Telefonaktiebolaget LM Ericsson (ERIC) 2011 Q2 法說會逐字稿

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

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

(Operator Instructions).

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

Ase Lindskog will now open the call.

Thank you, Operator, and hello, everyone, and welcome to our earnings call.

Today we will comment on our second-quarter report and also take questions and -- as always.

With me here today, I have Hans Vestberg, our President and CEO.

I have also Jan Frykhammar, Chief Financial Officer, and Johan Wibergh, who is head of our Business Unit Networks and Magnus Mandersson, our Head of Business Unit Global Services.

As always then, I have to 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 risk and uncertainties.

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

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

So with this introduction then, I would like to hand over to our President and CEO, Hans Vestberg, for comments about our performance and plans going forward.

Thank you, Ase.

I will briefly go through the second quarter.

But I will just start with a couple of highlights from the second quarter, what has been things that are happening in the industry and for us as well.

I think that starting with tiered pricing or (inaudible) service pricing on broadband, and especially mobile broadband, is on the top of the agenda of our customers.

And I think that is important to understand, that many operators are looking to that in order to capture a larger portion of the mobile broadband world and also serve both low-end mobile broadband users to high-end and enterprises, and therefore tier pricing is important.

So why is that important for us?

I guess that trend is very important for us when we come to you on the best area, when it comes to how to design the radio networks, the IP networks, in order to capture.

And being able to have tiered pricing in the multimedia segment very much lowers [SBSS] what needs to be done in those areas in order to capture the mobile broadband growth and the charging of it.

Of course, finally, the service capabilities need to be tuned into that as well.

So this is a very important trend and it is on top of the agenda of our customers.

Of course that is viewed from the mobile broadband continues to be driving in the markets.

However, as we say here, 60% of our population remains to be covered by WCDMA, HSPA, CDMA and mobile broadband.

And also, another thing that is a lot of discussion in the market with our customers' LTE.

Even though LTE today is a fraction of the subscribers of the 5.7 billion mobile subscriptions ending in the second quarter, it is an important technical revolution where 20 commercial networks launched on LTE where Ericsson is part of the majority of them, and of course are into discussions in the locals and regular around the globe.

The other area, of course, is the BSS/OSS.

We outlined already in the Capital Market Day that we see portfolio momentum in the Business Support Systems and the Operating Support Systems.

And we have a good portfolio there with the pre-paid OSS in the Networks business, [but] there was another application.

And now our intention is to go through the acquisition that we announced in the second quarter to add (inaudible) Telcordia in order to us to be a leading position in OSS/BSS.

Finally, patents have been on the lips in the industry this quarter.

Of course, Ericsson is committed very much to patents, sitting on the 27,000 patents that were generated in the history of Ericsson, a very solid and important piece.

As many new entrants are coming into this industry and we are sharing technology, patents will be important.

That was shown when the auction of the Nortel patents took place at the end of June, where we together with other technology leaders in the industry and in the consortia won that bid for the patents from Nortel.

So it clearly shows that patents are important and play an even more important role when we go into the network side and everything is going to be connected.

Okay, that was a little bit what we discussed with our customers recently and what is important.

Net (inaudible) figures, we will not dwell too much.

Second-quarter sales, almost SEK55 billion, 14% growth.

And if we adjust for currency and you take away acquisitions, which is the main part is Korea, we have 27% growth in the quarter.

That I think is a good quarter, fueled of course from the mobile broadband.

We also see new markets coming up in this mix, with the strong growth in Brazil, China, Germany, Korea and Russia.

If we then talk about Japan, we were early out talking about that the tragic event in Japan would have an impact on our business.

We had a limited impact of that, and two reasons.

One was the fast recovery of the Japanese population and how fast they came back to work, which is just fantastic.

The second is the very good and (inaudible) work of our supply chain, that was early on redesigning, buying on the spot market, which limited the impact in the quarter.

You will see that our customers got as much fulfillment of their desire as possible in the quarter.

Profitability, net income up 60%, or 59%, to be exact.

Impact on improvement on core Ericsson; however, increased losses on the joint ventures.

If you then take the joint ventures, ST-Ericsson reported last week.

Sony Ericsson had far bigger impact of the tragic event in Japan in the quarter, and it had an impact of not being able to deliver 1.5 million phones in the quarter of the total 7.6 million.

That made them to a loss in the quarter after five consecutive quarters of profit.

70% of the phones are android-based, as well as the new Xperia, so the portfolio is well-received by the market.

So I think that was a very clear reason for the loss for Sony Ericsson.

ST-Ericsson, however, as we talked about in the first quarter, as well as it was announced the 23rd of June by ST themselves, it is a totally changed market place when it comes to feature phones and smart phones.

And the strength of the volume that ST-Ericsson has had has, of course, been on the feature phones, with certain customers that are transitioning very quickly down on feature phones, which means that smart phones is not offsetting.

Even through ST-Ericsson is taking good design wins with more customers than we had -- than we previously when we engaged in this joint venture, it is not offsetting.

That we saw in the second quarter with a widening of the loss, where we are now adding a new restructuring program in order to come back and have the right size for the Company.

We of course are committed to ST-Ericsson and think it is a very important asset for us.

We say also in the report that if these quick changes that we have seen in the last two quarters continue to worse, then of course we need to look into what that impact has for ST-Ericsson.

But right now, with the plans that we have and the best knowledge we have, we have a plan and the assets that we have in ST Ericsson is okay.

But again, if there is going to be a significant worsening, which we don't know today, that we will reevaluate in that moment.

That leads to the Networks.

And as I have Johan Wibergh here, I ask Johan to go through the progress on Networks in the second quarter.

Thank you, Hans.

So the good speed we are having in Q1 continued into Q2, and being fueled by mobile broadband that Jan said, but also by a good increase of our IP network products.

With that then I mean packet core [that use] mobile networks, IP edge router, as well as IP-based transmission equipment.

We also had a good development in China on GSM; in Korea, where we had a really good development since the acquisition, with several good (inaudible); as well as a continued strong performance of CDMA in the US.

So we then had a 31% up year-over-year despite the FX headwind we have due to the strong Swedish currency.

When it comes then to the geographical mix, we had a shift, seeing more countries now taking uptake from mobile broadband.

So we could see growth coming in Latin America, strong performance in northern Europe and Central Asia, and also in part of Asia, as well as in Mediterranean.

We had a somewhat slower quarter then in North America and Japan.

Margins then continued fairly strong, but were impacted on the restructuring costs (inaudible) Swedish operations, as well as some markets.

And you should also remember then in Q1 that we had a one-time (inaudible) all for the same and we had more or less of an equal in profit development.

Back to the Japan situation then, as we said in the beginning of Q2, that we expected a bigger impact.

I am very happy with the work that we did, and we came out [with bids] much better than we expected and we had a very high [bid] in our production in June.

Overall then, we are seeing that we have continued to take market share, and that has been a very good development.

And we also see that we are taking more [deals, organization deals] in Europe, which is very good then overall for our market position.

But of course also then will have an impact on profitability.

Just a few words about this modernization project, since we get questions on how they work.

A modernization project is typically when the -- where an operator selects a vendor of technology for the coming seven, 10 years, typically.

And usually then the modernization project starts with something like 12 to 24 months over a replacement cycle, where you go in and replace the old technology with more modern technology.

And the modern technology then usually don't have full cost coverage for that initial phase.

But then when that is in place, you then reap the benefits over the coming years with expansions in both hardware and software, as well as additional capacity coverage.

Also then during this 12-24 months, depending then on the operator, you should then have less of expansions on the old technology, since that is really (inaudible).

I think with that, I hand back to Hans.

Yes, thank you, Johan.

Then we go to Global Services.

Magnus Mandersson will present that.

Magnus?

Thank you very much, Hans.

Talk a little bit about Global Services.

So we ended the quarter with SEK19 billion in sales.

We had a currency effect about 12% over the quarter.

Our year-on-year sales is then down 5%.

And sequentially, we are up 9% over the quarters.

We are also seeing, I would say, flattish sales on Professional Services; however, the earnings is about the same level as last in the same period, if we take out the restructuring charges, as we now given out on the result.

We have actually had a quite good quarter when it comes to order intake, signing on new contracts in Managed Services.

We have taken in over 24 contracts, whereas nine of these are extensions and expansions.

This is almost a doubling compared to a year back.

If you remember, the 2010 full-year result was 56 contracts and 26 renewals.

So of course, it is a heavy, heavy intake of new contracts then.

We are also seeing the systems integration taking off, a lot of new business in the area of OSS/BSS data center transformations and service delivery platforms to come in.

This is of course the change of the total landscape in the [ICT] as mobile broadband is growing.

A lot of these deals will of course come in -- sorry -- a lot of these will happen more in the future as well.

Then of course we have Network Rollout, our Operating Services that has been hampered of higher sales, but earnings is lower, based on the supply situation we have had over the past nine months, or three quarters, as well as the Japan catastrophe.

These results was in services that we have if only one product is short, in the area installations, we can't invoice the project.

So it is a lot of incomplete projects there.

Then of course we have large rollouts in India.

That is also a big investment for us that has taken a little bit of a toll on the earnings.

And of course the modernization of the European (inaudible).

Overall, we have increased our Professionals with up now to 50,000, and we feel that we have a good readiness for the second half.

Thank you.

Thank you, Magnus.

Then go to the last segment, Multimedia.

Multimedia had minus 2% year-over-year growth.

Of course, adjusting for currency, they would be in growth right now.

What has come back is Revenue Management, which is good to see, which is an important piece, the largest piece in this business.

TV Solutions came down, especially on compression, and you can be nice and say there was a weak quarter and it was a very strong 2010, but we came down on compression.

EBITDA margins improving, definitely because of the cost initiatives we have initiated.

Here, we are focusing not only taking out cost; I think the most important is getting volumes.

We don't have a gross margin problem here, as what I said before; it is more the volumes to get it out.

And now also when adding in Telcordia product, over time here, we are going to have a nice portfolio addressing OSS and BSS.

Regional sales.

We have now five regions growing.

If you are nice, you can include the currency effects are up to 6, 7, maybe up to 8 regions growing.

So we will have a different pattern.

And I just want to point out that two regions that are really down, and that is Southeast Asia and Oceania and Sub-Sahara.

And for their particular reasons they are down, which we have commented before.

If you then look at the ones that are really sticking out for growth right now.

India, 107%, easy comparison; we didn't sell that much last year, but anyhow, 3G is coming out there.

China and Northeast Asia are definitely growing well, 96% up.

Korea, Japan, China 2G, all of it is going up, so that is strong.

And then with our northern Europe and Central Asia, that is up 70%, very much fueled by large projects, many of them being in Russia, which is a large market.

Latin America, up 17%, very much also Brazil there.

So you see that we have a little bit of mix because then I come to North America that has been the growth engine for the Company the last two, three quarters, and actually doubled its size in one year, in 2010.

That means that we have come to a very good position in North America.

We are the leader in services and infrastructure in telecommunications in North America in less than 18 months.

That, I think, is an impressive job in one of the most important telecom markets around the world.

Now we have a negative growth in this quarter for the first time for a long time.

Of course, the currency has its toll, so it would be growth, but it is not the same growth rate as before.

So we see a somewhat slower Networks business quarter over quarter here, and the reason is of course we are all very strong with this customer and, as any customer, they [look at the investment] in different type of quarters here.

So I think that we have established ourselves on a very high level in North America and we will take that benefit.

We can see that our service portfolio is now also starting to get a lot of good traction in North America.

So still North America is an extremely important market for us.

I hand over to Jan Frykhammar to talk a little bit about the margins.

Okay.

Thank you, Hans.

So we go to profitability and focusing the first slide then on gross margin.

Gross margins in the quarter ended at 37.8%.

That is slightly down sequentially and down from 39% last year.

Of course, like all our numbers, this year restructuring charges are included in numbers, and last year they were excluded in numbers.

And I think if you look at this margins line here, we should remember that when we look at the years 2008,'09 and '10.

Having said that, we started to see in the quarter a bit of change in business mix, more -- as Johan and Magnus mentioned here -- more coverage buildouts, more modernization projects.

And we started to get in the quarter also a little bit of an impact of modernization projects; it was very slow in the first quarter.

We believe then for second half of this year that network modernization projects will continue to be a bigger portion of our sales and margins.

If we look at the year-over-year comparisons, positive one is that we have a lower share of services, which is impacting the gross margin in a year-over-year perspective.

The negative ones are, of course, the 3G rollouts in India, some modernization projects, but also some of the underabsorption in the service organization related to supply challenges.

Quarter over quarter, it is more of a change of the business mix or product mix that we start to see impacting the margins a little bit.

If we take next slide and look at operating expenses, SEK15.8 billion during the quarter.

R&D continued to increase, and that is exactly in accordance with our plan.

The investment areas that we focus on this year is -- as we have said before, it is to make sure that we have a strong position in LTE and [CDLT].

We continue to spend our efforts on IP and the new IP portfolio.

And then as well we have the impact of the acquired LG-Ericsson operation.

If we look at SG&A in the quarter at SEK7.7 billion, here we have a one-time hit of restructuring charge in Sweden; I will come back to that.

But that is the main reason for the increase.

And if we then look at the full year, we confirm our range then of R&D guidance for the full year, which is -- we believe will be between SEK31 billion up to SEK33 billion.

If we take then the operating margin, excluding joint ventures, 9.2%, as reported.

That is compared to 11.1% last year.

We include restructuring charges this year and excluded them last year, so underlying, it is an improvement if we compare like for like.

If we then take the restructuring charge, this program that we announced in Sweden had a higher uptake than what we anticipated.

And we believe that -- and it was really the voluntary redundancy offers in combination with early retirements that explains that the program became slightly more expensive, but also the fact that it was more successful in terms of number of employees.

We decided to take this investment because we see that there is a good payback here of 2.5 years.

We will start to see impact of run rate reductions during Q3, but the full impact is on the fourth quarter of this year.

If we then take the balance sheet, we have a decent progress in terms of days sales outstanding and payable days.

Where we are going to spend our effort and focus during the second half is to get the inventory more balanced, and you can see that that is the measurement here on these balance sheet ratios that are off-track.

It is in accordance with our strategy to mitigate the impact of the Japan situation.

It is also because we are still building production capacity for mainly RBS 6000, our Multi-Standard Radio.

But it is also a result of higher business activity or project activity.

And you can see that if you read in the report, because we disclosed inventory per region, and you can then net out what is remaining in the segments I mentioned.

If we take the next slide then we have changes in gross cash.

Recovered from an operating cash flow point of view this quarter, we had plus SEK5.8 billion, adjusted for restructuring outlays of SEK7 billion.

Net cash, however, was anyway negative in the quarter and that is because the payout of dividends.

We ended up with a net cash positive of SEK42.6 billion.

With that, Hans, I hand back to you.

Yes.

Quickly summarizing, our targets remain of course.

We have our four targets on long-term ambition that then come down to the plan that we presented at the Market Day.

Grow faster than the markets; I think we have proven this quarter that we once again had a very good, solid growth of 27%.

Best-in-class margins; we continued to do improvements on the bottom line.

We will continue to do so.

Cash conversion; so far, after six months we are not on 70%, but it is our clear commitment and target to get there.

And our JV earnings are not going in the right direction, as we are widening the loss on that.

So that indicates a little bit where we are putting the focus as well.

So by that, I hand back to Ase.

Thank you very much, all of you.

And by this then, we are ready to open up for question-and-answer session (multiple speakers).

(Operator Instructions) Pierre Ferragu, Bernstein.

Thank you.

I would like to ask you some more clarity on the patents -- also you mentioned on it the call today.

Are there major handset vendors who are not paying royalties to Ericsson at the moment, or who you do think might not be paying enough royalties?

We know that you have a litigation ongoing with [ET].

Could there be other litigation coming in the future?

I would say that you have (inaudible) it.

There are some that are not paying us.

And (inaudible) try of course in an amicable way to get the settlement with.

With the ones that we are not getting that settlement, we are unfortunately to go to this type of litigation.

I think that there are not that many.

I think the main part are the mobile handset vendors are part of our so-called licensing.

However, you have to see that we have 7000 patents and the main part is on wireless and that is also where we have the most cross-licenses.

But there are also other patents that we need to look into what we can do with them, and that is what we will pursue going forward.

Matthew Hoffman, Cowen.

Another question on IPR.

Hans, I would like to explore the Company's motivation for participating in the Nortel IPR auction.

And if you had to characterize it, was the motivation more about keeping IPR out of the hands of other infrastructure or device players, or was it more a worry about patent stacking driving LTE device costs higher, which would possibly slow the rollout of LTE infrastructure?

Thanks.

Thank you, Matthew.

I think it was more a twofolded strategy.

One, of course, is as you mentioned, the (inaudible) wanted to see the patents -- because this industry is built on having people being [interested] in the industry and we can use our patents, and we think that it is important.

And I think that was from a defensive point of view, to see that it ends up in the right hands.

But we are also [valuing] them, and that is why we had the consortium, where we participated, that won this deal, and that would work on that.

And I cannot say much more about it right now, because the consortium will be founded and the patents will be transferred and that will happen during third quarter.

And then the consortium will make the statements.

We are one stakeholder, so we cannot really comment as one stakeholder right now.

So we will come back and talk a little bit more on the strategies for that consortium.

Thank you.

Odon de Laporte, Cheuvreux.

Good afternoon.

Thanks for taking my question.

I had a question about North America, the trend in the US.

So revenues declined sequentially, but frankly speaking, it is not consistent with numbers reported earlier today by AT&T.

And I was wondering maybe you are losing market share, or is it a matter of timing.

Anything you can comment on, it would be really helpful.

Thank you very much.

Thank you for the question.

I think you almost answered it yourself.

There is a difference when [an operating spend the CapEx] and we have revenues.

That can be everything from three months to nine months, depending when they activate and when they do the investment.

So they -- and it can also be whatever is included in CapEx can be a lot of (inaudible) that we are not addressing.

So one needs to understand even more when you do a conclusion of a CapEx guidance from a customer.

We are not losing market share in North America; I think that is the most important to say.

We are well-positioned on the large operators and we have created, I would say, a fantastic position in North America and we are continuing doing that and working with our key partners there.

Thank you very much.

That is really it for --.

Richard Kramer, Arete Research.

Thanks very much, and maybe either for Jan or for Magnus.

One of the big disappointments for the past -- I don't know -- three or four quarters now has been the services business, which has been -- you have been talking about for some time, and it has gone from a quarter of sales in 2008 to over 35% now.

But the absolute run rate of profits from that business hasn't changed from about SEK6 billion or SEK7 billion.

I guess my question for Jan or for Magnus is when might we see some leverage in this business, especially as it continues to drive up headcount, and what is the prospect of the services business over time returning to the double-digit operating margin we saw in 2008, 2009 timeframe?

I will take that question.

I think first of all, if you go through some of the details in the report here, you can look at the Services business, the Professional Services business, which is holding up well.

And what we have seen for two quarters is a more challenging situation for the Network Rollout business.

Overall, the reasons for that, Magnus has highlighted very clearly in his presentation here.

The headcount increase in this business is either business-driven meaning, that it is managed service contract, or capability-driven, meaning for instance that we build capabilities, for example, in our Global Service Center in India or in Romania and so forth.

So of course we keep very good track of the headcount and we try to make sure that we all the time work on efficiencies there.

So I think the issue area is to turn the Network Rollout business around; the other business is doing fine.

And when might we see that happen, given the comments you made about inventory buildup and some of the projects in various emerging markets?

I think that if you look at the Network Rollout business, there are certain areas in that business that should recover with supply recovery.

And that is the comment that Magnus made around the underabsorption in some of the projects.

When it comes to the modernization aspect, that is, as Johan mentioned, a long-term business.

Having said that, if you have a modernization contract that lasts for, say, 18 to 24 months, you also have an opportunity to gradually improve that, both by means of being more efficient in the projects, as well as sourcing.

So a gradual improvement is probably a good bet.

Okay, thanks very much.

Zahid Hussein, Citigroup.

Thanks very much.

I just wanted to have a little bit more information around where you think you are gaining share in IP.

I mean, it has been brought up a couple of times today around the edge and maybe around the mobile packet.

If you could just give me a little bit of color around where you are seeing that in terms of globally, regionally, and certainly with which sort of tier carriers?

Is it Tier 1 or is it sort of lower down?

Thanks very much.

The areas that are growing really well is -- there's several related to the IP portfolio.

And today, a big part of our portfolio has become (inaudible).

The things I specifically referred to when I talked here was, first of all, the transmission products, which is both IP-based microwave or IP-based optical transmission; that is doing fine.

Also on the IP edge routers, where we are specifically strong with something that's called BRAS that's used on fixed Internet connections.

And we have some Tier 1 customers on that, but we are also starting to gain in volumes with other customers.

And we are also providing IP edge routers to mobile operators as a backbone network for 2G and 3G data traffic.

The final then, packet core.

We are doing well in packet core when it comes to 3G and 4G networks.

We (inaudible) step in a take a (inaudible) lead on LTE.

We will to a very large extent also take the lead on packet core.

And around these products, you have something called policy control, and we do something called smart pipe that enables you to have a very good differentiated quality facility that you can charge differently on.

We are very strong in that area also.

So in all, we are gaining.

In the Mobile World Congress in Barcelona, we announced a new generation of technology called the SSR, the smart services router, that will start shipping end of the year.

And that has also gotten a strong reception by customers.

So I am encouraged by the development we are doing.

In some of these areas, we are very strong; in other areas, we have been weaker, and we are gaining in those.

I think we still have a lot to prove in this area, but I am encouraged by the development during the quarter.

Just as a follow-up to that, where do you think you need to invest the most in your portfolio of products right now?

Where we are investing a lot is around the SSR product.

It is really a product I am extremely very proud of.

We have been having a drawback against Juniper and Cisco on capacity.

With that product, we will not have that drawback.

We are on power with the most powerful edge router that Cisco and Juniper have.

But on top of that, we have a functionality to handle both fixed and mobile in the same product, and neither Juniper nor Cisco has that functionality.

And I think that is where we are extremely strong.

And we have been investing around that product and the portfolio for some time.

It brings the best together of Ericsson had on the mobile packet core side, also [preparing them] for LTE.

And combining that with the fixed functionality of BRAS and other things.

So I think that is the area where we have been investing consistently now for a few years and that we are now bringing to the market, with shipments starting late end of the year, and next year is going to be interesting to see.

Thanks very much.

Edward Snyder, Charter Equity Research.

Thank you very much.

In terms of North America, your weakness -- which is obviously your largest market -- how much of your weakness there would you attribute to the weak economy in the US versus, say, the timing of revenue that you mentioned versus maybe the competitive impact on prices?

Just trying to get a feel for what the core demand is there, and is it mostly just the economy that is driving that or are you seeing something else?

I heard you not perfect, but I guess your question was -- is the less growth in North America and that we -- because we have growth; it is currency adjusted -- is that attributed to the macroeconomic situation in North America.

If that was the question, I answer it no, not to any significantly means.

The underlying consumer demand is there, new devices coming out all the time, apps is coming out, and that is what is driving the investment there for our customer.

But, again, any operator in the world will go up and down in investment a little bit, depending what they are doing at the moment.

And I think that is what we are seeing.

But again, remember, we have established ourselves on a total different volume in North America, where we are a main supplier to all the large operators in North America and the US, so I think that is really a positive area.

So it is not a competitive effect?

More from just the economy, or is it currency or is it just timing of revenue?

No -- the currency is one, of course, because in dollar invoicing, we had growth in North America in the quarter.

Because they are down 6% in Swedish krona, and that would be different from the year before.

But there is no other changes that you are alluding to or macroeconomics that is impacting it or something like that.

We feel it with less infrastructure sales, as was evident, and that is of course coming from some operators have periodically doing less investment.

It has not been strange I think, on this level.

And then in LTE, you've seen a big push for that in the US, those CDMA carriers.

And there has been some talk about it through the GSM carriers.

But it seems that the rollout is a bit more muted, certainly here.

Is this the trend in general?

Are they holding off, looking for maybe growth before they get into capacity?

What do you see as the overall trend based on LTE based on technology?

Is it mostly going to be a CDMA push initially and then we see a rollout in GSM?

I think that LTE is, of course, on top of many operators' minds as the next technology, and are in discussions or have decided.

But we all need to recognize it is still a smaller portion of the total market, both from an investment point of view and definitely from a subscriber point of view.

That doesn't mean that is not important to us.

It is of great importance for Ericsson to be the leader on LTE, because that is the next technology.

But from a volume point of view and a subscriber point of view, it is still a fairly small portion of the total mobile infrastructure business.

Alexander Peterc, Exane BNP Paribas.

Thanks for taking my question.

I would just like to get back a little bit to gross margin dynamics.

If you look at your gross margin before the impact of restructuring, it was down only 70 basis points year-on-year and 50 basis points quarter-on-quarter.

So it seems that most of this is down to the geographic mix, with Latin Am doing well, with India 3G.

So there has been some cost in terms of gross margin sequentially, I suppose.

But we haven't seen much of net modernization coming through.

So should we expect that to come on top of the emerging markets mix in the second half of the year, so we should be more (inaudible) of gross margin going forward?

Thanks.

I mean, as we said when we met in New York in May, the most important to understand when it comes to gross margin development for us as a Company is (inaudible).

And as we started to see in the quarter, it is business mix that is gradually changing towards more and more of the emerging markets.

In these markets, first of all, they are still building coverage, and it is quite often as well have quite the big services goals.

And that impacts the gross margin, at least initially, as we discussed a month ago.

On the modernization projects, I think that for the second half we will start to see some impact on the gross margin related to modernization projects, and that is also what we are highlighting in the report.

It is though with the same statement that we made in the first quarter, that as a management team, we work hard on trying to mitigate these impacts, both when it comes to learning curve and project execution, sourcing and other type of up-selling activities.

But it is fair to say that we now feel that the modernization element of the business in the second half will be bigger than in the first half.

Thanks very much.

Janardan Menon, Liberum Capital.

Thanks.

Just a follow-up to the previous question.

One of your comments on your statement is that the Indian 3G rollout has hit a sort of temporary peak and could drop a bit.

Would that have a beneficial impact on margins in the second half of the year and will that compensate for some of the acceleration in the European modernization?

And a second question, if I may is, how long would you expect this European modernization to last?

You have said it is 18 to 24 months, but when do you see the modernization, the hardware part of that business beginning to drop off, and then the software upgrade part of that business beginning to come through?

Would that be something that we can expect, say, from the first half of 2012?

On the first question there, when it comes to the revenue for India's second half, I am not guiding on that.

But as we said in the report, in this quarter, we had, first of all, a quite easy, if I may say so, comparison compared to last year.

And we had a big deployment pace of 3G.

Whether that will happen in the third quarter, let's come back to that then.

I think on the modernization project, what we say is that in average, these projects last probably between 18 to 24 months from an initial pace point of view.

And we now are stating, which we are, that these projects have started to impact the business in the second quarter and will accelerate in the second half.

So I mean then you have to look at a year and a half or so from the starting point.

So we will have an impact in 2012 as well, yes.

Okay, thank you very much.

James Faucette, Pacific Crest.

Thank you very much.

I just wanted to ask from a longer-term perspective, historically, emerging markets have been a lower margin business for Ericsson.

And as we go through the transitions to 3G, et cetera, ultimately should we anticipate that as emerging markets mature that their margin structure will improve to come closer to that that we have seen in developed markets?

Or should we anticipate that your highest margin business will remain in the US and Western Europe, particularly?

I think I sort of disagree with your statement.

It is not the particular market or country that is doing the best profitability (inaudible).

What Jan said here before, it is the business mix, the type of business we are doing.

That if it is a greenfield rollout modernization, that is when we fight for the market share, that is the most competitive.

And then if there are upgrades or expansions, that is the same basically (inaudible) market.

Then you have different prices.

But I would say it is not about the markets here or a certain country; it is about the business mix where (inaudible) the projects.

So maybe another way to ask the question is, as you see the developing markets begin to have more mature networks and you see more of your business with them shift to software and upgrades, then we should expect your margins will improve in those -- as a result of that in those markets.

Am I characterizing that correctly?

You are basically stating what I said.

Yes, if they are in that space, they will have a better profitability, so that is correct.

Then there are many countries in the world and generalization on all of them is very difficult.

But your statement is absolutely right.

Okay, that is great.

Thank you very much.

Kulbinder Garcha, Credit Suisse.

My question is just a clarification for Hans, really.

When you talk about the second half, everything that seems to be said today suggests that margins are going to go down, frankly.

Whether it is a buildup in emerging markets in revenue recovery that you're seeing now Asia-Pac/Middle East/Africa, I don't see any reason why that stops.

It's going to actually recover probably even more, given the underinvestment for the last couple of years, combined with the fact that the European network modernization.

So my question is what are the positive drivers of margins in the second half, if any, especially given that North America, as you say, is at decent high and elevated levels.

So I just don't see what the positive drivers are for especially Networking, I guess, operating margins.

Is there anything positive?

Thank you for the question.

Of course, as Jan said before, we are working on a lot of mitigating factors.

That is our job, to keep up the margin and doing profit improvements.

I think that we have areas where we are doing cost-efficiency work on.

We have markets that is coming into another phase than they have been before.

So it is always going to be mitigating factors.

Important for us that we were so clear on the network modernization from the beginning, that we were aiming for growing market share in Europe; we have done that.

But we also said that is going to be a competitive environment.

So that, we were clear from the beginning in talking about that, and we just want to be transparent and tell you about that.

That doesn't take away that this management team sitting around this table and the rest of the executive (inaudible) are committed to work hard to find upsides with the [18] factors.

But to single out one or two specifically, that I don't have.

But of course, we are all committed to work with that.

But again, we were just very transparent on the net modernization, which we think is an important piece of our cost structure.

But I guess, Hans, that is the issue -- what are the mitigating factors?

Because you have done a lot of restructuring in recent years; you're not doing that much more.

I guess you are doing some that surprised you now.

But then you also have the obvious 6000 renewal that probably helped as well, and you had North America that was very strong and CDMA [has lasted].

So I'm just not sure what -- can you even give me one or two mitigating positive factors?

All the efficiency that we have been working on, Johan has worked over a couple of years, where the whole portfolio has, as he represented at Capital Markets Day, fewer platforms, hardware, software, coming in, so we have a lower cost base on the product coming out.

And then we are working long-term with our cost efficiency.

In Magnus' area, we are working with the transformation of offshoring all the time.

Not necessarily going to be in a huge new restructuring; that we have done.

And of course, we are coming with a lower base all the time.

So we are working constantly in Services and in Networks on that.

And in Multimedia, where a program that is sort of in the works, and there we need volume.

So of course there are, of course, mitigating factors, but --.

So yes, we work daily on that.

That is part of our work.

One final thing.

Just on China, one of the things that has been clear has been there's been quite a strong 2G upgrade cycle -- I am sorry -- 2G strength.

Let's say, I think starting last September, Q4, I think it really kicked in.

What is the sustainability of that?

Because I assume the GSM business in China is probably still very high-margin.

I am wondering, are you expecting that to taper off or is that sustained strength just because of good subs growth?

Or how should we think about that?

We look backwards, of course, it is a good demand on 2G and edge in China at the moment from the consumers and the consumers are growing there.

So we look forward and we see China still continue to invest in GSM.

If it is going to be on this level or not, that remains to be seen.

But definitely we see a continuation of GSM for a while.

Okay, thank you.

Kai Korschelt, Deutsche Bank.

Thank you for taking my question.

So my first question was just on the US business.

The way I calculate it is if I adjusted for FX, you were still up 16% year-on-year, which is still pretty healthy.

And I'm just wondering in terms of seasonality maybe in the second half and the mix between LTE and CDM, how do you see that evolving?

And then my other question was just on the revaluation impact in the interest line.

It looks like it was several hundred million kronas.

How much was it exactly, if you could disclose that please, and what would be a more normalized run rate for interest?

Thank you.

On North America, of course, we have -- at the same time we have expansion on CDMA, we have a new rollout of LTE that we are doing at the same time.

What is going to define the mix of that, I would actually say is the consumer demand on the different type of technologies our customers are deciding to launch.

And that, we need to ask them for, because I cannot reveal what plans they have.

So it is going to be a mix of consumer demand and the plans they have for launches of different markets, et cetera.

But currently we are rolling out both CDMA and LTE in the region right now.

On the second question, what I will do then is that I will ask IR to get back to you with an answer on that one.

Okay, thank you.

Patrick Standaert, Morgan Stanley.

Thank you very much for taking my call.

I would like to come back on the gross margin projection, if it is possible, and particularly on the network modernization.

This is not new.

You have been flagging this for a while now, and certainly multiple quarters.

We've met recently.

This wasn't a big worry for you longer-term.

I am just trying to see if it is -- anything new happened recently to really flag this as a bigger threat to the gross margin profile, or is this something that you just wanted to repeat to make sure that we model it.

I mean, we have said all along that this is an important investment for us in footprint and it is a long-term investment.

This has not become any worse than what we originally anticipated.

What we said in the first quarter was that the activity level on the modernization project as such was perhaps a quarter or so delayed compared to what we originally anticipated.

Now, we also report back saying that we have started more of these modernization projects, but that they will accelerate in the second half.

So it is a little bit of a reminder, nothing else.

Okay, thank you.

Mark Sue, RBC Capital Markets.

Thank you.

Hans, recognizing LTE is small today, does it feel that the rate of commercial rollout of LTE can be further pushed out?

Are carriers waiting for the consumer demand to expand the rollout?

The urgency seems to be dissipating.

And then separately, another competitor, Nokia Siemens, seems to be rethinking their options after failing to find a buyer.

With the price now even lower, would you be interested in further consolidation?

I'll start with the first one.

On the LTE, I think that what I have been surprised -- and we can probably ask Johan to comment -- is that LTE is coming earlier and HSP is going further.

So I would say that we see a momentum on HSPA which will be prolonged because of the proliferation of products in HSPA, at the same time we see a big interest for LTE.

If we look at Ericsson, because that is probably what is more important, we would not see any significant revenues that impact the totality on LTE until maybe 2013.

That is how we see it.

So if that is giving you guidance.

That, again, is not saying that LTE is not important, because R&D is there and investing right now.

But the (inaudible) is that remember are very long in this industry before it turns into revenue.

Before I comment on NSM, maybe Johan want to comment something.

No, I think LTE is developing exactly as we thought or even slightly quicker than we thought.

I mean, we have just passed 1 million subscribers on LTE, and we got there much quicker than we did on 3G.

I think a few years out in time we're going to realize then that LTE was a few years quicker to reach volume compared to 3G.

So it is going according to plan.

(inaudible) was expected to boom immediately.

And everything here is really dependent on device availability.

And I think if you look at it in the market, you will find that quite a few devices are launching initially, and then they become more and more and it will pick up (inaudible).

So I'm very pleased with the development on Ericsson.

We continue to keep our strong market position in LTE; that has done quite well in Q2.

And I will give you a quick answer on NSM.

No, we are not interested.

Thank you, gentlemen.

Operator, we are going to take one final question then before we end this Q&A session.

Tim Boddy, Goldman Sachs.

Thanks, for the question.

Really it is a question about growth.

I know you don't give growth guidance.

But the sequential growth I thought in the second quarter was far below the type of seasonality we have seen historically in the business.

And obviously, your year-on-year comparisons are flattered by the supply shortages of a year ago.

But it does feel like growth is slowing and the cycle could be slowing a bit here.

Can you just help me understand why this isn't a point of peak growth for Ericsson?

Thanks.

I think that you alluded to the sequential growth -- or at least the historical one.

What we need to remember, the first quarter was very strong, and we are on growth rate on 27% currency-adjusted right now, which is fairly high.

What we are aiming for is, of course, to grow faster in the markets.

We have (inaudible) the market out there, as you know, on infrastructure, somewhere between 3 to 5 in the year to come.

And that is what we need to beat.

And I would say at the moment, we are doing that.

If it's a peak or not, let's see.

I think it's volume momentum in mobile broadband, volume momentum in managed services, it's portfolio momentum in OSS.

We are number one on mobile broadband; we are number one on managed services; and we are building a very strong (technical difficulty) with OSS/BSS.

So I think we are doing the right things in the Company.

We are taking cost measures at the same time.

So I think we (technical difficulty) with the growth because this is the task that the executive team has to grow and that is what the Board has told us to do.

So the week sequential momentum is just a reflection of kind of volatility into quarter rather than a change in trend, in your thinking?

I would include currency as one sort of factor which is very important.

We have several different factors in between the quarters, and we are (inaudible) mix between markets.

But I am not predicting next quarter it is going to be these same growth or not.

We are just hammering the model we have, and again, we think there's plenty of momentum in these areas and we are well-positioned.

Great.

Thank you very much.

By this, then we end our call.

And before saying goodbye, I would like to invite you to a few of our upcoming events.

We have our North American Analyst Forum, end of August in San Jose; and the Asia-Pacific Analyst Forum in Beijing, mid-September.

And then our Capital Markets Day coming up on November 9 here in Stockholm.

You are most welcome to visit our (inaudible) then in Stockholm in November.

So by this, thank you very much all of you for listening in and asking questions.

Bye-bye and thank you very much.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.