Telefonaktiebolaget LM Ericsson (ERIC) 2007 Q3 法說會逐字稿

Welcome to the Ericsson analyst and media conference call for the third 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.

Mr.

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

Please go ahead, sir.

Thank you, operator, and hello everyone.

Good afternoon.

And welcome to our conference call today.

With me here in Stockholm are our CEO, Carl-Henric Svanberg, and Hans Vestberg, 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, and these statements are based on our current expectations and certain planning assumptions.

The actual results may be different due to a number of factors, as there are risks and uncertainties associated with these planning assumptions.

Therefore, we encourage you to use caution when considering such forward-looking statements.

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

Carl-Henric?

Good afternoon, everybody.

Let me, before I go into the presentation where I will be quite brief because most of the numbers are known, and I will just make a couple of comments as we go through and then we go quickly to the Q&A.

But let me first say that, as you are aware, we announced this morning that Karl Sundstrom stepped down as CFO.

And Karl came to me a couple of days ago and told me that he wanted to step down.

I think we all feel it was -- he was disappointed with the quarter results.

This was totally his own initiative.

We -- to the extent that we could have done better in forecasting or so on, we share that responsibility, all of us, and ultimately me.

But anyway, I could just deal with Karl's decision there.

He has done a great job and been a great friend and colleague through the years I've been here, and for 22 years in Ericsson.

Replacing him is Hans Vestberg who, I think, will do a great job in the position.

Hans has a financial background.

He has done 15 years with Ericsson, of which 10 in financing controller jobs, nine of them in various assignments in different countries around the world.

And the last five years you know very well his achievements in Professional Services.

And he's been there now for almost five years and done a tremendous job and it was time to move on anyway.

And we're now in the selection process of a replacement there.

Karl Sundstrom will -- he's very keen on making sure now that he hands over in a proper way to Hans, so he will be there and support Hans in all he's done and we can only thank Karl for the job that he's done.

The -- if we then go into the results, so let me start by the first slide where we talk about the quarter in short.

These are known numbers.

So we can just conclude that we fell short in Networks, and the rest of the chart is known.

So let's go to the next slide, talking about the business dynamics.

I talked it through, I think, quite well last week so we just want to make sure that we will come back to this one.

The business dynamics are there.

There are swings between various regions, between technologies in businesses, between rollouts and expansions and what have you.

And one of the key learnings we obviously have here is the importance of understanding this for us all, both for us and for you, and we will do our best in guiding you forward there.

We will also think carefully about, and this will be one of Hans' initial tasks here, is to see if there are any early warnings or so on that we can introduce so we can follow the critical high-margin expansions and upgrades even closer than we have done before.

Let me also conclude that there is nothing -- I've got those questions from a couple of colleagues here to you.

We have no words at all about the information systems that we have and so on, and the information or whatever we need is there to be found in the system.

It's more what we have chosen to track and follow.

So we are very comfortable with the reporting system, as such, that we have.

Let me then go to the next slide when it comes to our strategy to gain scale.

I won't elaborate too much on this one, but it is important for the understanding of where we ended up in the quarter.

We have, since the consolidation started in the industry a couple of years ago when, before that consolidation, we had a clear size advantage, scale advantage, especially in the mobile networks and GSM and wideband CDMA.

And this is very critical to us to protect our technology leadership and margins and so on.

So in the turbulence that followed, and since we're also in a process where some of the players are becoming increasingly weaker, so there is an increasing worry among operators on their vendor choices.

And that has led us into a number of discussions of swaps or break-ins, or whatever we call it.

This was actually successful much faster than we anticipated.

We probably got more of an 80% hit ratio in such discussions than the 30% that we expected.

And we are now, in the latest external reports, we're back to the size advantage, scale advantage that we had a few years ago.

And I think this has been very, very important to us.

That also means that, that as one part, but also the fact that there is so much now of rollouts of new networks going on in the world and we have taken a larger market share.

For example, you can go to India, as one example, but you can just as well go to Nigeria or many parts of Africa or other parts of Asia, we have won a larger share.

So, for that reason, the share, the proportion of rollout of new networks, well, it's always full bargaining and tougher competition that had lower margins.

Then when we, at the same time in the quarter, and let's get back to that, but when we in the same time get hit by less upgrades and expansions where the margins are considerably higher, that is of course where we get squeezed.

But don't forget now, when we roll out more new networks, that we are, in fact, building faster than before an installed base for many, many years of profitable development and expansion.

We will continue to see this situation with a high proportion of new network build-outs for quite a -- for several quarters.

And as a result of the reasons I've just said, when it comes to expansions and upgrades, there we had a special situation in Q3.

It's not that we think it's going to bounce back and be back to normal in Q4 or Q1.

We will continue to see lesser than normal because of the mergers that is going on or consolidation or cooperation, network-sharing discussions and so on, in a very fragmented European market.

We think that the effects that we have, although those will go away, those particular discussions, but others may very well occur.

If we then go into the particular Q3 comments, again, on the sales side, we had less capacity upgrades and software sales.

China was down, but that was expected, so there was nothing peculiar with that.

But it's still lumpy invoicing, whereas the build-out, as such, is going very steady.

So it's more the Chinese bureaucracy that plays us, that has its effect here.

So that will continue to vary between quarters.

Of course, also the U.S.

dollar exchange rate has an effect here.

And let me say also on the sales side that, although we don't disclose that, but the sales and orders, as we track it month by month, we were actually well on plan, even a bit ahead of plan in July and August.

So in the middle of September we were still looking at at least a normal third quarter.

The whole slowdown came in September on the upgrades and software.

And although still our assumption is that this is for a more temporary character, and we talk about networks here, all these comments are about networks, we are going to analyze quite carefully here so that there isn't any underlying new trends or anything that we actually are spotting.

But it's only September.

On the margin side, I think everybody has understood.

We have both lower sales and we have also less software.

And that's a pretty significant, of course, bottom-line effect.

We have the shortfall of upgrades and expansions.

We have also more rollouts on new networks.

So all of this, basically, brings us to the conclusion that it's more of a changed business mix rather than a shift in underlying margins in the different businesses.

If we then go to the -- we've done another analysis, to just help you a bit, in comparing Q3 with Q2 and looking at Networks only.

And there we can see how we -- sales was down SEK5b, whereas we would have normal seasonality somewhere SEK2b to SEK3b.

And the operating income was down SEK4b.

And this is obviously because of lower sales.

Everybody understands that.

The part there that is software is of significant importance because it's almost full drop through to the bottom line.

But then in the remaining sales, the total sales for Networks in the quarter, that is a mix shift also within that with further less expansions and upgrades and more network rollouts and building new networks.

There is another comment that is not as significant here that we didn't mention last time and we don't want to add too many things to explaining here, but I think it is important that we do understand that there is an ongoing shift also from old circuit switching to packet core.

And this means that, as we do in every such technology shift, it means that we are basically moving from expansion or upgrade mode to a new rollout because, instead of just adding to an installed base of circuit switches, expanding and so on, we are now rolling out a new network or packet core.

And then, of course, that's a chance for everybody to be there and fight for the new footprint.

So that is an additional comment that I think is important to make.

And I'm sure you recall it from other colleagues in our industry that have reported the same phenomenon.

If we go to the financial highlights, I won't spend too much time there.

Remember when you look at the gross margin, 38.2% for last year, that last year that was affected by the restructuring charge.

So the trailing margin was some 5% higher, so you don't make the wrong comparison there.

If we then go to the next page, we look at the operating income.

That is all known to you.

The cash flow of minus SEK1.6b is affected by lesser earnings, basically.

And we will have -- throughout the year we will have an effect on cash flow basically for the shortfall in earnings.

That gives us a net cash position of SEK11.5b.

And the earnings per share is obviously then already known to you.

If we look at the comments around Mobile Networks, I think I should also be quite brief here, but the shortfall, as such, in sales is very much around U.S.

and countries in Western Europe, primarily U.K.

and Italy.

China I mentioned about.

The mix I mentioned about.

What I think is encouraging here is the good growth in transmission, optical and radio transmission, which is actually right now probably the fastest-growing business we have within Networks, and which was also the rationale for acquiring Marconi.

If we look then at Professional Services, we had an operating margin of 15%.

We said in the earnings call, analysts' call, a quarter ago and later updates, we have said that we may see a pressure on the operating margin because the number of managed services contracts that are being started up in the quarter, still with 50% growth for managed services, we are maintaining the operating margin here as a result of better performance, better than expected performance in basically every area except these new contracts.

If we look at Multimedia, there I will just -- we are around flattish there or breakeven on operating margin, although we had strong growth, 31%.

Here I just want to remind you, and we will come back at a better time and talk more about it, but the bulk of the business is coming from EMP, Tandberg, Service Delivery Platforms, the company that was called Drutt that we acquired, Charging.

This is the majority of sales.

It is growing nicely and is at healthy margins.

Then, in addition to that, we have the new business development areas, IPTV, messaging, IMS and so on.

These are areas with limited sales but fairly substantial R&D activity going on.

And we, as I said, we'll come back and talk more about it.

Multimedia is in an early phase.

We should be aware that sales and margins will vary going forward.

If we then go to the regional update, I said most of it, I think, last time.

So little to say here except that APAC that we are used to see grow very strongly is the effect of the strong decline in China, which is an invoicing phenomena.

Western Europe's growth is primarily -- is all from Managed Services.

Mobile Networks is down in Western Europe.

And when it comes to North America, the catch-up there is basically because we are meeting slower numbers for last year.

The planning assumptions for Q4 remain.

We are not going into an era of predicting sales or margins for quarters to come.

But following the profit warning, we wanted to give you a range so we had something to hold onto, and there is nothing that has changed this range.

If we then go to the next one, which is the outlook for the market, no change for 2007, obviously almost done.

And we are looking forward to see external analysts to conclude where they believe that the market has ended up.

Early expectations for 2008 is that the current market conditions will prevail.

And what do we mean by that?

Well, we do mean that if we take how we see -- how we now foresee the whole 2007 to play out, this is not about Ericsson.

This is about the market.

This is also a year when we've had some disruptions and effects from merger talks and so on.

And we expect a similar year in 2008, similar growth conditions, but also could very well have similar disruptions.

So that's a little bit how we see 2008.

So then if we finish off with a quick comment on our focus going forward now, in view of what we have learned.

Well, obviously we will put focus on improving the analysis of trends and underlying trends and so on, so we make sure that we do capture anything that is going on.

We will also look into our forecasting abilities.

Is it so that we can earlier spot if we have any shortfalls on upgrades and software, for example?

Of course we will do that.

We will also carefully analyze the Q3 result, as such.

We want to make sure that in this shortfall of sales and margins that there is nothing, no underlying trend that we are missing here, and carefully analyze also the sales growth, in the fact that it came so harshly in September.

So it's no indication of something new, then.

The only thing we can conclude so far is that our conclusions have not changed from the day of the profit warning till today.

But we will do more analysis and come back there.

Cash conversion is an obvious area of focus.

We will continue to see Asia and CEMA in being the strongest-growing regions.

And these are regions with turnkey and turnkey is a competitive advantage to us.

So we will grow with that.

But obviously, as we've said before, we will focus very hard on seeing whichever way we can do to improve our cash conversion in the terms and conditions, both for the operators and for our suppliers, but also in our way of processing the projects.

Q3 must be a reminder of the importance of operational excellence.

We will continue to address all processes in the Company, whether it's R&D, whether it's supply, whether it's sales, whether it's services, and I think also information here.

We must also draw conclusions if we are accurate in the way we inform and if we can be faster.

All of this boils down to also with all the market share we have grown.

That -- what we want to do is to leverage our leading position, capitalize on this restored scale advantage and work hard to build a stronger and even better company.

So that is my comments.

And I think we will, from there, we will go to Q&A.

And I have Hans Vestberg here.

I should say that with regards to Hans, Hans is part of our Executive Team now since four or five years.

He has also been part of the core team of a handful of people that initially analyze a situation and then, of course, we broaden it to include lots of people so we capture every underlying trend and thought, which means that Hans knows as much as me about the whole situation, although he is only a few days in thinking about this whole new job and was basically announced this morning.

Please?

We're ready for the first question, operator.

(OPERATOR INSTRUCTIONS).

We will take our first question from Peter Dionisio of Morgan Stanley.

Please go ahead.

Thank you.

Just the first question is if you could just give us your views with respect to the network overcapacity of wireless telcos in Western Europe.

The reason for the question is that is it possible that the capacity upgrades in Europe will take quite some time to return, even if we exclude the impact of M&A among telcos and the network sharing discussions that you have pointed out?

Well, the -- I wouldn't say that there is an overcapacity.

I would rather say that it's fairly loaded networks.

So there is no such conclusion to draw.

What is more important to understand, that if you're sitting on a network with 10,000 base stations and maybe 5m subscribers, and you have another network with 10,000 base stations and 5m subscribers, the only thing that you can be sure of is fairly fully utilized is the radio capacity if you trimmed your network reasonably right.

But the big gains of putting the two networks together, that doesn't lie there.

It lies that you share the towers, the batteries, the supply, power supply, the antennas, the land sites and everything, which is 85% of the cost of the site.

So when you put them together, you will need the capacity from the both networks anyway.

So there is no reason to see that in a shared network that there is a lesser need for radio capacity.

But what happens is in the time of such a discussion, obviously expansions are being put on hold because you don't know when you're going to put the networks together, which sites that's going to survive and which are going to move and so on.

And the same thing when a new owner starts to discuss a takeover of another company.

You typically put such expansions on hold because you can always wait a bit.

So it is more of a delay and that's why we're saying that we will expect it to gradually come back.

But we would also conclude with 40, 50 operators that I don't think we've seen the last merger talks.

Okay.

And just a quick follow-up, Carl-Henric.

When you look at your cost base, are there items there that you think you could cut or adjust to help your margins while you have this current revenue mix?

Well, this is what we call our operational excellence work and that just has to continue.

And we have done that very, very effectively, actually, during the years.

Of course, this is a reminder to push even harder and even further, although at the end of the day it is a bit of a mix in revenue.

It's base stations, more base stations and networks being rolled out in an initial phase at a lower pricing and less setup expansions.

But it doesn't mean that you need a smaller staff because of that.

So whatever we can do, we should have done anyway.

But it's certainly a signal for pushing even harder.

Thank you.

Thank you.

We will now take our next question from Rod Hall of JP Morgan.

Please go ahead.

Yes, hi.

Good afternoon.

Just a couple of questions, one is with regard to Marconi specifically.

I wonder if you could comment on whether Marconi is still breakeven, and I would characterize that as including amortization.

So if you could comment on that, I'd be interested in the answer.

Secondly, on China, I wonder if you could talk about the -- we know you've had the invoicing issues there that you highlighted nine days ago, but if you could also comment on whether there's any perception of market share loss in China, particularly in rural areas, that would be of interest.

And then finally, with regard to the Vodafone/Orange network sharing situation, I wonder if you could talk about your expected future footprint there, whether you expect any changes in your existing footprint if you put those two networks together in the U.K.

Well, let me take then one by one.

Marconi, as you know, is now broken up in many pieces, broadband products, so with broadband products in Ericsson and soft switches for Microsoft and the services contracts are merged and so on, and most of the structural costs are being -- have been taken away.

All of this, we set -- the targets that we have set for where we want to be with earnings and the restructurings and everything we wanted to do is all met.

It is now, in terms of a full Marconi consolidation, that is no longer possible to do.

But it also means that the Marconi products are, on average, as profitable as Ericsson's products.

And from there, of course, we have the intangible write offs and so on.

But this has really proven to be, now that we're sitting here today, a good deal and it's exciting to see the growth of these products now.

When it comes to China, we have not -- we are tracking the market shares down for the decimal basically, quarter by quarter.

And so far we haven't lost any market share in China.

We may come out, as some indications show, about 1% lower probably out of this year than we were last year, but this is almost impossible to say at this point in time.

We -- in China, the Chinese vendors are growing quite significantly from almost nowhere to probably over 20% right now.

The ones that suffer are the weaker players in the industry, but so far we have not suffered.

We are in a good position in China.

And, of course, now it's 2008 will be another GSM year.

Whatever happens to TD-SCDMA, it won't have any meaningful impact on the market, as such.

We are the only international bidder on TD-SCDMA.

And it will be very interesting to see how that standard will evolve.

That will continue to be basically Chinese standard because there isn't spectrum available outside China.

When it comes to Vodafone and Orange, remember now only that when we talk about the consolidation and the network sharing that goes on in the U.K., they were the ones that started.

That started in January, or it became official in January.

But that led basically every operator to sit in various discussions.

So the hold-up situation we have is basically valid for most of the U.K.

We -- I don't really have any comment to your question there.

I think that's not something we should comment on.

But whichever way they end up is any such work will create business opportunities in integrating networks and maybe even running the networks and so on.

So it'll be interesting to follow.

And, Carl-Henric, if I could just follow up on your comments on the fixed networking products, particularly in Europe.

You've obviously talked about a willingness to sacrifice margins on the wireless side to get the footprint because it's worth more in the future, which I think we'd all agree on.

The question is on fixed.

Do you have a similar philosophy when you think about the sort of optical builds that are going on around Europe now and maybe some of the other fixed investment that's going on?

We -- that has not -- it hasn't been a -- the strategic focus on securing or restoring the scale advantage that we've had, that has been a project for Mobile Systems.

That has -- in fixed, we're working in the same way there as we work with everything else, no particular strategy other than that it will be important to, over time, build a stronger position.

And remember, though, that whereas you have a handful of players on the mobile infrastructure network side, it's much more fragmented on the fixed side.

Okay.

Thank you.

Thank you.

We will take our next question from Phil Cusick of Bear Stearns.

Please go ahead.

Hi, guys.

Thanks for taking my question.

I wonder if we could talk first about the commentary you made on the press conference earlier this morning about the first quarter incomes of the network rollout mix and things like that.

You made a comment that sounded like it might be a little bit -- fairly big in the first quarter as well, which I would expect.

But I'm wondering how long this will remain a fairly large part of the Networks business or when things start to normalize.

Is this a couple of quarters or are we talking four to six quarters away before things normalize?

Thanks.

Well, we mustn't forget that when the new rollout of new networks, when that has -- takes a bigger share and thereby dilutes margins, it's not coming with a loss.

So in that sense, if that starts to shrink, it will not help our profit but it will push our margins.

And we just need to understand that effect.

But that was more philosophical.

But when we look at how it is, we will continue to see, I would say, for at least through quarter two we will have effects of a higher proportion of new network rollouts.

And, having said that, where we are in Q3 and 4, of course, that depends on the business development.

So we can make projections.

But what we carry with us here is going to take us through at least to quarter two.

In Q1 it's -- we have a fairly substantial part there.

And as Q1 normally is -- normal seasonality is a bit slower and we may have -- and we think we will still have probably somewhat lesser upgrades.

We could have -- Q1 could basically be a bit of a low point in this cycle, but it may be too early to say.

I see.

So we should think about 4Q not necessarily being a low point in the cycle.

But as your commentary about pulling back from going after market share aggressively, how long is the pipeline that's in place in terms of swap-outs and things like that, understanding that it's a positive margin, but a fairly low margin?

Is this a few quarters along?

And where are we in the cycle of that easing off as well?

That is what I meant with through Q2.

Okay.

Thank you.

Thank you.

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

Please go ahead.

Yes, thank you.

I wanted to ask about the idea of this being, if you like, just a change in mix as opposed to a structural change in the market dynamic.

It just seems to me that there is, [hard to say it], it's structural.

But I think what I've been surprised by, and perhaps many of us, is the extent to which your profitability is concentrated into a much smaller part of your business.

And the part of your business where profitability is low is now growing much more quickly.

So the only way we'll know that it isn't a structural change is over time, as these emerging markets and network rollout contracts start to improve in profitability.

What sort of confidence level do you have that the business you're writing today, at worse margins, will over time yield the kind of profitability that we're seeing today in isolated parts of the developed markets?

Well, it's -- there is no difference in -- between boxes in different regions.

There are additions and upgrades in every region and so on.

So it will follow the same pattern.

And basically every product line follows the same pattern.

It's the same thing when we go from the circuit switch into soft switch.

You go from being in an upgrade mode to being in a new rollout mode.

And so every product and every market goes through the same cycle.

So I think we can be fairly confident that this development will happen.

We have no indication at this point that we're seeing any structural change.

And it wouldn't come from that question.

It's more if there would be any form of slowdown in the market or nervousness or something.

We have no such indication.

We still just want to say that as it all came rather sudden in September, I think it's normal caution to make sure that we analyze that well.

Thank you.

Just briefly to follow up, in terms of the shape of profitability in the business, have you seen any pressure from customers resulting from the understanding of how profitable, for example, the software upgrades now are?

It's -- software is, by nature, basically R&D, and will always have a high gross margin.

I don't think necessarily that you can draw a conclusion that the money -- that the Company is making such incredible money on the software itself.

It's the incremental effects that are important to understand here.

Okay.

Thanks very much.

Thank you.

Our next question today comes from Mark Sue of RBC Capital Markets.

Please go ahead.

Thank you.

Carl-Henric, with everything going on, is there a change in your strategy and also a change in urgency as it relates to the wireline business, particularly in terms of collecting assets and creating some synergy for that division and going after some of the total opportunities for video?

No, there is no change in strategy at all.

And in that perspective, I must say, we had a very good Board meeting yesterday when we reviewed with the whole Non-Executive Board also the strategy and so on, making sure that we understand where we are.

It's in absolutely 100% support in what we're doing, the strategy we have.

It's, from a longer perspective actually, more encouraging how we are building footprint on the mobile side and how we have gathered assets and developed our capabilities in new, exciting areas of the business.

And the margin pressure that we get here is more the effect of the mix change and, of course, unfortunate shortfall in September.

So, no change in that perspective.

And I would imagine that you're still focused on near-term execution while you get your house in order in the wireless side?

Absolutely.

It's a good reminder to just keep pushing even harder.

Okay.

Thank you and good luck, gentlemen.

Thank you.

Per Lindberg of Dresdner Bank has our next question.

Thank you very much, Carl-Henric and Hans.

Leaving aside now the aberration and the surprises in a few weeks of a year, i.e.

the latter part of September, isn't the overarching conclusion that you are building the foundation for much bigger upgrade expansions in a few years' time, no matter when it exactly happens, and also that the push-outs we currently see in Western Europe and in North America, in part because of operators' organizational turmoil, will also build the foundation for pent-up demand, no matter when it may happen?

Well, that's at least a conclusion you can draw, especially if you take the positive sides of it.

And those elements are there.

And we, on one hand, just want to make sure that we don't miss anything in the shortfall in September.

That's one part of it.

We will, we think, because of the consolidation and so on going on, see effects also going into 2008 and probably others will occur.

And of all the traffic increases, and especially the dramatic acceleration on data, we don't think we'll have, in the aggregated global numbers, will have any meaningful impact in 2008.

So I think we're actually quite confident where things are going in the longer perspective.

But we don't want to, especially what we've learnt over the last couple of weeks, be too optimistic here about 2008.

Understandably.

A quick follow-up, then.

Where would you characterize the European and American spending levels at the moment?

I've just done a quick analysis and I see that it must now be undercutting the trough level of 2002/2003 on an absolute scale, and even more so relative to operator sales, i.e.

that operators now must be at or even beneath what could be deemed as maintenance spending, i.e.

to keep the networks in shape, without adding anything to capacity, without adding anything in terms of the functional enhancements.

Well, I think what you're seeing is -- I think everybody is changing efficiency in every aspect they can.

And I think the operators, to some extent, are also struggling a bit with seeing how their business models should be for new data services and so on.

But I think we're also seeing -- we're seeing that consumers -- if you do any consumer research, you find that almost every consumer will say that I will deal with [most of our emails], I believe, within a year or two on wireless networks.

I will do it on smart-phones.

I want to increase my music download.

I want to do this, I want to do that.

So I think there is a growing -- and that's what we see in the networks.

There is an acceleration of data, whether one has a model for it or not.

And I think this will -- it will bring out the local exciting services and also profitable business for the operators, but we are in a learning phase.

And in that learning phase, I guess, everybody wants to mention -- hold back and not expense too much too early.

Thank you.

Thank you.

We'll take our next question from Mats Nystrom of SEB.

Please go ahead.

Yes, hello.

A question on the U.S., if I may.

Looking at T-Mobile, one of your key clients there, was there any meaningful sales to T-Mobile in Q3?

And how do you see sales to T-Mobile developing next year, when they perhaps push the accelerator here on 3G build and 3G spend?

Will that sales be characterized as well as new network build, or will it have also an element of capacity expansion?

Thank you.

Well, you are right there, that there is a gray zone, of course, between what is what is a new network build and what is an expansion.

Typically, you would find an expansion to be once you are there and you are established and you roll out large parts of the country, and you add another city.

That's for us an expansion, still some of the work that goes on as part of the initial rollout contract.

So it's a bit of a gray zone.

We will not comment on specific operators and their particular plans and how we get involved there.

But we can only conclude that it is of course a positive -- it's positive in the general sense that T-Mobile continues and accelerates their build-out.

Okay.

Thank you.

Thank you.

Ed Snyder of Charter Equity Research has our next question.

Are we going to have to see more consolidation with your competitors before we see pricing improve?

Besides Nokia/Siemens, there hasn't been a lot of capacity taken off the market.

And Lucent wasn't big in GSM, so the merger with Alcatel didn't do much for pricing.

And outside of that, we've not seen any big suppliers exit.

So why should we expect pricing, and even growth, to remain weak as long as the current roster of suppliers remains constant?

I don't think you could really conclude that it's constant.

I think it's really come down to three major ones, if we include the Chinese as an important growing one on the mobile side, and maybe three larger ones on next-generation networks fixed side.

There are obviously still other vendors there.

And in that aspect, I think you may be right that there are some that are smaller and they need to find their way forward, and what they -- where they will make their bed somewhere, they will be less aggressive.

But it's clearly, I think, in that sense, we've gone from a period a couple of years ago when there was a lot of under critical -- sub-critical companies that fought for their survival into a somewhat better stability, I think.

So I think we're on our way into a more stable environment.

Of course, remember also that we need to understand what the Chinese does here, because they're not always predictable.

When you say it's a more stable environment, are you saying that some of the smaller players are going to be exiting, or the fact that we are where we're going to be and you just expect pricing to improve because we're not dealing with the same suite of people we were a year and a half ago?

I'm trying to grasp what you mean by more stable environment.

Well, we -- it is you that suggests that pricing will improve.

I'm just saying that I don't think that we have the same desperation out there in the market on some hands.

If you remember, for a few years ago, when vendors were bidding quite wildly on BS&L in India, for example, just as a way to, am I going to be in this country or not?

I think it has been -- it has become, I think, first tier players and second tier players today.

And the competition that we are facing is not really any more with the second tier players.

It's between the first tier.

And that, I think over time should maybe create a more stable environment.

But let us see how we go along.

It's not going backwards, anyway.

Thank you.

Thank you.

We'll take our next question from Andrew Griffin of Merrill Lynch.

Please go ahead.

Good afternoon, gentlemen.

With the benefit of hindsight, what should you have done, or what controls should have been in place, to see this fall in network margins coming ahead of time?

Thanks.

Well, that's one of those questions that we will not dig further into, and which is a prime question for Hans also to dig into.

But obviously, with 18 quarters of stable sales and with a very strong -- very high degree of stability and expansions and upgrades, of course we put most of our efforts and focus on bringing the new business in and project where that was.

We should obviously have had better traction of -- through the quarters, in where sales was -- how sales was developing and so on.

We must remember, though, that we can have, for example, we can very well have a software order that could be half a billion in the last couple of days, where the software is already in the competitors' -- in the operators' networks, and you basically open up with keys something that is there and it can be delivered in a couple of days.

So it's actually -- even if you track it much better, you can still have surprises in very late days, and that is why we come to the other conclusion that we draw, is that we have to talk more about the dynamics of what actually can happen, and also what kind of conclusions we should draw from swings in quarters.

But of course, we hope we will come wiser and stronger after this.

Yes.

I guess I can appreciate you can get sideswiped, as it were, by these late quarter revenues, but this is more than a one-quarter problem.

It's turned into a multi -- hopefully not too many quarters, but a multi-quarter problem.

So I guess it's back to -- gets back to the structural versus short-term thing that happened earlier.

And maybe you can't answer this, given you're still looking into it, but in more of the structural side, the fact that so many of your customers seem to have stepped away from the upgrade business at roughly the same time, which seems to be what you're saying, is there anything that's come up in your early analysis to say, actually, here's something that we should have been tracking that we weren't?

That is what I meant.

And I think the disappointment, or the discussion rather than disappointment, in the quarter I guess is that we weren't able to see it before it happened, and how we could talk about it.

Now, we do talk about it, so -- and I think we give pretty -- a better guidance that we will have such less -- not to the extent of Q3 as we expected, but still we will have a bit slower on the upgrade side in Q4 and probably into Q1 as well, plus the fact that other such situations could occur.

So I think we made -- we need to make a difference here on why we were surprised, and what the trends are.

Okay.

Thank you very much.

Thank you.

Jeffrey Schlesinger of UBS has our next question.

Thank you.

[Probably] onto the structural versus just a near-term change, and following up on Tim's question, he was interested in the emerging markets and the confidence there, that they too would evolve to the business you've seen historically in developed markets.

But the other question I have, it just doesn't appear clear to me or perhaps others, that the elasticity in the traffic in the developed markets is sufficient to drive growth in the industry, given the declining costs of technology and just the declining costs of digital technology in general.

What gives you the confidence that the elasticity is sufficient to drive this equation, where you actually will get industry growth as opposed to just really stagnant growth where, yes, capacity increases are being made, but because of the efficiency of digital technology you don't really see that in revenue growth?

Then one other question, if I could, just on the order book.

Can you give us a sense of book-to-bill in the quarter or over the nine months through the end of September?

Thank you.

In fact, here, I'm sorry to say, but the connection in your line was not really good enough.

I will see if I make some comments, and see how well I hit on where your questions were.

Let me first say on emerging markets, there's no change in emerging markets.

That is not affected here.

And as I said before, the whole profitability development and so on in emerging markets is no different.

Obviously, there is a higher degree of new network rollouts in emerging markets, but that doesn't take away the fact that there is also a lot of upgrades and expansions also there.

The other question which you put on the price elasticity and so on, I guess you're asking if -- how confident we can be that we have this with lower and middle and higher margins during the phase of dealing with the lifetime of a network.

I don't think there is a change there.

This is just the way business is being done and we have no such signs.

And this has been the picture for as long as anyone remembers in Ericsson.

Was that close enough to your question?

It will work.

One other, can you give us the book-to-bill over the nine months, just what you've seen through the end of September?

We are not disclosing our book-to-bill number.

But obviously, as you understand, the books as such has a higher proportion right now, and that will fill the lesser expansion.

Thank you.

Thank you.

Richard Kramer of Arete Research has our next question.

Please go ahead.

Thanks very much.

Two fairly simple questions.

The first one, this quarter we saw headcount up about 5%, by about 3,000 people sequentially, and somehow SG&A fell by about SEK1b.

Can you help us understand that, and more broadly whether, given the margin picture, we're heading into 2008 and should expect Ericsson restructuring Mark 2 or a re-run of the 2003 through 2005 type program?

And then secondly, just on the somewhat forgotten Multimedia division, you've long pointed to this as the growth engine, but it's never really picked up in terms of profitability.

At what point could we expect Multimedia to grow significant enough in terms of earnings to start offsetting some of the decline that's clearly evident in the core business that you've said is going to continue for a couple of quarters?

Thanks.

Well, Richard, I'll let actually Hans talk about the growth in and freeze, because that's a services-driven growth, and I'll let him answer also on the OpEx side.

It will be a good warm-up question for him in this situation.

When it comes to Multimedia, remember that the bulk of that Multimedia business is healthy, a healthy business with strong growth, billing, charging and service delivery platforms and EMP and Tandberg and so on.

That has healthy margins.

They are -- we're doing fine there.

What we are in the same division doing is the business development in new businesses, where we are doing substantial investments in R&D, and that is bringing the totality down to a breakeven level.

The question is very valid.

And as we go along, and I think we will provide you with more information and understanding, so that you can track it.

It is an important business for us and, as I said, it's the mixture here that may be a little bit hard to look through.

Okay.

On the headcount, as Carl-Henric said, that's much driven of the high -- the increase of managed services deals in the quarter, of course where we had transits there, or transforms or taking over employees from our customers.

If we talk about the OpEx and SG&A, we have in between Q2 and Q3 a seasonality as it goes downwards we have seen before, so that's nothing strange.

If you compare it to last year, we had -- in last year we had the restructuring from Marconi in the OpEx as well, so that should not be a decrease.

It was actually up.

So I think it's fairly normal, the development on OpEx.

And just as a quick follow-up, was the acquisition cost of SEK2.444b in the quarter, was that pretty much the full payment for LHS, or is there still some to come there when the deal closes?

That was coming from LHS, that's correct.

Okay.

Thank you.

Thank you.

Jan Dworski of Handelsbanken has our next question.

Please go ahead.

Thank you.

I have a detailed question on Western Europe and the comments related to weaker mobile system sales.

If we look at Western Europe revenues within networks, it was only down a couple of percentage points between Q2 and Q3.

Is that then weaker mobile offset by very strong transmission sales between Q2 and Q3?

If you look at mobile, mobile network sales is down more than 7%, actually.

Fixed is up over 15%.

And overall, Western Europe was much driven by managed services growth.

And just maybe a second question, if I may.

In terms of cash flow, and there's been a change now with Karl-Henrik, but in terms of the cash conversion ratio, you previously said that you expected some improvement from the level last year.

Can you make any comments in reference to that, how you see the full year now?

Well, I think that in the situation now here with -- that we make less profit, and that will travel through for the cash flow.

But I think this is a good chance for Hans now to get a feel for this and come back with an idea, depending on, of course, where the -- both the currency but also where the earnings shortfalls are, and where the growth mix is.

Okay.

Thank you.

Thank you.

We'll take our next question from Alexandre Peterc of Exane BNP Paribas.

Yes.

Thank you for taking my question.

I would like to ask a question about the migration to packet core from circuit switched.

Firstly, can you maybe give us a little bit of background on this?

Is this migration affecting equally 2G and 3G networks and mature and emerging markets, so where do you see more of that migration?

Then, if I compare to what has happened in fixed, it seems to me that the addressable market in soft switching will be smaller by an order of magnitude versus the circuit switched market.

Can you explain to us why you don't exactly share this view and how things will be different in mobile versus fixed?

And then finally, how about the stickiness of the customer base in the packet core?

Is that equally sticky as the circuit switched core, which obviously was extremely sticky as it was entirely proprietary?

Thank you very much.

Well, the migration here on -- from circuit switched to packet switch, or soft switch, is obviously very customer specific.

It is not a phenomena in mature markets only.

If you take China, for example, it is rapidly going into mobile soft switch.

I would say that a large degree of the change are basically happening as we speak.

We have at least half of that behind us.

On the other hand, there will continue to be legacy business with circuit switch for quite a while, because lots of switches will be out there and will continue to be serviced, and at times even upgraded.

It is true that -- so I am not sure you're saying that's different from what we are saying.

It is clear that the aggregated sales number for the same capacity in soft switch is a lower number than circuit switch, because it's a more cost-efficient product.

But what it does is that it also carries with it expected investments in IMS and other related products.

So we are actually not seeing that necessarily that the overall impacts are maybe as big as someone sees.

But let's see how that plays out.

When it comes to the stickiness, I'd say that's another good question.

We -- I think there is no difference in that sense in stickiness of a soft switch or any other product that we have.

The stickiness sometimes may be perceived as something where the customer simply has no choice, but anything can be swapped for a supplier that doesn't perform.

On the other hand, if you are there and you perform, you will have the ongoing business if you're competitive.

Okay.

Thank you very much.

Operator, one last question, please?

Thank you.

Our final question today comes from Kulbinder Garcha of Credit Suisse.

Please go ahead.

Thank you.

Just a quick question on cash conversion.

You've previously guided that this should be, I'm not talking about the near term but long term, 70%.

Does that still stand, or is that no longer the case?

And the next follow-up on that is that if network rollout continues to rise in your revenue mix and presumably turnkey does as well, could 2008 show a limited cash conversion improvement even from this year, or would you say this year's really the bottom for that?

Well, we are putting a lot of focus on cash conversion here, and of course we would expect 2008 to be a step in the right direction.

It is dependant, to some extent, on how the growth scenario plays out there.

And again, this is something that we will now let Hans dig into very, very carefully.

We have not changed our outlook for the long-term cash conversion.

It should really be on those levels.

We have also said that we will not be on that level in 2008.

That's not what we believe.

But we certainly would take a good step in that direction.

So -- but let us come back and discuss it more when Hans has also had a chance to make up his point of view here.

Thank you.

Operator?

Yes, sir?

Okay.

We're ready to conclude the call.

Thank you.

I'd like to turn the call back over to you for any additional or closing remarks.

Thank you, Operator.

Before we finish for today, I'd like to inform you that our next management briefing is scheduled for November 20 in New York City.

Agenda and registration information will be available on our website shortly.

If you have any additional questions, don't hesitate to give Suzanne or myself a call.

Thank you very much.

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

Thank you for your participation.

You may now disconnect.