Telefonaktiebolaget LM Ericsson (ERIC) 2009 Q2 法說會逐字稿

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

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

(Operator Instructions).

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

Mr.

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

Thank you, operator, and hello, everyone, and welcome to our conference call for the second quarter of 2009.

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 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 variety of factors.

We encourage you to use caution when considering such forward-looking statement, and please read our most recent annual report for more details on these risks and uncertainties.

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

Hello, everyone.

If we look at the quarter in summary, this is a quarter of opportunities, as well as challenges.

We are seeing a general continued strong pickup of mobile Internet services, multimedia services, Internet traffic that is driving traffic in the networks, and 3G is actually up by 60% year over year in the technology shift that is going on, which means that GSM is declining.

That is a natural technology shift.

We have the rollouts particularly, of course, in Japan, China and US, which is just a confirmation of that.

At the same time, we see, as we said at Q4, we said we expected our industry to be much less affected than most other parts of society by the economic decline, and we still believe so.

But, as we also said, it is unrealistic that we won't have some effect, and that is what we started to see in the first quarter where we commented on weaker Ukraine and Russia and some other East European countries.

We have a few more such countries also in Africa and Latin America.

And it is particularly where operators live in countries with sharp declining currencies, where their anticipated budgeted CapEx spend translates into fewer dollars or euros, and thereby, they can only afford to buy less equipment.

But the underlying traffic trends are all the same, and the upgrade needs are there.

So in that respect, this is more a matter of postponements of investments.

But at the same time also for the same reasons with the tougher economy, focus on services increases and outsourcing and other ways of finding ways of rationalizing the operators' cost levels.

So services for us is very strong.

It is now 38% of our total sales versus 33% just a year ago and 20%, 23% four or five years ago.

Services was actually up by 28% in this quarter, so that is a very, very strong performance.

And it has also the highest margins in the group so that it's encouraging to see.

It is also encouraging to see the margins.

Margins are up 2.4% year over year from -- as an effect of the restructuring.

The restructuring is on plan.

Charges were higher in this quarter, and we have come a long way of the SEK8 billion that we announced in the beginning of this year.

Cash flow finally caught up significantly, which was expected but still encouraging after the weaker cash flow in Q1.

Which means that our net cash in the quarter is up SEK5 billion, despite the fact we have paid SEK6 billion in dividends.

So from our perspective, the long-term fundamentals for our industry is there.

We expect to be lesser affected than most other parts of society, but we have some signs here.

If we talk a bit more about services, we have done some major advances here that you are all familiar with.

But still we, in fact, at the beginning of the year, we talked about the fact that Africa, North America was -- are the two regions in the world where we had the least footprint in managed services or outsourcing.

And it has gone -- we have really delivered well on those blank spots because the Sprint deal was, of course, important -- a seven-year contract for up to $5 billion, taking over 6000 employees which brings us to over 12,000 employees in North America, a significant strengthened position versus five or six years ago.

We also did a major deal in Africa with Zain.

This is about Nigeria, 500 employees, five years, but we expect more to come in that region and from Zain's African operation.

We also did a deal in with Telefonica with our two operations in UK, and we are now doing managed services for all large players in UK.

Our position here is quite impressive when it comes to services.

We have better scale and better global presence and skills in this field, and that is helping us at this point in time.

A couple of comments on the regions, start by Europe.

Europe saw a decline of 6%, but that is due to the divestiture of EMP and enterprise which had most of its sales in Europe.

So with that excluded, we are actually up in Europe, still, of course, with some currency effects there.

A lot of data traffic here as in other 3G networks, so most of the infrastructure build is driven by mobile data growth and 3G upgrades.

We had several markets that were stronger -- UK, Italy and the Netherlands.

The weakest market right now is Spain, which is probably one of the countries that are most hit by the recession here in Europe.

We also had another first with our 28 megabits per second MIMO network launch in Italy with Telecom Italia.

If we look at the CEMA region, if you flip the page, this is, as you understand, it is a large region because this starts with Russia and all those countries.

It covers Middle East, goes down through Africa.

So a big region with lots of variation and also a region where the need for telephony and the buildout is stronger, they need telephony.

It is more important than many other parts of the world.

But here are also some countries that are affected by the economy.

There are also some countries affected by political constraints like Sudan or Iran or --- well, Bangladesh does not belong to this region here.

Russia actually came back nicely and somewhat that depends on the fact that the last time we were on this call Russia and the ruble was down I think it was 60%, 70%.

Now it has come back almost halfway up again.

So the situation in Russia is a bit improved.

Here is also where we had the Zain deal.

We will then go to Asia.

Asia was up 10%.

China is strong here but so is Japan.

Indonesia and Australia also, whereas Bangladesh, Pakistan are down.

China is the strongest country in the quarter.

It will, of course, be challenged by US when Sprint comes in there.

India is also still high, doing well.

We have had good profit improvements in India actually over the last couple of quarters.

Still India can swing a little bit between quarters because it's large projects, and it depends on when those are concluded.

Different phases are concluded.

We will then talk about Latin America had a weaker quarter.

It was actually a negative, and here we have some effects from the economic decline, but it is also a very strong consumer demand increase across the region here for mobile broadband.

So 3G rollout continues for some countries.

Central America, Mexico, Brazil was weakened in this quarter, while Chile and Argentina were stronger, and that obviously varies between quarters here.

And then finally, if we look at North America, that is our strongest region right now, bigger.

Here we have dollar effect, of course, but still it is a strong region, a lot of activities, and this is where the consumer demand for mobile broadband is very obvious.

Here is also where we have the Sprint deal, which was significant and hopefully will lead to more managed services deals now that we have a critical mass to leverage on in US.

But with that said, I will hand over to Hans to give us more guidance on the numbers.

Thank you very much, Carl-Henric.

Let me go through a little bit more in detail the financial figures, and as usual, I will comment the figures excluding restructuring charges, and then when it's included I will mention that.

The quarter we heard about it was an 11% growth for comparable units and the units that are coming in and out between the quarters, of course, the EMP business and the enterprise business that we had in the second quarter 2008.

So the compare was up 11%.

And then we have our model to calculate all transactions and seeing what that gets in currency.

The adjusted -- of course, somewhat theoretical, but anyhow we do it -- that is negative 3% then in constant currency and comparable units.

Margins, the gross margin is stable 36.3% equally as Q1 and a little bit down from last year.

Then one needs to note the mix shift here with much more services in one term -- one-year time perspective than we had last year in Q2, and, of course, the main reason that the stable margin is, of course, the mix shift that we have in our business.

OpEx continued to go down, even though we encountered some challenges with the currencies, but we can definitely see a clear improvement on the cost level on OpEx as from our previous programs and some were from the programs starting this year.

We have an improvement in the operating margin in all segments in this quarter which is good.

We have in these figures the SEK6.9 billion, a capital gain of SEK800 million from the deal that was announced in the quarter of a divestment of TEMS.

That leaves us with SEK6.1 billion in operating income before joint ventures and an 11.7% is operating margin.

Still that is an improvement from one year ago as well as sequentially.

So then looking into the rest of the P&L, we can see that the biggest swing factor in the result is the joint ventures, which, of course, are having a negative result of SEK2 billion compared to SEK0.1 billion last year in Q1 or in Q2.

And, of course, this is mainly Sony Ericsson with SEK1.5 billion and the rest ST-Ericsson.

Carl-Henric will come back and talk about the joint ventures.

That leaves us an income of the financial items that is similar between years, but then we understand we have quite big swings.

The core area is on joint venture, and the joint venture is worse.

Net income then impacted by the SEK3.6 billion restructuring charge comes down to SEK0.8 billion.

If we talk about the cash flow, the adjusted cash flow and the -- just to remember you from the first quarter, adjusted cash flow from operations excludes any dividends from joint ventures, and it also excludes cash out from restructuring.

And the cash out from the restructuring in this quarter was SEK0.8 billion.

So that we have a SEK9.9 billion cash flow from operations.

That is good.

It was a good quarter from both a collection point of view, and the working capital came down.

Still saying that we see still effects from operators trying to optimize the cash flow as anybody doing in this time, so it is not easy times.

Still we made good cash flow.

Here I would like to see cash flow being seen over longer time cycles than quarters because Q1 was down.

[Q down is up].

I think if you look at the half year, it looks quite good.

If you look in then to what generated our increase in gross cash with SEK12 billion, the main contributor is, of course, our operating cash flow.

That is the main contributor.

We also made dividends as well as we took up new loans.

Notable to see is our net cash position went up SEK5 billion in the quarter, and that, of course, includes the SEK6 billion in dividends.

So it was quite a good jump in the net cash.

If we then look at our loan structure focusing a little bit on the balance sheet, we have done quite a lot on our balance sheet and especially our loan structure in the quarter, starting by repaying our debt that fell due in May, some $483 million bond.

Then we made two new loans, one loan that is for $625 million together with EKM, the Swedish credit agency, that matures 2016.

And then we went out in the market and made a euro bond of EUR600 million in the second quarter as well, adding to a payment in 2013.

It is of course important.

We have improved our debt structure.

We moved it backward.

We are taking opportunities to borrow to good conditions in this marketplace in the second quarter.

And this, together with the cash flow, of course, is important for us to have a very good eye on and work a lot with them, and the focus is definitely there.

If we think about the cost restructuring in the quarter, we, as I said in the first quarter, we started all activities in Q1.

And then, of course, we did not have that much.

Of course, now we have started the main part of all the activities.

Some are sequential, so you do one thing and then you get another activity.

But quite many are now going in parallel.

SEK3.6 billion restructuring in the quarter.

The main part from networks given that we are doing efficiency gains on site, but also looking into quite a lot of improvements in R&D.

So that is a large portion.

But also services has a large restructuring charge because they continue to optimize their service delivery structure.

Optimizing means here they are bringing more centralized resources in order to get more efficiency and scale the business as they want.

Notable on this one is, of course, that now on the balance sheet it remains SEK4.2 billion to be paid out from the restructuring programs ongoing.

That will, of course, impact on our cash flow from operation going forward, but as I said we adjust that also so you can see the underlying cash flow.

Then if we talk about networks going into the segments, networks had the growth in the quarter of 4%.

Currency adjusted down.

And here Carl-Henric has already elaborated about the mix here with a stronger growth in some key markets, and then some markets where the economic climates are impacting the investments, especially in some emerging markets.

You can see that we are going from in the situation in Q4 where we said it was unreasonable not to have an impact.

And then in the first quarter, some impact, and now it is a little bit more.

So it is not any dramatic, and it is sort of how we have viewed it all the time.

On the other hand, we also see that in WCDMA volume it is now higher than GSM, and you can also see that network rollout has grown in the quarter.

But it is a little bit lumpy coming off their deliveries in Q1.

All-in-all the operating margins anyhow went up with that mix, which is showing that both the cost adjustment program is starting to get effect, but also that they are doing a great job in networks.

Professional services, up 28%, 16% in local currencies.

It continued to have a strong growth.

Bottom line coming up.

16% operating margin improvement sequentially and improvement year-over-year.

We see continuously efficiency work here getting paid and, of course, a lot of new deals coming in at the same time.

Two things to be noted here.

We talk sometimes in professional services quite a lot about managed services, and that is important and it grew 34% in the quarter.

And we added some six new contracts and two news outside the quarter, which was Sprint and 02.

Anyhow that is important.

But also our consulting and system integration are growing very nicely and being more and more important for us as to doing the transformations on networks and integrating a lot in the networks.

We have now 7000 employees in networks in system integration and consulting.

And we also emphasized that by acquiring a company in this field in the quarter, Bizitek in Turkey, and this is a typical deal that we are doing in this domain.

It's companies with 100 plus employees.

Going to multimedia, multimedia had a good quarter growth of 23% for comparable units.

Also, a very strong improvement on bottom line, ending on a 9% operating margin or 17% EBITDA margin.

It is quite a significant improvement sequentially and also year-over-year.

Revenue management with LHS and pre-paid continued to be a strong growth generator, as well as our multimedia brokering or some what's more called IPX are fueling that.

We still have areas where we are doing investments, where we have less of growth or less on sales.

Margin improvement, two things.

The cost adjustments also are impacting here definitely.

Secondly, as we have quite a high level of software in the revenue management area, some software licenses will come and go in a quarter, and this quarter we will have a little bit better on that.

However, they should be counted.

So, of course, it was a good quarter from that point of view.

It still may vary between quarters the margins here because one or two contracts can impact the bottom line.

But you can see multimedia established themselves on another level right now compared to last year.

Good.

And I will hand back to Carl-Henric for the joint ventures.

Yes, you have already seen the reports and listened to management I'm sure on the joint ventures, so I'm not going to repeat that.

But it is a challenging device market, and as you all know, Sony Ericsson's stronghold in the market is where the demands are declining the most, Europe and the middle to high-end phones.

There are some very expensive cost reductions going on to restore profitability to the reality that the Company is living in.

And at the same time, of course, a lot of focus on introducing new products that are attractive to the market to defend the position that they have.

ST-Ericsson and I would say also on Sony Ericsson that the CFO there in Sony Ericsson was out commenting on the fact how they saw the need for additional financing and that they were talking about that they thought they could arrange that themselves in the market, and I think that is the right way to approach it if they need more money.

But they should -- the cost will now start to come down very quickly here.

ST-Ericsson, at the same time, living with the same device market decline.

They have also large cost reductions underway both because of the lower -- the slower economy, but also because of the opportunities to leverage on the synergies that are between these three or four operations that are being merged.

The fact that they had an increase in sales in the quarter was primarily because of lesser of destocking than what we saw in the first quarter.

And the fact on the margins, as they commented on themselves, were stable on the gross margin side.

The fact that it did not come through to the bottom line was more actually differences between quarters.

A bit more OpEx should have been reported in the first quarter, and they commented on that.

But anyway on both the joint ventures, very satisfying activities going on on adjusting to a tougher market, and then, of course, it is a matter of being backed with good products.

Then in summary for the quarter, as we have said, we have some different trends that are on one hand some impact on the economic environment, but there are also accelerating demands for mobile Internet.

The cost reductions are on plan.

We have increased margins in all our segments, and we are doing pretty strong cost restructuring efforts, as you know, to make sure that we are continuing to deliver a good profitable development here, even if the market will deteriorate further, which we don't expect.

And finally, services show a very encouraging development, fastest growing and highest margins.

So with that, I will hand back to Gary.

Thank you, Carl-Henric.

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

(Operator Instructions).

Edward Synder, Charter Equity Research.

Carl-Henric, I just want to check, the pushout of GSM into wideband CDMA, do you see this as more of a short-term economic issue?

So the demand that is not being fulfilled in GSM now will be pent up once the recession passes and that you will see a resurgence, or do you think this is the beginning of a longer-term transition to wideband CDMA that we could look forward to being permanent?

And how much of this gains in wideband CDMA do you think is share gains against competitors versus just native demand with your normal clients?

Well, the shift here between GSM and 3G is not really related to the economic situation in the world.

This is just a normal technology transfer.

And it would never -- you would never see big pickups of one without having declines of the other one.

They are related because that is how the operators plan for the networks going forward.

It is still so with that said that China is still a big taker of GSM equipment, and for obvious reasons with so much going on in China, they cannot do everything.

So they are spending less on GSM, but that is still where the major traffic increase is in new subscribers.

So there will be more GSM supplies around the corner in China also.

Which means that we could very well have in a quarter or two, we could very well see again that GSM is higher than 3G.

That could happen, but the overall trend is very clear, and it is technology driven.

And in terms of market share gains, how much of the strength that you saw in wideband CDMA do you think was market share against competitors versus just native demand from your normal clients?

We have over a long time taken market share step-by-step here, but there is also a mathematical increase, if you like.

Because we have a very strong position in Japan, and you know our position in China, and you know also our big position in the US.

So where the biggest rollouts are, we are over a percentage.

We have got bigger shares of that than our market share normally calls for.

So just by running those, we are increasing market share.

But besides that, we are picking up market shares all the time here in the market.

Thanks.

Sherief Bakr, Citigroup.

The question is really around the level of the deterioration in your topline, underlying excluding currency, which particularly in the networks business where you have seen the networks business now turn negative somewhere between -- I calculate somewhere between 5% and 10% negative this quarter.

Can you just perhaps talk us through your expectations into the back half of the year, how some of the trends you are seeing you think are one quarter temporary effects or whether you really are seeing something more material?

And a quick follow-up just on collections for Hans.

You are talking about you are not happy with where your DSO is today and believe that you can do a lot more.

Yet at the same time, your customers are clearly pushing back.

Can you just talk about the balance between trying to get your customers to pay you early versus perhaps having to be a little bit more friendly when it comes to pricing?

Let me say first on your question that I would be a little cautious on doing too mathematical conclusions on currency differences.

We do translate the 11% into minus 3% because we will lose track on ourselves if we don't follow the same calculation all the time.

But when currencies are going up between quarters and over years, it can make comparisons sometimes a little bit more difficult.

But anyway I don't think we are --- we are seeing some effects here, but we are not seeing any dramatic deterioration of any market conditions or anything here.

It is just that in a few more of the probably 100 countries in the emerging markets, we have seen operators having less capacity to spend the amount they maybe want to do.

I don't think that anyone sees the America -- the overall economy in the world going through any further major deterioration.

I think we are probably where things are bottoming out.

It is more a matter now of now how it probably could improve.

And I will hand over -- are you happy with that answer, and I will hand over to Hans?

Yes, thanks.

Maybe we should remember also that Q2 last year was a bit strong, so the comparison is maybe also a little bit tough.

I think we need to see this over several quarters.

If I talk about the DSO and as I said the depressed comparison, we have a target which is below 121 days.

When it comes to working with these, we try to do everything that is in our power, of course, to optimize our processes, seeing that we are doing collection on everything that is past due, continuing with our efficiency gains, seeing that people are incentivized to do it.

But, as you rightfully point out, there are, of course, things working against us, which are external factors.

Operators for obvious reasons are looking -- our customers are looking into cash flow as well.

And that goes also for competition, how they view the importance of this because that also plays into the game.

We are focusing quite a lot on this, and we really want to improve it.

My hope is that we can improve here regardless of the external factors.

So early payment, as you talked about, we don't have that much early payments.

We have, as I mentioned in Q1 call that on high risk markets, for example, we do the recognition or tail off our risks without having any recourse debt.

We do that if you mean by doing early payment, and that market can, of course, open and close.

So we do that, but negotiate early payments for any strange discounts on customers that we loan to.

I was just wondering whether you feel there is sort of operationally any sort of almost low hanging fruit you can still work, or whether the push from now in terms of collections is going to get incrementally tougher?

I think that low hanging fruits I have been working for a while and I don't have many left.

I guess I would love to have it.

I think it is a long, tedious work on our terms and conditions with customers and gradually improving them all the time.

Not expecting it is going to rock the boat and everybody pays immediately or something.

We are going to do this in harmony with our customers.

So we are going to do that tedious rework with all our accounts.

Thanks.

Good luck.

Mark Sue, RBC Capital Markets.

Carl-Henric, how long do you feel is the duration of this downturn?

Are some customers still budgeting month-to-month, or has that subsided?

And do you now feel European carriers will delay their LTE plans because of what they are seeing now?

And then separately when do you think the new CEO will say enough is enough with Sony Ericsson?

Why don't we start off with your first question and the second half of it.

The European operators' positioning versus LTE, I don't think it is related at all to the economic decline.

That is more a matter of where they see the efficiency of HSPA where that is, and the advantage that it has to go with HSPA because it can drive the capabilities in the networks to I would say almost unexpected high levels.

And there is a huge ecosystem there.

So at some point in time they will take the decision to proceed into LTE, but that is I think beyond this whole economic recession.

I don't think it is related to it.

When it comes to emerging-market operators, I mean I've think you have got that.

But just to make it clear -- if you are an emerging-market operator, in your own currency you have a budget to spend 100.

And then suddenly your currency drops by 30%.

You are sitting there and you can still spend your 100, but it is not going to give you as much equipment.

Obviously with underlying traffic, they will have to upgrade, but they are not going to do it probably quicker than they actually have to because they come under pressure.

It is not so logical in these countries -- because they are all countries where the growth is also a little bit slower than previous years -- that they go out and increase CapEx spend in their local currency in the same year.

So I think we will have to assume that it at least takes several quarters.

I think I will hand -- I will not hand -- I will hand over to Hans.

It is an outside question to put to Hans.

I think he can think about it for one or two more quarters.

But all-in-all let's remember I'm not trying to defend a defense on Ericsson and announce our way.

But I mean they have been a hugely positive investment for us, and we have fivefold payback on the money that we once put in.

Now they ended up in the turmoil where the decline in their segment was so strong, so now it is a matter of bringing them back into a profitable operation.

And then we have made the comments before on the strategic importance of that and the even higher strategic importance of the ST joint venture with the platforms.

But at the same time, the many opportunities that arises in the Sony relationship with all their electronic devices eventually are going to be connected.

Thank you, gentlemen.

Hans declines further comment.

Alexander Peterc, Exane BNP Paribas.

I would like to touch upon the Nortel situation.

Could you please outline the strategic and financial rationale, especially strategic, behind your bid for Nortel assets and how does that tie to your deal with Sprint where Nortel was a key supplier?

Does it play a role financially for you?

You may recall that we were once moved into CDMA some 12 years ago because at that time analysts thought and we thought that this would become maybe a third of the world market.

It did not do that.

It stopped at 12% or so.

And our position with those assets we acquired was far too small to be able to break through, and that is why we closed it down.

This is a totally different story.

This is about 10% of Nortel's assets.

And this is about an ongoing CDMA business in North America that will go on.

They will run networks for another 10 years, and there will be upgrades needed, and it is like taking over GSM at this point in time somewhere.

And that could certainly improve our position in the US strategically, especially since many CDMA operators will migrate, first of all, into LTE.

It has absolutely nothing to do with Sprint.

They never discussed the matter with Sprint.

But, of course, our interests have increased because of Sprint.

And maybe you have also because of Verizon with your enrollment in LTE there?

No, it's nothing else than that all CDMA operators are extremely interested in a strong company coming in and because they need this equipment for, say, another 10 years.

So huge support for should we come in.

Thanks very much.

Francois Meunier, Cazenove.

A quick question on the improvement on the overall margin.

Obviously there is a mix effect, but if you could quantify what would be the share of cost-cutting versus currencies effects?

Because to me, actually cost-cutting is a more high-quality exercise than just counting on currencies.

I will leave it to Hans.

We have no specific numbers for there.

But, of course, there is a significant portion of cost adjustments that are impacted.

But there also other factors besides currency.

I mean it's the pricing, how -- what type of products we send.

So it's a low bit more dynamic than only foreign exchange rates and cost-cutting.

But definitely cost-cutting is one component that is significant in that.

And going forward, going into H2 this year and H1 next year, is it going to be -- what type of curve is it going to be?

Is it going to be sequentially up, or is it going to be accelerating into H1 2010?

How is it going to work on the cost-cutting side?

As I said in the first quarter, we will have the -- you never know exactly, but the path that we will have is that Q1 we will start all activities, very low activity on the restructuring.

Q2, Q3 and Q4 probably is going to be higher, and then we are going to have less of it that will come into it in the second half of 2010.

Remember that the program aims to be read or finished in the middle of 2010.

But I guess all the activities will be started and much in the works by year-end, so the main part will be taken this year.

Okay.

Thank you very much and well done on the cost-cutting.

Also, on the -- just to remind us of what we've said several times before when it comes to currency.

As you all know, that currency -- when contracts are taken, we are hedging on it, which means that we will get paid for what the price was at the time we took it.

Over time when currencies go up and down, the price -- the competition will adjust for the positive or negative effects from currency because we basically have Euro competitors.

We don't have US competitors, which means that if the currency -- if we sell in dollars and the currency is swinging up and down, that will be translated in different US prices.

I think this is important, so we don't fall into the trap of doing a too mathematical calculation here on currency effect.

Philip Cusick, Macquarie.

So two questions for Hans.

First, on the level of receivable securitization this quarter, it sounded at the Analyst Day like this was really down in the first quarter, and I wonder if it rebounded at all in 2Q.

It does not look like it from the DSOs.

And, second of all, if you look out a few years and you think about the services business, how big do you think that this could become as a portion of revenue?

It is more stable, it has got a better margin than the networks business, and it is growing faster.

What does the internal planning look like as we look out three or five years?

On the first one, the recognition of receivables in the quarter two compared to Q1 was, of course, somewhat higher because the market was bigger but we also had higher sales.

But there was nothing abnormal.

It was a very normal quarter from that point of view.

And if we then talk about -- we don't have any internal targets saying how much shares we should have of different business, first of all.

We want all business to prosper, so we have no such goal.

However, if you look at the marketplace for infrastructure and services, there is, of course, an untapped potential in services, which is that two-thirds of the potential market that we are sort of addressing, it is still inside operators.

Meaning they run their networks themselves.

They do installation, integration, training, consulting themselves.

That portion, of course, can be dropped down and be used by a third party.

Of course, it is a far higher potential on that market, and that is where we have said that we believe it is a good possibility to grow in services.

On our internal plans, I'm not prepared to share them, but of course, our internal plans are where we want them to be in the long-term.

But still that is how we see it.

Thanks, Hans.

Nicholas von Stackelberg, Sal Oppenheim.

Thanks for taking my question which is rather more short term.

As the Sprint contract starts to kick in, how should we think about the margin development in services short-term?

As we mentioned before, our costs in managed services deals are sort of in the beginning of the contract when we transit all the employees over to us, and we transform them and put them on our tools, method and process.

That is an investment for the case.

In the quarter three or backend loaded and in Q4, we will have three contracts coming in here.

One is the same that Sprint will come in and also the H3G Italy, which is a re-scoping where we are also going to work a little bit different.

So we have some of those coming in, and that will impact our margins.

However, it is not like it's going to impact our margins for several years or not even quarters.

But initially we are going to have an impact of that.

We are not quantified, and I only wanted to look backwards and see how it has impacted when we take in these deals.

Of course, a little bit depending on how much people you take over.

On the other hand, the guys in global services or professional services have improved quite dramatically the time for doing transition and transformation.

Because the faster you can do it, the cost is lower.

So when I was running services, we probably took 18 months to do a transition and transformation, and I think the guys right now they are doing it much, much quicker.

Of course, there are efficiency gains always on this one time cost.

Can you give us a steer on how steep the impact on the margin could be, knowing full well this is just a transitional period, but just so that people are not too surprised?

It is not going to be any large variation on the operating margin.

But, of course, it will take some percentage off maybe.

But then you also need to think about what other mix will come into the quarter.

So that has to be taken into account.

But some impact it will be, and there we are going to see what other type of business comes in at the same time.

Just as an order of magnitude, are we talking a point or two or could it be more?

I would not go there because I mean if I start giving those, then I started guiding for the quarter and I'm not doing that.

As I said, there are other mixes at the same time, but we will have an impact from this.

Okay.

Thank you very much.

Neil Steer, Redburn.

I actually have two questions.

The first is for Hans.

You obviously took the SEK3.6 billion restructure charge in the quarter, and in the notes in the press release, you say that of the additions to provisions, SEK1.8 billion related to restructure.

Can you say what the remainder of the SEK3.6 billion restructure charge you took actually related to?

Good question.

First of all, we have a portion where we actually do things in the beginning of the quarter that actually cash out in the quarter.

So that is clear.

Then we also had some product decisions that impacted this quarter where balance sheet items that go straight to the balance sheet.

One, if you remember at the Capital Market Day, we talked quite a lot about how we now have decided and formulated a very strong focus on our IP portfolio based on our Redback business.

That, of course, brought with it some decisions that also impacted sites, redundancies, product and assets, and that is part of what we are doing here.

But all-in-all it comes with a strategic decision and base that we are putting on the Redback technology for portions of our next generation network.

So a chunk of the difference between SEK1.8 billion and SEK3.6 billion is effectively writing off IPR in some form, is that correct?

Yes, correct.

Okay.

And then an unrelated question, Carl-Henric, in your comments you yourself highlighted the recent commentary from the CFO of Sony Ericsson that there are other ways of raising sums, and you seem to have focused on that remark.

Does that, therefore, suggest that it is now a strategic decision that you will not commit any more capital to that business?

It is just -- I think it is logical that like Ericsson, for example, we would if we were in a need for cash, we would do what we can first in the financial market, and as a last resort, we would come to you as shareholders.

I think it is the same thing here.

I think it is more a matter of business morale that you do whatever you can first.

At the end of the day, money is money, but I think it is right that they start off dealing with the situation first.

Yes.

Thanks very much.

Kulbinder Garcha, Credit Suisse.

I have a couple of questions.

One of them really is on just the environment.

You mentioned how this kind of CapEx cautiousness has spread from Eastern Europe a little bit, then to Africa and South America.

There is a bunch of carriers in Asia that have also been quite cautious; in Indonesia I'm thinking in particular.

So I guess my question is, Carl-Henric, what is the risk that this gradual deterioration just comes later in this cycle for infrastructure?

I'm kind of questioning what visibility you really have for the second half, so any kind of insights you can give there would be very helpful.

And then the second question is just in terms of you mentioning this whole issue of affordability and currency rates.

How is that coming back to Ericsson?

Are those customers that have suffered a 20%, 30% change in their currency adversely to buy dollar-based base stations, are they now putting more pressure on you from a pricing point of view, and how do you think about that going forward?

Yes, I think first we need to -- we are not talking so much about an increased cautiousness among those operators.

More the fact that with falling currencies, they have less to spend in international value.

They may spend what they have anticipated.

But I mean we are talking -- there are -- if you talk about Sudan or if you talk about Bangladesh or Pakistan, these are countries where situations have changed quite dramatically for these countries.

So they are maybe specific cases.

But still we are -- I think anywhere you meet an operator they will still conclude that how much traffic and consumer spend continues in their networks.

So in that sense, it has not changed much.

I think we have pretty good visibility as such in terms of how they are thinking.

I think in an economic decline like this, I guess everybody is focusing on following the market and the consumers very closely to be prepared if anything changes.

But if it does, I guess we will see it fairly quickly.

And just one follow-up on regional sales.

How much of the sales in China was boosted just by a one-time recognition of the Unicom buildout?

Was that significant, and should that come back off in the near-term, or can you see that sales basis staying or even rising from where we are now?

No, there are no one-time effects.

As we said, we already have in the first quarter significant deliveries that was coming into the first-quarter revenues.

And it, of course, continued in the second quarter, and that was a full quarter.

We got the deal in the middle of the first quarter, so it is high.

But it is not any one-time recognition effect or something like that.

It is rolling on there.

Okay.

Thank you.

We will see in China, these operators they will continue now for several years to do rollouts of this equipment, and besides that, they will also come back for further GSM upgrades where the main traffic still will be for several years.

So China will remain a stable, good and growing market for us for several years.

Tim Boddy, Goldman Sachs.

I just had a couple of questions again on the environment.

Not wishing to sort of overdo it, but when I look at operators in emerging markets, the general trend seems to be slowing subscriber growth and slowing usage growth.

In many cases, a complete sort of stall in usage growth.

And I have always thought of the equipment business as being driven by incremental minutes.

And as you got fewer new users and either flat or declining usage growth in many markets -- not, of course, every market -- that normally means a slowdown in equipment demand.

So I just wanted -- am I thinking about that right?

Because you're saying that actually you're seeing healthy traffic, and I'm just wondering what I'm missing.

And then I guess the flip of that I get is it feels like the telecom market is lagging GDP pretty significantly.

So is it logical to assume that, therefore, it would lag any recovery?

I will start by answering the first question.

Over time all the growth in percentage will be lower as you increase the base.

So I guess I need to say yes for that.

But on the other hand, we still see continued growth in the networks and add additional subscribers in these regions.

And still if it's now a little bit plus 4 billion mobile subscribers, we envision in two or three years more; it's going to be 1.5 billion more.

So still there is a quite substantial growth to come.

So I think that has to be.

And then, of course, infrastructure has different waves.

First, of course, rolling out and getting coverage.

Next step is getting capacity, and of course, that all is going to happen also in emerging markets.

So I think that you, one, need to have a little bit more blended view on the market situation than you're saying that now it is less of growth in percentage so now infrastructure is totally stopping.

I think that wouldn't be our conclusion.

You have to look at all the other parameters as well.

And the point about the lag, do you have any views on that?

What exactly do you mean by the lag?

So, obviously GDP weakened dramatically in Q4.

Most operator revenues, and as you are saying operator CapEx budgets, are only weakening two or three quarters after that.

So, you know, is this the sort of industry which would lag a recovery, or do you think it's simply a matter of economic confidence that will return and give the operators the confidence to come back and invest?

I think there is -- I mean, as we have said all along, that we would be less affected, but it is unrealistic that we won't get affected at all.

I mean we know the yield, and what you are seeing now is a weaker market and a weaker growth, and we are, in fact, in a slight decline in the quarter in constant currency.

So I think that is all related.

That is what you are seeing.

But overall I think the general feeling among the operators is that they are surprisingly unaffected considering how other consumer spending in other areas of society is affected.

Okay.

Thanks for that.

We will take one last question, operator.

Rod Hall, JPMorgan.

Thanks for the taking my question.

I just have one, and that is that we see unemployment growing globally.

And yet we also continuously hear anecdotal evidence of deals being bid at rates that don't seem economical.

I'm talking about network deals.

And we have not heard very much in terms of political reaction to that in Europe.

And I just wonder if, Carl-Henric, you and, Hans, you as well, if you could just comment on your views of what the European Commission and other European governments are thinking about the playing field in telecoms infrastructure and whether there is any movement at all on potentially trying to level that playing field, or if you think that they just are turning a blind eye to it?

I think that it is fair to say that while a few years ago when you had more of that and that drove down prices somewhat faster than some of the vendors actually could cope with, that led to this huge consolidation.

And it is not unnoticed among political leaders that North America can almost not build its own telecom networks anymore.

It has to be imported equipment to a large extent.

I think there is a nervousness that if we don't watch it here, we could end up with an unfortunate situation.

And political leaders are aware of that, but so are the leaders for the operators around the world also.

So I think there is a more hesitance on -- more question marks on what is going on in that respect and more hesitance to push those trends too far.

I think we feel much stronger support around what we are doing from almost every part of our networks or partners or political leaders or operators.

I'm not sure if I answered so clearly here, but I guess in short, yes.

Okay.

So just to clarify, you are seeing an increasing nervousness, increasing interest in this from the various political leaders that would be involved?

Is that a correct way to characterize what you've just said?

Yes, I think -- I think yes, it is correct.

Okay.

Thank you.

Okay.

I would like to remind all of you that our Strategy & Technology Forum on August 12 and 13 in San Jose where we will showcase our growing presence in Silicon Valley.

There are more details on our website if you want to check it out.

Regarding our interim report, please don't hesitate to give us a call if you have any further questions.

Thank you and good-bye.

Thank you.

That will conclude today's conference call.

Thank you for your participation, ladies and gentlemen.

You may now disconnect.