Telefonaktiebolaget LM Ericsson (ERIC) 2010 Q1 法說會逐字稿

Welcome to the Ericsson's analysis and media conference call for the first quarter report.

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

(Operator Instructions).

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

[Suzanne Anderson] will now open the call.

Thank you, operator, and hello, everyone, and welcome to our call today.

With me here in Stockholm are Hans Vestberg, our President and CEO; and Jan Frykhammar, our CFO; and Johan Wibergh, Head of our Networks segment.

During the call today, we will be making forward-looking statements.

These statements are based on our current expectations and certain planning assumptions which are subject to risks and uncertainties.

The actual results may differ materially due to factors mentioned in today's press release and discussed in this conference call.

We encourage you to read about these risks and uncertainties in our earnings report as well as in our annual report.

I have one comment to today's report and that is that the acquired Nortel business was reported under the region other in Q4 '09.

We will correct this during the afternoon, and however, I want you to know that all totals are correct, so it's just a matter of a difference between the regions.

With that said, I would like to hand over the call to Mr.

Hans Vestberg.

Hello, everybody.

I will go through again a little bit what I did this morning, because we know that we have quite a lot of people coming onto this call that couldn't attend in the morning.

But I will try to make it quite brief.

Starting with just what we announced yesterday, so we are all clear on that, we made some change in our external reporting, basically a combination of feedback that we got from investors, how we should disclose, but also our ways of working internally.

The three that were done is number one.

We are now reporting 10 regions or actually 11 regions, one region is other.

But it's 10 geographical regions, and that is how we work internally.

That's from the first of April when we changed orientation internally at Ericsson as well, so it's going to be a clearer transparency our work internally as we report externally.

The second one is that we have moved the network rollout business from segment networks and we have moved that into the new segment called global services, which then is a combination of professional services and the network rollout.

And finally or the third one is that we have also off the discussion with investors changed to EBITA, which we then have replaced that we had before, EBITDA.

We're sort of taking away the depreciation there because that was sort of the feedback, and that we have done as well.

Those are the changes in the reporting and we can also see that the report as such is now takes a table on the first side.

All in all it should give a better visibility to everyone on where we are going.

As I said, we have done it both for transparency, our work internally as we have changed as well as feedback from the market.

Good.

A couple of Q1 trends there starting with we see that operators are still varying in their activities and that continued in this quarter.

We can say that the trends that we saw in the third quarter and the fourth quarter prevails, that there are both macroeconomic impacts in certain regions but it's also a technology shift from 2G to 3G as well as general quarters [set] in our markets.

So I think that is prevailing.

We see still that some of the growing markets like in Africa, parts of Asia, and even parts of Middle East are quarters and the level is quite low when it comes to investment.

Finally, we have seen during the quarter increased level of discussions with operators regarding their business when now the data growth is coming, how they can contribute to a good customer experience when it comes to quality and efficiency.

And of course, that is driven by the strong data growth.

And some of you might have recognized that during the CTIA, we released a press release where we basically -- as we are following the traffic in the networks, presented or communicated that now we have more traffic from the data users that are some plus 400 million in the world than all the voice subscribers, which are 4.8 off the closing this quarter.

So we definitely see that growth in data.

A couple of events that are important that has happened after the quarter which I just want to highlight.

The day before yesterday we announced that we acquired Nortel's share in the joint venture together with LG, addressing the Korean market and of course this from -- of this important thing because Korea is the third-largest telecom market in Asia.

Very advanced when it comes to technology, service, and applications.

And Ericsson has a very limited business in Korea today.

This enabled us to work with all the three major operators in the Korean market, both with the current portfolio, but also of course seeing that the technologies that will come, that we will be good represented on the LTE.

We also the day before yesterday announced the cooperation with Datang, a Chinese vendor which we have been working with before, on research and development as well as a commercial cooperation in order to even get the stronger offering to the TDD customers, which is mainly China Mobile in China.

And that is part of sort of our view to get a bigger foothold on that technology and going forward.

I will come back to the Sony Ericsson and the two announcements on deals in Asia we have talked about before.

Talk about the next [phase], we were down 9% in the quarter for comparable units down 16%.

We had good developments in TDMA.

Now we don't have them in the base so we can compare for last year because that (inaudible) did not exist in that form.

But we had a good performance on them and we are tracking on the integration and we are definitely tracking on the business plan.

Global services has also good growth and we will come back to that.

On the other side, we had networks that have a continued decline and that is coming back to the same trends that we had in previous quarters, so it's nothing new there.

It's basically the same.

Certain markets and a technology at the same time impacting the networks business.

Multimedia, however, they had sort of -- since they started to report the lowest quarter sales, very much driven by geography.

They have very strong revenue management in Africa and Middle East region and that is also where we see less of investment in the quarter and that fell through to multimedia.

At the latter part of the quarter, we also saw that we got some impacts from the supply constraint or the tight supply chain in the world, especially the semiconductors.

As we all know, the semiconductors are working for many industries.

Some industries are coming up right now.

So the demand has gone up.

At the same time, the semiconductor investment in capacity has been fairly low the last couple of years here.

So that made some impact for us but more importantly just to mention it.

If I talk about the margins, we saw the margins holding up on the Ericsson before joint ventures, 10% operating margin base use, same absolute number, 4.5 compared to 4.7.

This is I would say work that was done with the business model and sort of getting a lower threshold in a company when it comes to volumes.

We can sort of -- even though we have a decline in volumes, we are able to deliver this type of profit.

And you can see the EBITA level is on 13 and operating margin on 10.

If I then look at the regions, and this is a quick one just to get the feeling for the regions, you can see on the 2009 there how they are distributed for region, which was fairly evenly distributed in the first quarter.

You can see definitely the impact of the Sprint as well as the TDM acquisition which making North America a little bit larger than all other markets, all other regions.

In others, as we have disclosed, that's cables, modules and [patents] etc.

in that other, so we know that.

Quick comments on the regions.

Mediterranean I would say down 17%, a little bit mixed but still in a transition.

We see the mobile broadband taking off here and of course being part of growth, but we still have a decline and the quarters [net] in the region.

Western and Central Europe with a little bit of an adjustment on currency they would be actually flat and here we have seen a very good transition of the leadership team in this region because today that is a 3G and service business which were a 2G business just a couple of years ago.

So that transition there has done good and now we see also that the LTE and 4G license is coming up in this region.

Latin America 9% down.

Here we can say that we see good momentum and services still in decline but we have some 3G auctions coming up which are planned for this year in the region.

Northern Europe and Central Asia, a little bit mix as well.

You can say that in Northern Europe here we have Northern Europe will be the portion here in Nordics where I am based right now in Sweden and all the countries around here still have a good growth and modernization on the networks, etc.

On the part of the Central Asia, including Russia and all these countries, we still see a very cautious investment level.

Just a deep dive in North America, and this is what Suzanne referred to, in the fourth quarter there, we are lacking the CDMA operations business in that column.

But anyhow, you can see a quite impressive growth in North America.

We have both an acquired and non acquired business grown quite a lot and you can see from one year ago, it's a dramatic increase.

Here of course we had the Sprint managed services where the CDMA assets are coming in, but not only that.

We have our traditional WCDMA business in this region as well.

We signed in the quarter very important for us the LTE contract with AT&T, the 4G, which is important.

You can say that we are now integrating the CDMA business quite quickly into all the different pieces of our Company and migrating the portfolio as well.

So that is definitely on track.

To take the other regions, starting in Middle East, Middle East is flat now in this quarter even though first quarter last year was probably a little bit down because they were quite early into this but they are flat.

There's mixed development.

Some markets are really growing and some are not, but you can see the trend of services and still the 2G decline and the 3G growth.

Southeast Asia and Oceania, that is the region that we will talk the most about, I would say when it comes to financial crisis, the Bangladeshes, the Thailands and Indonesias which were very cautious.

You can see they are still 32% down year-over-year, so that still seems that we are a little bit cautious in this region.

And of course we have a shift from 2G to 3G as well.

China and Northeast Asia 15% down, a little bit tough comparison for the region.

Anyhow, 15% down in China and Japan, two of the most important markets, and of course China had a quite good first quarter last year.

Here as said earlier, we have added two important additions in acquisition and partnership with Datang and with the joint venture with LG in Korea to strengthen our position in Asia.

[We'd like to do a deep tie-in] South Sahara, which is basically half their volumes in one year, and here we have three things happening.

First, we have the overall cautiousness and the capital constraints and the credit constraints.

The other is that we have a 2G to 3G transition in this region and lastly, we also have operated consolidation ongoing in the region.

So that is impacting the whole business and you can see on the latter part of the graph, where we split it by segment how it will decrease in both I would say networks but also in multimedia.

And this is the region where multimedia is very strong when it comes to revenue management, but it is one of the regions where they are very strong.

And this has impacted multimedia in the quarter.

If you then take the segment starting with networks, networks down 14% in the quarter.

Of course, year-over-year comparables positively impacted by the acquired CDMA assets.

As I mentioned before, we had at the last deposit tight industry component supply in the networks business, but that is more than offset by the CDMA business, so we are clear on that.

But it's just important to understand it's an industry-wide challenge right now with the semiconductor industry.

We see clearly the continued sort of trend of 2G, all products around 2G coming down and 3G is growing, fueled of course by the data growth and the technology that you see.

We can also see that the EBITA levels are positive and are improving.

We are up to EBITA level of 16.

Here we can say that we have both efficiency gains with hard work on that.

We have of course a product geographical mix that we always have that is good and then we have a higher degree of software and networks in this quarter.

On the Ericsson level, just to be clear on that, we had a normal quarter on software because when we come to multimedia, we will see that they have come down and then of course they are very software-intensive.

But in networks we had a somewhat higher level of software.

If you then take global services, global services had a good quarter.

All the three parts of global service that we are now reporting we are growing.

Network rollout with 3%, professional services with 12% in local currencies, and managed services 17%.

And of course fueled about the efficiency review from the operators, we signed some 16 contract managers in the quarter.

Our margins on the whole global services including NRO were 12% and the professional services were up 16%.

So the efficiency work has definitely paid off here.

We still have a couple of the managed services contracts in transformation, the larger ones, but that we had throughout the quarter as well.

But it's important to know that we have been the (inaudible) in the base here in the beginning even though it's declining over time, our asset was a little bit bigger, the transition in the fourth quarter.

Global services, just some key highlights 410 million subscribers now in the networks that we are managing, some 2 billion customers on the support contracts in the world and we have more than 40,000 service professionals right now in the Company.

The last segment, multimedia, for the last of the core Ericsson segments.

As said, this was the lowest quarter since we started to report multimedia.

You can see we are roughly a little bit over SEK2 billion in sales, driven as I said before by the slower revenue management in certain regions where the foothold or the stronghold or revenue management is, Sub-Saharan Africa, Middle East, and Southeast Asia and Oceania.

Another thing that is also important to highlight is that when we came into the crisis the TV area was one of the first total areas where operators hesitated investment as the return on investment was a little bit longer.

We can now see that we have a good development on that and operators are definitely looking to the TV investments.

All in all, you can see that our EBITA is now negative in the quarter.

I would say that predominantly the reason is the volume.

The margins in general are fine.

It is more a volume game here on multimedia.

You will see that in that in the fourth quarter with roughly -- a little bit more than SEK3 billion turnover, we had a 17% EBITA.

Joint ventures, you have read about Sony Ericsson and probably ST Ericsson quickly.

Sony Ericsson has come down in volume 20%.

Still compared to last year, it is of course a dramatic improvement from EUR358 million in loss to a positive result of 21.

That has come from the reduced operating levels and the hard work on the portfolio of course and the management that is very focused.

I would say there's still of course a lot of work to do.

We are just breaking even but the track is definitely on the right track.

ST Ericsson reported yesterday night 18% down, operating, adjusted operating income at minus $114 million.

We are still in ST Ericsson doing the restructuring to come together as a Company and the volumes are still with the main customer there, so it's not that.

It's more about getting together now the Company and the restructuring plan is going as planned.

Fine.

With that, I leave over to Jan Frykhammar to talk a little bit about the financial data.

Thank you, Hans.

Hello, everyone.

Let me then talk a little bit about the Q1 financial highlights.

I think the first thing I would like to start with is that we have during the day, the course of the day today heard a lot of questions regarding the gross margin.

And of course, we are extremely happy about the improvement year-over-year and sequentially when it comes to gross margin.

I just want to highlight the fact that there are several components in the gross margin improvement.

One is of course the impact of the efficiency program.

But another -- two other important factors is of course the one around product mix, but as well business mix or market mix, if you like.

So I think with that clarification, I think it's important to consider all of those three things.

If you look at the operating income then in absolute money, we have managed to keep the numbers stable basically compared to last year excluding restructuring costs, and that is something that we are satisfied about and I think that we have seen now impact from all the hard efforts on the efficiencies.

If you then look at the share and earnings of joint ventures before tax, you can also see the impact of the hard work that Sony Ericsson has done, but also of course the hard work that ST Ericsson is doing, but Sony Ericsson obviously is the major contributor to the improvement.

If you then look at net income and net income of SEK1.3 billion in the quarter compared to SEK1.8 billion last year, this then includes of course the restructuring charges.

That's one of the explanations of the decline.

The other important thing to take note of here is the impact of the financial net.

And we are sitting on a very strong cash and the interest rates then are coming down, so we have a negative impact of financial net, but also some currency impact in that.

On the cash flow side, SEK2.3 billion positive compared to SEK2.9 billion last year.

I will come back to cash flow in a moment.

If we look at the debt maturity profile, this is nothing new really.

This is the same situation as I reported in the fourth quarter.

We think we are -- we have a strong debt maturity in the sense that we have no maturities within the coming two years and a good balance in terms of duration for the loans.

We should also remember that we have a backup facility that we haven't used on close to $2 billion.

So overall, we have a strong financial position, which is very important to have in this marketplace.

If you then look at the change in gross cash, we have an improvement here between Q4 and Q1 of SEK1.1 billion improvement in gross cash.

On the operating cash flow side, if we exclude the impacts of restructuring, SEK3 billion in the improved cash flow there.

Worthwhile to note as well is the around SEK900 million that we set aside for capitalization of our pension trusts, majority of that is in Sweden.

I also would like to mention that we paid dividends here last week SEK6.4 billion that then will impact the financial numbers in Q2.

So if we go to the balance sheet and the ratios there, we see a days of sales outstanding of 117 in the quarter, improvement compared to last year Q1 sequential increase.

Part of that is volume-driven.

We continue to work hard with the balance sheet.

We have our long-term targets there of less than 90 days of DSOs.

That is what we are working on.

The inventory days, some seasonal buildup of inventory, continue to do hard work there.

The internal target is less than 65 days.

This is obviously very difficult to say just on a single quarter basis, but we should look at it over a more of a rolling 12-month or at least calendar year basis.

But these are the internal targets.

Strong equity ratio of 53%.

If we then look at the cost reduction program, here we are still now talking about the original program, if you like, that we presented in the beginning of 2009 and we estimate the savings by midyear 2010 to be estimated to between SEK15 billion to SEK16 billion.

We estimate then the restructuring charges for this program overall to be SEK15 billion.

This means that there is around SEK1.5 billion that remains to be taken in the second quarter.

It's also worthwhile I think to mention that there will be cash outlays of this program in the second half but no more restructuring charges in the second half.

With that said, let me turn over to -- hand over to Hans again.

Thank you, Jan.

Just summing up then and you will now start to be familiar with our focus areas here.

And this is -- it is important for me because now we are modeling the Company based on this area.

The three on top here of course very much according to our core Ericsson business and the last one very much geared to our joint ventures.

The first one is of course growing faster than the market and as said, it's a little bit hard to say the first quarter here where the market is -- how much it has grown or not, but definitely where we focus on growth.

And we will -- that's partly what we have geared up on the go to market with the 10 regions to strengthen up because we think this is very important.

We think also we have a portfolio that should be [in all of] the stronger regions.

Best in class margins, yes, as I said before, we continue to work with our profitability and our profit levels.

And we have said that we are working to improve that, so that's an important target for us as well.

And then strong cash conversion.

I think that we have now proven that we are generating cash every quarter for quite awhile.

Important here is of course that we still see, as Jan mentioned, more improvements to be done on a capital structure how much we are tying up.

Not easy of course in this environment, but at least you should feel that we have targets internal to work on that as well.

And then finally, growth in the JV earnings right now we are basically flat on them, but of course that is a target to see that they are generating earnings for us as well.

So these are the four focus areas that we are deploying in all the dimensions, either regions or segments internally to see that we have the drive to deliver that because we believe if we can deliver on these four, we can deliver a value for our customers, shareholders, and for our employees.

Thank you very much.

Operator, we are ready for Q&A.

(Operator Instructions) As always please limit yourself to one question at a time.

Please keep your questions at broad level.

Detailed information is provided in the report of Ericsson's investor relations and media relations team will be happy to take additional questions and discuss further details with you after the call.

Rod Hall, JPMorgan.

Yes, thank you for taking my question.

I just have a couple actually quickly.

On the -- they're going to be on the gross margin, obviously.

The first one is with regards to the mix within the gross margin.

I noticed that you've got some of the more hardware-oriented regions or countries like India are slowing quite aggressively.

I wonder if you could comment on the degree to which that has impacted the mix shift towards software that you talked about in networks?

Hans, maybe you could comment on that.

And then I also would be interested in knowing whether that -- particularly on the slowdown in India, whether you would expect that to be or at least partially cease in the next quarter or two.

We've heard other competitors talking not only about the slowdown ahead of 3G builds, but also the fact that there's a major security review going on in India and that that has slowed investment in the short term.

But it's not expected to last indefinitely.

So if you could comment on that, I would appreciate it.

Okay, if we are talking about the mix shift and discussion, yes, of course usually we have been more driven on the type of business we are doing more than maybe the type of countries we are into, as I said before.

But of course we are predominantly a 2G market in India and a 3G -- are doing the auctions as we speak.

There are very little 3G.

One operator has 3G in the country only.

So of course that is impacting because it's more hardware on 2G than 3G, so that's correct.

But over time of course we will probably see more 3G deployment in India.

On the second question, I wouldn't guide if it's going up or down, but the only thing I can conclude it's an ongoing auction in India right now.

What we have seen is, of course, a little bit of slowdown in Q4 and still into Q1 when it comes to investment, especially after waiting to get spectrum for the 3G auction.

So we're going to see how that turns out, but probably if they get spectrum operators, they would probably deploy 3G and that would have a different profile then.

Okay, Hans, could you specifically comment on this security review point, though?

Do you -- have you guys seen that?

Is it having an impact outside of the 3G build situation?

Is there a security review underway?

We read the same reports that you are doing, and I couldn't comment anything more than you are doing at the moment.

Okay, great.

Thanks a lot.

[Zahid Hassan], Citi.

Thanks for taking my question.

Just a couple again.

In terms of the gross margin, you've been talking about some of it not being too much software-oriented and sort of being ongoing.

Given that side, this is going to be some cost savings, how sustainable is this going forward?

Should we be thinking about a gross margin above 36%, 37%, or should we be thinking of, in the moving parts, this could actually be below 30%, 35%?

I just wanted to get your feedback on that and also I've got a follow-up afterwards.

First of all, we don't guide on gross margin or something like that.

What we can say, we have a sustainable impact on our efficiency improvements, that's for sure, and that we are mentioning.

Then, of course, there's always moving parts when it comes to product mix, regions, and competition.

But, but we are doing the cost savings in order to improve our margins, of course.

But to guide where they will end up, that we are not doing.

All right, fine.

Then more importantly on the market, you're sort of talking about going fast in the market.

We haven't really got anything to benchmark here.

You haven't given anything about what you think the market will grow at this year or in terms of where you sit compared to that.

So it is just saying that you're going to grow faster than something and not giving us anything to measure that by is almost a useless metric.

Are you going to give us something to sort of judge it by or should we just discount that?

I think that we will continue to do as we have done before.

We will conclude after the quarters are done.

Then we reflect over that not giving any guidance we are going and when the year of 2010 is close, we can measure it if we have before.

As I said when we decided quite a time ago not to guide and as always pros and cons with that.

We are now concluding that there are more pros for us here than not doing it and that's why we're not doing it.

But we would like to show the performance of the Company and then we can measure that against the fact that is happening instead of the guidance.

Mark Sue, RBC Capital Markets.

This is Joe Longobardi on for Mark.

Are you seeing operators in developing markets return to investing in their networks or do you foresee them sitting on the sideline for an extended period?

I see in the developing markets we still see technologies, but also some cautiousness as I said before.

And we are of course, yes, we still see some of those markets being fairly weak then.

But again, there's no new trend.

It's the same trend that we had in the third quarter and the fourth quarter that we have now in the first quarter, so it's nothing worsening like that.

But we don't -- we see that there is some cautiousness but also the technologies as well as the macroeconomics.

So you have three of those factors.

And then of course now with 10 regions that we are elaborating on, we are trying to talk about each of the 10 regions to get a better flavor for what's happening in all 10 of the regions instead of doing a general brush over of the whole world, which is quite big.

Okay, and the recent pullback in China on the 3G network buildout, do you see that delaying a transition to 4G going forward or could that rate of adoption continue?

No, I think that of course last year was very much a focus of initiating 3G in China.

And then this year it's continued deployment of it, so it could be a little bit different between different years as they kicked it off last year and this year is sort of their rolling it up and getting consumers on it.

So it's a little bit different, but we don't see any difference from what we thought were the plans, that is.

Thank you.

Kulbinder Garcha, Credit Suisse.

Another question on the gross margins and a clarification on revenues.

On the gross margin point, Hans, can -- I just want to be clear.

So if you were to run the regions for the sequential and higher year-on-year gross margin, its efficiency first, then mix, and then software?

Is that right?

Is that how you would rank the order of the drivers and just saying the efficiency could be sustainable?

Is that how you want to communicate that?

That's my first question.

The second one is on sales.

It seems to me that if India is depressed because of 3G options and South America to a degree and sub-Saharan you've got consolidation holding back investment and your component constraint, at some point this year -- we can debate when it is -- we should have a very strong snap back in revenues, shouldn't we?

On the second one, you know that we're not going to guide on that one.

But let me start with the gross margin again.

As said, in the network segment we had efficiency gains, product mix, and software that are impacting the gross margin and overall margin.

On the overall Ericsson, as I said before, the software was pretty normal as we came down quite a lot, almost 30% in multimedia which is very software intense.

So that's what I'm trying to say.

Then of course, it's always going to be different between different quarters, but we have been working with efficiency in the Company.

Of course that is somewhat paying off, but all other things equal of course you can always say that the gross margins are where they are.

But we are of course in the market as well that it is dynamic in that sense.

Okay, on the revenue side then, are the component constraints still hindering your ability to supply equipment in the near term as in for Q2, or will that still hurt your ability to ship sales?

I think that as we elaborated, we saw that semiconductor industry was a little bit having a higher demand than supply at the latter part and we had a certain impact on that in the first quarter.

Maybe it was a little bit too naive and believe it's just going to go away in one quarter but we have a very strong and proactive sales supply and sourcing organization in Ericsson that I think is top class.

They have been working proactively to see that we can actually meet the customer needs.

But I cannot say at this stage that we will not have an impact in the second quarter.

Okay, finally just one very quick thing.

Hans, I guess you have been CEO now for several months.

I'm just thinking Ericsson is a world-class company in terms of market share but do you honestly believe with the guidance you give, that you are giving world-class communication and giving no real absolute margin target and no real revenue targets for the business, not even for this year, even over the longer term?

Is that not something that should be considered, do you think?

We always consider what types of things we should disclose.

And as I said, we now took a step forward in a couple of new disclosures here which we have discussed with the market which we think is important I guess that the market also think is important measurement that we want to both internal to be followed and externally.

We always debate these type of things.

At the moment, we have more pros to not doing any guidance and that is why I decided not to have that.

But again, we always review what we have but that doesn't mean that we will do it.

It's just that we review all this to see that we are doing the best.

Okay, thank you.

Inge Heydorn, Sentat.

Good afternoon.

A question.

How fast do you need us to run to stand still in the market?

Meaning on the question regarding that is if you think about the traffic, the traffic is growing very, very rapidly for the moment, especially the data traffic.

But at the same time prices on base stations are falling, the equipment is getting more efficient and bringing out more [lines].

So how fast do you need to run to grow the market?

How fast -- when you calculate it, how fast do the traffic need to grow in order to grow your top line, given the price pressure, given the more efficient equipment you are bringing out?

It is of course a fairly complex question.

But I think that there is of course a certain element of more slower in all the technologies we are doing.

We are all the time getting more technologies, being more capable all the time, so that's true.

But on the other hand, we see the data growth right now.

And as I said, we are now some more -- some 400 million mobile broadband users using more capacity than the 4.8 billion mobile subscriptions that we have.

So of course it will have an impact if that continues to grow that way.

And we talked about before that maybe it's only one-third of the 2G footprint worldwide that is 3G today and even less if it's grown on HSPA, so it's still quite a lot that has to be covered.

That was what we have disclosed before.

So I think that's important parameters.

But if you think about the hardware, if you think 10 years back, your sales is half roughly what it was 10 years back.

You are probably shipping three times the amount of equipment as you did then.

Prices have come down quite a lot, so your top line is halved and traffic has been exploding.

So how do you see it in the future?

How fast does it need to grow in order to get to top line?

I have a number here that you are asking for.

I think that again remember also we are moving from having a lot of hardware on 2G to less on 3G and even less on 4G for LTE.

That is also a reality we are living, but we also need to remember that we now have more than 40% of our business in services, which also is an important part of the Company.

And the combination of the technology leadership, what we have in technology together with services, is going to be even more important going forward when the networks is out there and you need to modernize.

Okay.

Thank you much.

Richard Kramer, Arete.

Yes, I guess just to follow on from that question and to dig into it a little bit more, we have now had a couple of quarters where there's been sharp declines in core network sales on an organic basis.

And can you break down a little bit or give us a little bit of color on the pricing environment?

It seems that several of your larger competitors, certainly European ones, are extremely aggressive right now trying to rebuild share and there's new Chinese competitors also very aggressive.

Maybe one other question for Jan.

We are seeing against the sort of 14% organic decline in sales or 16%, a 13% increase year on year in headcount and it seems to be that you are saying the restructuring programs, the current restructuring program will end fairly shortly.

Are you telling us that we will have quarters later in this year where there will be no restructuring charges or would you anticipate looking at another restructuring program over the course of the year given how quickly headcount has risen in the other direction from sales?

Thanks.

Jan will start.

I will start then.

I think first of all, as Hans mentioned, the business, the services business is growing.

And the services business is a headcount driven obviously business.

That doesn't mean that we are not changing or transforming that business.

We are doing that on a daily basis and that we will continue to do of course.

With regards to the restructuring program, what I am saying very clear is that with the program that started in the beginning of 2009, there will not be any restructuring charges in the second half.

If there is a new program, I am convinced that Hans and I will go out and tell you that in advance.

If we don't, then from the second half of 2010, we will start to look at the bottom line without excluding restructuring costs, let's say.

Yes, if we then take the price pressure and the question about what have we elaborated on the trends that we see the 2G going down including core and the pieces around whatever it's going to be in 2G is going down at the same time 3G is going up.

We think we have a very competitive portfolio in the 2G and as well in the core business regardless if it's 2G or 3G but by nature it's going down on 2G right now.

When it comes to the price pressure, I get the question so many times right now maybe I sound a little bit -- strange here, but we have had this price pressure for quite a while right now and tough competition for a long time as well.

So we just need to live with it as a company and we need just to fight with it, bring out our strategy, and we stand firm in our strategy.

We need to continue with the things that Jan is talking about, efficiency gains, and continue to work on our strategy.

So I think that's the most important for us.

Competition will always be there and it's going to be tough, and we need to understand it, but it's more about driving our agenda and our strategy right now.

Just to be clear, there's been no lessening of price pressure given how many of your competitors seem to be keen to get share right now.

You know, sometimes you have flavor of a lost deal that you remember what actually happened on that that but as usually I update on the longer time when we have looked into it.

No, it is no change.

It's equally tough as I usually say.

Okay.

Thank you.

Alexandre Peterc, Exane BNP Paribas.

Yes, thanks for taking my question.

I would just like to understand what's going on in the emerging markets that remain fairly soft not just in India but in other markets as well.

And I remember your comment saying that your cycle is lagging the macro cycle by six to 12 months.

So given that the credit markets bottomed out and the macro bottomed out about a year ago, how should we time then this recovery in emerging markets?

And then a very small follow-on will be on CDMA, I understand it was quite strong.

Are you surprised and can this continue?

Thanks.

On the emerging markets, I will just go back and reflect what happened in the first quarter and of course we tried to go through region by region right now, but sort of the growth markets, as I call them, instead of emerging markets like Africa, parts of Asia, and etc.

They have a combination of a couple of things.

They have sort of the cautiousness of operators of the ongoing financial turmoil.

But at the same time, they also have a transition with 2G and 3G.

And especially in Africa, we also have an operator consolidation that is taking down the pace a little bit.

But you can see also that in those regions mobile broadband is a very important piece of it going forward.

So that is sort of where we are on that.

And I'm not saying anything about the future, more about what we see right now.

On the CDMA, I think that we are happy with acquisition.

We position ourselves with the largest CDMA operators in North America.

I think that they also are seeing the data growth in the CDMA networks as we see in the WS CDMA networks, which of course are bringing business to our CDMA business.

So no, we are happy with that acquisition and we think it's performing well.

Are there any market share gains there against competition in CDMA specifically?

It's a little bit too early to say.

It's just one quarter that will have it.

But -- so I will come back and elaborate on that when we have a little bit more time behind us.

Excellent, thanks very much.

Patrick Standaert, Morgan Stanley.

A quick question on the CDMA business.

I'm trying to understand a bit if the upside you've seen on sales really had a big impact on the profitability?

I'm trying to understand, A, one, if you could tell us what the profitability came out from the Nortel business?

And if you can't, tell us how much more significant it is versus the group average.

Okay.

Well as we said in the fourth quarter, we talked about CDMA being well above average and remember we got CDMA business for the last six weeks and they are usually the strong weeks of the year.

This quarter is a little bit more normal but still a little bit above average to be honest.

But that's where we are.

But remember when we made the comment in the fourth quarter, we had the last six weeks, which are very important weeks for a year.

So this quarter it was more normal but still good profitability on the CDMA business.

When you talk versus historically and versus average, do you speak versus Ericsson average or do you speak with Nortel's historical average?

I talk about more the Ericsson average.

This business, we're not in business in Nortel ever because we took out the North American CDMA only so that -- we have no historical data on that one.

When you look at your pipeline for the CDMA business, any reason to believe that despite that you have seen in Q1 will continue in the beginning of the year or this should slow down?

And then on that similar trend of question, if you had some components shortage in 1Q, is there any reason to believe that the sequential growth for Q2 will be higher than historical average?

We don't comment on seasonality or something like that that we don't guide.

But secondly, when it comes to CDMA, again, I think what we bring to the table on CDMA is of course the financial stability of our company.

I think that's important and then of course, we want to see how the customer reacts and how they invest in CDMA.

So far it is progressing as planned and a little bit above plan as well, but it's finally going to be driven by the consumer demand on CDMA in North America.

I think that's the most important and that's (inaudible).

Okay, thank you.

Anuj Krishan, UBS.

Thanks for taking my question.

First of all, thanks for the additional disclosure around network rollout.

That's very useful.

But we are just trying to understand over here the profitability within that portion of the business.

It appears that it is quite lumpy from quarter to quarter.

Can you help us sort of understand how profitability -- how we should look at profitability within that and how it sort of fits in within the overall global services business?

And secondly, if I may, on the R&D, we understand that you have not changed your guidance at this stage.

But looking at the R&D spend in Q1 it would appear that based on normal seasonality, we might end up being higher than SEK30 billion.

Can you help us understand the sort of drivers within that and how we should look at R&D spend going forward?

Thank you.

We will start with NRO.

Yes, you can see from the disclosure that we have been quite lumpy on the NRO.

And the reason of course depending a little bit on the projects we take on and what type of projects is ongoing in that quarter.

But you can also see that we have improved our margins over time with a lot of focus on project execution and product management.

But remember, it is a very important enabler for our networks business.

You sell it together, and that has not changed.

So that's important to understand.

On the R&D, maybe Jan Frykhammar will comment on that.

Absolutely.

I think, though, one more thing on the network rollout.

It's very easy here.

We have two former heads of global services in the room.

But you know, it is a low margin business and as such, it's extremely important for us to work very hard, as Hans said, with project management.

So I think that is certainly an important addition to make.

On the R&D side, I don't see that there is a reason to change the guidance on the R&D spend.

I think we are -- I agree with you that there is a bit of a Q1 number there, but we have -- if we feel that there is a need to change the guidance, then we will do that.

So I think with that we will leave it.

All right, thank you very much.

Adnaan Ahmad, Berenberg.

Hi, guys.

A question for -- actually two questions for Hans.

First of all, are you seeing any increased activity from operators to bundle services deals together with networks deals?

If you look at the industrial market, vendors such as Kerner and ThyssenKrupp, they sell equipment at a cost or at low-margin and make the money on services at the multiyear deals.

Are you seeing an increased activity of that in your pipeline over the next 12 to 18 months?

And the second question for you, Hans, is just on your CDMA strategy, obviously you've taken out the Nortel business in the US and you've recently struck the deal with -- taking the Nortel position out of LG for the Korean market opportunity.

What type of strategy do you have for CDMA and other markets such as in China, India, and Japan over the next 12 to 18 months?

Thanks.

Regarding business models, I think of course, it is always some innovation in that area, but nothing dramatic of a trend shift or something.

I think that in our case we are also looking into using our assets when doing business deals where we have our strength in technologies and quality on our network performance together with our service business to see that we can do tailored need for our customers.

So I think that we are doing it as well, so -- but it's nothing -- a big trend shift.

When it comes to CDMA, you are rightfully pointing out that that was a North American CDMA business.

What we have said on the international business, we will do CDMA business outside North America if it makes sense for us.

We have already announced one in the Nordics on the 450 CDMA, which is a (inaudible) mobile broadband.

So when it makes sense, we are going to do it using again our assets, which is the global reach, using that sales channel and our service capabilities to get CDMA out in other markets.

But we will do it when it makes sense and sort of when it sort of makes financially sense, I would say.

Great, thank you.

James Faucette, Pacific Crest.

Thank you very much.

I wanted to ask a little bit of a longer-term question.

If we look at the way networks are moving, particularly with new introductions of things like femtocells, etc., how would you expect that this will impact your equipment business and competitive position going forward particularly as these new network elements seem to allow the smaller companies to compete effectively at least at this stage?

That's the first part of the question.

The second part is then as it relates to these new pieces of the network, how are they going to change what needs to be done from a network management standpoint, etc.?

Let's see if I understood your questions.

When it comes to the network and continued evolution on the technologies on the networks, we of course are following that closely and so for us the radio technology for example is much based on the micro, macro, and the picot cells at the moment, and that's where we are making our investments in order to meet these demands from the network with more usage from smartphone users or connected PC devices.

That's how we want to support the operators to manage the load.

At the same time, it's very important of course the transport and the routing of it and (inaudible) on the backhaul of it as well.

You need to balance that.

On top of that, the provisioning and the data management is going to be even more important when you bring in many new devices for the network and very different usage from those type of devices.

So that's what we are doing in the multimedia business.

You can historically say that on voice it's been numerous tariffs on voice but very few on data.

And of course going forward, we are going to see more different types of tariffs on data, and then we need to understand that in network what type of device it is and even what type of service it is in order to have different type of tariffs.

So that is sort of how we are gearing up to meet this market going forward.

The second question, what was that?

Yes, sorry, just trying to understand what challenges are introduced as you basically introduce more network elements and more base stations or places that you need to control.

Is that -- does that change for you what capabilities you need to have within the company or is that basically continued enhancement of the things you already own?

I think we have the main assets for the radio technology, but of course if you get more dense, urban business, you need to think about how you deploy that because maybe you cannot have more sites.

So you need to have more smarter than 10 (inaudible) or smarter cell sites, etc.

So that type of things we are developing all the time.

So I think we have that in the portfolio.

It's going to be more based on the assets of the operators one by one to understand what you have, what you need to grow, what type of load do you have in the networks, how you build it.

So I think that on the radio side and all that side, we feel that we have the product.

Thanks.

With that, operator, I think we have to conclude this call.

So we thank you for joining us today and we hope to see you all here in Stockholm in a couple of weeks, May 5 and 6 for our capital markets day.

Thank you.

Thank you, ladies and gentlemen.

This concludes today's Ericsson conference call.

Thank you for participating.

You may now disconnect.