Telefonaktiebolaget LM Ericsson (ERIC) 2009 Q1 法說會逐字稿

Welcome to the Ericsson analysts and media conference call for the first quarter report.

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

(Operator Instructions).

As a reminder, a 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 our conference call for the first quarter of 2009.

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

We will be making forward-looking statement 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, as you know, may be different due to a number of factors.

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

Well, 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 I'll be brief because I'm sure that you have seen the slides and many of you have listened to the webcast this morning.

On Ericsson, first a quick update.

We had a pretty good start of the year, especially in these economic times, with 5% growth in constant currencies, when adjusting for divested companies and currency exchange rates.

That we assume means that we have continued to gain market share.

Obviously, everybody hasn't reported yet, but it's our belief we did so.

We've had positive developments in the business units and Hans will come back and talk more about that in a second.

We have made several great deals which are important for the future and you are well aware of them.

The 3G rollout in China Unicom, where we have 30% and where some of the invoicing in Q1 is from that project.

Verizon Wireless was another very significant project.

Most of the invoicing will come in 2010.

Both of these customers are new to us and add to our position.

We've also made a managed services contract in UK, two of them, one for T-Mobile and 3 UK in combination and one for Vodafone UK.

Our cost reductions are on plan and Hans will talk more in detail about it.

But it's interesting to start to see now effects on the costs and on the margins from these ongoing activities.

And then, of course, fourthly here, we have our joint ventures that struggle with the dramatic drop in the consumer demand.

I'll be back in a couple of slides and say a few more words.

If we think about the market update, we have seen some but so far limited effects from the economic recession.

It's very much what we said in Q4, that we hadn't seen so much, but we found it unrealistic to believe that we wouldn't see some effects.

We are now seeing some effects.

We are seeing how -- for example, how -- on the fixed side, how some operators are postponing longer term payback projects, fiber rollouts.

We are seeing how operators in markets like, for example, Russia, Ukraine and other markets where we've seen very dramatic declines of currencies, local currencies, that are postponing projects.

And that is despite the fact that also in these countries the traffic patterns are largely unchanged.

But we are reminding everyone, as we did a quarter ago, that it is difficult in this environment to precisely predict how operators will act, even should the traffic patterns continue as they do.

We see a very encouraging and strong demand for mobile broadband, accelerated deployments of new technologies.

And it's interesting to also see how leading politicians do recognize the importance of communications as a growth driver in its role of developing societies.

Obama is -- part of his package, $7b, is for building broadband.

In China, the 3G rollout is somewhat supported -- to some extent supported by the stimulus package.

The China Unicom rollout is the largest, the fastest rollout ever.

And this is Unicom's ambition, to use every minute they can to catch up with the market leader.

We are also -- in this market situation, we are seeing an increased focus on managed services.

Everyone is obviously looking for cost cutting opportunities and managed services is one of those.

And to the extent that these are discussions that are ongoing, they are typically getting accelerated and we have seen a tripling of opportunities here in that field.

It is also a focus, in that context, on costs, on network transformation as networks are being transformed from mobile and fixed networks into converged networks.

And that will save costs and that's why that is even more focused.

But the long-term fundamentals are in place.

They haven't really been changed.

If you look at the numbers for Q1, and we do it before joint ventures and restructuring, sales is, I think, known by all of you now, 5% up constant currencies.

We are seeing sequential margin trends.

The sequential gross margin was actually up 1.1% despite pressure from the initial China Unicom rollout.

And the operating income of SEK4.7b is actually up 40% in the quarter.

And then we should remember that hedging here has had -- means that the increase or the better exchange rates from our point of view, the increased dollar and euro, what have you, has so far had only limited effects.

Cash flow was negative SEK1.7b.

That minus SEK1.7b, that is again before JVs and restructuring.

That minus SEK1.7b includes a contribution from Ericsson into our own pension trust of SEK1.5b, so without that we are close to zero there.

Still, that is SEK3b below last year and Hans will come back and talk about it.

Some portion is seasonality.

Some portion is the market environment.

If we look at our joint ventures, it is -- everyone understands what happens in the handset market, I guess, in consumer demand.

We, at Sony Ericsson, were down 35%, more or less in line with where you saw the market decline.

That, of course, puts the Company under big pressure and there is tremendous, or very extensive, cost reductions going on, EUR880m on the OpEx side and similar ambitious programs on the cost of sales side.

That part is -- we are satisfied with what we're seeing, what they're doing on the cost cutting side.

Still, of course, it remains to be seen how the market develops and how new products are received.

On the ST-Ericsson side, this is a new venture that you are all aware of, been in operation since February 1.

We have a base for world leadership here created.

We have leading technologies in 2G, 3G, HSPA, LTE, even TD-SCDMA, and we are strong suppliers here towards Nokia, Samsung, LG, Sharp and Sony Ericsson, so we have a good position there.

But it's a new merger.

They are affected by the same handset decline and obviously are running at a loss.

And we have similar extensive cost reductions going on here, $480m, both for right-sizing for the new environment but also to leverage on the synergies between our EMP, ST's wireless business, but also NXP.

If we then go through a couple of regional comments, Western Europe minus 4% year over year.

It needs to be adjusted, obviously, for the merger of EMP with ST and the divestiture of enterprise.

If we do so, we are up 5% in comparable units, with some differences in the region.

UK, Italy, Germany was in this quarter better, whereas Spain was tougher.

We see, as I mentioned, good demand for managed services.

We have made the deals that I talked about.

So, with that said, I'll move on to the Central Europe, Middle East and Africa region.

Here we were 12% up.

This is a region with a lot of growth opportunities, but also here a big difference between different parts of the region.

As an example, Turkey, sub-Sahara showed strong growth in the quarter, both 2G expansions and 3G rollouts.

Meanwhile, we have slowdowns in countries where we have these large currency drops, like Russia, Ukraine.

This is also the reason why we are running the Millennium villages in Africa, which have created both huge understanding for what communication means even in the poorest of places and it is driving a lot of also, I would say, goodwill for Ericsson.

And it's interesting to see that even in the poorest places it is a business case for the operator and for us.

If we then look at Asia Pacific, which was a strong grower in the quarter, 26% up, here we have large mobile broadband rollouts in both China, as I mentioned, after the license awards there, but also in Japan, lots of activities.

Also major buildouts in India, Indonesia and Vietnam, as examples, while we are slower in Bangladesh and Pakistan.

And as I mentioned, China Unicom's rollout was part of the China invoicing here.

Latin America, up 5%.

Here it's a matter of 2G expansions still continued, more subscribers in the networks, but it's also 3G rollouts.

We have now 3G rollouts basically in every country throughout the region.

In this quarter, we had good development in Brazil and Mexico.

There were the other markets with slower development.

This is a region for a lot of interest for managed services.

Almost in every country we have both contracts and discussions going on.

If I finish up, before I hand over to Hans, here with North America.

North America was 21% up year over year.

And obviously, if you look at the dollar increase, there are currency impacts here but even without those there is an underlying positive development here in US and we should end up with a good year here.

There is a lot of focus on mobile broadband, not just among the operators but among consumers in general.

And mobile broadband solutions, HSPA solutions, are gaining a lot of momentum over more standard WiFi solutions, hot spots.

Here, obviously, the contract with Verizon Wireless has been of major importance to us.

It's a new customer and a lead position in that rollout is important for us in our leadership in LTE.

With that, I will leave over to Hans Vestberg.

Thank you, Carl-Henric.

So, let me go through the financials a little bit more in detail.

First of all, I will comment the income figures excluding restructuring charges, if I don't state otherwise.

Carl-Henric talked about the sales in the quarter up 12% and then the two large entities that we have moved out from our operation is of course the Enterprise business, the PBX business that we sold last year, and then the transfer of EMP.

If we take that away, we have a growth of 16%.

And then, adjust back the currency development that we have had year over year, we are down to 5% organic growth.

So, that is the organic growth in constant currencies.

If we look at the margin, the gross margin, sequentially up then from the 35.2% to 36.3%.

This is mainly due to the business mix but also our efforts on the cost of sales reductions.

And I will say that we also have included here, as Carl-Henric mentioned, the rollouts in China on 3G, which of course are impacting.

If we then talk about the OpEx, we have seen encouraging signals on the OpEx.

It's going down.

And that, of course, is the benefit from the activities that we carried out last year.

It's, however, on SG&A a little bit difficult to see, as the OpEx is of course exposed to the same currency changes that we have on the sales at least.

So that of course gives a little bit of a trend that is going up there, but the underlying is going down.

It's actually the currency effect that is taking it up.

All in all, ending up on operating margin (sic) of SEK4.7b and operating margin on 9.5% before the joint ventures.

Here, in the quarter we reported also the EMP before it became a joint venture.

We had that still in Ericsson.

So, that's reported in the operating income before joint ventures with a loss of SEK500m, SEK0.5b.

If we move on to the share of earnings, where the biggest swing on the P&L is coming, is of course a loss of SEK2.2b from our JVs.

The main portion is coming from Sony Ericsson.

Then, that ends up in an income after financial items of SEK3.3b.

That is of course impacted of a positive financial net of some SEK800m.

I would say that's a strong financial net, coming from the interest rate development but also our revaluation of our financial investments.

So, that was a strong quarterly financial net.

Net income, then, including restructuring charges, SEK1.8b, and that leads to an earnings per share of SEK0.54.

Then we have adjusted cash flow, and here it's important that we will have an adjusted cash flow from operations and a cash from operations.

The reason why we put in adjusted cash flow is that we will have disbursement of our restructuring charges during the year, the cash outlays, and we won't exclude that so we'll see it.

But we will be very clear on exactly what we take out and we will have [both all] year.

But we will talk about an adjusted cash flow.

We are also adjusting for any dividend or impact from joint ventures on that line, so we are comparing it apples to apples.

If we do that, we had an adjusted cash flow of minus SEK1.7b and we had last year SEK2.8b in positive cash flow.

So, that's our adjusted cash flow.

If we then look into our gross position, gross cash position over the first quarter, that went down with SEK11b and our net cash went down SEK12b.

The main portion of that is of course our investment in the ST-Ericsson joint venture, which is the orange part of this waterfall chart, if you look at the chart, which is the main portion.

If we then talk about the operating cash flow, that was SEK2.9b.

Then, when I talk about adjusted, we take away the SEK1.2b, which was the cash outlays from the restructuring.

Then we're on SEK1.7b negative cash flow, and the main contributor to that negative cash flow is of course SEK1.5b that was capitalization of our pension trust.

Then, the other portions are divided in two changes.

One is the other current liabilities with, I would say, mainly seasonality has come down, provisions, VAT, accounts payable, etc.

Then we have the other area, which is our receivable side where the DSO is going up to 124 days.

There are two reasons for that.

I would say one is we had a strong (inaudible) support for the quarter so we (inaudible) a little bit more than usual in the end of the quarter, which of course makes it not collectable.

Secondly, normally for us, we try to sell off longer term of receivables that we have with customers as a normal procedure.

This time, at the current environment, that is very difficult both for pricing and availability of that.

And then I would say the operations themselves.

We are looking much more into the cash flow and seeing how we can optimize between quarters.

I still remain with the same ambition on the 70% cash conversion for the year and looking into one quarter is probably not how we should look into the cash flow for the full year.

But the focus is definitely there on cash flow.

If we then talk about the cost reductions, I'm just going back a little bit to 2008 and just rolling it through, so we'll get a feeling for the numbers here.

And again, here is some type of a table that I will follow now for a while, as we will have quite a lot of restructuring charges and cash layouts for it.

So, the 2008 program is closed, meaning that the activities are concluded.

We made savings of SEK6.5b and charges of SEK6.7b.

On the balance sheet, we have still provisions for SEK3.3b.

That is the cash outlays that will come through the year and a little bit in 2010.

So that will still have from that program the cash outlays, because there is a timing effect in between [the two of them].

We will follow that number, so we know how much we have.

2009 program, as we announced in the first -- when the fourth quarter was announced, targeting a SEK10b reduction mid 2010, basically 50/50 OpEx and cost of sales, with an estimated SEK6b or SEK7b in restructuring charges.

There we have initiated the main part of the activities and early in this process we feel that we are on track with that process.

That means also we took some restructuring charges in the first quarter from that program, of SEK0.7b.

At the bottom you see the table, where we outline all the restructuring charges taken so far and then the cash outlays per quarter as well, how much we're taking.

There will be a sort of a difference in between them because not all restructuring charges will be cash impacting, as there might be some assets that are not cash impacting that goes away.

But we will follow this, so you'll get a feeling for how much we have in cash outlays and restructuring charges.

Good.

Then, if we take a look at the three segments, starting with Networks.

Networks up 12%, as Carl-Henric mentioned, good growth and a couple of strategic wins in the quarter.

We can see a decreasing level of network rollout services growth.

We have typically had a higher growth of network rollout services.

We are now down to 4%, indicating of course that we have a little lower pace on larger projects but a lot of deliveries.

And they usually lag in between each other.

If we then talk about operating margin, coming in at 10%, an improvement since last year's of 9%.

Main reason, of course, the business mix but also the cost adjustments done here, as well as we have FX impact here.

And this is then despite the 3G rollout in China, which is mentioned earlier, a large [break in].

And we had sales through for China on 3G in the first quarter, even though we got the contract in the quarter as well.

If we then just look at the market and see what trends and what that means for Networks.

We see traffic growth that requires transmission, but also the packet data networks upgrades which we have seen in the quarter increasing our sales of MiniLink and SmartEdge products.

Moving into Services, 28% growth in Services.

They have a little bit different pattern when it comes to currencies because they're strong in Europe.

They have a 10% growth in constant currencies, which is of course a strong first quarter.

We see managed services and systems integration demand continuing to move up.

Managed services grew 34% year over year and we announced a couple of very important deals, strategic deals, in the UK.

We have now 275m subscribers in the network where we run managed services.

The operating margin came in at 15%, an improvement.

Of course, business mix, we did not have many new managed services deals starting up in the quarter.

And secondly, the continued efficiency gains and cost reductions in services, of course, are giving some impact as well.

Finally, ending up with Multimedia.

And here, of course, we have the most changes when it comes to comparable units - the PBX business and the EMP business that has been transferred to the AB.

That we have restated here and that means that we have a growth of 25% for comparable units.

The main drivers for that growth is the revenue management and the IPX or, as we call them, multimedia brokering.

We have a positive margin of 2% in the quarter, improving from last year minus 9%.

And we have had now for a couple of quarters there an improved margin.

Still, it is important to remind that we have a portion of business here that is an investment area and we have a portion which is healthy growing and healthy margin business.

So, we can have some swings here but we see definitely a positive development.

Finally, in the segment we can say that the cable and satellite operators are postponing the TV investments, which is impacting part of the portfolio multimedia.

I'd like to hand back to Carl-Henric.

Yes.

Quick summary.

Good start of the year.

We're winning strategic deals.

We're winning market shares.

We have seen some but still limited effects from the recession.

It is difficult to precisely predict how operators will act quarter by quarter, but we think our industry will be less affected than most other segments of society.

And we have our joint ventures that are affected by the slowdown and extensive programs are ongoing to get profitability quickly.

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

Thank you, Carl-Henric.

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

Thank you, sir.

(Operator Instructions).

We will now take our first question from Mark Sue with RBC.

Please go ahead.

Carl-Henric, you're seeing strength where others are not.

Some who are pointing to down minus 10% trends.

Can it all be market share gains?

If so, is it sustainable?

Or is there some timing element where a lot of the good news is front-end loaded this year?

I think everybody has to speak for themselves.

We have probably the -- we have the most extensive position and the most distributed position throughout the world.

Everybody else has more limited positions geographically or maybe from a product point of view.

I think it's hard to understand exactly where everybody makes their assumptions.

It is also clear that we are, I think, positioned with the strongest growing companies and we gain more market share than our fair share of the larger new products that are all projects that are part of this market.

So, I think this is what we see and I think the others have to speak for themselves.

Okay.

And then, secondly, Carl-Henric, just Nokia Siemens purchasing the Nortel wireless assets, does that change the dynamics at all for Ericsson and does it pose further opportunities for market share gains?

Well, it's -- I think it will be interesting now to follow and see what happens with the Nortel assets.

When you think about this grand company that had, after Chapter 11 times, some 30,000 people and there may be a handful of thousand that will be transferred somewhere, I don't think it really matters so much.

It's also taking a lot of time, which means that they don't keep as -- the value of them, I guess, deteriorates a bit over time.

It's more of a -- it's more business that goes into maintenance mode, so I don't think it really matters so much.

Okay.

Thank you and good luck.

Thanks.

Our next question comes from Rod Hall with JP Morgan.

Please go ahead.

Yes, hi.

Thanks for taking my question.

Actually, I have two.

The first one is for Hans.

Hans, I wonder if you could elaborate on the source of the SEK4.4b hedging loss that you reported in the quarter.

Should we be assuming that that's associated with BNET or is it related to activity in some other business unit?

And then I have one other question.

I can answer on the SEK4.4b of hedges losses.

That mainly is -- we hedge our transactions when it comes to hardware and software, so of course that main part is coming into the segment Networks.

Okay, great.

And then the second question I've got is for Carl-Henric.

I wonder, Carl-Henric, could you just catch us up on your latest disposition towards Sony Ericsson?

And I guess, in addition to just discussing how you see the unit now, if you could talk a little bit about how willing you would be to inject more cash there, if it were necessary later in the year, I would appreciate that.

Yes.

Maybe let me just have one comment on hedges from a more principle point of view first.

We don't want you to do too much of a mathematical exercise here or too easy a mathematical exercise.

First of all, currency changes have so far had very little impact on us because of the hedging contracts.

I think you do appreciate that.

But it's also important to remember that we are -- a lot of our invoicing is in US dollars and we are in competition with worldwide players that are non-US based, which means that currency changes over time will become part of the competitive dynamics in the business.

Having said that, a better exchange rate is better for us but it's not just mathematical additions.

When it comes to Sony Ericsson, we have to look back to the whole period that we have been involved.

They have added a great value in for us understanding the consumer and the trends and their requirements on the networks and in providing end-to-end solutions.

And I would say that they had a pretty -- both Sony and Sony Ericsson had a pretty important role when we won the Verizon LTE deal, because they -- we spent a lot of time initially there about the ecosystem and where consumer behavior will go long term before we even got into base stations and megabits per second and what have you.

We have made 35b in that joint venture.

Half of it has come to us and 8.5b is dividend.

So it's been largely a good thing.

Of course, now they are in big turmoil because of the market decline.

And as responsible owners, we are working very hard close to them, as Sony does, in helping them to come back to profitability as soon as possible.

And in that timeframe, we're not discussing anything about where -- what our future plans will be.

I don't think it's yet clear whether they will need a capital injection or not, but certainly we cannot rule it out.

And if they do, as a responsible owner, I guess we will stand behind them.

Okay.

Thank you for that.

Our next question will come from Matt Robison with Wedbush Morgan Securities.

Please go ahead.

Thank you for taking my question.

I'm interested to know how you would -- how you think we should calibrate the deployment in China.

You mentioned some of that occurred in the March quarter.

I'm sure there's some differences between installations and revenue recognition and so forth.

How should we look at that?

As I said in the press conference, we had a meaningful volume already in Q1 that was recognized as sales, as we delivered quite a lot in the quarter.

But that will continue throughout the year.

And of course, here we are with commitment on purchase orders, but of course we are looking into a much longer contract on 3G in China.

So we will see it -- will continue throughout the year but we had also meaningful volume in Q1.

Is there a period where we should expect it to peak, at least for the near term?

They are rolling out now 55 cities, I believe it is.

There are 290 cities coming after that, and that's before they have their real expansion.

So they are doing this really nationwide rollout.

And I think that we will have a steady and maybe hopefully expanding business throughout 2009 and '10 and beyond, but I don't think we can even overlook right now.

Thank you.

Our next question comes from Kulbinder Garcha with Credit Suisse.

Please go ahead.

Thanks.

I have a couple of questions.

One of them is just a follow-up to Carl-Henric.

I just want to understand the SEK4.4b negative loss on currency hedges that have impacted the P&L.

How one-time in nature are they?

Are you saying they are not one-time in nature or they're going to continue or they're not?

I just want to have some idea as to whether we should be thinking what the underlying profitability of Ericsson is, because it does seem that if that goes away your earnings at some point are going to double, and probably in the next six to nine months.

I just want to have some clarity there on what the net P&L impact is of hedges.

The second thing is again for Carl-Henric.

Your tone sounds a little bit more conservative than what we've heard over the past three months.

I'm just wondering, has visibility in infrastructure, do you think, started to deteriorate in terms of the impact of CapEx cuts that we heard about four months ago, i.e.

you're now beginning to talk about them in the emerging markets?

Is that beginning to happen, do you think?

Then third and finally, for Hans Vestberg, just on the gross margin, what was the positive business mix of gross margin in Q1?

Was there any IPR-related sales or activity that could have helped that, or was it just all cost cutting?

What was the business mix improvement that you talk about?

Thanks very much.

Okay.

First start with the hedges, and remember now that we are hedged for six to 12 months, so much of the hedges that we have right now that are from the beginning or mid from last year.

Secondly, we hedge against a transaction and in the quarter we have had a lot of transactions.

And also, the currency has been volatile in the quarter.

We had, for example, SEK9 in the month of -- SEK9 for $1 in the month of February.

So, of course -- in March, in March, sorry.

So that of course impacted somewhat the -- when we do that comparison to the hedges.

So one needs to have both in mind, the transaction gains that we have and then the hedge losses, if we call them hedge and losses in the totality.

So that's what we're playing with here.

Of course, if all things are equal over time, we will see a gradual improvement.

But remember, still we have hedges that now will continue to impact going through Q2 and then a little bit less in Q3 and Q4.

Then, on the other hand, we will also have different type of transactions coming in during the year, given what is happening in the marketplace.

So you cannot draw the conclusion that that will improve directly the P&L over time.

But overall, if the currency stays where they are right now, that's positive for Ericsson with the exposure that we have to the dollar and SEK, etc.

So that will give a positive effect over time, when the hedges -- exchange rate on the hedges are improving.

If I just answer on the tone there, it is not intended to be a change of tone.

We said after Q4 that we expected -- we saw limited effects in our industry.

And -- but we also said that it was unrealistic that we wouldn't be affected somewhat.

And now we're saying that we're seeing we're somewhat impacted, like Ukraine, like Russia, like on the fixed side.

So I think we're just confirming much of what we have expected here.

We're also saying that it's difficult to precisely predict how operators will spend.

That is a comment from the Q4 report as well.

So for us it's very much as we have expected it and it's not meant to be a change.

Then gross margin, then, I referred to business mix and what I meant was of course that we had a little bit lower number of rollouts, network rollouts, and we had a higher proportion of professional services, which of course improved the margin somewhat.

And then, when it comes to the cost improvements or savings in the cost of sales, remember, last year we had a fair amount of cost adjustment going to cost of sales as well, not only OpEx that it's impacting.

I would say mainly it is in services, where we have done a lot of efficiency gains through the year, with centralization, etc., which they do all the time but it starts to pay off right now.

That was what I meant with the business mix and the cost improvement.

Sorry, just to be clear, there's no significant IPR impact in Q1?

Are you expecting anything in Q2?

Because there have been a lot of IPR transfers, it seems, in the market in the past six months.

On the first question, there was nothing special on the IPRs in the first quarter.

And on the future, I can't really comment because we're not doing that right now.

But nothing special in the first quarter.

Okay.

Thank you very much.

Our next question comes from Pierre Ferragu with Bernstein.

Please go ahead.

Thank you for taking my questions.

In the first quarter, you've had -- you've drawn a bit more than usual on your provisions.

So part of that is restructuring, but if we exclude restructuring you've utilized SEK1.8b of provisions, which is fairly higher than what you've been utilizing over the last four quarters.

Could you give us a bit of color on that?

And what are the operating -- the rationale for this higher utilization of provision during the quarter?

Thank you.

First of all, the reason why they come, there's some where it's because we want to utilize them so I feel it's fine that we utilize them.

But you're right.

It was a little bit higher utilization on the -- if you exclude the restructuring charges.

But that comes from the commitment and the provisions we have taken earlier for customer commitments or warranties or things like that that came up in the first quarter.

So it was nothing unusual, but it was a little bit higher.

But it only reflects that the provision that we made is now getting paid out.

Thank you.

Our next question comes from Edward Snyder with Charter Equity Research.

Please go ahead.

Hi.

This is Mike Alexander in for Ed Snyder.

On inventories up 10%, is this just a normal buildup for the year or are you seeing some buildup because customers are slowing down purchases?

Not at all.

This is just normal inventories.

To a large extent, it's work in progress.

Inventories in factories and supply chain are always at a minimum.

So this is just normal buildup for the growth that is going on.

Thanks.

And then, in Multimedia, now that Ericsson Mobile Platforms has moved out to ST-Ericsson, what should we expect revenue and margin-wise for the Multimedia segment?

Well, we -- Multimedia is -- what we have said before is of course we are taking out both enterprise and EMP, but Multimedia is a mix of several strong growing businesses with good growth and good bottom line.

They are also -- but there is also investments going on in IPTV solutions and messaging.

So it's different parts of it.

Some of it is long-term R&D and others is good business.

And dependent then on where there -- there could, for that reason, be some swings between quarters.

But certainly this is an area of good growth and this quarter was an example of that.

Very good.

Thank you.

Our next question comes from Gareth Jenkins with UBS.

Please go ahead, sir.

Thanks.

Just a couple of quick ones, if I could.

I just -- you've signed a few contracts for the 6000 series base station in the Nordic region.

I just wondered, you mentioned this morning that Unicom hasn't signed for that.

I just wondered if you could give us some references outside the Nordic region for that particular product.

The second one is just on managed services.

You're talking about very strong bookings and the outlook looking very strong.

Is that coming from traditional operators looking to reduce costs or is it new build-outs that are looking to manage costs down that way?

And then the final one just on government financing.

There's been a lot of talk recently about ZTE receiving more government financing, AMX getting some from the Chinese Development Bank.

I just wondered whether you feel the Swedish government's still being very supportive and whether the Chinese banks are being very supportive to Ericsson as well.

Thank you.

Well, to start off with RBS 6000, the fact that -- that is the nature of that business that is determining when RBS 6000 will come in.

RBS 6000 is the next generation base station, so that will be just logically replacing most of business in the next couple of years.

We are starting off with RBS 3000.

I think RBS 6000 will start off during the autumn somewhere in China.

So there is not any -- there is no degree of success or anything.

It's just the next generation and it has more capabilities and a better cost efficiency equation there.

With -- in terms of managed services, I hand it over to Hans.

Regarding managed services, we can say that it is two types of customers are looking into it.

More Western European operators have increased their interest in it, especially from taking out costs.

And that we can see basically, that all major players are into this right now and doing it.

At the same time, we have the emerging markets and all the developing markets where many operators also are doing it at the same time, given that they need competence and rapid buildup and support.

I would say, going back three years, the changes that we have much more on Tier 1s being very interested in these discussions and doing deals in managed services.

And secondly, we see more operators, number one or number two, in emerging markets doing the same.

So, yes, we are seeing the trend shift a little bit on the interest and the demand and the discussions.

And we can see it on the deals that we have signed in this quarter, with of course Vodafone that is a Tier 1 operator.

If we talk about our EKN business, the financing support that we get from the Swedish export credit authority, that is working very good for us.

I think they do everything we can expect from them.

I don't think that anybody gets any better commercial terms in the world than we get from them.

So we have nothing more to ask for there.

It is true that China gets -- provides similar support to their vendors.

We -- occasionally, we read reports from guys like yourselves, analysts that are indicating that they're getting support that goes beyond what they're supposed to get, I guess, from BTO regulations.

I'm not -- I cannot confirm if that is the case.

I can just assume it's not.

It's an interesting question also.

I'm not sure whether you actually said that.

But considering that we have been there since 1892 and have as much people in our supply chain and our own employment as any of the others have, I suppose we should get our fair share of the Chinese financing also when we export out of China.

Thanks.

Our next question comes from Tim Boddy with Goldman Sachs.

Please go ahead.

Yes.

Thanks.

I just wanted to ask a bit more about seasonality and visibility.

Listening to operators, it does seem to be the case that, somewhere between their reports in February and their first quarter reports in April/May, there has been some kind of late cycle impact coming through.

And most operators seem to be lowering guidance for one reason or another and trimming CapEx as they do.

Is this something you've seen?

And I appreciate you've been asked this before, but it would just be helpful to understand whether we should just expect a typical year in terms of seasonality or if something different is happening.

And then a very brief follow-up on the ST-Ericsson, just to double check the SEK500m January loss of EMP before it was put into the joint venture, that's presumably non-recurring.

I imagine the run rate of losses in the joint venture has now changed very meaningfully.

Yes.

I think we can just confirm the last comment, so I'll take that first, but that can be confirmed.

It's non-recurring.

Now it's our share of the ST-Ericsson business that matters.

Great.

When it comes to the -- if there is a change there, we are following the operators very closely and reading all the same documentation as you are.

And I think there is a -- from some of the operators you can see that they lower their CapEx guidance.

The important thing is to go beyond general statements and look at what really happens there.

You can see that more explicit, AT&T, for example, in their reporting where they're saying that they're seeing -- they're somewhat affected on the fixed line revenues and therefore they're limiting fixed guidance.

But they are moving $1b from fixed to mobile investments.

And I think if you really read them through, you will see that most of them, at least in their strong positions and so on in their big markets, they are not changing their guidance in particular.

But there are, of course, cases when they do.

But that is also when we're saying don't forget that there are more larger projects, like China, like US and others, that are ongoing as well.

That's also part of the market.

So there will always be some ups and downs, but the totality I think is a little bit where we try to describe it.

And in terms of seasonality, how should we think about that?

Well, I -- seasonality is -- I don't think that we have -- every year becomes somewhat unique, of course.

But I don't think there is anything in particular that makes us expect a very different seasonality this year than other years.

But there will always be reasons why there can be difference in a year or difference for particular vendors.

That's very clear.

Thank you.

Our next question comes from Nicholas Von Stackelberg with Sal Oppenheim.

Please go ahead.

Yes.

Thank you for taking my question.

It's about DSO, which increased yet again and you point to some explanation in your release.

Where do you see this trending?

Ericsson has seen a massive buildup in working capital and when you look at working capital to sales ratios, is actually the most capital-intensive business in the industry, if I'm not mistaken.

As I said before, yes, we have an increase on the DSO and there are several reasons for it as I explained before.

We are not happy with it.

We are continuously working with it.

But we also need to acknowledge that there is a market situation out there and we, of course, are trying to improve the payment conditions with our customers in these circumstances.

So that's what we're doing.

We have -- if you go back since we have been starting to focus on the cash flow and the DSO, we have constantly improved.

But this quarter we had a setback, but I wouldn't judge one quarter to be significant or unique.

But of course it's a warning signal and we're working hard with it.

I will judge it when the year is over to see that we work it through.

But we're working on it.

And we still remain with our targets for DSO and for the cash conversion.

And that's what we've geared our internal organization with and we just need to work with our customers and see that we fix it.

But do you think that there will be some sequential improvement at least, that we should see some of this coming off as we go into the second quarter?

Of course, my ambition is that it should improve.

Okay.

And then maybe a quick follow-up.

Of the SEK6b to SEK7b restructuring, how much of that is going to be cash on your current estimate, and what is going to be the timing of the related cash outs?

Thank you.

Good question.

It's a little bit hard to predict at this moment, but I think a large portion of it will be cash out.

Depends a little bit how we do our site concentration and that will impact on certain sites, etc.

It's a little bit too early to say.

And remember, that was an estimate '06/'07.

We're going to see where it lands.

But we will continue the report that we're doing right now, both the restructuring charge and the cash outlays that we have done and the ones that we have on the balance sheet, and try to give you as good visibility to that as possible because we understand that's an important measure for you.

Thank you.

Our next question will come from Alexandre Peterc with Exane BNP Paribas.

Please go ahead.

Yes.

Hi.

Thanks for taking my question.

I actually have two.

The first one is again pertaining to working capital.

If I understand well, we already had the -- we heard from you already by the end of Q4 that the increased activity at the end of the quarter has deteriorated working capital metrics and therefore the operating cash flow.

And I'm under the impression we're hearing the same argument again now.

So can you explain when we will get some payback on that, i.e.

things reverting to normal?

Is this the result of the ongoing credit crisis?

And the second question is really housekeeping.

The parent company does no longer disclose the license revenues, as I understand.

Are you going to disclose those in another way?

Thanks.

On the working capital, you are right.

We had a very strong fourth quarter.

We also had a very strong end of the Q1.

That is not the full explanation that our DSO was going up.

That was the other explanation that we have.

We are in a situation where operators also optimize their cash flow and seeing how they pay their bills, etc.

As I said, my ambition is that should be improved over the year.

When it comes to your housekeeping question, as is written in the report, we have -- we are gradually moving our IPRs over to the [EAV] companies and AB company, where we're both -- especially for operational reasons, because we have the costs, etc., there so we can match them.

So, yes, you cannot see them today there fully.

If we're going to disclose patent revenues over time, that is something that we need to discuss.

We have not decided.

Thank you very much.

Yes.

And it's always in the annual report, on an annual basis.

Maybe one should also just say that we have always -- on your note how we disclose it, one thing is numbers.

But we are a little bit cautious there because these are normally confidential agreements as they are written one by one of them.

That's the normal case.

But secondly, we do comment and have always done if we have more or less IPRs, so you need to understand -- that we think you need to understand in modeling the business.

Thanks.

Take one last question.

And our last question today comes from Stuart Jeffrey with Nomura.

Please go ahead.

Thank you very much.

Good afternoon.

I had a question on managed services.

Hans, I think this morning you said that the growth rate as that business gets bigger, or professional services gets bigger, will inevitably decline.

And then this call started with a comment about the potential tripling for managed services so far this year.

So I was wondering if you could just give us an overview of where you think we are in the life cycle of managed services.

Are we still at the very early stages, or do you think we're starting to get closer to maturation, which would be implied by your comments around slowing growth in absolute percentage terms?

I think that if we look from a maturity model internally at Ericsson, we are closing to the third stage that we sometimes define.

Still we have some level to go, meaning that we have now a model that is global.

We run managed services efficiently across the globe as one operation.

We still have some more centralization to do over time here.

But I think that we are getting to quite good maturity on our managed services model, which means that it's very scaleable.

I think that I tried to a little bit support the professional services guys when I said -- when the question came if this growth rate that they have of 20%, 25%, 30% will continue, I just say that remember that that comes from lower level of absolute numbers, so the percentage, you shouldn't look for that, but that we should find growth both in managed services and professional services going forward.

That will be important.

Then, of course, in managed services you get a [step wise].

You get in a new deal and that is in your recurrent base and it's rolling in.

So it could be a quarter a little bit less and then it comes one which is going up again and then you run away.

But overall, we should see a good growth in managed services, given the demand that we see out in the marketplace.

Thank you.

Ladies and gentlemen, that will conclude today's question and answer session.

I would now like to hand the call back over to Mr.

Gary Pinkham.

Please, sir.

Thank you, operator.

And before we go, I'd like to remind all of you of our Capital Markets Day next week in Boston.

Details are on our website and you're more than welcome to join in, either in Boston with us or via a webcast.

Thank you very much and see you soon.

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

I thank you all for your participation and have a nice day.