Telefonaktiebolaget LM Ericsson (ERIC) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the Ericsson analyst and media conference call for their fourth 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 the call.

Thank you, Operator.

And hello, everyone.

And welcome to a new year and to our conference call for the fourth quarter 208.

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.

And 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?

Thank you, Gary.

And let me be rather brief as several of you may have followed us on the webcast.

And let me start on an overall comment on the telecom market in 2008.

We passed a 4b subscription milestone, a pretty amazing number, especially for us working for an all-communicating world.

It was also a year of a mobile broadband breakthrough with no longer concepts, ambitions, ideas, it is happening.

And I'm sure that most of you around this call you are using your Blackberrys or smartphones or laptops and you're accessing Internet and dealing with your mails, wherever you are at every moment, whenever you want.

There is also a -- it's basically becoming standard with built-in modules, HSPA modules, in PCs.

But we're also seeing a real convergence trend now focus on migrational networks to all-IP convergence.

And that, and it -- all-IP networks, and it's also affecting our way of working.

The financial crisis is obviously a focus, and I'll get back to that.

But we must remember that the long-term positive fundamentals are intact here for where we see this.

It is not a telecom crisis.

It is a financial slowdown with the effect that it has on the society.

We just reminded everybody on a quote that Jeffrey Sachs, the Special Advisor to UN Secretary General, about the telephony where he says that "the mobile phone is the single most transformational tool for development in Africa".

It is important to remember the huge importance of build-out of mobile telephony in all parts of the world.

And that only as a first step.

Then comes the connection to Internet and the importance of that.

But going into 2008 and how we performed, we reached sales of SEK208.9b, with a growth of 11%.

And here it's important to note that the currency rates that have been swinging up and down are basically back where we started, which means that the 11% growth is intact even with the currency changes.

Operating income of SEK23.5b, which is on par with last year.

But last year started with a stronger first half -- in 2007, started with a stronger first half, weaker autumn.

This, in 2008, it was a weaker start and a stronger autumn.

So we have actually turned the trend and we have a positive trend here through the last half year.

Cash flow reached SEK24b after a lot of hard work.

We have seen a year of 11% growth, whereas working capital is up 3%.

Cash conversion reached 92% and well exceeded our targets of about 70%.

We are now at, with a cash position, at SEK34.7b.

And I think this is a strategic, a matter of strategic importance in this time of the bank crisis and financial crisis.

It is important that we have the strength and the capabilities for difference in [REOCM].

Restructuring charges were announced a year ago with ambitions of reaching SEK4b in savings at SEK4b of charges.

We accelerated that as we saw more opportunities throughout the year and we ended up at SEK6.7b.

The Board is going to propose a dividend to the shareholders meeting of SEK1.85.

This corresponds to a total dividend of SEK6b, to be compared to last year's SEK8b, basically reflecting the fact that the Ericsson earnings is intact but we've had a dramatic decline in the contribution from Sony Ericsson.

So in terms of dividend versus our earnings, it's a non-changed ratio there.

Of course, we are all aware of how Sony Ericsson has been affected and the whole handset market is.

So I'll come back and talk more about that in a second.

If we then look at the global economic slowdown.

First of all, as I said, this is not a telecom crisis.

This is a financial crisis that has turned into an economic slowdown.

If we look at our market, operators are in good shape.

They have strong financial positions, most of them, with very, very few exceptions, four or five exceptions.

The networks are fairly fully loaded and there is strong traffic increase almost everywhere.

And, therefore, there are fundamentals in place for continued expansions and investments in networks.

And the effects on the mobile network market should therefore not be that significant.

So far, we have hardly seen any effects at all in the mobile network investment.

We can see some on the fixed side, people this time are rather abandoning their fixed lines but they keep their mobile phone.

However, having said that, when we are experiencing in the world today the most severe economic decline that we have seen since the thirties, and now it's across the world, it seems unreasonable to assume that our industry would be untouched.

And that is also why we are taking precautious actions here.

Obviously, the handset market is affected, primarily on the replacement side.

So far, we haven't seen much of a falling build up of further subscriptions in the world.

That continues.

But replacement phones sales is declining as people continue to use their existing ones.

And they don't call less but they use the existing phones.

When it comes to the cost reduction in 2008, I can be brief.

We wanted to do SEK4b, we ended up doing SEK6.5b.

All of -- all of this is now basically in place so we should have full effects from January 1.

But, more importantly, is that we will continue to do more.

And let me -- what we will do is basically the same amount of charges.

But we will, this time we believe we will have effects of around SEK10b by next summer, by midyear 2010.

Again, a 50/50 split between cost of sales and operating expenses.

But it's important to understand that the underlying rationale for this -- for these cost efficiency actions is the fact that we're moving towards all-IP technology.

This means that we will be able to use, or we are able to leverage synergies between different technologies, to work with fewer software platforms, to have a higher degree of hardware reuse.

And that means that we can -- we can, simply put, work in a more efficient way.

So the savings we are doing were planned anyway to come for the -- during the next several years.

We are accelerating it because we want to make sure that we prepare for tougher times here.

But it also means that we are not changing our strategy, we are not losing any of our capabilities by doing this.

The -- it will result in further consolidation of R&D sites.

We've done that already through the years.

We will do more of that.

There will be some layoffs.

But it will also be fewer temporary workers and consultants.

All in all, it will affect some 5,000 employees in the world, of which 1,000 will be laid off here in Sweden.

This is on par with what we did in 2008.

If we then look at Q4, we had a strong quarter.

We ended up at SEK67b.

This obviously corresponds to a growth, a strong growth, of 23%.

Not fully half of that were currency effects, more than half was the effect of a higher business activity than we and most, I guess, expected.

It was not any particular market, not any particular product area.

It was generally across the board.

And even with no currency changes we would -- this would have been our strongest growth quarter in the -- throughout the year.

And operating income, we reached an operating income of SEK9.2b, with a capital gain from the Symbian share divestiture offset by the loss in Sony Ericsson.

And, excluding Sony Ericsson, this number, SEK9b for the Ericsson business, is on par with the highest earnings that we -- that we've had before.

Cash flow was SEK7b, as I talked about.

Hans will come back and comment in a minute.

I'll just give a couple of comments around the regions before I hand over to Hans.

Europe showed a breaking -- break of trend here, getting back to growth 5%, obviously with some effects from the currency side.

We are generally seeing a growing demand for mobile broadband.

Services is obviously a bigger part of our sales in Western Europe than anywhere else in the world, close to 50%.

And even an -- increased focus now on Managed services in various forms.

We had countries like Germany, Denmark and Italy that are sticking out a little stronger than others.

But you can see on the graph that Q4 was a strong quarter here.

If we look at the CEMA regions, Central Europe, Middle East, Africa, sales were up 24%.

You've heard us comment on several times that we were seeing an underlying business activity, healthy -- healthy, glowing.

And now it translates into sales growth.

And you can see on the graphs again that there is a -- that's an interesting trend there.

It is about 2G, it's about 3G, across the region.

Nigeria, Saudi Arabia, South Africa, all involved in primarily 2G and some 3G -- 3G projects.

But we also had Russia where we have major 3G roll-outs going on.

If we then go into the Asia Pacific, the strongest growing region in this quarter, 49%, with a lot of activity in many markets.

For the first time, India for the full year is our largest market.

And it's also the fastest growing market.

Japan and Indonesia are the strong markets.

Japan, we have talked about Japan several times.

We have had several great years, but we were slower in the beginning of the year.

Q4 was a strong quarter and Japan is now -- was now the fifth largest market.

Indonesia is another strong growing market here.

We have also 3G licenses that were issued just a few weeks ago, immediately leading to RFQs, and an award process going on.

It won't be -- it won't take long now before the outcome -- we see the outcome of the wideband CDMA roll-out for Unicom.

And we're -- we continue to offer a good outcome, as we've talked about before.

If we look at Latin America and you look at the chart, you can see it's a strong -- the strong growth trend continues there.

But the comparison got a little tougher because Q4 2007 was strong.

Here, again, it's a lot about both 2G and 3G, new builds and expansions.

Mexico and Brazil are obviously still the most important countries.

Brazil the biggest, but Mexico the one right now with the strongest growth.

We haven't really seen any financial implications yet.

But obviously, Brazil, like Indonesia in that there are some markets here will have -- where we have seen a very strong decline in the local currency that may get some effects here over time.

But 3G is well established across the region.

If we look at North America, we have 13% sales growth, less than we have seen in the previous quarters.

But if you look at the chart you will see that it's more the comparison that gets difficult here, more challenging.

Q4 last year was when the stronger sales started.

We -- it is all driven by a consumer demand for mobile broadband.

It is really picking up in US.

Everybody wants mobility wherever they are now, and it's a lot of focus on continued rollouts on HSPA and expansions.

Obviously we have currency effects here as well in US as the dollar had come up as much as it has.

So let's go into more details on the financial numbers, Hans.

Thank you, Carl-Henric.

Hello, everybody.

I will comment the financial figures a little bit more in detail.

And I will comment them excluding restructuring charges if I don't state otherwise.

Sales of SEK67b in the fourth quarter, giving a full year sales of SEK208.9b.

The full year growth is 11%.

And, as Carl mentioned, Carl-Henric mentioned, the currencies, currency impact is very limited on a year-to-year basis.

In the fourth quarter, with a growth of 23%, we had an impact of the weakening Swedish krona by the year end, which has given us some extra growth in the fourth quarter.

However, even excluding that, that still would be our best quarter, our strongest quarter, the fourth quarter.

Margins, the gross margin is going down to 35.2%, percentage, which is a decline with some 1% compared to the fourth quarter last year.

More, I would say a mix issue.

We had a lot of completions on projects, especially these new network rollouts.

And you can see on the acceleration on our network rollout services that has a sequential growth of 61%.

OpEx continued to come down.

And we can see that our cost rationalization program during the year has given effect.

However, somewhat offset on the currencies in the fourth quarter.

All in all, ending on an operating margin of 13.7% for Ericsson.

Whereas we have a negative contribution from Sony Ericsson of [0.6%].

And then a positive contribution from a capital gain from Symbian in those numbers.

Net income ended at SEK3.9b.

And that's a number including restructuring charges and also the full contribution from Sony Ericsson, which includes also restructuring charges.

So that's coming down to an earnings per share to SEK1.21.

If you then look at the cash flow, the cash flow full year ended at SEK24b, which, in the fourth quarter we made some SEK7b in the operating cash flow.

This is being done through hard work through -- across all the Company, of course with a focus we've had on cash flow.

And on the working capital side we have improved our inventory and the trade payables.

And the trade receivables went up in the fourth quarter.

And the main reason is of course the volumes at the end of the year, but also the currency exchange rate as we used the closing rate here.

So that will get an extra increase on our receivables there.

Anyhow, that led us to a 92% cash conversion compared to 66% cash conversion last year.

If we then just get a little feeling about our financial situation.

We added some SEK10.4b in net cash the last 12 months, going up SEK34.7b in net cash, adding some SEK4.4b in the quarter.

And if we also look into our debt structure, which has not changed since the last quarter we reported it, but we have some repayments falling due in the second quarter of SEK3.5.

The rest is fairly good, spread out well up to 2020 or 2017.

All in all, a very balanced situation on the balance sheet.

An addition is that we have undrawn credit facilities of some US$2b as well.

So let us look into the three segments, starting Networks, which had a very strong ending on the year, growing some 22%.

Of course, there is a dollar effect in the quarter, but, full year, a growth of 10% has very little currency changes.

So still a good year and a good growth for Networks.

We can see that last year we had a record deliveries for GSM.

And, as Carl-Henric mentioned, we have now the two last markets basically going 3G.

That's China that has decided, India, most probably will be taking the final decision in this side of the year.

So that's very encouraging.

But also we had a very good progress in our IP broadband portfolio, with a lot of first contracts, of course based on our Redback and [enter square] business.

We can also say that Redback had a very good fourth quarter, continue -- grow with a very good growth.

Finally, clear leadership in the softswitch and the blade cluster, which is next software -- softswitch or switching technology, which also is very important.

All in all, leading to an operating margin on 14%.

And that increase or improvement during the year is of course driven by volume.

But not only that, also the cost efficiency gains and that were done during the year.

Multimedia, a growth of 4%.

But, for comparable units, 21% in the fourth quarter.

We can see that we had good growth and in both Tandberg Television and revenue management in the fourth quarter.

We can see some slowdown impact in EMP, Ericsson Mobile Platforms, due to the global handset market.

Other than that, we ended on an operating margin of 12%.

That includes of course, then, the SEK0.8b from the sale of Symbian shares.

So that will lead the Multimedia to the fourth quarter to a slight loss, and also for the full year.

As I said before, this is a business where we have good growth areas and good profit areas, and we have investment areas.

And that is panning out to be somewhat a slight loss due for the year, full year.

Professional Services, the last segment, had a very good quarter, growing some 34% in the quarter and 26% in constant currency.

Full year growth of 14%, which is good.

You can also see that now that we have a sales growth in all the different segments or product areas within Professional Services from manager, system integration, customer support, education and consulting.

Managed Services has definitely been developing good this year.

And it's -- we believe we are the leader in the managed services industry in -- for the telecoms, ending with 11 new managed services contracts and 250m subscribers in our operations right now.

So that has been growing nicely.

Finally, we recorded an all-time high operating margin, on 18% for the quarter in Professional Services, and full year 16%.

This is, of course, driven by the high volumes in the fourth quarter, but also all the continuously efficiency gains that we're doing in Global Services, and a favorable mix in the fourth quarter.

So, by that, I hand back to you Carl-Henric.

Let me just say before we hand over to Q&A here, Sony Ericsson and the handset market is well known I think.

We are seeing declining in demand for handsets, especially replacement phones.

And Sony Ericsson is affected with a 23% decline.

They are, therefore, taking pretty strong measures.

They are adjusting their OpEx cost structure with some EUR480m, which is quite a lot for a company with about 11,000, 10,000 employees.

We are confident that these are activities that will -- that will -- will be very meaningful in the situation that they have.

They will continue to bring out great phones to the market.

So they are, they should be, well equipped to drive a good turnaround here.

But it's of course a challenging market that they are in right now.

Finish off here with our focus for 2009.

It's quite obvious.

We are spending more time that ever to be close to our customers and make sure that we understand not only their principle [sectors] and ideas, but how they are actually going to run projects.

And if there is any sign of any delay or any change in their view, and make sure that we are well positioned to grab every opportunity that is out there.

We are preparing for tougher times.

It -- there are uncertainties and it's not easy to predict exactly how things is going to take -- going to develop here.

We will have a continued focus on margins and cash generation.

I think there are lots of opportunities to take market share here.

And I don't think it's -- this is the time to buy market share.

I think it will come a little bit by itself because there are weaker players out there.

We'll continue tight operational governance and make sure that we are well positioned to take, to grab opportunities as they come along, and extend our leadership.

So, with that, I'll hand back to Gary for Q&A.

Thank you, Carl-Henric.

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

Thank you.

Ladies and gentlemen, at this time we will begin the question and answer session.

(Operator Instructions).

As always, please keep limit yourself to one question at a time and please keep your questions at a broad level.

Detailed information is provided in the report, and Ericsson's Investor Relations and Media Relations team will be happy to take additional questions and discuss further details with you after the call.

We will pause for just a moment to allow everyone to signal for questions.

Our first question today comes from Edward Snyder of Charter Equity Research.

Please go ahead.

Mr.

Snyder, Mr.

Edward Snyder, your line is open to ask a question.

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

Please go ahead.

Thank you.

Recognizing your [which run] your full-year guidance, can you perhaps give us your thoughts on how we might see seasonality develop for 2009?

And also maybe if you could tell us which regions you feel most comfortable with?

And, conversely, which regions you are concerned with from a growth point of view as we start the new year?

Thank you.

Well, let me just remind you of the obvious in our report.

We are -- we are concluding that fundamentals are in place for continued investments in our space, but there are higher uncertainties due to the very dramatic economic decline than we usually see.

And that is why we are more focused on presenting how we see things and presenting what we do to make sure that we stay competitive and can defend margins even in a tougher scenario.

So, with that said, there's nothing fundamental that should be out there changing seasonality.

But, with a larger uncertainty, I guess that could influence even that part.

I don't think that there is any, either any particular factors that would make one country more or less attractive than it would normally be.

One can, of course, argue that the countries with very sharp declining local currencies, and operators, some of them, depending on how they have structured the balance sheet, could have lesser capacity to invest.

I mean that's a clear one.

But I think it's also clear that these markets tend to be the fast growing ones in terms of subscriptions.

And everybody knows that -- that this is a competitive game where it's about grabbing market share.

So anyone that hesitates on their build-outs will immediately lose to someone else that is more aggressive.

So, even that has its pros and cons.

I don't think there is anything in the situation otherwise that would change a normal year.

Okay.

And, Carl-Henric, you didn't mention anything about swapping out Nortel's gear?

Is there a plan in place for that?

Well, absolutely yes, in the sense that if you look at where we were in 2003, with a market share of 30 plus some, and there were 12 competitors.

Today there are maybe three, four, strong ones left and we have well over 40.

All of that is market share growth on -- as a result of companies leaving or contracting here.

And Nortel is one of them, so obviously Nortel's market share has gradually picked up.

I guess we haven't seen the end of the story of Nortel yet.

They're doing chapter 11 and they may come back in a new format or so bits and pieces.

But, certainly that's market share expansion opportunity.

Thank you.

Thank you.

We will now move to Pierre Ferragu of Bernstein for our next question.

Please go ahead.

Thank you for taking my questions.

With regard to Managed Services, you've had a very strong quarter and a lot of that of course is currency.

But I was wondering how much -- how much of that is more of one-offs like consulting related to your rollout contracts for instance?

And how much is more of a recurring nature?

And, when looking into 2009, we hear a lot of operators considering outsourcing to cut costs.

So I was wondering how your pipeline looks like and if you expect a significant number of outsourcing deals for 2009?

Thank you.

Okay.

Regarding everything that is reported in Managed Services is recurrent business, so it's nothing else.

But if you look at the whole Professional Services, roughly two thirds is recurrent business, and the rest one third is more projects -- projects or assignments on system integration, together with some solutions or consulting, etc.

So that's -- that's how the structure is.

Regarding going into 2009, I tend to agree with Carl-Henric there.

There are of course opportunities also in a little bit more uncertain marketplace going into 2009.

For example, Managed Services could be a very interesting product for operators if they are seeking efficiency gains.

So, and we are -- we are feeling fairly confident, we have a very good solution and world leader in Managed Services.

So if that market will grow in importance we will be definitely well positioned.

But do you see already an increase in your pipeline of projects or operators asking you for -- to bid on outsourcing?

I would say that all - all operators, not all, but the main part of operators in the world are all considering managed services in one form or another, then, of course decision making is a little bit different.

But I would say that we probably see a little bit more operators looking into that right now.

Thank you.

Thank you.

We will now move to Sherief Bakr of Citi.

Please go ahead.

Thank you very much.

My question really relates to competitive pressures and pricing dynamics.

You alluded that some of the smaller players are going away.

Can you maybe update us on how you see the competitive dynamics changing over the next 12 months, specifically on pricing of new contracts?

And, maybe added to that, given a lot of concerns about credit availability, what the role of credit export agencies will play or have played in your market share gains over the last 12 months and perhaps more importantly for your competitors, particularly the Chinese?

Thanks.

I would say in general that in tough situations, if there was, which we haven't really said, but even if there was some market decline or a tougher situation, I guess you could on one hand argue that everybody will be more cautious around their margins and protect their bottom line.

One could probably also argue that one would protect the volume and make sure that you fill up your business.

Now most of us are not dealing with any factories so we don't have that issue.

I am not able to say whether it's going to go one or the other way.

I would rather say that I don't expect pricing pressure to accelerate here.

I think it's also quite important to remember where everybody is in their earnings.

We are making some decent margins, and we have a pretty solid cash position.

I think we're the only one in that position.

Everybody else is basically in various forms of debt and with poor margins.

So I think we do not foresee any particular increased competitive price pressure here.

Maybe Hans should talk us through the financing?

As you know, we have had a clear policy the last five years on the financing that we use our balance sheet to a very little extent.

And you can see it on the balance sheet.

However, of course we're working with the credit agencies around the world to support our operators, especially of course the Swedish credit agencies.

I would say lately they have been supportive in supporting us in making deals all around the world.

So I cannot quantify if that has increased our market share, particular or not.

But they are important these times of course when operators are looking into their cash position in the little bit more challenging times ahead.

So yes, we work with the credit agencies as usual.

Just as a quick follow-up, are you seeing any evidence of your Chinese competitors seeing any form of financing strains in the current environment?

Is that maybe causing them to be slightly less aggressive or offering slightly less favorable payment terms to your potential customers?

I think in general when -- with the sort of growth that they have seen, they are not living in any other world than we are.

So they will have the same constraints as anybody else.

With strong growth you need strong finances, and that is probably not their best game right now.

I think they have in a pretty amazing way been able to support a lot of growth from a not too strong position, and they seem able to do that.

Thank you.

Thank you.

Next we will move to Edward Snyder of Charter Equity Research.

Please go ahead.

Thank you very much.

Can you hear me now?

Carl, you've seen very strong performance in networks rollouts in Asia.

How much of that is an effort, do you think, to use up money budgeted for '08 before, say, the end of the years versus ongoing spending?

And should we expect the new network rollouts in 3G in China, which you alluded to in RFQs to also carry the lower margins typical of GSMs initial network rollout?

Thanks.

I think every time that you look at projects where there are very large quantities, where there is a lot of footprint being secured and many years of expansion, you can expect the path to be pretty tough.

And that is always the case.

There is no difference whether it happens to be China or Latin America or anywhere else.

So of course it will be tough, tough margins initially there.

But it's one of the greater business opportunities for -- since several years and for several years, I would say.

In terms of the strong performance in the fourth quarter, especially in India and the rest of Asia, is -- do you see that more as ongoing business?

Or how much of this was to use up budgets that had already been allocated for '08 before the end of the year?

That's -- these are not State-owned companies that have budgets where you can use up money, otherwise it's getting lost.

These are private companies or public companies and they are -- it doesn't matter if they spend it now or later, it's the same investment anyway.

But there is an element of what you're saying.

There is always an element of Christmas shopping and some years it's more, some less, some years it's less.

We would probably have expected it to be a little bit less this year and it wasn't.

It was a pretty good year in that sense.

Thank you.

Thank you.

Next we will move to Jeff Kvaal of Barclays Capital.

Please go ahead.

Yes, thanks very much.

Carl-Henric, on the dividend, it seems that looking back a bit that the dividend reduction is higher than Sony Ericsson's contribution has been in the past.

So should we be -- should we read this as a signal -- worry about Sony Ericsson going forward?

Or are you being just careful about your cash heading into 2009, given your uncertain view?

Thank you.

I think the -- if I should speak for -- just [interpret] the Board discussion -- I'm part of the Board, by the way, but this is not a management decision, obviously.

And eventually it's going to be a shareholder decision.

But I think the view is that on one -- to reflect the fact that our earnings including Sony Ericsson has come down and therefore if our total earnings have gone from SEK31b to SEK24b or so, a reduction, a similar reduction of dividends seems appropriate.

I think also the Board wants to on the one hand signal that it is good to be cautious in these times.

On the other hand, not overreact, because we are in a good position.

Ericsson is well positioned to grab opportunities and to continue to develop well.

When it comes to Sony Ericsson, they have a quite strong financial position.

They have a net cash of EUR1.1b, so they should be able to deal themselves with even a tougher development.

Of course, not for too long, but there is nothing around the corner that we are planning for there.

Thank you.

Thank you.

James Faucette of Pacific Crest has our next question.

Please go ahead.

Thank you very much.

I wanted to follow up on the questions related to your particularly Chinese competitors.

And I'm just wondering, obviously they -- you would think they would be subject to the same conditions of difficult (technical difficulty) repayment or payment terms, etc.

But I'm wondering how, if any, the impact of currency moves may have affected their competitiveness, particularly in emerging markets where contracts seem to be driven primarily by price.

The won obviously has been quite strong whereas the Swedish krona has been weak along with a lot of these emerging market currencies.

I'm just wondering if you feel like this improves your ability to deal with them specifically on price, or if we haven't seen much change in that respect yet.

Thank you.

I think they are hard to read at times.

And they have done -- I guess we must just conclude that they've done a good job in building up a position in a rather rapid time.

Obviously it's easier to take a reference project.

And so when you take a few or your first one, the more you grow your portfolio and your sales and you have considerations to take left and right, you cannot sell cheaper to one customer, to someone else and so on.

They will end up in a more normalized way, I would think.

They will, I'm sure, continue to fight hard to grow their position.

If you look at currency wise, they are not winning on the strengthening dollar and RMB.

Their cost position is -- we are gaining position versus them, that is clear.

Exactly how it's going to play out, I think it's hard to say, but I don't think it's working against us right now.

But as of yet, at least in the contracts that you're contesting now, that hasn't been an issue, it's just one that you would anticipate coming into play?

I didn't (technical difficulty).

The same about (technical difficulty) the memory (technical difficulty) it's difficult when you look at the whole pattern but I wouldn't say that (technical difficulty).

Operator, can we have the next question, please?

Thank you.

Our next question today comes from Rod Hall of JPMorgan.

Please go ahead.

Yes, hi, thanks for taking my question.

Hans, I just wanted to ask you as the CFO if you're finding that hedging costs are going up with all of the currency volatility that we've seen recently.

And I wonder -- I know there's a practice at Ericsson to hedge costs on deals you're bidding, and there are a lot of deals up for bid at the moment.

Do you find it now more difficult to hedge costs moving forward?

Do you think you'll be able to hedge less costs than you have been able to in the past?

Or do you still feel pretty confident that you can lock in margins as you bid these deals going forward?

Yes, you're right, we are pretty conservative on the hedging and we have been keeping the same policy for quite a while.

There might be some currencies that are a little bit more difficult to hedge in these times, especially some emerging market currencies.

But other than that, I don't see any major challenges with that.

Of course it's always a cost, but if you have a policy and you follow that all the time, I think that's the best way to do it.

Okay.

And then I -- just to follow up on the margins.

Multimedia now this year is a negative margin for the full year and it's been very volatile, as you guys know.

I wonder if you could talk to us about how we should be thinking about that going forward?

Most of us keep taking the last quarter and extrapolating -- increasing margin off of that.

It doesn't really feel like that business is going to necessarily generate any kind of significant positive margin in the next year.

Can you just talk to us about how you see that developing?

It's our smallest area obviously and it's a new area growth area, and we have -- as we've said, we have the majority of the business is activities charging, service delivery platforms, Tandberg television and so on.

These are areas where we have both strong earnings and -- strong growth and strong earnings.

But then we have the large investment areas and the nature, especially maybe on the charging side, are pretty large projects.

And we can have more of that in one quarter and we can have less of that in another quarter.

So I can understand that it can be hard for you guys to model it.

The important thing for us is of course that we have the strong growth that we have, 20%, where we are -- because this is an investment area.

Obviously, it's important to maximize profitability here, but how that swings is more how each quarter gets the combination of the different businesses, how they coincide in each quarter.

Okay.

We have been reshaping the multimedia segment quite a lot during the year and enterprise has been divested.

We will during the year 2009 also make the joint venture with ST.

So of course we're going to have a little bit smaller unit.

That's probably going to be a little bit easier to follow because we've had a couple of other areas in there.

So hopefully it's going to be easier to model for you going forward.

Okay.

Okay, thanks Hans.

I just have one last question, and I know, Carl-Henric, you've addressed this to some extent, but I wanted to get more specific about the cuts in R&D personnel.

In your annual report in 2007 you were talking about something just over 19,000 people in R&D.

And you're now talking about this incremental cut to costs, which adds 5,000 cuts to the R&D staffing, if I've got that right.

And then you're talking about that being on par with the original 2008 restructuring program.

So that feels like you're reducing your R&D staffing by almost half, down toward maybe 10,000, 12,000 people.

And I wonder -- I know you're saying that the convergence of networks towards IP and the simplification that comes along with that allows you to make those decreases.

But those are pretty -- those are very extreme decreases in the levels of staffing.

And I just wondered if you could get a little bit more specific and talk to us about maybe some of the -- give us a couple of examples of how this move towards IP is allowing you to get rid of or reduce certain areas of R&D that you previously would have needed to staff?

First of all, I'm glad you put the question.

It is a misunderstanding that the 5,000 are primarily in R&D.

It's the opposite, they're primarily in other areas than R&D.

And therefore it's important if others have arrived at the same conclusion.

We are not cutting back particularly much on R&D.

However we are -- and the bulk of the cutbacks is across the company in services, in general administration, in sales support and so on, as we simplify our product portfolio.

But it does mean that when we arrive at an all-IP technology world it means that we can reduce software platforms.

We believe that of the today's 15 to 20 R&D platforms we have, we can probably reduce that over time down to, say, five.

When it comes to hardware, if you just think 20 years back, you guys all know this, but if you think 20 years back, how every category of people had different computers, they had.

Today, whether you are music composer or whether you are an engineer or whether you're a journalist writing papers, you're all sitting with your laptop.

And it's all different software.

So it's the same thing here.

We get less hardware boxes, less hardware -- software platforms, more reuse of technologies, we're building Web capabilities into base stations.

So every base station can deal with its IP traffic directly from the base station backwards on -- basically a router technology board.

So this is all what actually takes down the need for both R&D, but also for support right through the company.

And could you -- since that isn't completely clear, could you talk about how many R&D staff you expect to hear by the time the program is finished?

Say mid 2010?

Roughly.

We are not necessarily want to tell that number in that detail, level of detail, because we are in the midst of these activities, and we start by talking about that internally with everybody that is related and unions and so on.

But eventually, of course, we will be able to show you how it develops.

But I think it is very important to state, we are not going to compromise on our technology leadership.

That is what has brought us success, and that is not the route we're going to go.

Okay, thank you for that.

Thank you.

Alexandre Peterc of Exane BNP has our next question.

Please go ahead.

Yes, hi.

I'd like to ask you a question on mobile broadband and the real impact it has on your business.

Can you really confirm, because you've been rather coy previously on this, that the growth in Europe in particular is now effectively down to the impact of mobile broadband?

Or are there any other mechanisms in play there?

We have said already before that first of all the uptake of mobile broadband is strong.

It is strong across the world of course this year.

It has really taken off in US, it's the same thing in Australia, same thing in Japan, same thing in Europe.

We said in the last report I believe that we have already a pretty good growth, pretty strong growth actually, from operators investing in capacity for 3G, for example in Europe.

So far it's been offset by a parallel decline on the GSM side.

But now we have passed the level of the 3G build-out so expansion sales are now higher than GSM in Europe.

And therefore the transfer should get stronger and stronger.

Yes, I remember you saying that, particularly in Nordic countries but also in -- you pointed out some countries where you had a strong mobile broadband uptake that actually generated growth.

So are there any other countries you can point to now, like the UK, where you see that?

Or, I don't know, Spain, maybe?

With Spain in particular, it's probably the worst country in Europe now when it comes to economic development.

So they're actually somewhat touched also here.

But in general my comment was for the development for Europe as a whole.

And the countries you are mentioning are sticking out even more so in this development.

But this was the case.

Remember also, maybe that was not your -- exactly your question, but we have equally much it's also affecting the transmission part of the network as it is the radio interface.

Okay, thanks very much.

Thank you.

Matthew Hoffman of Cowen has our next question.

Please go ahead.

Carl-Henric.

You singled out China Unicom's W-CDMA build-out as I guess the primary opportunity for Ericsson.

And I'd like you to outline your expectations for Ericsson on that Unicom build-out.

Specifically, would you be disappointed if Ericsson was anything less than the primary contractor on that Unicom build-out?

And also outline whether you think Huawei and ZTE, whether they have the capabilities to lead such a huge effort.

Thanks

It's -- as I said, Ericsson's sales is extremely distributed around the world in 150 markets.

So it's -- there are always more exciting projects than others.

But it's nothing that -- no project's ever that -- that makes a huge difference from us, however they turn.

We have good hopes that we will play a lead role.

I'm sure that it could very well be that we could end up on par with Huawei or something here, because this is a major Chinese rollout and like it would be if there was a major rollout in Sweden or US or whatever country, there is always better to be a local than to be a foreigner.

And our position in China is very strong.

And we have -- we've actually good hopes that we will continue to hold our position well in China.

It's -- we have been there since 1892 so we are foreigners, but we are foreigners with quite a strong local touch.

Right.

And in terms of the margins on such a contract, should we anticipate that if you were to be a strong co-leader, some type of major part of that rollout, would you assume it would be a solid margin business or margin that's on par with your other network rollout business historically?

Thanks.

I think it would -- we would expect that to be a good margin business over a three, four year period.

I think we can expect it to be a pretty tough initial period.

There is no difference for that rollout than for any other major rollout.

It's the same thing as it was when we did the American rollout or other in Australia or wherever.

Initial rollouts are always where the toughest competition is and follows many, many years of expansion.

Great, thank you.

Thank you.

Stuart Jeffrey of Nomura has our next question.

Please go ahead.

Hi there, thank you very much.

I've got a question on your wireline infrastructure business.

I was wondering if you could just give us an update on your progress in optics broadband access.

Perhaps an update on whether you're happy with the margin structure there and whether you might be inclined to try and look for ways to improve your scale in those businesses, perhaps using your balance sheet to look at some of the M&A opportunities out there.

Thanks.

If you look at how much money that is spent on mobile access, fixed access transmission and core, those four areas -- when you in core include even routers and big routers -- these four areas, they are about equally big.

And you know that we are the clear world leader in the fields of mobile access with -- mobile core is almost part of that thing.

But there we are strong leaders.

We have invested in core in key technologies to pick up the most important strategic pieces in fixed broadband, for example, [deep on] where we see that.

That's this -- technology shaped like that is when you can break in and actually grab a position.

I don't think we are particularly interested in expanding other area in fixed access than in the fiber area.

When it comes to transmission, that is where both Marconi and Redback matter.

So they were important there.

I would still think that transmission optics, transmission is an area where we could probably grow even stronger and we're always looking at alternatives.

The basic strategy is own development and if something comes around maybe we will evaluate, we will always evaluate it.

On the router side is where again Redback came in.

I don't think we want to deviate too much from our base strategy with organic growth.

That has served us well, that is how we have advanced our position through the years.

It could be of interest to look at something, but I don't think that we would be particularly interested in acquiring something and just to restructure and close down activities.

That would take away our focus.

Thank you.

Operator, we can take one last question.

Thank you.

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

Please go ahead.

Thanks.

A few questions mainly around currency.

Can you just clarify, did you say that the currency impact was just under half of your sales growth year-on-year?

So that would have been I guess around about 11% or so.

And also, what was the sequential currency impact?

That's my first question.

The second one is what was the bottom line impact, could you give us some quantification on that?

And the third is, on your receivables, I take the point on exchange rates, but if you look at your receivables as a percentage of sales, it's probably 46% of annual sales now, the highest level it's been for five years.

And I'm wondering whether -- what checks you've done with respect to the quality of those receivables, whether you're confident you can collect or are you having to, in the current credit environment, extend more generous terms to your customers?

Many thanks.

Okay, let me see if I can sort out the questions that you had.

The first was regarding the currency impact year-over-year, meaning quarter four to quarter four.

As we said before, it is an impact, significant impact in the fourth quarter, less than half of it.

We don't go into an exact number because it comes a little bit academic as we're moving so much in the quarter what we're doing or not doing.

But it's less than half of it.

We still had strongest quarter, the fourth quarter for the year excluding that.

That means sequentially also we had with that some improvements on currency as we are using the translation, the average rate on the translation effect, and of course we got with that a little bit from the nine first months into the fourth quarter as well.

If that's correct.

In the fourth quarter you asked us how the bottom line impact was, and we -- that is basically a very small positive sign but nothing else than that.

Because we have also the hedges going one way and then offset by the translation.

Was that all questions?

No, the receivables.

The receivables, yes, they are high, and as I tried to explain at the beginning, we had very strong sales by year end.

Then we also need to remind ourselves that we're using the closing rate on the balance sheet when we close the receivable side, so that is of course a substantially higher, for example, dollar rate than the average rate, which we divide with, which giving a high proportion when you do it.

That I think is also an important reminder now that we have been running on for example US dollar, which is one of the most important currencies, that we have been running on an average rate of 660 the full year.

Now we're going to 2008 and of course we start with a high ending currency here of almost SEK8 and then depending on how it will continue in the quarter, that will of course be a big important factor as well when going into the first quarter.

Let me just add one thing about currencies that I think is important.

Remember that -- go back to 2003.

We were about 47,000 people, half of which was employed in Sweden.

Today we are 78,000 people, and we are some 19,000 in Sweden.

75% of all our employees are outside Sweden, which means that they are principally affected by the same.

When the currency goes up it affects cost as well.

If you look at our supply chain we have similar effects in our suppliers and where we buy components.

So I'm sure this is all clear to you.

But it's far from when you have manufacturing in Sweden and selling in a foreign currency.

There is a lot of natural fluctuations also on the cost side.

And just one follow-up there, just on the currency rate you translate your revenues at for the fourth quarter.

Would that just be the Q4 average or the year to date average?

How do you -- which way do you actually use it, just so I know how to model this going forward?

Hans Vestberg It's a year average for the 12 months.

Year average for the 12 months, okay, thanks.

Okay.

Very good.

Okay, thank you for participating in today's conference call and if you have any further questions please don't hesitate to give us a call.

Thank you and see you next time.

Thank you, ladies and gentlemen.

That will conclude today's conference call.

Thank you for your participation.

You may now disconnect.