year.

For the full year, we have not come to positive numbers; that's clear.

Okay.

Thank you.

We will now move to our next question today from Mark Power from Redburn Partners.

Please go ahead.

Thanks very much.

I guess it's fairly easy to argue that Ericsson is somewhat using its balance sheet to support sales growth, and possibly even to support reported margins in the near term.

I am just wondering, would you accept that you are using your balance sheet to extent these market share gains?

And crucially, if that's the case, can you give us some confidence that, when you negotiate these large contracts, that the negotiations are done with long-term return on capital and not just margins in mind?

Thanks

Well, I think you are -- I would totally object your view, because that is not the way business is being done.

But it is so that if -- for example, if you take Asia, the Asian region and the same thing with Africa and Middle East, Eastern Europe, these are markets where 10 years ago green fielders started to build their business and were under heavy financing needs.

Customer financing was big, every financial parameter was stretched, which means that there are longer payment terms.

And there is also more turnkey projects, because these operators do not have the local expertise and own competence to do a rollout.

They basically just [don't have enough] to do it, versus Europe and U.S., where we ship the product and come back and install our own stuff.

This is building up working capital needs.

This is not something you negotiate around.

These are prevailing conditions in these markets.

And if growth is stronger in these markets than other markets, then mathematically you get longer payment terms, you get bigger working capital build up.

The question is obviously the other way round.

If we are working now with cash-generating companies like Maxis or Bharti or whatever, and they enjoy longer payment terms than maybe colleagues in Western Europe, can we gradually move them back to pay faster?

Can we align with the rest of the world?

That's the challenge, because nobody gives up one territory.

But the effect it has on the balance sheet is purely because growth is stronger in parts of the world where different market conditions prevail.

So, effectively, you think the returns can improve over time back to where -- what we are used to, I guess, over the good years, 2004/2005?

Yes.

I think clearly that we will over time come to a level where there is balance in growth, so we are invoicing as many turnkey projects as we are building up new ones, and we are gradually going there.

We are also addressing this heavily, because there is still some merit if an operator, say, in Maxis in Malaysia has turned to cash positive but is starting a Greenfield operation in India.

So he's still under financial constraint.

That is not the time you easily go in and change things.

But over time there is no reason that we act as a bank for them if they are cash positive.

So that is something we are pushing very hard.

And I think you will see a positive development, but it's not something where you -- where we send Karl out on a trip in August and he comes back with better conditions.

This is something you have to work very, very consistently through quite a while.

But balance and growth for the rest of the Company and better performance should turn this to a much better development.

Fair enough.

Thanks very much.

Thank you.

We will move to Stuart Jeffrey from Lehman Brothers.

Please go ahead.

Hi there.

Thank you.

I've got a question on wireline.

You say here that wireline growth in the quarter was particularly strong.

And I was hoping you could perhaps elaborate on that a little bit more.

Is that principally existing customers, or is that new customers you are signing up?

And it seems to me that there hasn't been that many press releases with regard to new customers.

So do you still think you can sustain Group average margins in the next couple of years while you build brand new footprint?

Or do you think you need to start investing in lower margins, for example the GPON contract presumably is a low initial upfront margin, but your targets have always been in wireline to have Group average margins?

I think it is in this business, as in the rest of Ericsson's business, that is a mixed bag of everything.

If you look at the GPON contract, it is likely to be not very exciting margins at an initial rollout.

And then, as you go on, it will build margins.

But at the same time you have equally much extensions of transmission, whether it's Medialink from the old Ericsson, or whether it's trunk radio or optical from Marconi, which is -- has margins well in line where Ericsson is.

So I would say it's very much a mixed situation.

This is not different -- besides the new GPON wins, where rollouts have hardly started, this is not a win with new customers; this is basically existing customers.

And in that perspective a lot of the Redback customers are also old Ericsson customers, whether it be at Telefonica or Deutsche Telecom or China Unicom or what have you.

Sorry, just to elaborate, I'm assuming that -- your footprint in wireline has fallen quite a bit over the last few years, and you are looking to expand that footprint.

So I am assuming that the bulk of new contracts going forward over the next couple of years will be brand new footprint, in new parts of the network that you haven't previously been involved with, with that particular operator.

I am presuming that that's going to be significantly lower margin than, say, supplying more optical equipment to BT.

There is an element of that.

That is clear.

But remember that a lot of it is in transmission, not in -- which is a well-known territory for us, and where Marconi and Ericsson from their respective product programs are old suppliers into the networks.

Redback is well known and are working with good margins and so on.

But there are other areas where we are newcomers and we have to show what our capabilities are.

So -- and maybe to a larger extent if we expand or accelerate that growth, but it is not a clear case, but it may be an element of it.

So we shouldn't see margins necessarily deteriorate in wireline in the next couple of years, or next year or so?

No, I wouldn't say so.

Not any significance, anyway.

Thank you.

Thank you.

We'll move to our next question today, from Richard Kramer from Arete Research.

Please go ahead.

Thanks very much.

A couple of questions for each of you.

For Carl-Henri Svanberg, can you help us understand how investors should judge the roughly SEK30b or so you've spent on acquisitions since the start of the year?

It's very difficult, outside of backing out your organic sales, to judge the P&L impact of those acquisitions.

And is it contracts, is it profitability?

How might we understand better the internal rate of return on those sorts of deals?

And also, just more broadly, can you talk about when you expect Ericsson will move towards more of a software mix within its networks business, where we might start to see both gross margins improve, but also more the dynamics of a software company where you have regular release schedules and the profitability fluctuates more by quarter?

And then, for Karl-Henrik Sundstrom, can you just help us understand, since there is no longer disclosure on IPR, what the material impact of 3G royalties might be as 3G becomes a much wider portion of the handset overall market, specifically thinking about settlements like the Samsung deal?

What sort of impact might that have on the P&L longer term?

And maybe if you could help us understand, on the cash flow side, what of the SEK55b of receivables might be sitting in escrow accounts with clients whereby, when you hit certain milestones it's just a matter of releasing the payments that are sitting there, as opposed to renegotiating collection terms?

Thanks.

Well, let me start by your first question of the SEK30b.

Obviously, Marconi is now a company that is -- the integration is behind us.

This was a company with lots of different products for different -- coming from different companies within Marconi, four different companies.

This is fully integrated into Ericsson.

The Marconi products have Group average margins, as was our target, or even slightly better than that.

They are now part of Ericsson.

It is not possible for neither us or anybody else to really follow it, because product had been largely their own products on the broadband side, on the services side, Softswitch has been merged and so on.

But the targets we set have been reached; Group margins and we are back to also better growth.

And they're part of the better growth in fixed, as we reported here in the quarter.

So that's basically how we can talk about Marconi.

When it comes to Tandberg and Redback, these are two relatively smaller companies where we obviously have paid quite high premiums for companies that are doing profit-wise very well.

And we have no reason whatsoever to expect those earnings numbers to come down.

We have rather the opposite opportunity, as we mentioned on Redback, to leverage Ericsson's supply agreements and thereby improve margins, which is in fact already what has started to happen on Redback.

The whole critical pace will be to follow sales for both Redback and for Tandberg, and we will try to guide you through that process.

When it comes to being a more software-oriented company, already now software is a significant part of what we do.

And it's a substantial part of what we do in R&D, that's the bulk of what we do in R&D is software development.

To what extent would we come to a similar situation as Microsoft, where we would have one revision yearly and so on?

That is clearly a dream scenario for us.

Could we get -- it is not really easy to come all that way, because these networks are very complex in the world.

And different operators have different ambitions and seeking different features and so on.

So we won't get there very, very soon, or in the foreseeable future.

But we could certainly find better ways of pay-as-you-grow solutions, and those are in the making, where we don't charge our own fixed or hardware culture.

But we actually have a lower up-front fee, and then you spend more for applications or capabilities of the network that you open up.

That is in its making, not only from us but also our peers Cisco and Nokia and others.

Okay.

Richard, when it comes to IPR, I think it's important to remember that the early phases of IPRs and royalties on 3G that we do sign were higher.

But as volume kicks up, those go down over time.

And you have to remember that our prime drive is to make sure that we have a very competitive IPR portfolio, so that when we do have the cross-licensing agreement that we are obliged to have, when we enter into these [trend] agreements on every standard, is to sit on a better pie than anybody else with more essentials.

That's our -- so that's the main focus.

Then we are also, on top of that, trying to make some money on it.

But we are not trying to maximize that, because we benefit from low IPR fees on the handsets.

But we also would like to make sure that people that using our technology are paying for it.

So, if I explain it, it's a good thing that comes in extra and this Samsung deal doesn't really move the needle for us, but it's good extra money.

But the prime driver is to make sure that the IPR fees on the total -- in the total industry are on a reasonable level, which means that handsets will be -- and devices will be affordable.

Okay.

And on escrow accounts and money sitting in the hands of operators?

First I would have to say it's not in escrow in any way more than -- like a comparison.

In any given point, there is always a couple of billions, depending on the region, where you might argue with a client about if it's due or not due.

And that has to do with -- when you have turnkey you might have bigger arguments, but turnkey is also in regions where you have clients who, for different reasons, are in a start-up phase who also would like to pay as late as possible.

Where you have box deliveries or drop shipments in other -- in some other regions, you might get paid faster.

But it's always a couple of billion, and it varies between quarters depending on where you have a lot of sales in that quarter.

But it can be big money.

Just maybe to be helpful for investors, can you break down the SEK55b of receivables in terms of duration?

What of those are -- effectively have been billed in the past quarter, and what of those are longer term in nature that fall into this category of escrow-type arrangements with clients?

I would like to say they are not escrow per se.

It's where they argue that we haven't fulfilled and we think we have fulfilled.

So -- but I will take that and look into if we consider that going forward.

Okay.

Thank you.

Thank you.

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

Please go ahead.

Yes.

Thanks very much.

I would like perhaps to have your perspective on the growth prospects in many parts of the world, not least India in the wake of this mammoth contract with Bharti and more coming along.

If one just takes that number, the SEK1b per annum, SEK2b over two years, SEK1b compares with approximately SEK20b of Ericsson global mobile network plus professional sales last year, i.e.

this single contract alone is 5%, and that's not an isolated phenomenon, it seems.

Could you shed more light on where you can see bumper changes in terms of this order of business activity?

Not only, of course, in India but China, Brazil with 3G licensing soon coming on stream, Turkey, we understand the wideband CDMA contract in North America.

That I think would be helpful for investors.

Thank you.

Well, I -- it all starts with a strong rollout of new networks, and the growth of subscribers being at 3b and heading for 4.5b or so in the next three years.

I think India is a bit of a special case, because of a not-too-clear rule from the Regulator there, early.

They started their development later than other markets, three, four later than China.

And when you combine that with then a -- with very aggressive operators and a pent-up demand, growth became very, very strong.

And you have three, four operators that are now pushing hard to try to grow faster than one another, BSNL and Reliance and Bharti and also Maxis there and Hatch.

There are several operators, and it's a race of being first.

So that is a little bit unique.

But it is not unique in where it's heading, it's a little bit unique in its speed.

If you look at Africa being at 140m subscribers, that will grow to 500m.

And the importance of mobile telephony there is huge.

So in that sense I would say that emerging markets is steaming on, it's not slowing down.

Maybe that was our last question.

Thank you.

Tim Boddy from Goldman Sachs has our next question.

Yes.

Thanks very much.

Just to finish, I'd like to go back to the very first question, which was around data.

And I just want to clarify that I've understood this correctly.

So you are saying there's two things that need to happen.

First, the operators need to deliver the services to consumers which will drive accelerating data usage; you mentioned YouTube.

And then we need to fill the capacity that has already been built.

And then, after that, we see a demand picking up for your equipment.

Can you kind of dimension for us, even if it's a question of a half a year time period, when we would see that impact Europe?

Are we talking about the first half of '08, the first half of '09?

What's your best guess for when data actually begins, we see that second wave?

Thank you.

Well, I think it is a question that is a bit difficult to answer, because it has -- there are many different answers there.

And you know already about the comment about Japan and the second carriers and so on.

We can see, for example, when in Swedish networks video services being introduced immediately jams transmission.

And that goes on market by market.

And it does -- it is a little bit dependant on how aggressive the operators are pushing the networks.

We are having large network operators in Europe, for example, that are saying, well, we can cope with a lot of growth, but not, of course, if we introduce video or services like that, because then we will immediately need more capacity.

So when are they going to build up?

I don't know.

I think this is a little bit different answers here with different operators.

And it is competition driven.

But it is interesting to see what happens in countries like Japan or Australia or North America, where you have operators pushing each other head-on with new exciting services.

But there is a shift in trend in Europe that is -- lots of new excitement coming here.

And to what extent do you think iPhone could capitalize interest in these services?

I think iPhone is an interesting phenomenon.

There are many things one can say about the iPhone.

It's, of course, for us, from our point of view, maybe we are specialists in our field, but we feel that the iPhone is obviously slow, being a 2G phone, that that is an unfortunate combination with an exciting phone.

But when you look at it, and its ease of use and the excitement that it drives, the incredible excitement, I think that shows a little bit where the market is going to go.

And I can tell you, all the handset vendors and operators, everybody is after the Master.

They have -- they relate to it somehow, either they want it or they want something different.

But they are not sitting there and saying I am going to do nothing.

That's very good.

Thanks.

Operator?

Thank you.

We will now move to Paul Sagawa from Bernstein.

Please go ahead.

Okay.

Thanks.

I got out of the water, because I thought there was only one more question.

A quick one, really.

When you talk to operators around the world, particularly European operators, they have a tendency to talk about CapEx as a percentage of their sales.

And they constantly are sounding a drum beat, oh, this time we are going to be disciplined and we are going to take our CapEx to sales down to 10% or lower.

So if we put the picture out over the next five years, our revenues go up but our CapEx goes down, we deliver this great, great cash flow to our shareholders, etc.

Now, of course, from my view I've heard this kind of discussion from the carriers for a long time, and we haven't really seen them deliver that perspective.

Is it realistic to think about carriers of the future existing on a substantially lower CapEx to sales ratio?

Is there something happening in the efficiency of these networks that would allow that to happen?

Is there something happening in competition amongst carriers that would allow that to happen?

I would love to get your perspective.

Let me first say to the operator here we are trying to come and bring this conference to a close.

You obviously don't hear us.

But this is the last question we are going to take, and then I'm going to let Gary in to finish off the call.

But, on your question, we need to remember that when you roll out a network you have huge costs in land and towers and all that.

Then you can expand your capacity for quite many years without adding towers or land or so on, which means that you can actually see your CapEx come down in percentage while your spending on telecom equipment from us is not affected, could even go up.

If you take Cingular, obviously we are hit by the slowdown in Cingular, but the dramatic savings they are making is from this effect.

Typically, you can double your capacity in a consecutive year with 40% more spending or so.

So keep that in mind.

We also see more of this argumentation, I would say, in Europe where operators have been more focused on cash flow generation.

And I think in this industry when if you compare that to North America or Japan, for example, where lots of investment goes in, in a fight of having the best and most attractive service in the market, and be first to market with services of that kind, it creates very strong operators doing very well.

So I think it's different attitudes around the world.

But there is no magic around this.

It's -- they still need their equipment.

Thank you.

I'll hand over to Gary Pinkham to close this call.

Thank you, Carl-Henric.

Before we finish today, I would like to inform you that our next strategy and technology summit is scheduled for September 11 in London.

Space is limited, so I encourage you to register as soon as possible if you expect to or want to attend.

Agenda and registration information is available on our site shortly.

Regarding our interim report, if you have any more questions, don't hesitate to give us a call.

Thank you.

Thank you.

That will conclude today's conference call.

Thank you for your participation, ladies and gentlemen.