Telefonaktiebolaget LM Ericsson (ERIC) 2010 Q3 法說會逐字稿

Welcome to the Ericsson's analyst and media conference call for the third-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 conference.

Ase Lindskog will now open the call.

Thank you, operator.

Hello, everyone, and welcome to our call today.

With me here today, I have Hans Vestberg, who is President and CEO of Ericsson.

Also, Jan Frykhammar, who is our Chief Financial Officer and Johan Wibergh, Head of our Business Unit Networks.

Before we open up our presentation, I must remind you 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.

Keep, therefore, in mind that the actual results may differ materially due to factors mentioned in today's press release, as well as discussed in this conference call.

I would also like to encourage you to read about these risks and uncertainties in our earnings report, and as well as our annual report.

And, with this said then, I would like to hand over the call to Hans Vestberg, who is our first speaker today.

Thank you, Ase.

Yes, we will briefly go over the material together here, me, Johan and Jan, and then we will of course open up for questions.

Let me start with the sales; sales ended in the third quarter, SEK47.5 billion.

That was sequentially basically flat, and year over year up 2%.

If we make it for comparable units, it was down 5% comparable units and adjusting for currency.

So all in all, it's -- has less of an impact negative quarters that we have had earlier.

We have had four quarters of negative growth.

This was the first quarter and then in four quarters that we've actually had a positive growth of 2%.

Even though it's small, it's an important one for us.

If we look at the segments and we will come back to them, but basically, it was Networks with Mobile Broadband are growing well and Global Services continuing to show good growth.

Both of course are impacted by currency, as well, where we see Professional Services of course in local currency being up 10%.

We will talk later on, or Johan will talk about the component shortage that we talked about in the second quarter, where we already then said that we will have an impact in the second half of 2010.

On the other hand we said also, should see some gradual improvement.

So we will come back to that.

Multimedia, we will come back to that as well, but Multimedia stayed on the same pattern as before with a negative growth of some 30%.

We'll come back to that as well.

So Johan, let's hear about Networks.

Thank you, Hans.

So sales grew in the quarter with 6% year over year, and it's being driven by mobile broadband and most specifically very much related to the success of iPhone and android-based devices.

And especially strong market for you was in Japan, but there's also of course a correlation to where smartphones are growing.

Yet we had a positive impact from the acquired Nortel business and its CDMA, EV-DO and the same connection to mobile broadband there before.

And 2G sales picked up somewhat and in India and China, but we have still overall slow voice sales.

As we said and in the second quarter, we would then have an impact on the second half of the year from component shortages.

It has eased somewhat and but we still have an impact of SEK2 billion to SEK3 billion due to component shortages.

Margins have improved, as you saw, and the strengthening is basically coming from business mix.

We have a favorable product portfolio.

And but also the cost savings we have been doing.

And then also we usually have in the third quarter, we have a seasonally low operating expenses.

Hans, back to you.

Thank you.

If we talk about the Global Services then, up 3% for the whole Global Services.

We see a slow Network rollout business very much connected to that -- we have less of turnkey contracts at the moment.

And we have had that for a while right now so it's no news in that, but Professional Services continued to grow in local currency with 10%.

We can also say that Managed Services continued to a very good growth, up 46%.

However, there, we need to remember that this is the last quarter where we have spring in the current quarter but not in the previous year's quarters, and in the fourth quarter it will be more comparable.

Still, good growth and we signed up some 13 new Managed Services contracts in the quarter, which eight of them was renewals.

The margins on Global Services, basically stayed stable, a little bit up.

The same goes for Professional Services and [only a beat of] 16%.

So very good stability on the margin side and the growth side.

And on the margin development, we see some impact from the supply chain bottlenecks as we need to go out and do installations a couple of times for that -- to start the customers.

On the other hand, it's less of turnkey projects, so those are sort of easing of each other.

Multimedia, we have now seen three quarters running around SEK2 billion, SEK2.5 billion in sales, down from 30%.

Same reasons as we have seen in the three previous quarters and even in the fourth quarter last year, Asia, Southeast Asia, Middle East, and Africa which is a stronghold for revenue management and manual applications and provisioning systems that we have, have had much lower investment level from operators, much due from cautiousness.

And that is continued impact.

The TV business, that was the first one that we alerted on from an investment point of view when we came into the more of a cautious period after the financial crisis or in the financial crisis; that is now coming back, and we see more interest, and we see a growth in the TV business.

All in all, the margins came back to a [an EBIT] level of breakeven, improvement from the last quarter even with the flat sales.

However, the management or multimedia is continued working to get back to profitability.

And they have initiated plans to see how they can get back, and that will encompass how to sell more because it's more a volume problem than a margin problem here.

But as well, looking into all other improvements when it comes to product rationalization [in the pipeline].

And so that's important.

If we move slides and talk about the joint ventures, and here you see Sony Ericsson is there.

Sony Ericsson running around with the sales of running -- on the sales of EUR1.4 billion to EUR1.6 billion has now turned for the third quarter making profit, which we think has done a tremendous job coming from those volumes and turning it around in such a short period.

That doesn't mean that they are sort of out of a challenging time, but definitely the product portfolio and what they are doing is encouraging.

And they have some 4% operating margin in the quarter.

ST-Ericsson reported late yesterday night basically same volumes over the quarters, some improvement on the losses, especially due to the cost efficiency.

Here, we are continuing to bridge together or merge together three companies, NXP, ST, and Ericsson Mobile Platforms to get out with the new models, and those are planned for next year.

Mentioned in the press release that we have some design wins on the new products, which is very important for us.

And here we continue to see efficiency gains, but the most important, the new product portfolio coming out.

You can see on the last year the Ericsson share in the earnings has turned and are now flat [especially] in this quarter coming from huge losses in last year, and the main reason is Sony Ericsson's turnaround.

That is really what's making a difference here.

If we then move to the regionals -- regions, you can say in general that we have had some impact on the strong Swedish krone in the quarter on several regions as we are trading in dollars and selling hardware and software in dollars and euro, not that huge, but still it has an impact.

We also, as Johan mentioned, there is very much the component shortage is very much sort of in the Mobile Broadband portfolio in the product.

That is cross-over on the regions, so it's no regions that is left or having more favor or less favor in the situation; all are impacting, unfortunately.

And, we talked a lot about the modernization in Europe.

In the second quarter, we can say that we have no impact in the third quarter and will probably start having an impact in next year.

So far, the decision on modernization, as we can view it from our side, has had a good positive development for Ericsson.

And we will come back when we can communicate on the deals that have been closed.

If we look at the regions in general, I will not dwell too much on it, but you can see that Mobile Broadband and services are the parts of the portfolio that has a good momentum.

You can see also we have more regions now having a year-over-year growth.

We have more that have a sequential growth than before, North America is, of course, sticking out with a very good growth of 223%, and very much fueled by the Mobile Broadband both on CDMA, HSPA and HSPA+.

That's sort of where it comes from.

But also, North America has the Sprint deal, which is important on the service piece of it.

India, quickly mention that.

Second quarter was the low point since 2005 on equipment side.

Both security issues that we cannot ship; secondly, the 3G auctions that had come up just made a stop in the market until they have [defined].

Second, the third quarter we started shipping 2G equipment, and we're up sequentially 58%.

However, not really equipment shipped in that quarter, but the decision of 3G vendors was done in very much, to a large extent, in the third quarter.

And we can say that we maintained our market share in India on 3G versus to the 2G.

And the ones that have been communicated as we continue to be the main supplier to Bharti Airtel, for example.

That will start rolling out in the fourth quarter and then during 2011.

China also had -- China and Northeast Asia I should say -- that's the region -- that had good development as well -- 24% up year over year and 51% sequentially.

Here we have Japan being one important driver with mobile broadband.

We saw also in the quarter investments on 2G in China.

In the quarter also, we included LG Ericsson, the Korean company that we have working with the Korean market.

There are no significant or immaterial sales and margins from that in the quarter.

However, important to say that the LTE race is now on in Korea, and we have now a company that can address that which I think is good timing.

However, if we want to win or not, that's the latest question, but we are well-positioned with our Korean company now.

Jan, I'll leave it all to you.

Okay.

Thank you, Hans.

Then we are on the slide with the heading, "Profitability." I think just a few remarks on this slide.

The gross margin of 39%, same level as in the second quarter, improved compared to last year.

There are no changes into the reasons why we stayed flat.

It's business mix as well as continued impact of the cost savings.

On the operating expense, main reason I would say if you look at a sequential reduction is the seasonality.

And basically we have also higher costs, thanks to the fact that we have integrated acquired companies; the same reasons really as in the second quarter there as well.

If we take the next slide and go to the balance sheet ratios, here, it was not easy [to be easy] of the company in the second quarter and report negative cash flow then.

On the other hand, I'm really happy to talk about the improvements we have made on the days of sales outstanding in this quarter, and I think we have really focused in on collecting cash and improving also the inventory levels.

However, the inventory level is high still.

Part of that is related to a normal system build up.

But it's also so that some of the impact of our supply chain is still impacting inventory.

I would say that the third reason is that we also are driving or buying material now for volumes in Q1 and Q2, and that has a small impact on inventory.

If we then look -- take the next slide and look at the slide that is called "Changing Gross Cash," here you can see the green nice box there of an operating cash flow of SEK11.8 billion in the quarter; and an adjusted cash flow if we adjust for cash outlays related to restructuring, where we then have SEK12.7 billion of operational cash flow in the quarter.

That's something we are happy with.

If you look at the change in net cash, it's an improvement in the quarter of almost SEK10 billion.

Next slide, "Cost Efficiency." We have said all the time that at the Company, we continue to have both capital efficiency, as well as cost efficiency high on our agenda.

The main area from activity that we are carrying out in the Company is with regards to [rationalization] of product, seeking synergies and efficiency gains in service delivery, as well as of course, the transformation activities in our Managed Services business.

In the quarter then, we took charges for restructuring of SEK0.9 billion, and we did cash outlays of the same amount.

Now if we look at what remains to be paid for in terms of cash for restructuring, it's SEK3.8 billion.

We have also then guided for a number for the fourth quarter as we feel that that's important for us and in our dialogue with you to get better transparency on the expected restructuring charges, and you see the number there of SEK1.5 billion.

It's with the same reasons I would say.

So, with that then, I hand over to Hans.

Thank you very much.

And I will just come back to the four focus areas that we have in the Company.

You have seen them many times, but this is how we are [showing you the Company of course on the incentives], and I'll try to really -- to create value and see that we are doing a great job.

And going forward in the market, as it was outlined in the report, the first half-year of 2010 on the CapEx side had a negative growth.

I would say that the second half in 2011, it still remains to be seen from a market point of view.

We actually came -- we came back somewhat from a declining business to having a small growth.

That's important.

We've continued to be very focused on that than we do changes in the company to address our portfolio and be stronger with our customers and see that we sell the full solutions when we did the regionalization.

Next, on gross margins, we continue to work hard with the margins.

We have seen a sequential and a year-over-year improvement for a couple of reasons.

I think both the mix, but also the cost efficiencies that were done.

We will continue to try to find the best efficiency gains even though we will not have a global program, as Jan said.

The cash conversion, we have a target of about 70% cash conversion, and we are there right now.

We will continue to strive for that.

We had a strong third quarter, but it should be viewed over a longer period.

We usually say look over a year, and that's where we have the focus to continue to generate at least 70%.

Our JV earnings is coming back to a zero, so if it's growing or not, then that's probably a different question, but definitely coming from big losses last year to being zero right now, very much driven by Sony Ericsson.

And we will continue to support them in that transition.

That, would be then our presentation.

Thank you very much, Hans, Jan, and Johan.

And operator, we are ready to take questions now.

(Operator Instructions).

Edward Snyder, Charter Equity Research.

Thank you very much.

Hans, I had a quick question.

You mentioned in the release that there was an increased interest on the part of operators in network sharing, particularly in Europe.

Is this LTE or wideband CDMA?

How large of an impact do you expect this to have on the size and timing of rollout of say 4G?

And if you could comment on what you think the pace of rollout in 3G in India is going to be, I'd appreciate it.

Thanks.

Hi, Ed.

When it comes to network sharing, we have seen that for quite a while in Europe, especially in the market where we have several operators.

And it's everything from passive and in some extends also the active sharing.

We have seen, I said, a couple of them.

We are going to see it going forward.

At least the interest and the discussion is quite high on the passive side, but on the active site, we're going to see what's going to happen.

So it's a little bit early to say yet.

I will come back on that when we have those type of developments.

But definitely there's a lot of discussions around it.

When it comes to 3G in India, we will, as soon as the contracts are cleared, we will start shipping as soon as possible.

So of course we will, already, in the fourth quarter ship some 3G equipment, but much will also be shipped in the 2011.

India is a large country, so we will not be able to do all the country in the quarter.

So it will take some time.

But it will be shipments for certain regions or cities, which some operators are focusing on in the beginning.

But this should affect your margin profile, should it not, given that you're doing a lot of 2G there which I would expect to be much higher margin product than your 3G?

Depends on how they select to do with, but if it's going to be purely the new footprint on 3G, there will be some pressure on the margins.

On the other hand, we don't know the pace this can be done, and because it's quite a lot.

And a lot has been decided in the third quarter, of course, but we will ship 3G equipment to India in the fourth quarter.

Thank you very much.

Rod Hall, JPMorgan.

Yes, hi; thank you for taking my question.

Hopefully you can hear me okay.

I have two actually.

I wonder, Hans, could you just comment -- we've seen now revenues kind of creeping their way back up for the whole market, not just Ericsson, to levels that we saw maybe in 2008, 2009 -- not even quite at that level.

And, at best, it looks to us like next year, we're looking at maybe low single-digit growth for the overall market.

I just wonder if you could comment for the radio access network in particular whether you think the market is actually a growth market or not.

I mean do you think that that market can accelerate to double-digit growth on an annualized basis?

Or do you think it's more like a low single-digit growth market that just continues to grow that way over the next couple of years?

And then I have one follow-up to that.

Hi, Rod.

I think on the radio access, we think that if you go start from the outside in thinking about the consumers and the smartphones and all of that, we think that the radio access will be a very important piece of that business to really meet the demand from the consumers.

At the same time, we have modernization coming as the installed base that is installed in many places, actually, can be very much improved from a technology point of view, but also from a power saving, etc., and all of that.

So yes, we believe it will grow, but if it's low single-digit or whatever, that is too early to say.

But given the underlying market trends with the smartphones and all of that and modernization, it should be a possibility of growth.

Okay, yes, it just seems like the equipment just gets more and more efficient, and as a result, the effective price per unit of bandwidth keeps coming down.

So, it's just not clear whether we have a market that's a low growth market or something higher.

At this point, it looks like a lower growth market, so, okay.

I guess there's nothing else you can say about that.

The second question I had is on provisions.

It sounded this morning like you were saying, and maybe this is more for Jan.

You're saying that structurally you are taking lower provisions on the RBS 6000.

Is that correct when you compare the RBS 6000 provision level to prior generations of base station?

Should we be expecting provisions to kind of run structurally lower as we get more and more RBS 6000s in the mix?

I can start then Jan general answer.

The question that I got was LTE.

And my answer was that so far, that on LTE, we have not had a -- as we say, provisions usually reflect the risk level.

And of course if we get new technology coming out, usually we have the preparations for that because the [sale] rate is a little bit higher.

We have not seen that on LTE and LTE is on the RBS 6000.

So that's what my answer, just to clarify that.

Jan?

I think also that when it comes to the [rule] provision level, you have to look at the business mix as well.

I mean the business mix during this year is really much more of upgrade.

And, I mean if you -- a year or few years ago, we had much more of turnkey projects and so forth with a different risk profile.

So, let's see what happens in the future, but right now, the provision level reflects the business mix.

Okay, great.

Thanks a lot, guys.

Johan would like to give an add-on then.

RBS 6000 is our latest generation of base stations that we launched in the second quarter.

We have a tremendously good reception of it from our customers.

It's a base station that can handle all wireless technologies.

And, it has also then be used to LTE, as earlier.

It continues to go quite well, and it will be an important product for us in the coming year.

Mark Sue, RBC Capital Markets.

Thank you.

AS carriers enter the second phase mobile broadband, will that be the event that pulls along higher demand for more networks?

Is tiered pricing a catalyst for a step function that will increase also the [mass] in networks?

Maybe if you could help us, let us know, what investors should look for to be a positive catalyst to accelerate demand for networks?

I think you mentioned two of the important trends that we should look for.

I think tiered pricing is a very important piece of it, to us that operators can match their costs and revenues in another way, and they can [advance] both high-end users and low-end users and probably also machine to machine over time.

So tiered pricing on mobile broadband is an important indicator for the market when it comes to the possibility of gaining growth from an operator point of view, and of course, consequently, was investment.

And the other indicator that you have for -- and I think smartphones is a very important indicator as well and when it comes to the networks and the usage from them.

It was initially of course the iPhone, but today it also goes for many other types of phones like the Sony-Ericsson's android phones.

So I think that those two are two important elements.

Then, which operator in which moment they're going to invest, it's a little bit different how they built their network from the beginning and what they were expecting and preparing for.

So, but as a leading indicator, tiered pricing, smartphones are important.

And on these things, you feel maybe there will be a point where things can actually accelerate so that networks is just not a GDP growing segment?

It's a little bit difficult to say because when I generalize on the whole world, it's sometimes difficult because there are of course regions that are investing quite heavily right now in Mobile Broadband and there are others that are not.

But in general, the transition that we see in Johan's business on Networks, [they're based] that mobile broadband is growing well and that the voice related equipment part is declining.

So, we see investments on mobile broadband, definitely.

Thank you.

Good luck.

Alexander Peterc, Exane BNP Paribas.

Thanks for this.

Just a question along the same lines as the previous one.

Really, when we look at the US and Japan now that are in a very strong growth phase, and you underscore the importance of mobile broadband there, I'm just wondering how long do you think it will take until that comes to Europe as well?

And is the network modernization you are talking about in Europe, is that part of that mobile broadband spending that we're going to see investing in Europe as well, perhaps at lower margins than what you see in the US because it's more competitive priced?

Thanks.

I'll start and then Johan will follow up.

I think that yes, rightly mentioned, the growth that we see in Japan and North America is very much driven about smartphones and mobile broadband.

Johan can talk about Europe and what's happening in Europe.

I mean we have seen a clear development of mobile broadband over the last year.

It was initially driven then by pieces [and bundles] but the last -- at least last two years, the most important growth factor has been the smartphones, the iPhone and then the android-based phones, which according to Google then are activating more than 200,000 per day right now.

And of course those are then the factors that are driving uptake.

Also the iPad will of course have a positive impact even though still volumes have been small.

So, we then expect and we can then see that where uptake of smartphones are increasing, that of course then it drives traffic in the 3G network, and, hence, need for more expansion and capacity upgrades.

And some may have a lot of capacity ready.

Others may be strained, and depending on that, investments come.

And the timing varies depending on how much is being used.

Modernization in Europe will support this.

Fourth generation LTE will also support and drive it.

And also due to these factors then, you have different developments in different countries.

Finally, then as the question said before, this is supported by the different business models.

As you get more advanced business models, you get the bigger uptake and hence a bigger usage.

Okay, thanks very much.

Richard Kramer, Arete Research.

Thanks, guys.

If we look back to 2007, and I think this is the gist of Rod's question as well, there seems to be very little growth in the core networks business despite this huge boom in mobile data traffic and despite acquiring Nortel.

So my question for you, Hans, is do you think Ericsson needs to widen its addressable market to reach other end segments of operators perhaps in cable or satellite or other markets?

And how do you see potentially using now the SEK35 billion of net cash to try to hasten some consolidation in the industry that might ease some of the pricing pressure that clearly operators are quite happy about?

And then a quick question for Jan.

Were there any sales of receivables in the quarter?

And do you anticipate for 2011 having a further restructuring program as we have seen for many of the past years?

Thanks.

Thank you.

On the first question, I think that as long as our portfolio can address the needs of other industries and other operators, we will definitely pursue that as well.

And we see that traction that more and more other industries are looking into sort of standard technologies.

So I think your question is right there that yes, we will see possibility with cable companies, utilization companies, doing either Managed Services or technology.

And, so that -- yes, it will be natural for us from our portfolio point of view.

And on your other question, Richard, regarding what we're going to do with the net cash, do we see any possibility for industry consolidation; I think a good industry consolidation was the Nortel acquisition that we made.

It was not the parent maybe that we needed CDMA in the portfolio.

We will follow whatever is happening in the market as a leader and see if there's something we need to do in order to keep or strengthen our position.

At the moment, nothing specific on the radar screen, but we are all the time browsing and seeing what's happening in the market.

Okay, Richard, let me try to answer your two questions then.

Factoring was at normal levels in the quarter.

When it comes to the continuous improvements or ambition we have to work in a more efficient way and so forth, I mean that's something that we as a company will continue to do, of course.

We will come back in the fourth quarter with -- or after the fourth quarter with more of a guidance, if I may say so, on the level of restructuring charges for 2011.

Now, we gave a number for the fourth quarter, but let's come back in January with a number for 2011.

Okay.

And can you say what normal level of factoring is in a given quarter?

No.

Okay, thanks.

Anuj Krishan, UBS.

Yes, hi; thanks for taking my question.

First one for Jan, perhaps, on the OpEx side.

You've made a couple of comments around costs related to LTE trials and also CDMA integration costs kind of peaking right now.

So just wanted to understand how should we look at the OpEx seasonality going into Q4?

If I look at the last three to four years, the SG&A charges have increased by about SEK2 billion to SEK2.5 billion in Q4 over Q3 and R&D has increased about SEK1 billion.

Should we expect a similar kind of level in Q4, or will there be any differences given the drivers?

And then second one for Hans perhaps, if you could just maybe talk about some of the drivers for gross margins going into next year?

I know you've discussed network modernization; HSPA in China; 3G is rolling out in India, but putting it altogether, what does it sort of imply for gross margins for the group?

Thanks.

Okay, thank you.

I think first of all, on the operating expense, I don't expect any different pattern than a normal seasonality here on the operating expense.

I think on the ISIT mainly integration costs related to their positions from Nortel, I think we have peaked there in the second and third quarter.

So that portion will probably go down a bit.

On the other hand, we have a big activity level when it comes to LTE trials, and that will continue throughout the year.

So on the gross margin there, which I think are one of the most important drivers is volume of course and that is an important driver on the infrastructure side of it.

Then, of course, it's the type of business we are doing, not the country we're doing it, as I said so many times before.

If it is expansion, upgrades, so if it's a new footprint, of course, that mix is important.

In services, it's other drivers, of course.

It's more our radio transforming business, and offshore and onshoring, doing everything that as smooth as possible.

That is an ongoing work every day.

Those are the drivers for us to keep up the margins.

And, of course, new product is also an important point that you one wrote up.

And then we come up with a new radio-based family, which is also important from a cost point of view.

So I think those are the drivers for us when we look into the cost of sales and quarterly drivers to see that way we drive costs down.

Okay.

Thank you.

Stuart Jeffrey, Nomura.

Hi, thank you very much.

I had a question on balancing growth with margins.

I think you said in the past that you wouldn't really want margins to go above 20%, perhaps for fear of upsetting operators.

And it has now gone above 20%.

And the last few quarters we've seen some of your competitors perhaps win a number of contracts that might suggest they will start to gain market share.

So I was just trying to understand why perhaps you haven't been as aggressive chasing some of those contracts; whether you are holding back for network modernization; or whether Q3 is just a little bit of an unusual quarter.

Thanks.

Hi, Stuart.

Not really recognizing a couple of the comments there.

I think that, as I said before, I think we are doing well on the network modernization in Europe.

As said, sometimes we cannot reveal the deals that we have won because a customer doesn't want us to do it.

I think we are doing well.

We are definitely keeping our market share in Europe.

So, we, all the time, balance the growth with the margins, but also sometimes growth is important for -- because volume is also driving the bottom line.

So I think it's a balance for us, but we all the time I don't think we have changed any view on how we work on that.

It's nothing unusual.

I guess I was just wondering whether or not you might use that profit, that margin, to be a little bit more aggressive going forward.

That was another question.

I would talk about the history now.

We're going to use it in the best way to balance -- growth is important for us, so we're going to balance it in the right way.

But on the other hand we have said that we wanted a good profitability as well in order to make our investment in R&D.

Technology leadership is so important for us so we can generate that.

So we're going to balance it going forward.

So of course when we see opportunities of the market share, with new footprint, we're going to be, as usual, be very keen on it.

And let me add there as well too, that when we met here at the Capital Market Day, we said that we are on a -- we are not happy with the current level of profitability and that we, over a long-term period would like to make sure that we gradually improve, right?

And I think that is something that is important for us.

Still, as Hans said, of course, footprint drives volume and so forth as well.

So, but over the longer or midterm period, we are trying to improve [above] demand.

Pierre Ferragu, Bernstein.

Thank you.

Could you give us a bit of a sense of how your clients in North America are spending money with you?

Because there are a lot of controversies around what sort of spending really mobile broadband triggers.

Is that mostly spending on the core network, on the backhaul, or it's on the radio network?

And on the radio access network, do you see a steep increase in the number of sites, the number of base stations that operators are deploying to cope with the growth of smartphone usage?

Or is it mostly money spent on operating existing equipment and existing sites?

I will let Johan comment, but first before we start commenting, first of all, you know how sensitive we are to disclosing what our customers are investing.

I think that's very important.

And then so, sometimes we ask you to ask them, but you want and in general terms probably talk about what we see in North America.

When we speak about mobile broadband, what products it drives, is first of all, the radio base station side, then it's backhaul, and then there's something called the [control at RMC], and then there might be a further more transmission.

So these are the products involved.

And so in some cases, operators then need to deploy a bigger coverage because if you still look, there is something like 5% -- if you take where we had GSM today, 2G your coverage that's on like 5% of the same coverage that has a 21 megabit per second 3G coverage.

So there's still a lot of coverage that we built out.

Secondly then, there are capacity increases and they go all over the [change].

Capacity increases in the radio base stations, [connected by] new carriers or upgrade their hardware to handle higher speeds.

And then you saw more mobile backhauls, so that's more transmission equipment.

And you need to increase the capacity on the RMC.

And then I might get further on capacity increase in transmission.

And each operator has an individual situation on what we then need and to buy out, etc.

These are the general areas where we then -- that are benefiting from mobile broadband growth.

Thank you.

And perhaps a very quick follow-up, why don't we hear about network modernization in North America as we do in Europe?

I think in North America, you have two things.

First of all, you have more capacity upgrades on 3G because North America has invested in 3G quite recently, so there is no need to modernize it.

And then secondly, North America is deploying LTE fourth generation also, which is the modern of course.

Thank you.

Matthew Hoffman, Cowen.

Thank you, Hans, and Jan.

It seems as though most of the change in operating profit quarter on quarter was due to the steep drop in SG&A which was down by about SEK1.4 billion sequentially.

Can you specify what drove that?

I think I heard to say something about FX in the press conference this morning, but I was hoping you could clarify your comments there and help us to quantify that and comment on whether it's sustainable or not into the fourth quarter and beyond.

Thanks.

Thank you, Matthew.

What we said this morning was that it was seasonality, and it is seasonality.

So that is the way you should have interpreted the answer.

On the -- what's the --

(inaudible).

Was that the question?

Okay.

So I think that's -- as we said in the second quarter, it is important to understand these different elements.

I mean we have had a bit of an IT integration costs related to Nortel CDMA and GSM.

The bulk of those costs were in the second quarter and the third quarter.

We think we have peaked in that respect.

But those are not billions of SEK, just to be clear on that.

The LTE trial activity, however, is intense, and we think that that will continue throughout the year.

The other reasons are simply seasonality.

Okay.

In then a follow-up for Hans, I think you made a comment in your prepared remarks about the Sprint deal hitting its anniversary in the fourth quarter.

Was that a way to talk to us about our models which have 30% sequential or so revenue increases in the fourth quarter and comparing -- and looking at the basis for comparison of that and worrying that maybe it's too high for the fourth quarter?

I was more referring to year over year when you start comparing Q4 last year with Q4 this year, that we will have, then on the managed shares side, we will have Sprint in both quarters.

That is what I was referring to, nothing else.

Thank you.

Zahid Hussein, Citigroup.

Yes, thank you very much for taking my question.

Just wanted to ask a little bit about North America again.

Looking into the news, it looks like we are trying to team up a lot more closely to try and get into some of the larger carriers with sort of recent [hires] such as [Court of] England.

Just wanted to get your take on that.

Is that a concern for you?

Or do you think that margins will remain structurally higher?

And then just a second one in terms of India, are you seeing a little bit more of bundling with services or equipment from some of the Chinese vendors?

And is that going to cause you further margin compression?

Thank you.

It's a little bit hard for me to comment on their movements in either of the markets.

I think you have [asked them yourself].

But we face the competition all over the place and I think it's nothing different from before, and we're going to see what's going to happen in North America.

In India, I think that operators define quite much how they want to buy that, and so that's sort of how the solutions are made for the customer.

So I'm not sure to answer any question perfect, but I'm not sure how you want me to answer because I don't think with that knowledge, or at least the knowledge that I can talk about.

Would you consider bundling services or anything like that in India, or potentially like professional service or spare parts, anything like that?

Or would you kind of keep those two businesses separate?

No, we're already doing it.

We have done that for quite a while in India.

We bundle our equipment with services and we deliver -- we sell different sort of capacities or voice-related business or whatever it is, so that we have done since 2003, 2004 in India, and so -- but it's more depending on how the customer wants to buy.

It's much more that.

But we have the flexibility when we have a technology leadership and we have the service arm, and then we can bundle it as the customer wants to do business with us.

One final remark there on spares.

We have a spare part management service as part of our portfolio, and that's been a global offering for quite a few years.

Great.

Thank you.

Kulbinder Garcha, Credit Suisse.

Thank you.

I've got a couple of questions.

On the restructuring, the SEK1.5 billion in Q4, I was under the impression that your major program was over, so what specifically is this for?

And just in terms of magnitude, Jan, is this the kind of level we should expect going forward?

Or is this inflated for some reason, just to give us some idea like -- because I think it's important for investors to understand if you are going to keep restructuring, to leave estimates out there, this is going to be a major SEK5 billion or SEK7 billion or SEK10 billion charge to depress earnings, that leaves a lot of volatility I think in the shares potentially.

And then for Hans, on the gross margin, everything you speak about, unless I'm interpreting it wrong, really seems to emphasize network modernization, India 3G, LTE -- all things that we would associate at least for the next 12 to 18 months, being low gross margin.

So are you basically telling us gross margins have peaked?

Thanks.

On the provisions, I think that first of all, as I said before, I mean, we have always had a certain level of restructuring.

We are in 175 countries and we have quite a big portfolio, so there's always going to be up and downs, but we will not have a global program.

Now we have a little bit higher in Q4.

And the reason basically is that we come from the regionalization that we made in the second quarter that is now coming together and they see efficiency gains.

Regarding next year, I think Jan has already answered that, that we will come back on that.

But again, we will not have the levels that we had the last couple of years if we don't announce a major program.

We will run on a lower level, but we will never have zero.

That you can never expect from a business like ours.

Jan is fine with my answer.

I'm looking at him.

Gross margin, we want to give some color on what type of business we [have in front of us].

Of course we're going to have expansion and upgrades as well.

Now we talk about Europe modernization and 3G, now that's the two things we're talking about.

There are other business as well.

Services has consistently been very good at managing their margins as well.

So I think it's the balance of it all, and we'll talk a little bit more about the new footprint, where it's coming and where do we see the pressure coming?

That doesn't take away.

We will continue to work with efficiency, rationalizations, new product portfolios, et cetera, all the time to see that we can keep it.

But of course, there are some impacts of modernization during 2011 in 3G India as well, but let's see where it ends up.

Kai Korschelt, Deutsche Bank.

I had a couple please.

Hans, you made a couple of questions I believe a few weeks back in a Swedish newspaper around competition, I think particularly from the likes of NSN increasing for deals like network modernization.

So I'm just wondering if there's been any update in terms of how aggressive your smaller competitors have been and whether that has had any impact on pricing.

And my second question was, I think you alluded to 2% year-on-year growth.

But could you break out for us please what the organic sort of ex-M&A and ex-FX growth was both on a year-on-year and sequential basis, please?

And then my third question is on CDMA revenues in the US, is that still strong?

And for how long do you think that the strength continues?

Thank you.

On the first question, I probably need to change your view a little bit.

I've never talked about NSN doing something.

I never speak on the competition.

The only thing I have said, as I always said, when new footprint comes up, that's when competition is.

That happened on 3G in 2002 and 2003 in Europe, and it happens now in the modernization.

So I don't see any different view on that, [then] the Swedish [media] I portrayed a little different.

But the same story as before.

The competition is tough, has been tough for a long time.

That's what we have seen.

When it comes to CDMA, there are other I don't have.

On the CDMA, we had a normal quarter on CDMA, maybe a little bit less because they've been so strong in the first half.

But I think it's more the operators [one at a time], how long CDMA will be around, but it will definitely be for quite a while.

The base, consumer base, on CDMA in North America is large, very large.

So of course it's going to require investment on CDMA for quite a while.

It's too early for me to speculate when that is going to end or when it's going to start decline, et cetera.

That we have to come back with.

But are basically -- are focused on a couple of really very important customers in North America.

So we have to come back on that.

I can add there a bit, Hans.

I think if you look at the overall and as you remember what you once said in the beginning here, I mean we had of course a positive development on that business thanks to the EV-DO or the mobile broadband in North America.

I think in the quarter, we saw some seasonally lower revenue from the CDMA business, nothing to be worried about I think.

And also we had a couple of percentage points impact from the FX there, just to add to Hans' comments.

Operator, we can take one final question now.

Mark McKechnie, Gleacher & Co.

Thank you very much, and good work on the name there.

So Hans and Jan, congrats on a good solid quarter.

My question is, on the component tightness, and specifically, two things.

One, for Q4, again, I know you don't give guidance, but you're typically up pretty strong 25%, 30%.

Do you think components might limit that to some sub-seasonality here in Q4?

And then, maybe if you can tell us some of the components that are tight, and how you see those playing out into next year.

Thank you.

I'll start with the first question.

I missed a little bit on the second one.

When it comes to the components, as I said already in the second quarter and Johan mentioned as well, there is a shortage on components that will also impact the fourth quarter.

We see, however, a gradual improvement.

Everything relative, depending of course on the demand.

And this especially now to our mobile broadband portfolio.

What Johan answered when the question was raised, what is actually investment in mobile broadband?

Those type of equipment.

So we will have to come back when the quarter is over to see where we ended up, but there will be impact in the fourth quarter from the component shortage.

And it's important for me to mention that because I have customers that want to have deliveries, but I cannot really meet the demand, so it's equally important that they know it is actually a tough situation.

But we are working very hard, and we have seen a gradual improvement as said, and our organization is doing everything to mitigate the challenges.

Okay.

And in addition there is that if you look at this fantastic currency of Swedish krone that is very strong right now, I mean, if the currency stays on this very strong level, we will start to see an impact as well in the fourth quarter.

And let's see where we end the year and where we start next year, but we have to look at that as well.

One more follow-up on the component side and I appreciate it, but it's interesting.

I know you don't like to talk about competitors, but Nokia Siemens, your friends in Finland had -- their margins were pretty tricky -- weak; and they mentioned that they had tight components at the high end.

It seems like you bucked that trend of little bit.

Is it fair to assume that you did a better job on your mix?

Maybe you allocated the scarce components to higher-margin business relative to your competition?

Well, yes, you're sitting on better facts than I am because I cannot draw the conclusion because I don't know how they have worked in the quarter.

I think that our organization has worked very hard.

Still, I have to emphasize that I have customers that have not been satisfied with the delivery from us.

They want more.

So, I don't know how they have handled it.

I think we are handling very professionally; we have a very good supply orientation that has worked diligently with this.

Still we have an impact.

But we have had this as the number one focus for the quarter all over the Company, and we would have it in the fourth quarter as well.

But, I'm not sure how our friends, as you say, have been working with that in the quarter.

Great.

Thank you very much.

By this, we end today's conference call.

And I want to thank you, Hans and Jan and Johan, for this call then today and many thanks to all of you who are listening in and asked the questions.

Our next earnings report will be posted on January 25 next year then.

So for now then, I wish you all a very good day and good bye, and bye for now.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.