Telefonaktiebolaget LM Ericsson (ERIC) 2010 Q2 法說會逐字稿

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

To view visual aids for this call, please look 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 conference.

Ase Lindskog will now open the call.

Thank you, operator, and hello, everyone.

Welcome to our call today.

With me here today are Hans Vestberg, President and CEO of Ericsson; Jan Frykhammar, who is our Chief Financial Officer; and Johan Wibergh, head of our Business Unit Network.

Before starting our presentation, I have to remind you all that 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 reports, as well as in our annual report.

With this said, I would like to hand over now to Hans Vestberg for comments about our performance and plans going forward.

So let me start by going over a little bit on the trends in the quarter.

We saw pretty much the same pattern in the second quarter as we have seen now basically at the second quarter 2009, meaning that we see strong mobile broadband or good mobile broadband development.

We see also North America in the professional service continue.

But then on the other hand, we see the markets that have an impact from the financial crisis either from structure point of view or financial credit point of view, currency point of view, are still very slow in investment.

And then of course, (inaudible) caution us from those operators.

So, that is very much the same pattern as we have had now in Q3, Q4 and Q1.

And as we actually started talking about the Q4 quarter 2008.

So, the mixed operator investment activities is still prevailing, and at these great variations.

We see a continuation of a good demand for mobile broadband.

We're seeing even more Android phones coming out in the markets, smartphones and connected devices, of course bringing data growth there.

And, I think that is encouraging to see.

We have also seen some initial changes to the pricing or data, where operators, some operators, have started with tiered pricing for data traffic, which we have outlined in a couple of market days as an important trend to follow to see how that pans out.

And we're now seeing some operators.

We see a continuing focus on network quality and efficiency.

As we said at the capital markets day, there is quite a substantial portion of the rating based station up in the world that needs to be modernized.

Many of them actually in Europe, because Europe was off -- was early up on GSM and 3G.

And, that will mean that we're going to see a modernization in Europe quite a lot when it comes to that.

There are other reasons as well, but I would say a big portion of that is happening in Europe.

When it comes to the components, we talked about the component shortage in the first quarter, where we saw the capacity of the supplier of components were not enough when the different industries are coming up in volume and demand.

And they reduced their capacity dramatically when the crisis started, and the ramp-up has not really come up to the levels.

We had some impact in the first quarter, and you remember we went through that.

In the second quarter, that impact has continued.

And, what we can see is that we actually got the gradual improvement in the quarter, and actually, it was not even in the quarter.

It actually was in the last month that we had high volumes, and at the end of the June month.

And that of course impacted us in several areas.

I will come back to that.

Of course, the toughest for us is that we were not able to deliver to our customers that were expecting to get deliveries from us in this quarter.

And, of course, when you get the supply chain high volumes late in the quarter, then, of course, logistics and installation have to happen as well, and that was hard to finish in the quarter.

A couple of the recent events that we think are important happening in the quarter and after the quarter.

We closed the LG Ericsson, nowadays called LG Ericsson, the previous LG Nortel.

We are happy to be a leading vendor in the Korean market.

We closed on the 30 of June, meaning that we have an impact on the balance sheet for the acquisition.

We are not paid all, but the main part is paid, but that has an impact on our balance sheet.

But we have no impact on the P&L.

That will happen in the second half of this year.

We highlight here one, the -- but, of course, as we have outlined, we believe that telecommunication will be for many different industries in the segment going forward.

We highlight one deal here.

Of course we're doing others.

This one we have publicly announced, and that's with the energy company in Spain, Endesa, where we will do managed services for them.

And I think that's how we see our offering going into other industries.

Another highlight that came off of the quarter was our managed services deal with China Mobile Hebei, which is very important for us.

We have done, of course, services before in China, but this is actually a large and the first really big managed services deal -- some 22,000 radio base stations that we want to manage.

And I think this, of course, with a good focus on quality and delivery on this opens up other opportunities.

And as we have said before, China has a lower level or share of services historically and lower than the average.

This is, of course, an important inroad there.

We also made another important deal, which came off for the quarter, but again, combining our strength in technology and services, where we will, where Telefonica will outsource their prepaid and billing solution to Ericsson and an IT company called Indra, a Spanish company, where we will take care of their prepaid and billing for maintaining it and upgrading it over a long time period.

This, again, shows the innovation that you need to have now in this industry combining services and equipment.

LTE, as we said before, we are the leader in LTE with the largest market share so far.

That's, of course, very important for us.

More interesting is that we have more than 50 ongoing, to be started, LTE trials, confirming, of course, that LTE is the preferred solution for the next generation standard, which we think is very good.

So, we move on.

If we talk about our own performance and net sales, down 8% in the quarter, same as we've seen before.

Down in networks and multimedia.

Global services was flat.

But if you take out the network rollout portion of it, it was actually up, the so-called professional services area up 9%.

And the service share in the quarter was an all-time high of 42% of the total revenues.

The component shortage that talked about on previous slides that impacted us in the quarter, and we started with a late -- came out late with deliveries in the quarter.

We estimate that impact for our customers on things that we were committed to delivery in the quarter but were not able due to the shortage in the supply chain to some SEK3 billion to SEK4 billion that we were not able to deliver.

That's, of course, unfortunate, especially for our customers that were expecting those deliveries.

Margin-wise, we stayed fairly stable on operating margin, some 11% compared to last year 12%.

Actually the difference is only [7.6]% if you compare them on the decimal.

So were almost in the same, and if you look from the first quarter, it's an improvement.

Of course, one important piece here is the gross margin, rose somewhat to 39%.

Main attributes are, of course, business mix, which means that we have a little bit less of rollout, and more of expansion and upgrades.

Basically what we have explained before, how our business model is working to get the footprint first, then you get extension and then upgrades on that.

And, of course, the most competitive area is the footprint when you build it.

But also, not to forget, also an important piece of the improvement of gross margin is coming from efficiency gains that we now have carried out since the beginning of 2009.

In the program that we closed this quarter, basically, we have concluded all things that we outlined in the beginning of 2009 and a little bit more.

Regional comments, if we take the region distribution, just to highlight, of course, that North America is standing for a quite substantial piece of the quarter, 27%; was down 20+% in the last quarter.

Of course, that means that others have shrinked, but important to understand that that is an important region for us right now.

So starting with North America, up 128% year over year.

I would say even excluding our acquisition on CDM and GSM from Nortel, and even excluding the Sprint managed services, which was up in the base last year, is still good growth in North America for us on the base business on mobile broadband.

That has to be clear.

We are also seeing a continuing demand on data in this region, and it doesn't really matter if it's WCDMA or CDMA.

Both technologies are the same.

And of course, we are now also doing volume shipment on deliveries on LTE to this region.

Mediterranean, down 17%.

Sequentially up 11%.

Here we see a little bit different pictures.

We have, of course, some slowness in some of the economies in Europe, which are impacting the operating spending, especially Spain and Greece.

We also see in this region a lot on modernization plans and also LTE trials.

Latin America, down 12% year over year.

Sequentially, up six.

In this region, we've talked about before the shift from 2G to 3G.

And that's happening; the mobile broadband is the predominant investment right now.

But we also see LTE trials.

And also we have a couple of different countries that has quite large operator consolidation happening.

Western and Central Europe, here we see a decline on 19% and sequentially 16%.

Here, we have a large variation between the different regions and the countries.

If I try to generalize such a big region, I would say that Eastern Europe is slow.

Some countries there actually are impacted from the financial crisis and are being very cautious on the investment.

Western Europe, a little bit more the same as we've seen before.

Service is strong as well as the mobile broadband.

Here in this region, as I mentioned before, we're going to see quite a lot of LTE and sort of net of modernization happens because 2G and 3G was early out in this region.

And the modernization work will happen in this region in the next 24 months, I guess.

A little bit different from different operators.

But, it's an important piece there that going forward we're going to see modernization work coming up, and that sort of is the new footprint to be built in Europe right now.

So, it's going to be an important piece to the puzzle.

Northern Europe and Central Asia, two pieces here.

I would say mobile broadband and the modernization on the fixed networks are happening in this region, as well as with the 2G expansions in this region and then 3G expansions or rollouts in Eastern Europe, especially Russia.

If we then take the other regions, Middle East down 20%.

We see general [course of] operators in this region.

And the area of strength right now in Europe is the service area, down 4% sequentially.

Sub-Saharan Africa, down 19% year over year -- and 19% year over year and 22% sequentially up.

Here, we see that we're still impacted by the economic climate, and of course, also, as we have mentioned several times before, the operator consolidation taking place in Africa as we speak, which has not spurred any investment so far.

Southeast Asia and Oceania, this is the region where we have together with Africa and Middle East, have had the largest impact on the quarters [now] and the financial crisis.

Many countries with a high volatility on currency and credit limits.

Here, we're down 36%.

Sequentially we're growing.

You can say here that definitely HSPA upgrades and mobile broadband in demand here, and we see also LTE trials starting.

India and China I will take specifically.

If I start with India, we have one of the lowest quarter sales in India for many, many years.

If we take the side that is not declining, it's a service business, that is remaining fairly intact, especially the recurrent business.

If we look at the infrastructure, mobile infrastructure, we have clear shortfall.

There are two reasons for it, one that we've talked before about -- I've talked about both.

But the 3G auctions, which have very important spectrum coming out for continuous deployment or equipment [intra] in India; that now is concluded but has not spurred any investment so far.

It's still up to be grabbed, that market.

And of course, that market is a new footprint which will be very competitive because the mobile broadband and the penetration still are going up in the country, which are, of course, giving good prospects for that.

The other area is security clearance process that all vendors in our industry and even other industries have to go through.

That has in the quarter impacted us significantly.

We were cleared for one operator late in the quarter, so that's the only sales we have is to one operator at the end of the quarter because we were not security cleared.

Now we are security cleared, and we have outbid some other operators after the quarter.

So, that is fine, and then we can start delivering.

However, just as a reminder, as we understand and we are discussing, is that there are a new security clearance process that will come up; that is a long-term solution.

This was a short-term solution.

That we don't know how it's going to impact and what it means, as we haven't seen that process defined yet.

But at the moment, we are cleared with the majority of our customers for deliveries.

But again, 61% down is quite significant.

China, Northeast Asia, down 36% year over year, and 7% sequentially.

If we're nice to each other, which we sometimes can be, China, of course, has a very hard comparison in this region in the second quarter.

The second quarter last year was an all-time high on 3G rollouts.

And I think that the future focus on 3G in China is still there, and they're really focused on success, so it's more of a timing issue when they are spending that money.

LTE is on, again, (inaudible) here China, Japan, et cetera are looking into LTE.

We can also clearly see that Japan, dropped down to the fourth-place in our country, ranking as a very good growth when it comes to mobile broadband and a very healthy growth for us as a company.

Finally, I've already mentioned it, but in this region, we will from the next quarter have our acquisition from LG Nortel; that is now renamed to LG Ericsson.

Segments, starting with networks, networks down 12% in the quarter.

Fairly the same trend.

Mobile broadband and CDMA developed favorably in the quarter, partly offsetting the decline in 2G or the voice-related sales.

It's the whole chain on that.

So, it's much what we have discussed before.

This is the segment that will have the main or the majority of the impact of the supply, or the shortage of components.

However, on the positive side, we continue to creep up on EBITA.

We had 70% EBITA in this quarter.

And of course, that's very much fueled by the good business mix, but also the efficiency gains that have been down in this segment.

EBITA in [Tech] Global Services, as said, flat, but it turned net of rollout down 12%, very much correlating with the networks business.

And if we then look only at Professional Services, up 9% and Managed Services grew 23% in the quarter.

And you can see that the margin is fairly stable on the whole segment, 12%.

First growth in year over year and sequentially.

And, you can also see that Professional Services held up well in the range where we usually have had Global Services profitability.

A couple of highlights on services.

We are now 450 million subscribers in the networks where we have [in turn] responsibility in Managed Services.

So we're actually growing quite rapidly here.

If we define the Managed Services arena, including stand-alone fee maintenance, which we have not historically done, then we would come up to 750 million subscribers.

We are disclosing that number because some other companies are disclosing that number, so we just have them both.

So when we have full [in trend] responsibilities, 450 million subscribers.

2 billion subscribers in the 24 by 7 technical support.

And some 40,000 plus service engineers.

We are now -- we're actually having a very strong and powerful service orientation.

Have had 42% of the turnover in the quarter.

Multimedia, here, you can say we see I would say very, very similar patterns as in the first quarter, meaning that the stronghold for our building and revenue side is in Africa, Middle East and India.

And those three areas, as you have seen on the slide, are very much down, which has impacted our multimedia business.

The multimedia business, down 27% in the quarter.

Very much as we saw in the first quarter.

This leads to a negative EBITA of 5%, same as we had in the first quarter.

We had some growth sequentially, and that was more attributed to TV and multimedia brokering.

So this is, of course, a challenging area.

But on the other hand, we believe that our revenue management and billing are essential pieces for the future growth for operators to see that they have a very good building system that can actually both do voice and data.

And we believe we have the state-of-the-art technology here.

Joint ventures, both has reported, so I will be brief.

Sony-Ericsson reported earlier this week and had the sequential growth of 25%.

And of course, quite a dramatic improvement year over year on profitability, coming, of course, from a very big loss in the second quarter of 2009.

What is encouraging here, is of course, to see their new successful range of products that has a good attraction in the market, which also led to a very good and healthy ASP in the quarter.

ST-Ericsson reported yesterday night.

They have a sequential decline on of 10%, mainly because of the transition on the portfolio.

That meant that we basically kept our loss at the same level, meaning that we see traction on our cost adjustments program.

But if we would compare year over year, it is somewhat an improvement.

By that, I will leave it to you, Jan Frykhammer, to go over a couple of the financial highlights.

January, please.

Okay.

Thank you, Hans.

Let me then just talk through some of the financial highlights for the second quarter.

First of all, if we look at the gross margin, we are encouraged about the improved gross margins.

And this is, as Hans said, due to business mix, meaning really more expansions rather than turnkey projects, as well as good progress and results delivered on the efficiency gains.

Note as well in this context, as Hans said, that there's 42% service share in the quarter, so we are really encouraged about the improvements here.

If you then look at the operating margin, it declined, mainly due to lower sales, and it improved, as Hans said, slightly sequentially.

It's also important to note the reduction in profitability in the multimedia segment here.

We had around SEK300 million of profit last year.

Now it's a negative SEK300 million, so that's more than 1 percentage point.

If you look at the operating expense, there are a couple of things that I would like to mention there.

First of all, we now this quarter have the full impact of the acquired GSM business from Nortel that impacts the operating expense.

There's also an impact on SG&A due to high amount of LTE trials.

And I think we should expect that high activity to remain throughout the year.

And then, as well then, if we look at more of an effort that is ongoing in North America, and that is also the integration then of the CDMA acquired assets, and that has been a lot of cost in the second quarter, predominately related to integration work around ISIT environment.

Our ambition when it comes to selling and G&A expenses is, of course, to reduce that percentage as a percentage of sales, but over a certain quarter, it may vary.

If we then look at the R&D guidance, the R&D guidance that we have in the report is staying at between SEK28 billion to SEK30 billion for the full year.

Here, it's important to note, then, that since we will then start to get the LG-Ericsson impact in the P&L from second half, I think we should expect that that will have an impact on the R&D guidance.

But we will come back to that in the third quarter.

If we then look at the net income, it improved year over year and sequentially mainly due to the improved earnings in our joint ventures.

Great progress.

But also then, due to slightly lower restructuring charges if you compare it with last year.

Then those improvements were offset, then, with the same reasons as for the operating margin, [e.i.] lower volumes.

If we look at cash flow, this is minus SEK2.7 billion in the quarter.

That's not a number that we are happy with.

The explanations are clear.

It has to do with the supply chain.

The root cause is the component shortages.

But also then some related booked mix since we started to get volumes up here late in the quarter.

And that has then impacted the working capital.

If we then take some highlights on the balance sheet, here, we can see then the impact on trade receivables, inventory, and payable days by the supply chain.

Also important to note here that the consolidation of LG Ericsson then, has impacted the receivables and the inventory with about SEK1 billion each.

It's also highlighted in the report.

But then also, look at our continued, very strong equity ratio.

If we take a look at the cash position, we had a change in gross and net cash in the quarter of some between SEK12.7 billion in the net cash.

There are three reasons for that.

Two of them were planned, meaning the payout of dividends, and the fact that we paid also SEK212 million out of the SEK242 million that we are going to pay for Nortel's share of what is today LG Ericsson.

The operating cash flow of minus SEK2.7 million is the reason that we discussed before here.

We, I think it's -- it is so important here to say that you need to look at cash flow over a longer period than one single quarter.

We have continued to target a cash conversion of more than 70%.

And that is what we target.

If you then look at the debt maturity profile, it continues to look very strong.

There's no changes here compared to the first quarter.

We have a very strong payment [readiness] in the quarter that was SEK79.3 billion.

Then, if I end with some highlights on the cost reduction program, the program has now really delivered the savings that we expected.

Most of the estimated savings are now impacting the P&L in the second quarter, and it is both then cost of sales as well as operating expense.

And I think we have, as an organization, worked very good proactively with this program.

The total restructuring charges of the program since the start in the beginning of 2009 will be then or is SEK15.5 billion.

I think it's important to say then that in this program then, there will be cash outlays also going forward, both in the second half of 2010 and perhaps some still in 2011.

The total amount of those you see there on this slide, SEK4.7 billion.

Having said all of this, having said that we are extremely satisfied with the progress of this program, cost efficiency and capital efficiencies remains top of our agenda.

We are in a very competitive market environment.

We are all seeing a business that requires that we all the time look at different synergies.

Our services share is 42% of the total Company and so forth.

But, we will not run a new Company-wide program.

Cost efficiency working and [what may] and so forth will continue to be on top of our agenda.

So with that said, Hans, I hand back to you.

Thank you, Jan.

Just rounding up the four focus areas and targets we have.

Growth also in the markets off the first six months.

Of course, it's a little bit too early to say how the market has been growing, but we don't believe that the market has been growing.

And of course, we have so far a decline when we compare to last year.

So, we will continue to strive for growth and then see that we can do that.

Not say anything about the future, but that is on top on our agenda.

Best in class margins.

I think that the organization that I'm heading up has done a great job being proactive on the cost efficiency work starting quite in advance proactively to see that we can now cater for the margins that we have despite the lower volumes.

But, that doesn't mean that we will continue to work with the margin, but that's at least very standard.

Strong cash conversion, as Jan outlined, our ambition and target is clear, that the main part of our profit should be cash flow.

And we have a target of about 70%.

So far this year we have had a little bit more challenging, especially in the second quarter due to the working capital build-up.

That doesn't take away our ambition to generate more than 70% in cash of the profit.

The JV earnings, of course, coming from a low level or a loss level last year has had a very good development.

We are around [Cingular] right now for two joint ventures.

Both of them have their different challenges and their different strengths, and we continue to support them and work with them to see that they continue to succeed.

But definitely we have seen an improvement on JV earnings.

Thank you very much.

That was the update.

Thank you very much, Hans and Jan.

And by this, then, we are ready to open up for the Q&A session.

And I just want to stress that here beside me, I also have Johan Wibergh, who is head of our Business Unit Network, who can also take questions then.

So, operator, you can open the Q&A session now.

(Operator Instructions).

Rod Hall, JPMorgan.

Thanks for taking my question.

I just got a couple.

The first one, I guess, is on this SEK3 billion to SEK4 billion of lost sales related to the component shortage.

I wonder if you could talk about whether you expect all of that to come back?

And if you do, when you would expect it to be coming back so we can think about in our models how that revenue returns to the P&L.

And then my second question is on OpEx drivers, Jan, I just wanted to clarify something you said.

You were talking about LTE trials I think when you said that those won't go away soon.

Could you comment on the other two OpEx drivers as well, the R&D and the integration cost?

Do you expect that OpEx to be maintained at this higher level now for a few quarters or ongoing?

Could you talk to us about that a little bit?

And those are my two main questions.

I'll start with the SEK3 billion to SEK4 billion, the impact.

Of course, it's sort of the ones that are getting closest to us now to deliver, so of course this delay that we now have, of course, will be served now, going forward.

But that said, we will have a gradual improvement on in the supply chain in second half.

But of course, the SEK3 billion to SEK4 billion that we now have a delay on, and specifically those, they will, of course, be served the first right now when it comes from a customer point of view.

But, again, we will have a gradual improvement in the quarter, but we will serve the SEK3 billion to SEK4 billion in deliveries as we speak right now.

Okay.

And then (multiple speakers)

Hans, on the SEK3 billion to SEK4 billion, do you expect -- oh sorry.

I was just going to say, do you expect all of the SEK3 billion to SEK4 billion to come back?

Or is part of it just lost to competitors or lost for some other reason?

Sorry, I didn't get that.

No, at this stage, it's only delayed.

It's not lost business.

It's a delay that we now are serving.

Okay.

On the operating expense, then, for the R&D, they acquired GSM business from Nortel.

That will stay.

That will remain.

On the ISIT integration-related costs, it's also reinstated, completely transparent.

Those costs, I think, we have seen the majority of the cost in the second quarter.

There will still be some cost in the third quarter, but then, over time, that will -- within this year, it will go away.

Mark McKechnie, Gleacher & Co.

Great.

Thank you.

Two questions if I may.

The first is, on the follow-up on the component tightness, what technologies and geographies do you think that impacted the most?

And then also, I guess you said a gradual recovery, so I'll just ask that.

And then second, on the LTE rollout, how should we think about that?

Are we going to see a nice acceleration there?

You're talking about competition.

Would that be lower-margin business at the beginning with the higher margins on the capacity upgrades to follow?

Thanks.

If I start with the LTE and then you, Johan, will answer about the components a little bit about which technology it's impacting?

On the LTE rollout, it's not changing anything to our previous ideas on when LTE will be in sight.

But when we talk about that we see industry-wide support for LTE at the next generation, as so many are doing fine, so I think that's important.

I guess, in the new footprint, as our normal business Nortel, when it's a new footprint, of course, that is a little bit more competitive environment than when you have the footprint.

So, it's no different from that when we grew that 2G or new (inaudible) any country.

The increased demand is really coming from mobile broadband.

It's not phones and laptop usage in mobile broadband that is driving the demand.

It's affecting technology assistance related to mobile broadband, so CDMA, EV-DO.

It's everything related to 3G HSPA to transmission products and then further into the network.

Those are the key technologies affected by the increased demand.

Alexandre Peterc, Exane BNP Paribas.

Thanks for taking my question.

I would just like to understand, you said that you had increased activity in June, and that you're fulfilling the SEK3 billion to SEK4 billion of backlog as we speak.

So would that mean that we should have a bit of an acceleration in the current quarter, and then that would die away?

Just to tell us then how this will play out over time.

And then secondly, if you could talk a little bit about the (inaudible) of European network that were going to go through the upgrades; you mentioned this repeatedly.

Do you expect this to play out really in H2 or is it more a next 12 months affair?

And competitively, I understand we were then through open tenders.

So how would the competitive situation then play out, and how that will impact the gross margins?

Thanks.

Thank you.

If we start, yes, you understood right.

We are in higher volumes at the end of June, which of course created bottlenecks in the logistics and installation.

But, we had higher volumes.

I understand your question.

My answer was basically that those SEK3 to SEK4 billion are not lost.

It's only delayed.

And as we have delays in the supply chain, we are now delivering that to our customers.

As we said, we will have a gradual improvement in the quarter.

That means that we will not have total lapsed over our lead times and deliveries to our customers, but it's too early for me to judge sort of how that will impact or not.

But it will be strange or unreasonable to believe that that will go away in Q3, and that's why I'm saying is gradual improvement in the second half.

On the European network modernization, as I said, that will probably pan out the next 24 months.

And what we are seeing right now is that some operators will but decide, of course, in this half year 2010.

And we will see some sort of deals being done and start being delivered, but it's also coming into 2011, I would say.

So it's a little bit distributed, and it's more about operators deciding for it than when they will decide it.

So that remains to be seen because we will communicate as soon as we know any deals that are closed, and we report on that.

But so far, we haven't done that.

But we will come back on that, so you can see when it comes in time.

Okay?

Great.

Thank you very much.

Mark Sue, RBC Capital Markets.

Thank you.

From a regional point of view, will the countries which declined sequentially near term, such as China, India, and Western Europe, will they grow into second half if you had to give us a sense?

And separately, does the goal of improving operating margins get progressively more difficult now that the cost reduction programs are mostly over?

And if anything, it seems like the moving parts with Nortel and LTE implies more outbacks for the second half.

Can we sort of get back to like 15%?

What would be your ambition for operating margins?

Thank you.

When it comes to -- I think we have six regions having sequential growth in this quarter.

And of course, looking forward, we don't do any forward-looking statements.

And we try to elaborate on each and every region.

As I said, India is an all-time low for structural reasons, not because of demand reasons.

China it's low more from timing reasons than something else, so that we have said.

But not saying if there's something happening on a specific region for the next quarter or for that.

So that I refrain from.

When it comes to the cost efficiency and keeping up the margins, having -- yes it's a competitive environment.

As Jan said, we will continue to look for efficiencies and the work, that we'll have to do all the time.

That is nothing because we now are taking down the global program that had certain criterias and certain projects that we do, which we have done all of them.

Now, sort of we will continue.

Remember, we're in 175 countries.

We have a quite broad portfolio.

We're actually [saving] on the portfolio and improvements all the time and business mix and business volume in different countries will impact our efficiency gain.

When it comes to ambitions and goals for our operating margin, that we have not said.

What [Johan] and I have said that we strive for improvements, but we also need to acknowledge the marketplace at the same time.

But we are continuing to strive for improvements, but not having decided when a specific number to the market.

But we will continue to strive for that improvement.

Tim Boddy, Goldman Sachs.

Thank you.

I wanted to ask about the sharp rise in inventory.

I understand why it took place.

I think there it was [SEK1] billion from LG Nortel coming in.

But, could you just clarify the impact that inventory build had on your gross margin in the quarter?

And then secondly, if you could just talk to the size, just very roughly, annualized sales and operating profit from the LG Ericsson activity, that would help us model it accurately.

Thanks very much.

First of all, on the first question there, we did not have any impact on the gross margin because of the inventory buildup.

Then, when it comes to LG Nortel, and now LG Ericsson, I think what we would like -- we're not guiding about the future revenues and so forth of any of our regions nor the joint ventures, but what we can say is that the LG Nortel joint venture had a peak revenue in the year in 2008, as Korea then finalized a big buildout of 3G.

And that was about $1.3 billion.

Last year, in 2009, it was more in the area of between $600 million to $650 million.

I also think it's important to manage when it comes to LG Ericsson, then, that from 1 of July when we then consolidate the full P&L, we will also see then an impact on the R&D expense.

And that is something that we will then come back to in Q3 and revised our guidance if we feel that that is necessary.

Kulbinder Garcha, Credit Suisse.

Thanks.

I've got just a couple of clarifications.

On the gross margin that you produce now in the first half, which is roughly between 30% and 39%, and I think 200 basis points higher than last year, could you split out the impact of business mix versus your efficiency gains just in terms of which is the larger of the two?

And when you look at your business mix, Hans, would you say it's disproportionately positive right now, just given how big North America is becoming your sales?

Or would you say that we're looking at this level going forward?

It's hard to give you a perfect split on how much is efficiency and business mix, but both are important, and both are a significant contributor to that gross margin.

If we have a perfect optimized business mix right now, they're already be give and take.

And think that from the infrastructure point of view, yes, we are more upgrades than expansions.

On the other hand, we need to remember 42% of our gross margin is impacted by services that, by nature, has a significantly lower gross margin.

And then also, adding to that that multimedia, which has higher proportion of software is down.

So I think it's a balance of it, but for this first half-year, that is the gross margin we get with the mix we have and the cost efficiency go forward.

But of course, going forward, if we are going to have more footprints and more sort of modernization work or 3G, new 3G networks or LTE networks, that will, of course, be a different mix.

But they are also the cost efficiency that will be sustainable here.

And one follow-up.

Just the SEK3 billion to SEK4 billion of lost sales, given what Jan was saying in terms of CDMA business and HSDPA, et cetera, it sounds to me that that should be relatively on balance higher gross margin lost sales.

Is that a fair assumption?

Yet, well you're referring back to the SEK3 billion to SEK4 billion that are delayed that that will have a higher margin than the rest?

Correct, yes.

I think it's a normal business mix that we have on everything else.

But as said, you, won't mention it that it's related to the mobile broadband if it's three WCDMA or CDMA, that that's where is.

So, but, it's a normal mix.

It's not any specific higher-margin or lower margin.

It's a normal mix on that delay.

Okay, thank you.

Pierre Ferragu, Bernstein.

Thank you for taking the question.

I have a question more specifically on China.

You signed a firm agreement earlier this year with the main operator in the country.

And if I remember correctly, the firm agreement was up 6% compared to last year.

And your revenues in the country are down 20% year to date.

And I think the contract represents historically 60%, 70% of your business in China.

So my question is, when we look at the full year 2010, what's the best indication for your performance in the country, it's up 6% as a firm agreement or the 20% year to date on your business in the first half?

Thank you.

Thanks, Pierre.

I think you have made your analysis yourself here.

But, of course, the frame agreement that was signed, they are always a little bit different form and shape, of course.

And they're not necessary, not covering everything we're doing in China.

They are for certain pieces.

And then, how they pan out in time.

That will be different for different quarters.

As I said, the commitment for 3G success in India is very high among the operators.

Our market share remains.

So, and of course, last year, they had the very strong first half-year when it comes to 3G and they are a little bit slower right now.

So we will see when we report the third quarter where we are with China.

Jeff Kvaal, Barclays Capital.

Thank you very much.

I was wondering if you wouldn't mind addressing the upcoming LTE and 3G wins in India.

Will you be recognizing that revenue straightaway?

Will you be building that on the balance sheet?

And if so, is there a way for us to see how big that deferred revenue might be?

Thank you.

I think that in general, as we are not concluding any 3G business yet in India, it's a little bit theoretical question.

So, but normally, if it's a straightforward sort of CapEx decision by our operators in India, it's of course going to show up as soon as we get acceptance on it.

But, we have to come back to that when we have the deals, if there is something new or something different.

But, at this stage, we don't have concluded any [3G], so it's a little bit premature to have any comments on it.

Richard Kramer, Arete Research.

Thanks very much.

Two fairly straightforward questions.

First, for Hans, you mentioned at the capital markets day that once this current SEK15 billion restructuring plan is done, you wouldn't have any new large plans.

Are you sticking to that?

And at what point might you switch to reporting EBIT margins, which include restructuring charges, since I guess what you've been saying is that they will be much smaller going forward.

And then for Jan, can you help us understand the 138% year-on-year growth in the US?

How much of that was from Sprint and Nortel business that obviously wasn't there in second quarter last year?

And, would there have been a positive impact on gross margins from the Nortel CDMA business, which historically had very high gross margins.

Thanks very much.

Okay.

If we take the first one, yes, we have now concluded the global program as we outlined.

And that's over.

That doesn't mean that we will not continue to work with restructuring or efficiency gains because that, we do all the time.

But of course, over time, we will see lower levels of restructuring and -- but we will -- if they are significant, we always need to at least disclose them and give you the information.

We have not decided exactly what we're going to do, but if they are significant amounts of restructuring we're going to tell you, so that you will know.

But I think we're going to see a gradual downgrade on the restructuring charges, not basically coming to zero straight away because there are other initiatives at the same time as we are running right now.

But we will come back on that in the third quarter and see where we are in the fourth quarter.

Maybe I can just say something, or maybe Jan.

I can start with North America.

We don't disclose exactly how much it is, those items.

What I have said that even if we take away Sprint and we take away CDMA, acquisition, we still have good growth in North America on the operators, there on the mobile broadband business and service business that we had before.

So, I think that's important.

On the CDMA margins, we have said it's good profitability on it, but it's nothing unusual in this quarter.

It was unusual in the last quarter of 2009 because we only had the last six weeks, which are usually weeks where you had a lot of shipments.

But nothing unusual in this quarter from the CDMA camp.

Okay; thank you.

Patrick Standaert, Morgan Stanley.

Thank you very much for taking my question.

The first one, if it's possible, in terms of understanding the cash flow, you've mentioned that the inventories have been significantly impacted by the component shortage.

But when you look back historically on the Q2, you're turning around 80 to 82 days on average in inventory days, and this is exactly where we are.

So I'm trying to understand a bit what's the situation on this.

And the second question is trying to -- if you could give us a bit of an idea of what you're seeing the Q-on-Q seasonality for the US could look like in the rest of the year?

Thank you.

Could you comment on the [IDO] data are basically similar.

Yes.

No, I think first of all, when it comes to inventory turnaround, as a company, we are working hard on improving the processes and the systems in order to improve inventory days.

And, we feel that we have been on the right track to improve the inventory days.

Now, we have a particular situation in this quarter, and that is related to the supply chain because, of course, when you get ramp-up of volume late in the quarter, it impacts the accounts receivables, but it also impacts the project part of the inventory because we had a lot of projects then that was started, but was not finalized in time for invoicing, right?

So that is the main explanation.

I think overall, long term, our improvement activities on the inventory, which involves then processes, project management systems, is of course, all aiming to improve this down to the levels that we communicated at the capital market day.

On seasonality, US, et cetera, we have tried to describe all the sort of dynamics in the different regions in our segments, but not going into a particular guidance on the quarters to come or any seasonality at this moment.

However, of course important to remember that the component shortage is an important parameter.

And if everything remains the same, as I said before so many times now, we will see a gradual improvement, but that's about it.

And can you take --

Operator, we can take one more question now.

Stuart Jeffrey, Nomura.

I've got a quick one.

Trying to give more explanation of what's happening to the end market.

You and Nokia Siemens have reported down over 10% revenues in the first half.

Yet, when we look at operator CapEx in mobile, it looks to be around flattish for the year.

So I'm trying to get a sense of where you think the discrepancy is coming from.

Are operators simply under-spending despite strong data growth?

Is it a timing issue that perhaps means second-half improves?

Or do you think you might be losing market share, either directly within wireless infrastructure or perhaps because operators are focusing on transmission or areas where you're less strong?

Thanks.

Thank you for the question.

First of all, we mention market share for the full year because that's when we have panned out all the facts.

But we don't have any feeling that we're losing market share the moment.

When it CapEx correlations to our own sales, there are so many different parameters; you mentioned some of them.

The timing on when they do the investment, where we have the revenue; what is including in the CapEx and what we are selling might not be the same as well.

So I guess, it's hard to grow that correlation with the CapEx.

And all the time, we can actually see that CapEx is going down, but actually our share of that CapEx is going up.

And we can also see CapEx going up and our share is going down.

So it's a little bit more to understand what's inside that CapEx for each and every operator.

And then, of course, seeing the totality.

Then, one should also remember that we are addressing a lot of OpEx with our service business, which is another area.

And then again, I said before, but even though it was a high time this time at 42% is quite a substantial piece of our business as well right now when it comes to services.

Thank you very much, Hans and Jan and Johan.

Hans, would you like to wrap up the presentation and Q&A session?

Yes.

It's, of course, the questions are extremely good and of course highlighting a lot of areas that we have been discussed.

I think that if I would summarize a couple of points from this quarter and a little bit in general, first of all, I would say that we believe that telecom industry, mobility and broadband are an industry of long-term growth.

And definitely all the time the last 10 years has been very important for the industry and the next 10 years probably are going to be even more important what we're going to do with technology and mobility and broadband.

I think that's important.

Then short term, it's another question.

But long term, this is a, we believe, very important industry for growth.

We see large variations in this second quarter.

We have seen that large variation between operator spending and between regions and products.

And we saw that yet another quarter.

We tried to give you a flavor for the differences.

We have an improved cost base.

We have worked with that very diligently during the last six quarters, outlined the program that we exceeded.

And I would like to thank the organization for doing that, even though we had good times at the beginning of 2009.

And, finally, I think that we stand strong in this industry by being the leader in mobility and services, which are key areas for the telecom industry going forward.

Thank you.

Thank you very much, Hans.

And I would like then to take the opportunity to invite you to our North American Investor Relations forum in San Jose in California.

And it's taking place on August 12.

And, the forum is hosted by our CTO, Hakan Eriksson, and a number of prominent Ericsson speakers will be there.

And they will guide you through technology trends, modernization of radio networks, converged all IP networks and many other exciting topics.

So by this, then, I conclude the second-quarter conference call, and we look forward to talking to you again on October 22nd in conjunction with our third-quarter report.

Have a good day and bye for now.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.