Telefonaktiebolaget LM Ericsson (ERIC) 2008 Q2 法說會逐字稿

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

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

(OPERATOR INSTRUCTIONS).

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

Mr.

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

Please go ahead, sir.

Hello, everyone, and welcome to our conference call this afternoon.

With me here in Stockholm is Ericsson's CEO, Carl-Henric Svanberg and Hans Vestberg, the Chief Financial Officer.

As you know, we will be making some forward-looking statements during the call today and these statements are based on our current expectations and certain planning assumptions.

There are risks and uncertainties associated with these planning assumptions and the actual results may be different due to a number of factors.

Therefore, 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 some comments about our results and plans going forward.

Carl-Henric?

Thank you, Gary.

Hello, everyone.

A couple of comments then, first on Q2 in summary.

We see very much a stable business activity.

There are some regional variations which I will come back and talk about.

Business is, for us, a lot driven by GSM, the continued spend on GSM, more than maybe most of us thought a couple of years ago, but also accelerating demand on mobile broadband.

We have seen a high proportion of new network builds that continue to put pressure on our margins.

Cash flow was quite strong in the quarter, SEK8.5b, and we'll come back and talk more about that.

We see no reason to change our planning assumptions and I'll comment more on it at the back then, but they are staying.

And, of course, we are affected by Sony Ericsson's breakeven result in the quarter.

So a couple of comments on the network side of the business, the fact that GSM continues and the interest for HSPA mobile broadband accelerates, with good rollout there.

And also LTE in early phase; this means that we will have three technologies that will exist in parallel for several years.

But it's also important that -- to note the winning track here, the winning technology track, where also the base stations and equipment that we're rolling out now is prepared for a migration path.

Even GSM base stations today can be gradually upgraded all the way to LTE over time.

3.7b mobile subscriptions is already an incredible number and continues to grow; 170m in the quarter.

And also to note that with the now soon 240m wideband CDMA subscriptions, 236m right now, it is growing with 31m each quarter.

That pace is twice as high as a year ago.

On the fixed and convergence side, a lot of focus on network transformation.

How do I take my network, as it looks today, into where I want to be in the future?

And IP plays a very important role here for the convergence, as such.

And, in that context, Redback is a very important part of that process for us, where we've used their technology increasingly now in product development in our own equipment.

So they are now being part of, for example, our range of base stations.

On the broadband side, there are now 352m mobile broadband connections, fixed broadband connections, which shows a growth trend of some 17m per quarter and, overall, a very strong demand for broadband of various kinds.

On services, we see continued strong demand for managed services.

We have now 210m subscribers throughout the world, on par with the largest operators, 50/50 split between emerging markets and mature markets.

What we also see is that with more and more of the networks being rolled out, it becomes more of, as I said previously there, on migrating the network that is there into the next generation, which means that it becomes more service-driven sales, and that systems integration and consulting are key elements in our strength locally.

We see -- in the managed services business, we see major efficiency opportunities, as we've often spoken about on the -- between ourselves and the operators, with overlapping work, but also in what we're doing now in leveraging more and more of our global resources in low-cost countries as more and more of the service work now can be done remotely cross borders.

If we look at then going to the numbers, we hit sales of SEK48.5b which, in the Swedish reporting currency, is 2% up, but in constant currency, organic growth corresponds to some 7%.

The operating income reached SEK4.7b.

I'm sure you've all seen that includes SEK0.2b from the enterprise divestment and operating margin is 9.7% here.

Cash flow was strong in the quarter, SEK8.5b, and that was a combination of, to some extent, all the activities that goes on with terms and conditions with suppliers and customers and efficiency gains and workflows, or what have you, but also it reflects the fact that we have lesser of growth in the turnkey-dominated regions and higher growth in US.

A couple of regional comments.

If we start with Western Europe, we are 3% down in the quarter.

And if you look at the graph, you can see that it's a pretty flattish development over the last couple of years.

Some of it is impacted by continued operator consultation activities, [two] offshore mergers, attempts to put the investments on hold.

It is a, throughout Europe, which I think everybody is aware that is living in Europe, lots of focus on mobile broadband and wireless connections in laptops and everything, and that is going on, but there are capacities and rollout networks that can absorb that traffic for a while.

We don't expect at least any upgrades for this -- for this year.

We continue to see UK very slow, as we've reported on since Q3.

Spain is also slow for us now and so are the -- and while the strongest growing countries in the region is right now the Nordic countries.

If we then look at Central Europe, Middle East and Africa, there is actually a slight decline there, but still lots of activities going on, both 2G and 3G rollouts.

Mobile penetration is growing beyond most expectations, closing in to 200m in Africa, just as one example.

Africa in general very strong, but we have parts of Eastern Europe primarily -- and Middle East, primarily Turkey and Saudi Arabia, that were slower in this quarter, but underlying good activity level.

Same goes for Asia Pacific, which is 5% down in the quarter.

This is almost all due to a tough comparison.

If you look at the diagram, you can see the strong growth pattern resulting from high business activity throughout the regions.

There is higher growth right now and the highest growth right now is in India, Pakistan and in Indonesia.

India is -- may soon become our largest market.

And since that is so much rollouts and new equipment, including third party and everything in turnkey projects, that puts some pressure on our margins here.

China, actually, had a very strong quarter but they were the reason for the very, very -- for the very tough comparison for last year.

So they -- on the numbers, they come out as flattish with last year, or slightly down.

But the activity level was very high now, preparing for the Olympic Games.

Japan was actually down in the quarter which is more a phenomenon being between rollout projects here.

We have new expansions, large expansion orders from Softbank that will come back and guide sales from early in the fourth quarter.

If we look at Latin America, good trend.

You can see the comparisons for last year there.

Generally good development for mobile and fixed broadband throughout the region.

Brazil and Mexico are strong-growing markets that push the numbers big time.

Chile is also growing equally much, but from a larger -- from a smaller base.

Generally good momentum in services and several managed services deals are being worked on and landed there in Latin America.

If we look at North America, it's the region that sticks out probably most here, especially considering that the economical development in North America isn't that strong, we are 47% up there.

Of course, you can see that it's, to some extent, depending on an easy comparison in this case.

Generally in the market, there is an accelerating demand for broadband services, both fixed and mobile, with rollouts of different technologies there.

And in our case, it's obviously the increased coverage build-out in HSPA and capacity expansions that goes on that drives our sales.

And, with that, I will leave over to Hans and talk more about the financials.

Thank you, Carl-Henric.

Let me go through the financial figures with you more in detail, starting with a couple of overall comments.

First of all, the figures that I will now comment on will be excluding restructuring charges if I don't state otherwise.

There will also be a move [over] product between professional services and multimedia which is a micro-payment system, IPX, which is in the figures that move.

And also we have included here in the figures the capital gain of enterprise, so you know that when I comment here.

As Carl-Henric said, a 2% growth in the first -- in the second quarter.

7% in constant currency, indicating that we continue to have a quite large effect of the US dollar decline, even in this quarter.

If we look at the gross margin, 37%, which is a decline from last year's 43% and, of course, here we have all the explanation with the business mix and the US dollar that we have been talking about previously.

If we look sequentially, it's also down from the first quarter.

And I would say that the main things are that India accelerates in the quarter with the turnkey, as we said already in the first quarter.

And we had a more normal quarter software and IPR sales.

As you remember in the first quarter, we tended to have slightly higher on software and IPR sales.

If we talk about the OpEx, that was sequentially almost flat, a little bit down.

And then we can see some early, even though fairly small, indications that our cost adjustments are now starting to take some form and shape.

I'll come back to where we are on those quarter adjustments, but the OpEx basically flat sequentially.

All this meaning that our operating margin was SEK4.7b, including the capital gain on SEK0.2b from Enterprise giving us 9.7% operating margin and, excluding Sony Ericsson, also 9.7% operating margin, of course, with the breakeven result of Sony Ericsson.

That means that we have no contribution in second quarter from Sony Ericsson.

If we then move on, looking at the other items in the P&L and the net income which includes the restructuring charges end at SEK1.9b.

Consequently, we had an earnings per share of SEK0.60 which also includes the restructuring charge.

The cash flow from operating activities, SEK8.5b.

This is mainly due to, I would say, we had a good collection.

We continue with a very good focus within our -- in our orientation on the cash flow.

Secondly, we had a fairly stable working capital position, even though the sequential growth grew.

And then, thirdly, I would say that we also had increase in other current liabilities.

And, as we have talked about before, other current liabilities is everything from advance from customers, accruals, cost accruals, provisions, VAT refunds, etc.

Some of them, of course, are -- or all of them, I would say, are also harmonizing with the type of projects and the business we have in that quarter.

And, of course, that will vary between quarters (inaudible) currently and [we have clearly] seen that before.

All in all, still, it's a good development on the cash flow.

Networks business, 1% decline in the business.

Here, of course, we have a US dollar impact on the top and bottom line, as we have said before.

You can also see on the network rollout that they continue to roll -- grow the network rollout portion within segment networks, growing with 11% which, of course, indicates that we continue to have a high proportion of new network buildouts that put some pressure on the margin, as well as we have India accelerating turnkey in the quarter as well.

And, as Carl-Henric said, we probably see now that India will be the largest market in Q3 already.

We also had in the quarter a more normal level of software and IPR sales in networks.

If we continue with multimedia, a growth of 16%.

Here, I would say now that our acquisition and divestments are neutralizing each other.

So that is not an impact of [an] either/or, even including the move of IPX, so a good growth of 16%; sequentially, 10%.

The operating margin ended at minus 1% which, of course, sequentially is a good improvement.

Here, of course, we have the SEK0.2b from the Enterprise divestment that we announced in the second quarter and also concluded in the second quarter.

Again, when it comes to the margin, just to be clear, that we might have variation between quarters here.

We have still 25% at our investment areas.

It's fairly small revenues, but high investment in R&D.

And we have three quarters that is normal business growing well with normal margins.

Adding to that, we are happy for the good progress that we have at both Tandberg Television and LHS, both from a growth perspective but also from our offering point of view there doing well.

Going to professional services, professional services grew 7%, 11% adjusted for currency and the move of IPX, but given also that we have adjusted a Hutch UK contract as you remember from the first quarter which is impacting here, it's still a growth of 11%.

Managed services grew by 17%, with the same comment on Hutch UK, of course.

We had in the quarter six new managed services deals signed.

I think most important and publicly-announced deals were the two in Latin America with Telefonica and Telcel or America Movil which are, of course, the key players in Latin America which is good there.

Stable margins in the quarter; 14% operating margin.

When we talk about the cost reductions, we announced earlier this year a SEK4b saving program, a SEK4b saving program, with effect 2009, with an estimated charge of some SEK4b.

Second quarter continued with the good progress.

We took SEK1.8b in restructuring charges related to two areas.

One is where we have done product and supply rationalization.

We have either decided to merge products or close them, which means that that has weakening effects on everything around it from sites to the people, etc.

That has also had, on the product rationalization, some consequence on capitalized development as (inaudible) of the closed products impacted on that.

The second area is layoffs, of course, in Western Europe that went down in the second quarter, including the announced layoffs in Sweden in the beginning of the second quarter.

Totally, we are now totaling charges of SEK2.6b so far this year, and we are feeling that we have good progress in all areas of the projects.

Very good.

Let me then just quickly comment on Sony Ericsson.

Sony Ericsson's strongest foothold is the European market which is significantly down.

According to Gartner, actually, 16% down.

Of course, that has an impact on Sony Ericsson.

But on top of that, they have had their own -- they haven't been as successful in launching their new product now that they've been on the last three, four years when they've been growing tremendously.

So, for that reason, their sales per unit shipped was slightly down and their sales was more down, and they are at the breakeven level.

This is a tough situation for Sony Ericsson, as such, but they are working very hard now under Dick Komiyama to rectify the situation.

And they have launched this cost-cutting program of EUR300m which they will do now in the quarters to come.

All in all, a challenging year for them, but I must say we've had good presentations from the Company and Sony and Ericsson are strongly behind here.

And when it comes to our planning assumptions, we haven't seen any reason to change those, as I said.

The continuous plan for a flattish mobile infrastructure market, with better growth in both professional services and multimedia.

We have said before that we believe that the industry fundamentals and consumer behavior support a more positive and a longer-term outlook.

So, in summary, I would say that we are seeing a challenging, yet stable, business environment.

The business mix is continuing to affect us.

The declining dollar has its impact on top and bottom line.

We had good growth in constant currency, some 7%, driven by GSM largely and the interest for broadband and services obviously.

We have a lot of focus now on operational excellence, as we've had through the last years, but not more so now also on the restructuring activities or the cost cutback activities and the execution of those in all the aspects of the Company, in SG&A and in research and development and in the operations.

So, with that, I'll hand back to Gary to guide us through the questions.

Thank you, Carl-Henric.

Operator, we are ready to start our question and answer session.

(OPERATOR INSTRUCTIONS).

We'll now take our first question from Tim Boddy from Goldman Sachs.

Please go ahead.

I'd like to ask a broad question about the macro environment, obviously following Vodafone's comments today, who are not the only operator, for example, to see significant slowdown in usage in Spain.

To what extent are you seeing any trend of pressure on usage, your customers in developed markets, or could you expect to see that become a broader trend if the economic challenges of Spain spread across Europe and, of course, they're present in the US?

And then, I guess a similar vein in the emerging markets, have you seen any market where there's evidence that, whether it be inflation of food or commodity prices, starting to also wear on usage growth?

That would be very helpful.

Okay.

Let me start with the first one and I'll let Hans take the second question here.

But when it comes to the macro environment, I must say that we haven't really seen any effect on -- no effect on us and very little in the discussions with the operators.

Vodafone, obviously, was out there and talked about Spain today but, generally, we haven't seen anything of that kind yet.

And, of course, our business is driven by many factors.

And we can see the contradiction there in US where -- which is presently our strongest growth market, 47% up, when the economical situation is a bit squeezed.

But if the financial crisis would worsen or go on for a long time, I'm sure there will come eventually some effects on us as well but, so far, we haven't seen really anything.

When it comes to emerging markets and inflation, etc., yes, there are some markets that actually have a very high inflation at the moment.

Here it's all about the balance, the value chain between our suppliers and our customers to see that we spread out that cost for the inflation.

And, of course, it's a little bit different from contract to contract.

But in general terms, we try to protect ourselves from those type of things, because we talk about service engineers in field or we talk about local purchases that are impacted by the inflation but, of course, if we are hit in very high level of inflation, it's always difficult to distribute that in the value chain between suppliers' costs and the customers.

But, so far, we have been handling that well.

Just to clarify on that, within, for example, your managed services contracts, are you exposed, either in developed or emerging markets, to a rise in inflationary pressures?

Or do you write into the contract some kind of inflation index?

It's different from type of contract to type of contract.

But we are always trying to get as much protection on it as possible when it comes to inflation, especially for our local cost.

Okay.

Thanks very much.

We'll now take our next question from Ed Snyder from Charter Equity Research.

Please go ahead.

Hi, this is [Mike Alexander] in for Ed Snyder.

My question is what percent of your growth in North America was due to AT&T?

And was the preponderance of that due to a second carrier in 3G?

In -- when you look at North America, we have several customers there but it's well known that AT&T is our largest customer.

And we could hardly present a figure like that without them being a significant part of it.

But they are one of many several customers.

It is also a mix of new rollouts and, to some extent, also increased capacity build-ups.

And just a follow-up on that, with the high mix of network rollouts, when can we expect these systems to mature and yield higher margins, or are the margins going to remain low and we'll just see services revenue go up?

Thank you.

The mix shift that we saw here in the autumn, with the higher proportion of new networks build, that does continue as we go along here and as we predicted it would do for several quarters.

But it is -- if anything, we have had even stronger growth in new network builds.

That obviously is good for us for the longer run because it increases our footprint.

The slower trend with the upgrades and expenses are primarily coming out of Europe and we see no shift in trend there.

Thank you.

We'll now take our next question from Janardan Menon from Dresdner.

Yes, hi.

Thanks for the question.

I was just wondering, on your gross margin trend, you did drop a bit because of you said the IPR dropping off a bit and because emerging markets like India were coming up stronger.

But you also said that India was going to be your largest market in Q3 and perhaps even beyond that.

Can we take that to assume that you could see further pressure on gross margins going forward?

Or would there be any other factors which could enable you to keep it roughly at the current level of about 37%?

The pressure that we get from a higher proportion of new network builds, where India is maybe the prime example because they are the fastest growing and the most competitive market because of the big potential there, and our position is strong in India.

But that is one element that affects the gross margins.

But there are different elements, some working up and some working down, and we are working hard in general to improve our margins over time.

We can all understand why our margins took a hit last year when we saw this business shift mix.

But, even if it's logical, we want to improve the margin so all our activities are directed in that way.

And we're not going to give any particular further guidance and so on.

And would you have any further cost-cutting measures at the end of this year to support that improving margin?

Are you putting in the plans right now which you will probably tell us later in the year or something like that?

We -- the cost cuts that we announced, the SEK4b, to adjust for slower growth, they are fine for the situation as it is.

We don't expect to launch anything else relative to that.

But in this industry, obviously because of the competitive pressure and then more so, and everything, everything is constantly thought through, every process, every way of working, every way of building our products.

So I do hope that we can find more and more efficient ways of working, but no programs of this kind we don't expect.

Thank you very much.

We'll now take our next question from Kulbinder Garcha from Credit Suisse.

Thank you.

Just a question, if I look at the comments you've made today and on the press conference, it seems that India's going to rise in your mix, it seems that China's going to be weak in the near term, there's uncertainties in Western Europe and I guess all of those suggest to me that your margins actually go down in the next six months.

And I guess, rather than making that conclusion, what are the positive bias of gross operating margins?

Is it just cost cutting?

That's my first question.

And my second one is on Western Europe, I take the point that you're not seeing any macro weakness today.

Can you remind us of what kind of visibility you have in Western Europe?

Well, if we start off with the gross margin, there are -- there are always a number of positive factors and negative factors that you can summarize in -- all in one direction, if you like.

It is true that India is impacting us.

It is true that China could be slightly weaker in the third quarter because of the Olympic Games and so on.

But there are other markets as well that create this mixed bag.

And, as I said, we're not going to guide for a particular quarter but, generally, we're working to improve the situation and that's where our focus lies.

When it comes to the visibility of the European market, if there would come into some sort of major stop or something, I guess we could be more affected.

But remember also that Europe is like US is, but a little bit ahead of Europe.

There is a fight on new attractive services and broadband rollout and everything.

And the Nordic region here in Sweden is driven very much around the mobile broadband rollout.

And I think there is sold 1m bundles here every (inaudible) wireless connection today.

So I don't think it's a -- it's not a very smart strategy to try to starve a European operator to success.

So, as long as we have a reasonable development, I don't think should foresee that.

Thank you.

We'll now take our next question from Mark Sue from RBC Capital Markets.

Please go ahead.

Thank you.

In Asia, and China in particular, do you have any data to suggest things will bounce back later this year?

What's your initial read on the impact of the restructuring, if you can give us your thoughts?

And maybe just finally on gross margins, understanding that it will bounce around, is there a new range that we should consider?

Is it more 37% to 43%, or is it a tighter range than that?

I don't think we're going to guide on that.

I think we've given you enough commentary on the gross margin.

The restructuring was commented on China, wasn't it?

No, that was in general.

I'll leave it to Hans because he heard the question.

Yes.

On the restructuring in US, if I understood the question, it is when will we get an impact.

As was said before, that's going to be in 2009.

We see some slight impacts right now.

But the whole idea with the -- what we are doing right now is that we are going to have an impact on the result in 2009.

And then [various question] on Asia.

And the question on China and Asia, if it will bounce back was the question, as I understand.

As we have said before several times, China has, at least in all industry segments right now in the third quarter due to Olympics, will have some sort of slowdown so they will most probably come back.

And we believe that we can grow in China this year.

Secondly, as we said also in the second quarter about Japan now that we have had going up and down and temporary down, I would say, and now we're getting over this and that can come up by end of the year with what we have there.

But, other than that, I don't comment more on Asia.

But those we have done comments on before.

And the earthquake impact in China, any thoughts on what that might do for demand?

Yes, just one more comment on Asia and then the earthquake.

I encourage you to look at the chart on Asia.

You will see that Asia is slightly down because of the tough comparison from an unusually strong quarter last year, Q2.

But generally the growth trend is there.

There is some impact in Bangladesh which is slow and so on, and Japan between quarters, but the growth then in Asia is good.

When it comes to the earthquake, there were -- many vendors in many industries were obviously hit and so -- in our industry.

So there is a -- some slight shortage here that we're still coping with and haven't had really any effects.

And we don't have really indication that we will start to have constraints.

But it's a tight race because there were some capacity that was put on hold.

So far, so good.

Thank you.

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

Yes, hi.

Thanks for taking my question.

I'd just like to come back to an earlier comment you made at the time of an H2 '07 decline in profitability.

At that time, you had stated that Q1 would be the bottom of this cycle.

So could you maybe come back on that statement now a little bit and explain to us where we sit in the -- in your either margin or activity cycle?

Thanks.

Well, what we said at that time was that we expected the business mix to prevail for several quarters.

And, therefore, it would be logical that Q1 was a low point since you see the seasonality would affect us also in Q1.

And, so far, it's proven to be that way.

And if we exclude Sony Ericsson, we are on a good trend this year and I won't give you any particular further guidance than that.

But we have concluded that the high level build continues and that Europe still is slow.

So I think we have to add that to the picture.

And maybe just a quick follow-up.

Given the strong, or relatively strong organic growth that you are getting, with like-for-like sales up, I think it was 8% Q1, 7% Q2, why are you maintaining such a prudent stance on the overall markets.

Well, it's -- remember now that that stand is on the mobile infrastructure market.

Then we have a stronger growth in multimedia and services that adds to the average.

And remember it is the market, and remember it is our planning horizon.

We felt -- or planning assumption.

We felt in Q3 that when we were somewhat surprised by the mix shift that this wasn't the time to go out and be very precise on exactly where the market was going to go.

But this is the planning assumptions that we expect at least is not going to be too optimistic.

And then we will see how it develops from there.

Okay.

Thank you very much.

We'll now take our next question from Ilkka Rauvola from Danske.

Thanks for taking my question.

It looks like your North American sales were flat during the quarter sequentially.

In the quarter, did you recognize revenues from a large software upgrade from AT&T?

Or would that happen perhaps in the second half, assuming that AT&T would test that to see how the iPhone, for instance, works on the network?

Well, in the -- there was nothing in particular regarding software/hardware mix when it comes to America that is reason to comment on.

And it looks that the work in process inventories were up in the balance sheet, so would that be related to anything that relates to the US market?

We don't go into details on where the work in progress or the inventory are.

But, of course, the inventory is up compared sequentially to the second quarter which, of course, indicates a high activity level in our business going forward as well.

Okay, thanks.

We'll now take our next question from Rod Hall from JP Morgan.

Yes, hello.

Thank you for taking my question.

I just had a quick question on provisions.

I noticed the balance is up again by almost a SEK1b this time around, and the provisions impacts are fairly high as well.

I wonder, Hans, if you could comment on how we should expect the provisions additions to go in the next couple of quarters.

Should we be expecting that you are going to continue to add to these?

And also, if you could talk us through what it is that's driving those additions that would be helpful as well.

When it comes to provisions in the second quarter, they should, of course, reflect the business risk that you have at that moment.

And, given the product mix, the current risk and also the country mix and the product mix that we have, that has created that level of provisions.

So, as you know, we have a very thorough process where we go through them all.

But, of course, it should reflect the situation that we have at the moment in the Company and what business we have.

Going forward, I don't comment on -- or it will always reflect the right level of provisions given the business mix that we have.

So I don't give any guidance if it should be a lower or higher.

This reflects the right level of provisions that we have right now.

Okay.

And also, just on the services, I noticed your other services grew fairly well in the quarter, and I wondered if you could comment on two things on that.

One, what's driving that?

And, two, do you expect that growth to continue or is that a one-off for Q2?

Question related to professional services?

Yes, but non-managed services.

Okay.

Of course, if you look into professional services, we have two thirds, basically, of the total revenue being some kind of recurring business which is, of course, important.

But then we have one third that is system integration projects, consulting projects that is varying between quarters as well.

But I would say that we saw a growth of 11% in the quarter, and we still believe in the market as such as a good growth possibility.

So yes and no on the question.

It might vary between quarters, but we have two thirds that are recurrent business here.

Okay, thank you.

We'll now take our next question from Per Lindberg from MF Global.

(Technical difficulty) for taking my questions.

The dichotomies and the discrepancies between different regions must have surprised you, I am sure, given what's happening with one of your operators in Japan in terms of the traffic load on the networks in Australia and your most prominent operator in North America.

The one that recently said that it needs to upgrade the capacity of the base stations by a factor of two, or you double the base station capacity in the next six months plus.

That is starkly contrasting the situation in Western Europe, where at least two operators are contemplating merging the networks with 3,000 base stations each, i.e., roughly a third of what AT&T in North America currently plans to double.

And Softbank in Japan is hovering around 60,000 base stations, many of which already with two or three carriers.

That must be opening up enormous opportunities for you should other operators behave like the front runners.

Can you comment on that in general terms, how you see your business evolving if many operators in your core markets were to behave like the front runners, in terms of accommodating mobile data?

Thank you.

Well, the various operators that you comment on, they are in different parts of their development.

If you take Softbank as an example, they are a challenger of the incumbent.

And they have to just develop superior services and better coverage and everything else if they should see it in their venture to challenge the incumbent there.

And they are really working hard, and they do it in all aspects of the business.

And they are doing an interesting job, and will continue to expand their network.

If you look at MobileCom in Austria or Telstar, they are incumbents that are driving very, very hard with the same conviction.

There is only long-term strong services and attractive services in the marketplace that can build long term success.

So the three of them are working very hard and, from our point of view, very much the same.

We have the situation in Europe where everybody is more hesitant and sitting back a little bit and watching.

AT&T is the biggest of them all and are doing exactly what you are saying.

I don't think we have to draw two big conclusions in one single quarter, but it is indicating a little bit where things should end up in the longer run.

And you must see a very stark contrast in terms of the number of base stations you are rolling out to operators that are pushing the agenda and, hence, a tripling or [quinn]-tripling traffic compared with those that are holding back.

That is clear.

And we should remember that, from a more technical point of view, when you had a GSM base station that wasn't fully loaded then that capacity was lost.

The 3G technology is much smarter so you could not fully load it, it takes time to sell as some of you may know.

But it means that when the load picks up, you actually shrink the sell, and you end up with having to fill up the network.

So you are right there.

If you build with a hard determination, of course, you end up with a tighter and more filled up network.

Thank you.

We'll now take our next question from Gareth Jenkins from UBS.

Yes, hi, just a couple of quick ones, if I can.

Just coming back to the market growth outlook, I think if I aggregate constant currency terms yourself and MSN and put aside Wuawei who are faster growing, you grew around 5% to 6% for H1.

And I just wondered whether we are going to expect a slowdown in H2 or whether you are more confident than you were six months ago.

And the second question, just on the second carrier channel upgrade in Europe etc., we talk about Telecom Austria, we talk about Telstra and, yet, your Australian sales are down, Telecom Austria expecting a 5% decline in domestic CapEx this year.

And I just wonder whether you can give a sense of when second carrier channels actually lead to upgrades in network capacity CapEx.

Thank you.

If we come to the first question about whether we see a slowdown or so on, obviously, we are not guiding here so we need to be cautious.

But there is nothing in particular that changes the way things are progressing at this point in time.

When it comes to Australia, there was a massive buildout where we changed, in fact, 5,000 base stations in almost 12 months.

That's one of the largest projects in the shortest period of time that Ericsson has made.

So when you compare that with a sort of -- when you compare that going forward, it will be a decline almost irrespective of what then happens.

In that sequence -- following a period after that, there are upgrades to second carrier which some of (inaudible) and tends to have been quite vocal about.

So they have started to do that.

Thank you.

We'll now take our next question from Nicholas Von Stackelberg from Sal.

Oppenheim.

Yes, thanks for taking my question.

I've got a question regarding free cash flow, which was exceptionally strong at SEK7.1b.

However, SEK5b of those relate to changes, especially on the liability side of your balance sheet.

In your introduction, you touched on these.

Can you give us a feel for how this will behave more on a short-term basis looking into Q3?

Should we expect some swing-back on these items and, therefore, a significantly lower free cash flow figure in Q3?

We will not give any guidance on that.

But, as I said before, other current liability we have been following that for several quarters back.

And that will swing with the type of projects and customers that we have.

If I have a lot of projects being closed, as we had in the fourth quarter, then it means all of that will increase our accruals.

Then we can get advanced payments from our customers.

Certain customers will get more VAT to [offload] liability on so.

So that little more swinging back and forth depends on the mix that we have on other current liabilities.

So it's -- I will not give any indication where it will go in the future, but this quarter, we had that type of mix and it can go back and forth.

But, anyhow, we would say that we had a good progress on cash flow.

And then just a quick housekeeping question, if I may.

If I remember well, in Q2 last year, you benefited from a contract around SEK1.6b that was pushed into Q2 from Q1.

Can you just remind us of which region that was allocated to?

I am not sure what that is, that comment.

What is that comment?

When you go back to your Q2 reporting last year, you talked about a contract that was pushed over from Q1 into Q2, as I recall well.

So the question is about a base effect in the regions.

But we can take this offline maybe.

We can take this offline with IR.

I cannot recall it.

Okay, thank you.

But we will definitely look up that, but I don't know.

Thanks.

We'll now take our next question from Clara van der Elst from Standard & Poor's.

(Technical difficulty).

I was wondering if you could also talk a little bit about (technical difficulty).

We can't understand you.

Could you repeat the question, please?

I think there is an echo.

You've talked about price competition and have linked this to regions, to India for instance.

I was wondering if you could also link it to network product types?

For instance, do you see them compared to 3G, and how has that developed (technical difficulty) [first quarter and the sector].

Can you hear me now?

When it comes to -- you broke up at the end there, but I think we got the question.

There is today, I would say, no difference for us on 2G versus 3G.

We have been clear that the initial rollouts are more squeezed margins than maybe upgrades and expansions with more software content, and as 3G tends to be more new rollouts and GSM more expansions that could be a difference.

But between the technologies, they are both mature enough, so there is really not that big a difference.

The reason why the Indian market is so competitive is solely because there is such a potential.

You think about now that we have learned that China has gone to 500m, probably going to go to 800m subscribers, when you are going to hit the 200m in India, everybody wants to be part of it.

So -- but that's why that's more competitive.

Okay.

And I had a follow-up.

Could you maybe disclose the number of professional services staff that is currently based in Sweden?

A follow-up from the wage inflation question.

Now, again, you broke apart, but it was better.

Can the operator do something?

Try again.

Shall I repeat the question?

Yes, please.

You are breaking apart.

Yes, we can't hear you really.

Try again.

Okay.

I just wondered if you could disclose the number of professional services staff that is based in Sweden currently.

This is a follow-up on the wage inflation question.

Was that clear?

I am sorry, I hear you asking about professional -- okay.

This is for Hans, please.

We don't go into exactly how it's distributed but it's, of course, correlated a little bit to where our business is.

But we have it fairly evenly spread on the local resources with our revenues.

And then I would say our global centers, which are I would say -- our global resources, they are in many cases placed in local countries like Romania, India, China etc.

You could probably -- it's probably a fair comment to say that, historically, if you go some years back, services was entirely a local business, where it was reflecting our local position in that particular market.

If you look further ahead five, 10 years, you will have much more that is cross-border in low-cost countries doing the Nokia.

Okay.

But you still have a quarter of your staff based in Sweden.

(technical difficulty).

(Technical difficulty).

Okay, thanks.

We'll now take our next question from Thomas Langer from West LB.

Please go ahead.

Yes, thanks for taking my question.

For the time being, I just want to diverge a little bit from mobile equipment and maybe just want to get the owners view on the prospects for Sony Ericsson.

So the question is should we model a further dividend cash-in in the third quarter?

And, secondly, do you think Sony Ericsson can maintain a simple handset JV also in the future?

You've mentioned that you were -- attended a presentation by Sony Ericsson management.

Maybe there is something you want to convey to the investor audience, how we should look at the future of Sony Ericsson.

Thank you.

On Sony Ericsson Joint Venture, if you look at it over the last seven years, although they are less successful right now, but they have certainly built a very good business foundation.

And there are no fundamental things that have changed in the way they work.

They simply have to shape up in some areas, which they are working very forcefully with.

When it comes to the -- and the strategic importance for us, the value, the big value for us is there.

For us, it's important not just to be able to build a network, but also to provide an end to end solution and understand how we do that effectively with products that enable such advanced services and communication.

When it comes to their dividend, this is still for the owners to decide on but, as communicated by Sony Ericsson in the quarter, they are planning for a dividend later this year.

Okay.

If I may, I just want to come back to that JV question.

So, in essence, what you say is that cost cutting plus better products will eventually do the trick.

The question I am asking is simply the fact that also Apple again mentioned the importance of the applications they've just launched, and I am just wondering whether we should see more initiatives also on that front.

Well, such questions I think are, of course, best put to Dick Komiyama and his team; they speak for their company.

One should remember, though, that Apple is really targeting a very high-end niche of the Company.

And Sony Ericsson's problems lies when they are strong in the middle to high end, but that's not necessarily in that particular segment.

Whether Apple will go long term, we all have to see.

So Sony Ericsson's issues don't lie there, but certainly I am sure there are opportunities there, and you should turn the question to them.

Thank you.

We'll now take our next question from Michael Andersson from Evli Bank.

Hi, it's Michael here from Evli Bank in Stockholm.

I have a new question regarding Western Europe and the network or the operators -- the network capacity there.

You are writing in the report that there is some excess capacity, especially in the HSPA networks.

Is there a chance of you to quantify that, as what scares me a little bit is the macro environment in combination with excess capacity in the networks as the lower usage, and that we would get a hit on CapEx in Western Europe.

The second question is the US good growth you had.

This morning, Carl-Henric, you mentioned also the fixed line here, or the fixed IP and also ICON.

Do you see similar growth within both mobile and fixed IP networks in the US?

Thank you.

The vast majority of the business in the US is driven through mobile networks in our case.

When it comes to Western Europe, the investment level is already low so -- because of the sales capacity there is there.

We must remember, though, that we [hold] about 50/60 operators and every operator having a niche situation.

But it is because the initial capacity that have even been expanded with software upgrades to faster networks with faster speeds, which initially gives some extra capacity.

It doesn't do that when you expand it to even higher speeds, as we have talked about before.

But it's already now at a lower standing, so it's more a matter of when it will start rather than how it will slow down.

All right.

Thank you.

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

Hi, thank you.

You mentioned lower turnkey projects as one reason for the better cash flow.

In the past, you've said that turnkey would generally increase as a percentage of sales, which was why the cash conversion guidance has been less than 100%.

I wondered if you could elaborate on the turnkey slowdown.

Is this more a one-quarter effect or a bit of a broader trend?

And if you could throw in any impact and, particularly on particular regions or change in business mix, then that would be helpful too.

Thank you.

Just a couple of comments there.

Some regions, primarily Asia and Central Europe, Middle East, Africa, are turnkey-like regions, whereas, Latin America and North America and Europe are not typically the turnkey projects.

Of course, there is variations to that exception.

But, principally, that's a good split to think about.

And in a turnkey project, it means that such an operator doesn't build up his own resources to roll out networks, and he gets dependant on us doing it.

In other markets where the opposite is, then he has full resources.

So it's not something that he chooses from time to time; he has a way of working.

Obviously, in a turnkey project with much more third-party products and so on, you tend to get paid at the end of it.

In a traditional way, you get paid at the end of the project.

That's why we build up much more working capital.

And that is, from a cash flow point of view, is when such projects grow faster than the Company as such, or faster than the market, that's when we build up working capital and drain cash flow.

Once you are at the more steady state, then cash flow returns again.

And that is a little bit what you are seeing in this particular quarter where the US is growing stronger and traditional turnkey markets are growing less.

But remember that you cannot do a full one-to-one comparison between where sales has been and where working capital build up is, because that is more -- working capital build up is for the future.

But that probably gives you some guidance.

And with lesser turnkey growth, that have give us some lesser constraints on the cash flow.

I guess your cash conversion guidance is still 70% plus, is that correct?

Our target is still about 70% cash conversion.

Okay.

Thank you very much.

Operator, we can take one last question, please.

Now we'll take our last question from Jan Dworsky from Handelsbanken.

Thank you for taking my question.

I had a question on the development of number employees, and as I understand it, we've seen one reason why it's increasing is managed services, but it's also increasing in R&D staff.

In relation to the restructuring program, should we expect the headcount, excluding managed service contracts, [added] to start declining in the second half of the year?

That's a little bit difficult to predict precisely how that is going to work.

And remember now that we are working [this] in line here when we are, on one hand, adjusting the number of employees and the costs down because of prudent planning for a flattish mobile infrastructure market.

And at the same time, we are making sure that we can -- we are not compromising on the R&D side, as you rightfully say.

So we have some expansions on the R&D.

But, all in all, it's, of course, a slowdown, but the services activities are very man-intensive, so it's not just managed services contracts that builds up services.

It's as much, be it systems integration or just support services or consultants that are pushing the numbers the other way.

Okay, thank you.

That would conclude today's question and answer session.

I would now return the call back over to your host for any additional or closing remarks.

Thank you, operator.

Before we finish today, I would like to remind you of our investor forum scheduled for August 14 in Boston.

The forum will mainly address technological developments and will not cover any financial information.

Agenda and registration information is available on our website.

And thank you very much.

See you next quarter.

Thank you.

That will conclude today's conference call.

Thank you for your participation, ladies and gentlemen.

You may now disconnect.