Telefonaktiebolaget LM Ericsson (ERIC) 2011 Q4 法說會逐字稿

Welcome to the Ericsson analyst and media conference call for their fourth quarter report.

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

(Operator instructions).

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

Ase Lindskog will now open the call.

Thank you, operator, and hello, everyone.

You are all very welcome to our call today, where we will comment on our fourth quarter and full year earnings report.

So, with me here today, I have Hans Vestberg, President and CEO of Ericsson; Jan Frykhammar, Chief Financial Officer; Johan Wibergh, Head of our Business Unit Networks; and Magnus Mandersson, Head of Business Unit Global Services; and, for the first time, then, in our quarterly calls, Per Borgklint, who's Head of Business Unit Multimedia.

So, to start with, I have to make the usual reminder that we, during the call today, will be making forward-looking statements, and these statements are based on our current expectations and certain planning assumptions, which are subject to risks and uncertainties.

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

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

And so, with this introduction, then, I would like to hand off the call to Hans Vestberg.

Okay.

I will start to briefly go through the 2011.

Some of you probably attended the press conference, but we'll repeat as well, as we know that many are joining only for this call.

So, if you take 2011, it was definitely a year of mobile broadband where we had both a subscriber growth on mobile broadband and (inaudible) 1 billion mobile broadband subscriptions, which was in line.

We estimate that, which was fairly in line what we thought.

We also saw an enormous lot of new devices.

If we look at our own business in 2011, we grew 19% for comparable units, and, adjusted for currency, and that's probably one of the years that we have grown the most if we go back in history, ending at some SEK227 billion almost.

Networks grew 17%.

We'll come back to that.

It had a profile of a very, very strong first half year and then declined towards the second half and the fourth quarter.

Global Services, the opposite, slower first half and then a stronger second half and, especially, fourth quarter.

If you adjust for currency, we actually had all regions growing in the full year.

We also had a clear strategy of gaining market share that we already, end of 2010, started to communicate.

We wanted to regain market share in Europe in the modernization work.

We have done so.

But it also comes with a business mix shift that we will talk about that impacts our numbers.

We end also 2011 with a good and a strong financial position.

If I may just go through a little bit what are the main topics with our customers, our main topics in this quarter have been, firstly, I would say, the fact of the economic uncertainty.

As I said in the third quarter report, as well as in the capital markets day, we cannot exclude that short-term operators will be more cautious on investments.

What we now see, they have been cautious on investment, and it's not strange, given what is happening all around us.

That means that budget cycle's a little bit longer, project decisions takes a little bit longer than normal.

And we normally have by yearend more investment coming from operators.

We saw less of that this year.

So it is a little bit more cautious.

But the impact on the fourth quarter still was not that much.

It's more a feeling about the cautiousness when it comes to the macroeconomics.

That we, of course, have discussed [a lot to now].

Then the three others are the ones that we have been discussing before-- mobile broadband, period pricing [in order to monetize] the mobile broadband is on top of the agenda, and that leads to both are ability to support that with our technology but also in the OSS/BSS transformations.

And, finally, we discussed quite a lot about operational efficiency, given the circumstances.

And Magnus will come back to how the year ended on managed services.

But we clearly see an interest there.

If we then take the fourth quarter, as I said before, and Johan will come back to it, Networks slowed down in the fourth quarter, with the same comments as we had in the third quarter and the second quarter and the capital markets day.

North America-- three factors impacted North America-- consolidation, high-level investment for a while-- that comes down, which is not strange, and then the shift from CDMA to LTE.

And Russia, as well, came down in the fourth quarter.

Services, the opposite, grew heavily on network rollout due to the mix we have, and, in general, also growing by yearend and in the fourth quarter.

Multimedia, a more normal quarter, at least from seasonality point of view.

Quarter on Quarter, up 33% and flat, you can say, year over year.

If you then take the profitability, starting with the gross margin, we continue with the business mix that we explained both in the third quarter, second quarter, and in the capital markets day, meaning we have more coverage projects and modernization projects, having, in average, a lower margin on average as we roll them out.

We have a higher percentage of that.

At the same time, the gross margin is, for obvious reasons, impacted also from services that had a strong quarter and, now, had an all-time high.

42% of our sales in the quarter was services.

All in all, that led to net income decline in the fourth quarter, driven by Networks that had lower volumes and a lower bottom line but also the JVs that I will come back to that also had a difficult quarter.

Full year, despite the JVs, we increased the net income with SEK1.3 billion.

The joint ventures then.

Sony Ericsson we won't spend too much time with.

You have read the report.

They had a big loss in the fourth quarter, half of it driven by restructuring charge.

I think the most important for us to communicate-- the plan is to close it in February.

There are no price adjustments, nor any balance sheet adjustment, given the results they've had.

That means that the difference will be that the capital gain will be sort of higher.

Given that the result was low in the fourth quarter, our investment on the balance sheet goes down, so the capital gain becomes higher.

When we close, now expected at February, of course, Sony is responsible for getting all the approvals, and they are indicating to the market that that will happen during February.

ST-Ericsson continued on the same path, very difficult situation.

Feature phone market, which is the main revenue source for ST-Ericsson, has gone down for several quarters and continued to go down extremely fast.

R&D is geared to smartphones, where we're [doing inroads] and getting into new handset manufacturers but not at all to offset the decline in the feature phones, meaning that we have too low sales to support our R&D at the moment.

We have a new CEO that is reviewing the strategy together with the board.

We're going to see what we're going to do-- if there are any strategy changes or anything else.

But, all in all, the focus is to maintain the value in the company and come to breakeven as soon as possible.

However, I just need to say it will take some time because, given the dynamics of ST-Ericsson, that will go up and down.

I leave over to Johan Wibergh to talk about Networks.

On the Networks side overall, we had a strength in market share in 2011, and that was really that we executed on the strategy that we decided in the beginning of the year.

We will see, then, how much the market share has increased when we summarize 2011.

But, after three quarters, we said that we have increased around 4 percentage points.

We can also then see when it comes to the important LTE and fourth-generation mobile systems that we are-- now two years after we started delivering LTE, we still have more than 60% market share in LTE, and that feels really good for our position going forward.

I also feel very happy with the strong contribution from the new generation portfolio of technologies that we brought to the market during 2011.

And I feel extremely good about the position we have right now.

Also, at the end of last year, we brought to the market, as planned, another SSR, our combined IP Edge and the packet core router.

Looking then on the fourth quarter how that developed, as Hans already said, we had a tough quarter in a couple of markets that impacted us.

In North America, that was down 27% quarter over quarter.

It's almost half year over year.

And, of course, that was impacted by the operator consolidation and the rapid technology shift, then, from CDMA to LTE that is moving quite quickly and, also, a slower pace of investment after a period of very high investments in network capacity.

We also saw an impact of lower volumes in Russia, and we had a very strong 2010 overall in Russia.

And that was good also during the first six months of 2011 and then slowed down quite a lot during the end of the year.

The rollout in India of 3G-- they peaked through the first six months, and it slowed down quite a lot at the end of the year.

And then, finally, then, we see a normalization of the GSM sales in China, as well as a shift to LTE coverage in the Korean market.

Looking then on the profitability side, of course, the lower volumes overall in the business, as well as the higher degree of network coverage projects and modernization projects, pushed the margin down, as expected.

And, of course, I mean, when we put out this new generation of technology, it has typically a lifespan of seven to ten years, and we saw an increasing, higher degree of those projects during 2011, where end of 2011 is the first period of these seven to ten years.

As we then go on, the coverage will change to more capacity [in sales], as we demonstrated at the capital markets day.

We also decided early in 2011 to increase our R&D investments to move ahead some things into 2011 and to utilize the opportunity with a tough situation in the market and the competitive situation.

So we have really accelerated in some areas, which makes me feel very confident about our product portfolio position going into 2012 and 2013.

Looking then on 2012, we expect operators to continue to be cautious with spending, short term, due to, of course, the economic climate.

Good underlying fundamentals with smartphone take-up and usage and data volumes and networks-- that remains.

That goes on quite well and exactly according to what we have communicated in our traffic and market data report that was disclosed back in November.

We also then expect the rapid CDMA transition to LTE to continue as we now come into 2012.

With that, I hand over to Mr.

Magnus Mandersson, Head of Global Services.

Let me then start with talking a little bit about the full year.

I think we had a good full year.

We, as Hans said, began the year, the first half, with lower growth and lower margins, which was caught up in the second half with higher growth.

And we can see straight through our portfolio that we have good growth in network rollout, as well as in professional services in the local currencies.

And, of course, if we look into it in SEK, we have a little growth in professional services; however, it's compensated with the network rollout, which has very high growth and very much driven by the demand on mobile broadband.

We concluded 70 managed service contracts over the year.

That is-- we came from 54 the year before.

We have also extended contracts, over 32 contracts, which is very strong.

We have also signed more than 30 contracts in the OSS/BSS and SDP area, as well as within datacenter development.

We are also seeing a very, very good progress in consulting and SI over the year, and we have also signed a couple contracts in the vertical industry in transport here with Maersk Line, basically, the biggest shipping company in the world, and we'll do mobile communication for them.

We have also had a very strong demand on network optimization, as networks is getting more and more complex as we now have three different technologies out on the networks.

We're also seeing that that service is increasing strongly.

And, as we said in the capital market day, that's higher-margin sales.

We have increased our workforce now, so we ended the year with 56,000 professionals, which is very strong, as well as we have now managing the networks in managed services for more than 900 million subscribers.

The quarter then.

We could see a very strong development still in North America on the services side.

A lot of project execution we could see there.

We also had full effect of network modernizations in Europe.

Northeast Asia and Japan has given us a high level of project executions, [which grow] a lot of sales.

Of course, shown a good, sustainable margin, I would say, on professional services, which has been around 14% to 15% over the year.

And remember here that we, this year, included restructuring.

That was more than 2% impact in the quarter.

For 2012, then, we see, of course, as everybody else, that the economic environment is weakening.

That should give us more opportunity on managed services, as our customers in-- is focused more and more on operational efficiencies.

We also see that the ICT industry then drives a lot-- will continue to drive on [the amount of growth] in consulting and system integration.

We're still executing a lot on our network rollout.

And, of course, here is a lot of project execution that we are focusing on, as well as the way we are delivering our services that we do more and more on remote deliveries.

So, with that, I will hand over to Per Borgklint.

Hi, everyone.

So, Multimedia.

The sales in the quarter decreased 2% year over year and 33% sequentially increase.

What we can see is that Multimedia brokering and TV showed in the fourth quarter a good development.

For the full year, sales were kind of flattish and was also negatively impacted by a decrease in activities in India but also the political unrest in the Middle East.

All in all, the EBITA margin, due to product mix that was unfavorable, (inaudible) 6%, compared to 16% last year, and that was mainly lower sales of revenue management licenses.

And that also reflects in the full year margin of 2%, compared to 3% last year.

We are on top of the agenda with integration of Telcordia and also with a new, strategic direction, putting efficiency measures in place to improve profitability and strengthen the product portfolio going forward.

And, as of now, the integration of Telcordia starts off, and, with this, we will get a leading position within OSS and BSS.

And, as you know, Telcordia generated some $739 million in revenue ending with the fiscal year [31, 2011].

And we expect it to be accretive to Ericsson's earnings within 12 months.

I think that is, all in all, Multimedia.

Thank you, Per.

If I then talk about the Q4 and the regional sales, we'll not dwell on that.

We'll talk about the regions that are impacting us, North America, of course, but maybe not talking so much about China and northeast Asia that has, again, a strong quarter in Japan, Korea, and China, very important.

And sometimes we tend to forget Latin America, as well, which had a very good year with 23% growth.

But, again, ending up, then, talking about Other.

In Other, we have cables, we have IPR revenues, we have mobile broadband modules, power modules, et cetera.

Had good growth, and that was mainly, I would say, driven by our recurrent revenues in IPR sales revenues.

We also in Other-- we decided in the quarter to phase out our mobile broadband modules.

Jan, I'll leave it to you.

So, let me then go to the slide that explains the business mix and the impact on the gross margin.

This is the same slide, basically, that we ended the capital market day with in November.

I have now added the fourth quarter.

In all periods here, the margin numbers are excluding restructuring charges.

What you can see here is that the major impact in the shift in the gross margin during second half of 2011 is the business mix, meaning more of coverage projects in relation to capacity projects, but also that we have now-- all the modernization projects that we have won in Europe are now in execution, and that impact is also, then, shown in this slide.

And, then, we also added the impact of the increased services sales.

Also, now, what is important, of course, is to remember that the business mix and the modernization projects will prevail a couple or more quarters.

If we then take some highlights on the P&L, operating expense obviously in focus, more so, as well, in uncertain times.

We have-- as Johan mentioned, we have invested a bit additional operating expense in R&D this year.

And that is to strengthen the technology leadership, and the area is known to all of you.

The areas are IP, radio, and that's very important, obviously, from a technology leadership point of view.

SG&A continued to find ways of optimizing the fixed-cost structures.

Some of the selling expenses are obviously variable with, also, a lot of activity that we have had in the business during 2011.

If we then look at the expenses going into 2012, the ambition that we have here is to reduce the R&D expenses.

We ended the year, as I said, on SEK32.6 billion.

Now we give a range between SEK29 billion to SEK31 billion for next year, and that is, of course-- it's an easy explanation.

I mean, we said we had some additional investments during 2011.

Now, in 2012, we will go more back to the normal ratio.

We feel that we have a very strong portfolio, but we also continue on a high level with R&D because this is obviously core to us when it comes to technology leadership.

These numbers also include the impact of Telcordia.

If we look at restructuring charges, this is an estimate.

We believe, then, that the number for the year will be approximately SEK4 billion.

We also say here that we think that the main part of the activities will take place during the first half of 2012.

And, if you want to try to estimate the impact in cost of sales versus operating expense, let's use 50/50.

If we then take the balance sheet, some highlights.

If we look at the KPIs, then, the day sales outstanding-- I think if you look at-- since second half of 2010 into 2011, we have been able to reduce day sales outstanding overall.

Now we are operating, average-wise, between 90 to 100 days.

The target still remains.

It's below 90 days.

The big challenge on the balance sheet from a working capital point of view this year has been inventory.

We had good progress in reducing inventory in the fourth quarter, and we have also then had a lot of project completions.

It's visible in the network rollout numbers.

This will continue to be in focus for us going into 2012, working hard on working capital over net sales ratios.

If you take the cash flow for the fourth quarter, operating cash flow of SEK5.5 billion, adjusted for cash out related to restructuring, SEK6 billion.

The big change compared to fourth quarter of 2010 is the net income impact, and it is related to core Ericsson earnings that were higher in the fourth quarter of 2010.

But, also, if you look at the full year, which is next slide, you can see that the big impact for the year is working capital.

And we have-- if you look at working capital over net sales, as such, that ratio has been reduced during the year but not enough to self-fund, if I may so, the growth.

But this is something that we will continue, of course, to focus on.

It is about project execution, efficiency, and so forth.

All in all, net cash for the year went from SEK51.3 billion to SEK39.5 billion; during the fourth quarter, an improvement.

We end the year with a strong net cash position.

And, if you go to the next slide, then, which is proposed dividend, we-- the board will propose to the annual general meeting an increase of dividends of 11%, up to SEK2.5 per share.

May 8, 2012 is the record day for payment.

Also important to highlight here is that, when the board has made this proposal, they have been looking at 2011 earnings, as well as balance sheet structure, but they have also been reviewing the business plan and the expected economic developments going forward.

With that said, Hans, I hand over to you again.

Just to reiterate our performance targets that we have for long term and not trying to update too much, growth (inaudible) market.

This is just one indication on the three-year plan; so, where we should grow more between 4% to 10%.

The first year, at least, we are above it.

But, again, it's two years left.

On the best-in-class margins, we are below that because, as you all remember, we exclude restructuring in 2010, and we include it in 2011, meaning that the basis is a bit tougher.

But, again, it's two years left to deliver on that.

The cash conversion, however-- that we sort of define every year, and that means that, on the long term variable pay, we will not get payout on that [ninth], as we missed the cash conversion this year.

And Jan has talked about the main reasons for it.

Finally, the focus going forward.

I think it's clear that we will capitalize on our market share gains.

And, as Johan has said and Magnus as well, that means executing well on the projects we have, see that our customers are satisfied with that and seeing that on that footprint we stay in there for a long time because that's the investment we have done long term to really be strong with our customers, have a bigger footprint.

Then, of course, we still believe it's (inaudible) in the three areas where we are strong-- mobile broadband, managed services, OSS/BSS.

And, here, it's about executing on our growth strategy in these three areas.

And, of course, the additional Telcordia is adding up to our strength also in OSS/BSS.

Jan has talked about, also, that we will focus on efficient cost reduction, not that we haven't done it before.

But I think it's important just to bring it up that we will continue to look for efficiencies, both, of course, in the transition that service is doing with high activity-- there you have service (inaudible) transformation, product portfolio consolidation, as well, and, finally, looking at the fixed-cost, as well-- [lease] cost as well.

So we are working hard on that, and we have already started, as we said at the capital market day in November, with those type of activities.

And we have been planning.

So we are in full swing.

All in all, important, long term, leverage and key for technology and service leadership because that finally is going to pay off, both from a profitability point of view and customer satisfaction point of view long term.

And we are here to see that we really create long-term value for all the stakeholders that we have.

And we have now gained market share; now it's time to execute on that in a very well, good way.

Thank you.

Thank you, all of you.

So, operator, we are now ready to open for questions.

(Operator instructions).

Kulbinder Garcha, Credit Suisse.

My question is for Hans and Jan.

I guess, obviously, the gross margin level you've produced this quarter is even below what anybody saw.

I know you guys signaled it, but, clearly, either that signal wasn't understood or something else has happened.

I guess my question really is-- how much of this gross margin pressure is structural?

And maybe if we go back historically, when your gross margins went down from the low 40s to, initially, high 30s, that change provide structural.

This move now, down from 36% or 37% to 31%-- how much of that is structural?

The reason why I ask is that it seems to me, at least, the decline in CDMA being replaced by LTE, you're not going to get the same gross margin structure on LTE and CDMA because the competitive dynamics are different.

You've also then got the network modernization, which could prove temporary, but permanently higher services mix.

So, I guess, what conviction do you have you can even return to mid 30s gross margins?

I'm not asking for next quarter's guidance-- two to three years out.

So, if you could just comment on the structural versus a temporary nature, that would be very helpful.

Thanks.

I think we'll try to explain the business dynamics as they are coming in right now.

We see, long term, that we should be able to create those margins that we have had.

But, again, we're not guiding for short term here at all.

But, definitely, I mean, if you compare CDMA to LTE, for example, they are in totally different cycles.

I mean, CDMA is at the end of the cycle, and LTE is in the beginning.

That will be going the same discussion for 2G to 3G.

And we don't see, in general, any difference on gross margins there.

It's more about the scale of them and how-- the scale it takes to build them up.

So I think that's very important.

But, again, right now, we have a fairly hardware-centric rollout, and that gives a certain type of margin.

But this management team is definitely committed to improving that with the mix and, all the same given, we should be able to get back.

But, again, remember now what I said.

Again, the margins will in this modernization prevail for a couple of quarters, so that we know.

But that doesn't mean we're not working to improve them.

And, just on that point--

Kulbinder, if I could add here, I mean, this question that you raise, first of all, I think it's very important to look back to the business cycle slides from the capital market day, where we have coverage and capacity.

That is very important to understand this.

I think, also, that we got this question a lot in the transition from 2G to 3G.

And we managed to improve margins over the cycle of 3G so that they [become] really strong over time.

Thirdly, the thing that I think you need to consider, of course, is the share of services sales going forward.

When we were operating at gross margin levels that were significantly higher, we had a much lower services share of the business.

Okay.

Thank you.

Edward Snyder, Charter Equity Research.

Hans, you mentioned political uncertainty as a reason for the slower spending.

Can you give us a little more color on that?

And how much impact is the credit crunch in Europe having on the operators' ability or willingness to spend?

And then I have one for Jan.

I'm sure, like everyone, you follow the developments with the euro.

What happens to your business and, more importantly, to your balance sheet if Greece does go into default?

And, besides hedging, what impact will a high-inflation environment have on your financials or your spending by your customers, particularly in the network business?

Thanks.

When it comes-- we talked already in the first and the second quarter that we had two impacts on the sort of uncertainty in the world, southern Europe and northern Africa and Middle East.

And they're a little bit different the reasons for it.

That I've had all year.

We have not (inaudible) any regions or countries that we now see a slowdown due to macroeconomics.

What we have done is that, in the conversation that I have with operators all around the world, my management team, and a discussion with my region heads, we have seen that operators are more cautious.

Last time, I cannot exclude that they will be cautious.

Now they're a little bit more cautious.

It has not impacted much in the quarter.

It's more a feeling that they are thinking more on the budget, taking longer time to close it, taking longer time to decide on projects.

But, in general, the business activity, meaning possibilities, are equally the same, I would say.

But the feeling is that people are more cautious, and I think that's nothing strange.

We see what's happening around us and read all the reports.

So, of course, all responsible business leaders think about this being more cautious.

So we're going to see how that impacts investment level later on.

The only visible impact we had, which was (inaudible)-- that was a normal year.

We had more yearend investments on network side.

We had less of this this year.

But, again, it was not any huge things here.

But that is why I coming out and saying that we believe that they are going to be a little bit more cautious.

But how that will translate into investment, that remains to be seen.

Okay.

Let me then try to answer, at least partly, the question around a possible default situation in Greece and the impact on the euro.

That's a big question, Ed.

I think, to begin with, we are, as many other multinational companies, looking at different scenarios for how to act in certain situations and so forth.

What is important to remember, of course, is that, when it comes to exposures, our biggest currency is dollars.

Most infrastructure contracts are in [all] currency, both euro and dollars.

Our policy and principle that we apply in the Company is to have as little equity as possible in any subsidiary.

Finally, if euro breaks up and so forth, that is going to be, obviously, a long period of implementing certain currency.

On your final point around high inflation, we have good experience of handling high-inflation situations.

We have been in Latin America, I think, more than 100 years.

We are experienced on this.

What it has to do, of course, is to handle-- to have as little local tied up capital as possible and transparent payment terms and so forth.

So I think we are as prepared as we can be for possible scenarios.

At the same time, we have business in a lot of different countries, so we are exposed to currencies.

But that is part of doing business in many countries.

Great.

Thanks a lot.

Alexandre Peterc, Exane BNP Paribas.

Can we come back a little bit on the North American situation?

Obviously, it had a very strong sequential decline there against the usual seasonal pattern.

So would you expect in Q1 again a slightly atypical seasonality, given this bizarre Q4 base?

And, secondly, I understand there's an element of CDMA going down.

There's also an element of M&A that impacted operator spending in the quarter.

Do you--?

Can you kind of split those up?

Which one was stronger impact?

And would you expect a snap back related to the M&A that now didn't happen and solid CapEx might come back?

Thanks.

On North America, you're absolutely right.

The year-over-year decline was, on Networks, big.

That was, as previously communicated, due to three reasons.

One was we have had sort of a period of higher investment in North America.

But I think also very important for us was the planned mergers-- the planned merger that was planned, which sort of made less of investment.

And, thirdly, the transition from CDMA to LTE.

So then you can say the merger will not happen, so that you can take away.

When those operators will start invest, I guess, that's not for me to comment.

That's more for them to comment, as there are a few of them, and you would know them by name.

Every time I started to comment their business, I guess, then I'm in trouble.

But that merger plan which holds back the investment, that has gone away.

When they will start and do something, that we will see.

And that's too early for me to say.

The CDMA to LTE that's happening-- we have peaked on CDMA.

It's going down.

And that decline is not really offset by the LTE ramp-up, at least, initially.

Over time, of course, it will.

But right now it's not doing it.

And we have had a very strong CDMA year in 2011.

We have to remember that.

On the investment levels that have been high and now coming-- have been coming down in the second half, that is a little bit more temporary and depending on cycles.

And that's harder to predict.

Finally, I think, as far as we can judge, the underlying sort of factors in North America, they remain.

People use mobile broadband more.

They're coming out with new devices, et cetera.

And that's important.

But, again, we have had quite a substantial decline, both sequentially and year over year.

Some of those factors remain, of course, going into next year.

The others we will see for this year.

It will be 2012.

And, on the acquisition, yes, there are, of course, a portion on that acquisition that goes to the North American market.

Okay.

Great.

Thanks a lot.

Sandeep Deshpande, J.P.

Morgan.

Can I go back to that earlier question on the gross margin?

Given what is happening with the network modernization projects, would you say that what you're seeing-- what you've seen in the last few quarters is radically different from the change in margin you saw in 2007 and that this scenario will result in improved gross margin once the capacity-related shipments start, whenever, either later this year or next year?

I think there is-- First of all, as we have said now at the capital market day and that Johan mentioned as well, we have invested in the footprint.

And the average length, as we think, of the networks are between seven to ten years.

So, of course, once the capacity cycle is coming, there will be more software, there will be need for hardware expansions, and so forth.

So, of course, the whole investment is built around an upside in gross margin as the traffic puts requirements on increased capacity.

Secondly, I think 2007 was slightly different because, in 2007 and early 2008, we also had more of circa switched core and late architecture.

Now it's more radio in the mix.

As Johan, as well, has mentioned before, we are working hard to establish a good position on the Smart Service Router and that type of business, which is more software-centric.

So you are saying that there is no real competitive impact or price pressure impact in this margin at this point.

I think every time there is new footprint available or a new technology, there is more dynamics in the pricing.

That's been the case when 3G was introduced in Europe, when 3G was introduced in the US, and so forth.

So those are the most-- every time new footprint is available, either by means of new technology or greenfield footprint, there is a more competitive situation.

The modernization projects, as such, nothing has changed compared to the business cases.

And, again, the business case is about getting the projects done and then as fast as possible getting into the capacity cycle.

Thank you.

[Mark Fu], RBC Capital Markets.

Hans, if network modernization is something Ericsson has done in the past with hopes of better margin someday-- if that someday is today and we're still pursuing network modernization, I'm just wondering why would net margins get better in the future, particularly as operators proactively reduce their CapEx to revenue ratio?

I think that we decided to communicate clearly on the European modernization because of the reason that we saw a large proportion of the installed base in Europe needed to be modernized.

We don't see any such large happening-- of course, it's going to be new licenses coming out, et cetera, but not on the magnitude as we saw the European modernization.

That's why we are being so clear talking about that, since fourth quarter 2010 through all the quarters-- first quarter, second quarter, third quarter, fourth quarter, because it has been unique.

Remember also we were not number one on mobile infrastructure in Europe because, during the 3G race, we had to back off there.

We decided this time as a leader in the industry we also want to be number one in Europe.

So that will not come back as opportunity.

It's now and the next ten years.

So, I guess, that's, hopefully answering your question about network modernization.

It was a very specific region and a specific task we had.

Then there will always be deals up and down, and some will be capacity, some will be modernization.

But this was a cluster of many of them at the same time, and we don't ambition that we see that in other region happening right now.

It will be folded out over years then.

So, Hans, does that mean you continue to drive with modernization overall, or do you kind of step back and say, regionally, we'd do some of it here but less of it here?

I think I tried to say it in my last slide.

This is the year to capitalize on our market shares, execute what we have taken and the market share we have.

Of course, there will be opportunity where we can gain market share, but we have no specific region or specific area that we are now targeting as we have in 2011.

Then we would say-- then it's a normal year that we're going to focus equally much on bringing the profitability up as anything else.

Okay.

Good luck, gentlemen.

Francois Meunier, Morgan Stanley.

I've got a question, actually, on CDMA again.

You tried to claim this morning at the press conference that you haven't lost any market share in CDMA.

I think our recent discussion with Alcatel actually show that, in Q3, they hadn't seen any decline so far.

So I was just wondering from what type of information you basically affirm that you've not lost any market share in CDMA and how fast it's been Q4 versus Q3.

If you could, be a bit quantitative on that one.

And then I've got a follow-up question.

First of all, remember that our CDMA footprint is only North America.

We have not gone expanding outside very-- a little bit we have outside but, mainly, we work from the footprint that we got from Nortel and in order to go into LTE with it.

So there might be different markets we're talking about.

We talk about our markets and the few customers we have on CDMA.

They are migrating to LTE.

We can, of course, see that we have a decline year over year and sequentially on CDMA at the moment.

And that is still better than expected (inaudible) CDMA, but it was clear that it would go down sooner or later.

And we have a few customers in North America that are migrating quite quickly to LTE.

That means that we will see a decline in 2012 on CDMA, and we are preparing for that and seeing that we, both from an efficiency point of view, resource competence point of view on the right.

We've already now, as we presented at the capital markets day-- our Radio Base Station 6000 can include CDMA, meaning that we have migrated from a technology point of view that into the Radio Base Station as well.

So we are doing all of that.

We have already kicked off our efficiency work, et cetera, in the CDMA, given what we see.

Do you confirm it's a double-digit, significant number decline in Q4 versus Q3?

We have not disclosed that exact number.

But, again, we are-- it is declining in CDMA, both sequentially and quarter over quarter.

Okay.

Then I've got another question around network rollouts as you disclosed them in the Global Services now.

It looks like the margins were around minus 4% or minus 5% last quarter.

Now they are around minus 10%.

Is there any way to cut costs in this network rollout category?

I think-- So, first of all, the same message as we have been conveying throughout the year.

There are three reasons for the low margins in network rollout.

The first reason was that we got efficiency issues with the projects because of the supply chain issues, predominantly first half.

We also had first half of 2011 rollouts in India.

And then we have the modernization projects.

The two first items are gone.

The impact that you see now on network rollout is related to the modernization projects in Europe.

Having said all of that, we know that network rollout is a lower-margin business.

But, as a leadership team, we are not happy with losses, of course not.

So what we work on is, of course, to execute the projects, to improve the efficiency in the projects, and so forth.

But, as long as the modernization projects will be there, we will have an impact in the network rollout margins.

Okay.

Thank you very much.

Simon Schafer, Goldman Sachs.

I actually wanted to go back to this question about the tailing off of network modernization projects.

I think, at the capital markets day, you were talking about 18 to 24 months.

But then, in Q4, obviously, there seemed to have been a good amount of pull-in, if anything, and mix weighting towards those modernization projects.

So, in essence, my question is-- are you still comfortable that that will fade as a percentage of the mix relatively quickly?

Or how should we look at the timing in terms of that mix effect into 2012?

I think what we said was that if-- remember what we have said during 2011.

I mean, in January of last year, we thought that the modernization projects would be-- have commenced already in Q1 of 2011.

It was only a minor impact in Q1.

The projects really started in the second quarter of 2011.

And what we also said was that all projects would have commenced in the fourth quarter, and that is what we confirm.

So, from the starting point, you have to calculate in 18 to 24 months.

And that is what we stick to.

We have detailed control, of course, of all of these projects, rest assured.

So they will stay with us for a couple of more quarters.

Understood.

Thank you.

And then, secondly, on the same sort of topic, how does this mix shift affect your aspirations to improve your working capital, Hans?

It looks like Q4 perhaps-- again, if anything, you're falling slightly short of your cash conversion targets.

Maybe just remind us how that mix dynamic may affect your working capital in the first half and the second half of 2012.

I think that-- first of all, I think we have-- the reason for the high inventory during 2011 was slightly different if you look at first half and second half.

I mean, first half, we had inventory because of the supply chain issues.

Second half, we started to get more coverage projects and modernization projects.

And projects in our business means more working capital or project capital.

Then, in the fourth quarter, we had good progress on reducing working capital.

Everything else equal, we still see a potential to improve the inventory from the levels we have, but we should also remember that we have a mix with more coverage projects that tie up slightly more capital.

But, when I say that I'm not happy with the working capital over net sales, it is, of course, because we think that we have potential to improve here gradually during the year.

Got it.

Thanks so much.

Matthew Hoffman, Cowen.

My question is why, as you think about the options for ST-Ericsson-- why is the ST-Ericsson JV structure still strategic to Ericsson if they're going to continue to pursue the app processor market?

Why not just move to a modem-only strategy similar to the old Ericsson (inaudible) platform which was so successful?

I'll have a follow-up too.

Thanks.

Again, we have a new CEO in, and we are reviewing our options in the company.

We have two main thoughts or main objectives in that review.

One, keep the value that we think we have in that joint venture because we have really a lot of value.

And second is to bring the breakeven point and the sensitivity in the business down.

Let us come back with that and not preempt any of the reviews that they're doing at the moment.

Perhaps that was a leading question.

But is there any chance where we've reached the level where operator up-front subsidies of handsets like the iPhone have become an issue, as operator cash flow goes in terms of subsidies and now have less to spend on network rollouts?

And, if so, would that--?

What would reverse that?

Thanks.

Of course, you're right.

The subsidy moderates in certain markets, not all over the world.

I mean, there are regions in the world where there is no subsidy at all.

We're clear on that.

So it's a little bit different how the market structure (inaudible).

So I think that for the markets where the subsidies have been, that has been even for a while, whereas it's not been, it has not been there.

So, of course, we would be happy if there is no subsidies because that will create more opportunities for us to get investment.

I don't see any change on the subsidy model in a big way at the moment at least.

But let's wait and see because it's a big ticket for the operators, of course, doing subsidies, especially with the phones that you are mentioning.

Thank you, and good luck.

One final question.

Richard Kramer, Arete Research.

A couple of questions for Hans or Jan.

You made a point of calling out intellectual property at the capital markets day.

Could you give us a sense of what the yearend royalty income was?

And, now that you've promoted the team as a direct report to Hans, can you give us a sense of the kind of growth you expect in royalty income for next year, given the wide range of 3G devices that are coming to market and some recent-- obviously, some license agreements you've made?

And then I'll have a follow-up for Magnus, please.

Okay.

We'll not give you that much of information.

We have not disclosed finally the yearend IPRs, as we don't disclose in that.

We did that at capital markets day (inaudible).

We will come back when the first quarter is brought in the report.

As I said, we change disclosures once a year, and that's it for disclosures.

We will come back if we want to change that or not.

So we'll come back to that.

On the royalty growth rate, I will not give you any indication, but I will-- what I have told you and everybody else-- we think we have a very good portfolio.

We see a growing number of devices coming out.

We see the 50 billion connected devices.

We see more infrastructure base coming in.

We say, as we have said before, if you want to do infrastructure or handsets in this industry, you need a license with us.

We almost have with everyone that is acting right now.

So, over time, we believe this could be an important asset, an important asset that can grow.

And, secondly, we need to remember it's a flip side on our R&D investment.

We would not have patents if we didn't do the R&D investment.

So we need to continue with them in parallel, as we said before.

Okay.

And a quick one for Magnus.

It seems almost as if you have declining recurrence in the Global Services business.

The larger the scale you get, the lower the margin comes.

And you've clearly added a lot of staff.

Is there any reason to expect that you shouldn't need some sort of restructuring for next year?

You've seen some of your major competitors going through this and talking about efficiencies in their global NOC.

Why wouldn't Global Services, instead of looking to pursue revenue growth, start to look to rebuild the double-digit operating margins as a group that you saw two or three years ago in that business?

Let's try to capture what was on the question here.

I think, first of all, we are actually growing our business in local currencies.

That's one thing.

Restructuring is a part of our business.

We are restructuring every operation we are sitting on in 175 countries day by day, everything from the managed service contracts we are doing, as well as the way we are delivering our services from global service centers, as well as the global network operation centers.

And we are collapsing, basically, every local NOC we're having into global NOCs.

Romania, for instance, we have more than 26 operations hooked up to that center.

The Indian network operations is also double-digit numbers on operations hooked up to that and with many, many hundreds of millions of subscribers.

I think we're leading in that transformation in the industry.

Maybe just add in there that we need to separate it to this network rollout.

As Johan has said, there, we don't have a satisfactory profitability.

Given the projects that we have at the moment, we will work on that.

If you look at professional services, being in the same range of EBITA basis since we started to report, we always need to remember that 2010 figures excluded restructuring, and now we're including restructuring.

So we are a little bit unfair to Magnus when you look at professional services because that would be flat between the years if you look at that for Q4 when it comes to professional services.

But, again, network rollout is not good, but professional services has been in the same range since we started, even though, with expansion, we're growing 12% in professional services in Q4.

And, of course, we are consistently working with improvement programs in network rollout and basically doing everything right from the beginning and execute on the projects and conclude those on a daily basis.

So it's full focus on it.

Thanks, Magnus.

Thank you very much, all of you.

And, before concluding this call, I would like to take the opportunity to invite all of you to our investor day on November 6 here in Stockholm.

So, by this, we conclude our call, and I wish you all a very good day.

Thank you, and bye-bye.