Telefonaktiebolaget LM Ericsson (ERIC) 2008 Q1 法說會逐字稿

Welcome to the Ericsson analysts and media conference call for their first 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, replay will be available one hour after today's conference.

Mr.

Henry Stenson will now open the call.

Thank you, operator.

Hello, everyone, and welcome to our conference call for the first quarter of 2008.

This is Henry Stenson, Head of Corporate Communications at Ericsson.

With me here in Stockholm is Ericsson's CEO, Carl-Henric Svanberg, and CFO, Hans Vestberg.

And I also have Head of IR, Gary Pinkham, on my right side.

We will be making forward-looking statements during the call today.

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

The actual results may be different due to a number of factors.

There are also risks and uncertainties associated with these planning assumptions.

We encourage you to use caution when considering such forward-looking statements.

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

Carl-Henric, please.

Thank you, Henry.

I will be quite brief because we want to make as much room for your questions as possible.

If we start with the first slide that I'm -- because I'm sure also that most of you have followed the webcast, so you have the slides.

If we start off with the slide of Q1 in summary, there is a lot of focus in the world now on rollout of mobile broadband and HSPA.

Lots of activities, lots of examples of new applications and traffic growth.

It is also interesting to see how the world has united, the world's leading operators have united behind LTE.

It's the first time that we have basically a full support from -- throughout the world for one technology and it is our technology of choice.

Lots of network builds continue in high-growth markets, which means that that is the prime driver of growth at this point in time, Africa and the BRIC countries in particular.

We have a U.S.

dollar decline that affects us, top line and bottom line.

As we have commented on before, if there is a gradual decline or increase of a dollar, as we are a euro-based company or a European-based company with euro competition mostly, prices in dollars will be adjusted over time.

But when there is sharp declines like this, then we have quite some effect.

If we look at our growth in constant currencies, as I'll come back, it's 11% minus 2% for acquisitions, so 9% organic.

We're still keeping our planning assumptions and our cost adjustments are going according to plan.

A couple of quick comments, then, on the different segments or businesses here.

On the Networks side, on the next slide there, the subscriber growth continues throughout the world steady and strong.

If we look at only China in the quarter, 9m up in March only, India 7m up in March only.

So that continues nicely.

Wideband CDMA has passed 200m.

What is happening now, which I think is important to follow, is that we will now have several technologies that coexist.

There will be continued rollout for GSM, and GSM is the natural fall back when you build up an HSPA network.

At the same time, we start to see the first initiatives on LTE.

The first rollouts may happen in a couple of years' time.

All of this means that not only that there are business opportunities, but we have to entertain, R&D wise, three technologies.

That puts burden on the R&D and we have somewhat higher R&D, but it also means that there are fewer -- only the fewer and the stronger that can be their competence and that is of course good for us.

It also means that one cannot just innovate the new technology but it has to sort of build on the installed base.

When it comes to Multimedia, just give a couple of examples of what happens in the networks.

Each day there are some 100m video clips that are downloaded in the networks, fixed and mobile.

There are some 250m photos sent around in the mobile networks.

There are billions of SMSs.

These are just examples of what happens and why the traffic growth is so dramatic.

And I'll come back to talk about the regions later.

What we do in Multimedia is that we do provide -- we provide the service delivery platforms and provisionings, which is really the software and products that are needed for the operators to provide multimedia services for their consumers.

We're providing the charging, the revenue management systems that arrange the payments and charge for their services.

And finally, we are also investing in IPTV, which everybody sees is the biggest investment area for years to come and for spending, CapEx spending for operators.

Not necessarily in 2008 or '09, but very interesting growth opportunities for the future.

If we look at Services, managed services, we have talked a lot about the growth drivers of managed services.

In mature markets it's basically for cost reasons, whereas in the emerging markets it's much more focused on growth and help the customers there, the operator, to focus on capturing new customers.

But in parallel to this, there is an accelerating demand for systems integration, on one hand driven by network complexity, on the other hand also driven my multimedia services and customizing such and introducing them in each operator's network.

Then, a couple of words on the Q1 numbers in short.

Hans will come back with more details.

I already talked about the growth and the organic growth of 9%.

Operating income, operating margin is 9.7%.

It's important to keep track here on the EBITDA margin, which is 14.7%.

Between there, you have intangible write-downs from acquisitions, some software write-downs and also, of course, normal depreciation from test equipment and others.

Cash flow was very good in the quarter.

It includes the dividend from Sony Ericsson, which has a lesser effect than last year.

Good progress in our cash flow related activities, and Hans will come back and talk about it.

So let me go to the next one and talk about the regional comments.

Europe is remaining slow, very much as we saw in the autumn, and U.K.

is still particularly slow.

Spain, maybe a tougher comparison.

But overall, lesser activity in Europe.

Central Europe, Middle East and Africa, 1% up.

Basically flattish, but loads of business activities and should improve as we go along here.

Both general good business in Africa and Middle East, but also 3G rollouts in the various markets and especially now in Russia.

Asia Pacific, 5% up.

It's a mix of Bangladesh being slow because of the -- quite down versus last year because of the political situation.

Japan and Australia is down because of tough comparison, large project last year.

But besides Bangladesh, Japan and Australia we are actually 30% up in the region, showing the activity level in the other markets.

China and India is particularly strong.

Latin America shows strong progress here of 25%.

Here the comparison is more easy, because the activity was not that high in the beginning of last year.

But it's a continent with continued 2G expansions and new 3G rollouts.

And finally, North America, which had a strong quarter.

A softer start last year but still a strong quarter, where we have increasing Wideband CDMA upgrades.

We had also in the quarter a bit higher software and IPR sales, patent sales.

And also important to keep track on is now what follows after the spectrum auctions for the U.S.

operators.

North American operators are spending some $20b for spectrum and the right to roll out networks, and obviously business should follow.

So when we summarize that and how we see the world, we continue to plan for a flattish mobile infrastructure market for 2008.

We believe that there are a better outlook for years to come, but for this year we maintain our flattish planning assumption -- flattish mobile planning assumption.

When it comes to Services, we continue to see good growth, and Multimedia as well.

So with that said, I'll hand it over to Hans.

Thank you, Carl-Henric.

First of all, I would like to mention that the numbers that we're talking about here are excluding restructuring.

We will comment on numbers excluding restructuring in order to have a good comparison.

When they are included in the numbers, I will highlight that.

So, starting with the financial highlights in the quarter one.

As Carl-Henric said, we had growth of 5% and organic sales growth in constant currency of 9%, of course indicating the sharp decline on dollar, which has had an impact on the top line.

I will come back to the segments, talk about the margins.

Two things that I would like to highlight here.

First is the OpEx.

The OpEx ended at SEK14.1b compared to SEK11.8b in Q1 last year.

That's an increase of SEK2.3b.

It's two main reasons for that growth.

One is our acquired companies, both the depreciation or amortization on the intangibles, as well as the acquired OpEx from those companies.

Secondly is the constant decision on R&D investment on future technologies, such as LTE and IPTV, as well as our investment in EMP to follow now the track on all the technologies going forward, and also of course investment in areas where we believe it's going to be revenue streams in the future, which of course will come a little bit later, in a couple of years here.

So that's important.

And then we have also an increase in SG&A, mainly due to that we are building our marketing and sales resources that can sell the broader portfolio that we have acquired the last 24 months, everything from Marconi, LHS, Tandberg, etc., because we are now getting a bigger market that we need to be prepared for.

Nevertheless, we have also, as you all know, launched in the first -- at the fourth quarter our adjustment program, which of course will also impact on our OpEx going forward, but we've not seen anything yet.

Second point I just want to point out, that's the difference between the EBITDA margin and the operating margin, which we can see here is 5% in the quarter.

It's three pieces there.

One is the amortization on the intangibles that I mentioned previously.

The second one is our amortization on software, our capitalized software, which we're now having a net negative impact from.

And that's of course our lead times on TPM and the market on that product is gong down, so we are now doing it much better.

And the last piece of it is the CapEx on normal -- or the depreciation on any equipment or whatever we might have in order to perform our business.

So, continuing with that, talking about the net income, SEK2.6b.

Net income includes the restructuring.

And which gives us an EPS of SEK0.17, which then are including the restructuring.

Cash flow, a quick comment on that.

We had SEK4.7b in the quarter, last year SEK4.6b.

However, it should be noted that the cash contribution from Sony Ericsson was SEK3.5b in the Q1 last year, SEK3.5b, and it was SEK2.2b this quarter.

That means that we had somewhat an improvement on the Ericsson performance on cash, driven by, I would say, a fairly good development on working capital as well as good cash collection.

That gives us 83% cash conversion versus 80% cash conversion last year.

I would say that this is above our long-term target, which is about [70%] cash conversion.

Again, we will have different quarters going up and down.

It depends a little bit where we -- which customers, etc., we're working with and invoicing.

This is not indicating that we don't have room for improvement on cash flow.

We will work a lot with cash flow to see that that improves.

Quickly to Networks, comment on Networks.

They were up 2% in the quarter.

But of course they are, as well as the Ericsson Group, impacted by the U.S.

dollar decline both on top line and on bottom line.

Important here to mention that they continued with a high degree of projects, new rollouts on networks.

That can be indicated by two things.

One is that the network rollout is up 20% in the quarter, [pressing], of course.

And secondly, that India now is the second largest country and accelerating though the year.

That, of course, is giving an impact on our margins as that is a high-volume market with high competition.

Furthermore, we had in the quarter a slightly higher mix of software and IPR sales, which of course support us on top line but -- and somewhat on the bottom line, which is important to note.

Anyhow, we ended up on 9% operating margin versus 17% last year.

Multimedia, a quick comment.

We had growth of 16%, mainly due to acquired growth, ending up at 13% negative operating margin.

Here we have -- from the Sony Ericsson pre-announcement in March, we already then indicated that this would have a direct impact on Ericsson mobile platform, which it had.

And it came into the magnitude that we pre-announced, roughly SEK300m to the bottom line for the Multimedia, due to lower volume from Sony Ericsson and royalties.

You can also say that this business, as I said several times before and we need to continue to reiterate that, here we will see that this business is in early phases.

Sales and margins will vary between quarters.

We are now trying to start splitting them up a little bit, for everybody to understand better what we have in Multimedia.

We'll continue so at the Capital Markets Day, a little bit more in detail.

But you can say that 75% of the revenues which is coming from revenue management including LHS, service delivery platform, provisioning, Tandberg and EMP.

It's good growth and healthy margins in that 75%.

Then we have 25% that is investment areas, I would say, where we have a high level of R&D and a fairly low level of sales.

That would be IPTV, IMS application and enterprise applications.

All three of them, we strongly believe, are areas of future revenues where we're investing to actually capture that revenue in the future.

So that's Multimedia.

Professional Services, up 8% in the quarter, 10% in constant currency.

And that's despite what we announced in the fourth quarter, the adjusted Hutch U.K.

contract, which took down our total volume on the contract, in order for opening up so they can do network sharing.

We have also signed a couple of important deals in the quarter, TDC in Denmark, Mobily in Saudi Arabia, for example.

We ended up at 13% operating margin versus 15% operating margin last year, so it's a drop of 2%.

The main reason for that deviation, or the 13%, I would say, is, one, is that we have had a higher level of managed services contracts in early cycle.

That's when we [start to perform].

If we are early in the cycle, we have transition and transformation costs in the managed services deal, which of course is more costly in the beginning before we get fully started.

The second one you can see on the EBITDA level.

As you can see, we have dropped 1% only on EBITDA level.

That means that also Professional Services also have amortization of intangible assets.

So those are the two main reasons for the 13%, I would say.

Finally, finally, cost reductions.

We announced in the fourth quarter SEK4b savings that we're looking for, with a charge of -- at least around SEK4b that will be recognized, as activities are decided.

We have now had activities in the first quarter, announced in Sweden, U.K., Germany and Italy, amongst some.

That rendered SEK0.8b of restructuring charges in Q1, and that excludes Sweden as we announced Sweden April 15.

That means that that charge, whatever it's going to be, is going to be in the second quarter.

That said, let me just say very little on Sony Ericsson, because they reported here only two days ago and I'm sure you all know about it.

They have launched new products here.

They're about to launch a product, the XPERIA X1.

They had a softer quarter in general and they have made all the comments that is relevant here.

In summary, we have a challenging but stable market environment.

Of course, the business mix and -- the business mix continues, but of course the dollar effect also is there, and we'll continue to bear it as long as the dollar is declining.

We have a lot of focus on the market trends, so we understand where the market is going and we maintain our planning assumptions.

The cost reductions are on track.

We can conclude that this was yet another quarter where we took market share.

So with that, I think we will leave over to questions and answers.

Gary, please.

Hello, operator.

We're ready to start the Q&A session.

(OPERATOR INSTRUCTIONS).

We will take our first question from Jeff Kvaal from Lehman Brothers.

Please go ahead.

Operator, I guess if he's not there we can take the next question.

Hello, can you hear me now?

Yes, we hear you now, Jeff.

Okay.

Thanks, Gary.

I was wondering if you both might be able to comment a little bit about the underlying trend in gross margin.

Obviously, this includes volatility over the course of the past year.

I was wondering what some of the variables might be in forecasting your gross margin out over the next period.

We're not going to guide on the margins as such, but of course it is -- they have been impacted, as we all know, with the higher proportion of new network build and less upgrades and expansions.

And the more we get into upgrades and expansions, the more we get into software content and higher incremental effects, and that's why the swings becomes as strong as they are.

We expect this business mix to continue for a while.

Still the underlying trend is for a gradual increase in software.

With, for example, 3G most of upgrades is now software, whereas on 2G it's stick in electronic cards.

In between quarters, that is an important part.

It's also an important part to what extent the new network rollouts, where they are in the world.

As we are indicating in the press release, there is an increasing part now going to India.

And India is a very important market and a quite exciting market, because it's in the very beginning of its build out.

But it is very strongly new network builds that put the pressure on the margins.

So it's a little bit a balance between upgrades, expansion, also which particular market that is there.

We have also IPR income that can fluctuate a little bit between quarters.

So there are some elements there.

Is that -- I guess does that suggest, then, that there some extraneous factors in this particular quarter that helped you, or there are still headwinds from emerging markets?

Well, I would say it was a positive development in the quarter.

We're working hard to obviously improve margins, as always.

We just want to make sure that everybody understands that there are always factors, that some go up and some go down.

And it's in that reality we are living in and different quarters can fluctuate a bit.

Thanks very much, Carl-Henric.

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

Please go ahead.

Hi.

Thanks for taking my call.

I think this follows up a little bit on Jeff's question.

But just looking at the mix of network rollout in the quarter, it was down a little bit from the fourth quarter but the gross margin's expanded dramatically.

Is there something else going on in the mix that's shifting gross margin back up, or are we seeing any sort of cost cuts in terms of new products across the infrastructure business?

Thanks.

No, I wouldn't say it's any of that.

What one should remember is in the fourth quarter, as that is a stronger -- the strongest quarter of the year, the biggest portion of the extra volume that comes in is larger projects that get terminated or concluded.

And that's why network rollout is always strong there and puts a little bit of pressure on the margins.

You don't typically see that network boost in the fourth quarter, as volumes as such may indicate.

Okay.

So there's nothing else besides the little bit lower network rollout that's got the margin boosted up so much in the first quarter?

It was that and what we indicated also, with the somewhat higher software and IPR sales.

Got you.

And then, can you give us any sort of extra detail on the U.S.

strength?

It seems like there was a big deal in the quarter.

Thank you.

Well, U.S.

was certainly better than it's been over the last couple of years.

Although the last couple of years U.S.

has been slow, following the major rollouts in U.S.

that we had a few years ago upgrades and expansions of the wideband networks was lower, and partly, I would say, because of all the merger and integration work that was ongoing with our largest customers.

So I'm sure you're following them down there, and they indicated that they're accelerating their CapEx a bit and I think that's part of what we're seeing.

And then we also had, on the patent software side, we had some effects also in the quarter here.

But again, remember also now going forward that in U.S.

the spectrum auctions should pave the way for maybe a bit better market for the next couple of years.

Okay.

Thank you.

We will take our next question from Matthew Hoffman from Cowen.

Please go ahead.

Hi, good morning, gentlemen.

Another question on the sustainability of gross margins.

Looking through the balance sheet and the intangible assets line, it looks like it declined about SEK1.5b.

You also mentioned you sold some patents during the quarter.

Can we link the two?

Was the reduction in intangibles mostly IPR?

And also, can you describe the nature of the patents you sold?

Thanks.

There was no related balance sheet effect from the IPRs, no.

Can you tell us a little bit more about the patents that you did sell during the quarter or what kind of agreement you entered into there?

No, we don't.

Generally neither we or anybody else in the industry comments on that, not so much for our sake but for those that we do the deals with.

It's -- in the vast majority of deals there's confidentiality involved.

Thank you.

We will take our next question from Peter Dionisio from Morgan Stanley.

Please go ahead.

Thank you.

Could you just comment on your flattish guidance for the wireless infrastructure market in 2008?

Do you think that there is a bit of an upside possibility here, given what you've seen in Q1 in countries such as India, China, and I should mention also in the U.S.?

And just a quick follow-up.

In Western Europe obviously remained weak in Q1.

Have you seen any evidence that this might change any time soon?

Thank you.

No, we haven't really.

I think it's important not to draw too quick conclusions on a particular quarter.

If we have done -- at least for the five years when I've been the CEO, we can look at quarters and they indicate strongly up here and sharply down there.

And I think it's an effect that -- of the fact that we are involved in such large projects that we can have those swings.

We find it prudent to plan for a flattish market and when we change our mind we will tell you so.

I don't think we should try to get -- try to go into grades of flattish or tendencies or so.

Thanks.

Then just very quickly on Western Europe.

Well, Western Europe is -- I think it very much is what we have said.

Western Europe is -- eventually Western Europe should start to upgrade, when the capacity ceilings are hit with the data traffic.

Of course, that won't go at the same time for everybody.

We will see it gradually happen.

We're already seeing it happen in some of the markets, but they're moving -- they're not moving the numbers in any big way yet.

And also, Europe is the area where we have more consolidation talks and these talks tend to put investment decisions on hold, as nobody really knows where the future lies for that particular operator.

We have a couple of operators again in different talks now and U.K.

was still slow.

So Europe is much the same.

I can make an additional comment.

This is Hans Vestberg.

We got the question about network sharing.

And what we can see on network sharing is that some have now concluded a discussion and coming out and do something, but others have come in.

So on that question, we'd say that it's equal; it's not a major change.

We see still interest from operators.

Some have now decided how to do, some in U.K., as you have seen, but there are others that have discussion on the table.

So that's quite usual, I would say, for Western Europe.

Great.

Thank you.

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

Thank you.

Things seem to be starting off a little better, yet you are maintaining your outlook, which is to be expected considering the environment.

Now, having said that, are there some concerns that the benefit you are seeing now is due to recognize -- recognition of Push, as we saw in the autumn?

And do you have concerns that CapEx may be somewhat front-end loaded this year, in planning a challenging back half?

The answer is no.

Okay.

So, stable and back to normal seasonality, at least for the near term?

That I wouldn't answer, because that's guidance.

But we haven't seen anything of the kind that you said first.

Okay.

And then, just on China 3G, any last thoughts there?

Well, that's an interesting one, because in -- what we are expecting first to happen here is the telecom reform.

And I guess everybody has figured out that there will be a China Mobile operator with a TD-SCDMA license sooner or later, there would be one wideband license for Unicom's VSM network and one CDMA license for their CDMA network.

And that's probably what's the structure we are going to see.

TD-SCDMA -- at the same time China Mobile, together with MII, the industry there, the telecom ministry there, we are cooperating with them in migrating their TD-SCDMA into our LTE solution.

I think China has realized that it is better to be on a world standard.

And exactly then what will happen on TD-SCDMA we are not really sure yet.

We are the only international company that offers a solution there, so we will be involved whatever decision they take.

Got it.

That's helpful.

Thank you, Carl-Henric.

Thanks.

We will now move to Ilkka Rauvola from Danske Bank.

Thanks very much.

You were saying that sales of software and IPR developed favorably in the quarter.

Can you say what is the share of software and IPR of total network sales, and whether both the sales of software and the sales of IPR did grow in the quarter?

Thanks.

Well, if we talk about software, IPRs we are a bit careful in disclosing.

But IPRs is a steadily increasing level, because as we get fewer and fewer in the industry that does technology development, it means that more want to benefit from our results and pay for it rather than do it themselves.

So that is on a steadily increasing pace.

When it comes to software, that has increased quite significantly, actually, over the last years.

If you look at GSM, the software portion was smaller.

When it comes to wideband, the software portion is much higher.

That does not mean that software in itself necessarily is -- neither it means or excludes that it's very profitable.

It only means that the bulk of the work is done one time in laboratories and then the incremental effect is very high.

And that's why you can have such result impact of an extra gain 1b or an extra loss 1b.

Right.

Are we over the 50% sale of software yet?

Where do you see things heading?

And then, do you see any competitors coming out with more aggressive pricing models for software?

We are not on a 50%, but we are about 25%.

We are -- it's significant and in the next five, 10 years that will continue to grow.

And somewhere in the future we'll become more of a software company.

I think we are one of the -- somebody ranked us as -- we are fairly high up on the 10, top 10 list of software companies in the world.

Thanks.

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

Please go ahead.

Yes.

Hi, guys.

Thanks for taking my question.

I've just got a couple.

One, you've indicated in a statement and again in the press conference and your comments today that the new network builds, as a proportion of total revenues, are expected to continue growing, which I think we all anticipate.

The question is, given what you've got on the books right now, when do you think that's going to stabilize?

Can you give us any indication of when we are going to see that proportion stabilizing, based on what you know today?

And I know there may be a lot of things you don't know today.

And then the second question is just on the tax rate.

Hans, first, could you confirm that I'm calculating this right?

But it looks to me like if you take the restructuring charge out the tax rate's lower than normal, maybe around 24% or something like that.

Could you just confirm that's roughly right?

And if it is, then that's two quarters we've had a relatively low tax rate.

Are we -- should we be expecting to see tax at around 30% for the full year?

So if you could comment on those two things, that would be great.

If I start off there with new network builds.

First of all, from our point of view, more networks built -- the more new networks build there is, the better it is for us, because it just paves the way for lots of business, good business for many years going forward.

And at the same time, we are not making any loss-making deals.

So in that sense, it is good for us.

But incremental, they may have a small impact.

It's a little bit hard to say because we tend to, all the time, underestimate the importance of mobile telephony in these markets.

It is only four years ago when we sat there and said could we ever get the 2b subscribers.

That seems impossible.

Now we are at 3.5b and there are speculations about 5b.

And when that is done, then we are into rolling out the data networks, because this is the only way that the majority of the people in the world would get Internet.

So I am not sure that I can draw a conclusion that that is something that will easily come down, and we don't look forward to such a development either.

It's more interesting to see how upgrades and expansions can develop.

On the tax rate, that's of course driven by where we pay taxes, so it's a little bit hard to say.

But below 30%, definitely we'll probably come in on tax rate, but not as low as 24%, as you are indicating.

But below 30%, I'd believe it.

But again, that depends a little bit on where we generate profits.

So that would be some sort of indication what you could calculate on.

Okay.

And I'll ask the question one more time on IPR, because I think everybody on the call would love to hear you guys quantify roughly how much IPR contribution there was this quarter.

Can you give us any idea at all?

No, but -- we are not disclosing that.

But as we said, it had some impact but not significantly on the bottom line.

Okay.

Thank you.

We will take our next question from Edward Snyder from Charter Equity Research.

Thank you very much.

Carl-Henric, I wanted to ask about LTE, actually.

You're looking at rolling out these services now or this upgrade now.

I am curious, with what you are seeing in Europe, when you've got carriers sharing networks and -- because they've got overcapacity.

And some of the other effects of this [nature], we've had a push-out in CapEx in the U.S.

for a while in HSDP and Wideband CDMA.

What's the motivation of going to LTE?

I understand that you get better data rates.

But if you've already got excess capacity in some of the -- in a lot of the data networks, and you're asking carriers to spend more CapEx with this expansion, are you -- is it that we are talking about a different type of pricing model here?

Or is it an inexpensive upgrade, so it's not that big of a CapEx outlay?

What's going to be the impact on your business model?

What's the motivation for carriers to do this, if we are already seeing network sharing in a lot of these customers?

Thank you.

Well, I would say that to go to LTE for somebody that has built up a fairly new HSPA network makes very little sense.

The HSPA networks are efficient and will be able to be upgraded -- could be upgraded over time to [50] megabits per second.

It's more obvious for those operators that are sitting on older technologies like CDMA or something, and they need to make a switch rather soon.

And then, of course, it's better to try to be the first, maybe, on LTE than go via HSPA.

There are also Wideband CDMA networks on some of the suppliers that are not upgradeable to HSPA.

And then you need to make -- do a forklift and that could initiate an LTE decision.

That means that I wouldn't expect LTE to be the technology of choice for quite a while in Europe.

It will be for Verizon the need to change technologies.

That will be for some of the operators in Japan for the same reason.

It will be the choice for China, China Mobile, when they go to their next generation.

Deutsche Telekom is one of those that seem to rather want to change technology than do too much, because their network is not easily upgradeable.

So I think we will actually see much more of a coexistence of technologies here.

And there is no way around it.

It's a fair assumption to say if you are dealing with non-HSDPA, non-Wideband CDMA networks, specifically CDMA or any of the other variants, you are going to have to do a forklift upgrade.

Is there any way to do this marginally or maybe more gradually, or is it something that is going to have to be switched over en masse?

No.

It's -- I think really it has to be a fairly substantial work done there.

There is no way around that.

At the same time, I think everybody that -- we've had CDMA, we've had even TD-SCDMA to some extent, we've had the Japanese CDC standard and so on.

These are standards that are fine, they are fine technologies.

But if you have 10%, 15% of world market share and something else has 80% it simply doesn't make scale work, so the equipment ends up being too expensive.

And I think that's why it's worth doing the switch, but it has to be done at some point in time.

I think an even more important matter for them than, for example, Verizon will be how they can provide handsets that can work on CDMA networks, some kind of dual-mode handset.

Those are even bigger investments in all the handsets of the users than on the networks.

Finally, when you are planning, for your own planning assumptions, when you see them getting to the tipping point, is it -- obviously it has to do with cost but it's also got to do with roaming charges.

Or should we look at what their cost of equipment -- specifically with handsets, when the differentiation between, say, a CDMA-based handset and GSM gets to a certain level, that you believe Verizon will make a switchover then.

Or where do you think the decision criteria lies with them and we can anticipate maybe a larger change?

I think when they -- where their decision point is, I think, well, that's an obvious answer that you should rather direct your question to them.

But generally what happens when the operator is thinking is more, I would say, when do we think we can have a mature enough technology and high enough variety of handsets and devices.

That is what they would be looking for.

But once they've decided it, it's always interesting to be a first mover.

Thank you very much.

We will take our next question from Rod Sleath from Collins Stewart Fund Management.

Yes, hello.

Thank you very much for taking my question.

At the third quarter last year, when you were talking about the reduction in the profitability that occurred in that quarter, you spoke about historically the normal level of upgrade expansion and network rollout sales within the Networks division running at around a third of revenues each.

I guess I'm interested in where you are currently seeing that mix.

Clearly network rollouts are higher, but can you give us some better guidance of where that is as a proportion of Network revenues at the moment?

And I guess, following on from that, also at the third quarter you spoke about the negative effect of swap-out contracts on the operating margin, and you did suggest that the effect of swap-out contracts would increase in the fourth quarter and the first quarter, with a likely peak, if my understanding was correct, in either the first quarter or second quarter this year.

So I was just wondering if you could explain to us how that has actually panned out.

And there is a third question, which is just with regard to R&D.

The R&D to sales number running at about 19% of sales in this quarter, considerably above first quarter last year.

In absolute terms the spend is up about 33% year on year and about 8% quarter on quarter.

So I am just wondering if you could perhaps expand on where the additional R&D spend is going at the moment, and whether that is a sustainable level or whether you would expect that to reduce as a proportion of sales.

If we start, I'll take them in order here.

When we talked about the normal being a third/a third/a third, these are still rough estimates, both because they vary over time and also that there are not sharp boundaries between them.

They go gradually from being a large project to being an expansion, whatever.

But I would say, in those terms that we did it then, it's probably more half that is new network rollouts now.

If we talk about the swap contracts, that is what we said at that point in time.

And again, there is no clear definition what a particular contract is, because there is always customers that need to change a technology.

When Verizon eventually goes to LTE, that is, I guess, not a swap contract, even if it has a bit of that nature.

But certainly you were right, that was the comment we made.

And we were at the time more aggressive, because we choose to defend our position more from an organic point of view than acquiring market share and that worked quite well.

And what we said then was right.

We can conclude now that we continue to win market share and that's what you see in the organic growth, although it's not a focus to that extent as it was before.

But we appreciate every market share we win.

When it comes to the R&D, it has increased primarily because of higher investments on LTE, which is accelerating.

I would say that the interest for LTE is accelerating a bit faster than most expected.

And that's good, good news, good news for us, but it means we expand there.

We also expand on mobile platforms.

Three, four years ago it was a matter of doing a Wideband CDMA chipset.

Today it's about HSPA and 1.8, 3.6, 7.2, 14.4.

It's all these chips, it's lots of frequencies.

So their product portfolio needs to expand, so we have -- we've actually tripled the whole engineering staff in EMP over the last three, four years.

The third area where we invested is on IPTV.

So we've had a somewhat higher spend on R&D and those -- that spend itself, the new areas are there and to be probably further expanded.

On the other hand, others are being reduced.

We are also doing -- some of the cost program is hitting here in R&D, where we've rationalized and closed sites and get to fewer sites and try to be more efficient.

Okay.

Thank you.

Can I just -- with regard to the network -- that mix effect, the other thing that you also said at the time was that the reduction in profitability was the result of the mix effect, not a result of competitive pricing within the individual portions of the mix.

Is that -- the first question is, is that still the case that it is a mix effect and pricing is competitive, it's always been competitive, but there is no dramatic changes?

I think when you look at pricing, if we discuss a pricing environment now, for example, it means that that has effect in a year's time, probably.

So it's a matter of whether you discuss it now or whether prices are in -- and what we have just concluded for the quarter.

If you look at the decline on Networks' margins, I would say that one -- it's four things here.

One is the mix, and that we described fairly in detail in the quarter three.

It is the acquisitions that we have made, which means that we burden with intangibles, amortization, which you'll see when you compare on the EBITDA.

It is also the declining dollar that has quite some effect, as the dollar decline is so rapid.

And then finally, it is an element of competition as well.

And of those four, I wouldn't rank competition as one of the strongest, but it is there.

It has had some effect as well.

We would expect the price competition at least not to get worse going forward, now that we have fewer stronger players reasonably well-established, including the Chinese that are very aggressive, or building up their position and start to have quite a lot to deal with.

Fine.

Okay.

Thank you very much.

We will take our next question from Alexandre Peterc from BNP Paribas.

Yes.

Hi.

Thanks for taking my question.

I would just like to see a little bit where we are going in terms of seasonality.

Obviously, I gather the impression that you guided, when Q4 results were out, for a rather pronounced seasonal decline in Q1 and that didn't happen.

So I'd like to understand to what extent what happened surprised you, where were the areas of surprise and how we should expect things going from here, i.e.

did we really get an exceptional bump in both profitability and sales, or should we plan the year from the first quarter that we've got here?

Thanks.

Well, the comment, as such, was more related back to what started in Q3.

We are not commenting on the coming quarter.

So some of what you are saying is sort of conclusions that people have drawn.

But what we said at the time was that we expected the effects from Q3 to also prevail into Q1 and maybe into Q2.

And when we said when you combine that with normal seasonality, of course, that indicates a low point, and that was more of a principle comment.

It was not a try to guide for the quarter as such.

When you then look at the quarter, what was better or less good in the quarter, I guess that Europe's poor performance was much expected by most, I would say.

U.S.

was a little bit better, emerging markets maybe a little bit better and we had slightly more software sales.

Okay.

Thank you.

We will take our next question from James Faucette from Pacific Crest.

Thank you very much.

I just wanted to ask about the competitive environment and if you can shed a little light on your win rates, perhaps in different geographies, particularly as Huawei and ZT become more aggressive and Nokia Siemens seems to be on a better footing.

And specifically, I'd also like to ask on that, can you talk about the key elements that are leading to wins, or is price still as critical as ever or has there been increased weight given to other factors like roadmap, power consumption, equivalent footprint, etc?

Thank you.

I would say that it's a combination of several things.

If you -- if we start by remembering that back in 2003, after the crisis, I think there were 12 companies that could provide a rollout of a mobile network.

Today, there are -- or a few years later, there was maybe half a dozen.

Today, I would say maybe three left, maybe four, it's somewhere there.

So we are fewer and stronger and some are shrinking in importance, which means that the bigger ones should gain market share.

If you look at Huawei, they're clearly advancing their position.

That's in a -- we just understand, we all understand that they are going to build a good position, they are going to be a strong competitor.

And from our point of view, the sooner they grow the better it is, because that means that they come into the same realities as us.

They have to deal with -- they can't be overly aggressive on one account, because then they irritate the other account.

There has to be balance on everything.

And that's -- they have lots to deliver and lots to deal with and so on, and I think that puts them in a -- they become more of a normal competitor.

That doesn't mean that they won't continue to be extremely fierce.

There is also -- one aspect is the larger, fewer operators becoming more tougher in the negotiations, some purchasing departments being quite non-emotional whether things are really working so well or not in the networks.

It's more a matter of getting a good price.

At the same time, networks and technology is getting more complex, so it has to work.

So some experimentation that is done here and there doesn't always come out as the best bottom line solution in the long run.

So I think there are several aspects of it.

And it has always been.

I guess -- it's clear that those things are impacting the decision process.

Can you talk about specifically Ericsson and how you feel your win rates in different geographies have been changing, perhaps over the last 12 months or so?

Are you winning more in emerging markets, etc?

We are -- I think the last two or three years have probably been the best years for Ericsson in many years, when it comes to winning market share.

And it is very much driven on our technology leadership and what we so much talk about, the total cost of ownership, which means that it's just not the matter of the network, but actually what is the bottom line effect for an operator in the long run.

Sometimes we see -- and I will not underestimate for a second our Chinese friends, but sometimes there are thoughts around them about their winning rates.

And remember that there are often smaller networks and [pet] networks and so on, whereas if you really look at where all the bulk delivery is going, where the meaningful contracts are going, you may get a somewhat different picture.

That's great.

Thank you very much.

We will take our next question from Gareth Jenkins from UBS.

Yes.

Thanks for taking the question.

I just wondered, Carl-Henric, with the cash generation -- strong cash generation that you've seen in Q1 and obviously the strong free cash flow conversion, what your intentions are to do with the cash long term.

Are there any acquisitions that you see that you need to make to fill in gaps within the fixed line portfolio, for example?

And then, just secondly, it's a geographic question.

I noticed that Canada was particularly strong in the quarter, with the 4% of your sales, and I just wondered what was going on in there.

Thanks.

Well, I will start off with the -- I will talk about the cash situation.

In this financial crisis that goes on and somewhat more challenging environment generally in our industry, not necessarily related to the first, I think they are good reminders of the importance of holding a good cash position.

And we are not alone there.

I think that we and Cisco and Nokia and Microsoft and others, I think we are -- I think it's important to have a good cash position for all those reasons, whether it turns suddenly much better or much worse, or there are opportunities for acquisitions.

Acquisitions is not a prime strategy for us.

We don't hesitate to do it when we think we can really add value, but it tends to be de-focus a company a bit.

So the more we can do ourselves, the better we think it is to do that.

When it comes to Canada, Canada is an important market.

We have a strong position in Canada and Canada had a good development in the quarter.

Remember, though, that they popped up now as number eight here on a 10 list, but the list has only been 10 before so you haven't seen them.

They've been close to that list for a time, so they popped up a bit here.

Thanks.

Operator, we can take one last question, please.

We will take our last question from Johannes Ries from Cominvest.

Yes, hello.

Maybe only a question regarding fully diluted earnings per share.

I think you publish earnings per share on the number of shares which is just around.

And secondly -- all is answered, sorry.

(Technical difficulty).

What was your second question?

No the second question is already answered.

Okay.

Could you repeat the first?

We didn't really understand what you said about EPS.

If you can tell us maybe the -- why you didn't choose, maybe, the fully loaded number of shares for the earnings per share.

Fully loaded with also options or --?

Exactly, exactly.

I don't think there is any other particular reason.

We haven't really -- this is quite a -- not a big difference, as this is -- doesn't make a big difference what we choose here, but this is the way we've always done it.

I don't think we have a -- we don't hardly remember why we choose that strategy.

Okay.

Thanks.

Then we have had our last question and I would like to thank everyone and thank you, operator.

Before we finish today, though, I would like to remind you of our Capital Markets Day, scheduled for May 14/15 here in Stockholm.

Agenda and registration information is available on our website.

Regarding our interim report, please do not hesitate to call the investor relations team if you have any further questions.

Thank you once again and goodbye for today.

That will conclude today's conference call.

Thank you for your participation, ladies and gentlemen.