Telefonaktiebolaget LM Ericsson (ERIC) 2012 Q2 法說會逐字稿

Welcome to the Ericsson Analyst and Media Conference Call for the Second Quarter Report.

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

(Operator Instructions).

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

Ase Lindskog will now open the call.

Thank you.

Thank you, operator, and hello, everyone.

You are all welcome to our call today, where we will run through our second quarter report.

And with me here today, I have Hans Vestberg, our CEO and President; Jan Frykhammar, our Chief Financial Officer; Johan Wibergh, Head of business unit Networks; and Magnus Mandersson, who's Head of business unit Global Services.

So, to start with, then, I have to make the usual reminder that, during the call today, we will be making forward-looking statements.

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

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

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

And so, with this said, I would like to hand over the call to Hans Vestberg.

Thank you very much, Ase.

Hello, everyone.

Let me be brief on the key developments in the quarter, as many of you probably listened to the press conference and have read our material.

But, in the quarter, we have continued to stay very close to our customers.

And, as I mentioned earlier this morning, as well, the last 45 days, we in the executive team, including myself -- we have talked to 100% of our revenue base to understand where the market is going.

And we don't see any major changes since the first quarter.

Remember, in the first quarter and the fourth quarter last year, we said that, in the markets where there are some macroeconomic uncertainties, we see more cautious operators when it comes to investments.

So that is the same sort of prevailing in the quarter.

But we have not seen any change to what we talked about in the first quarter.

But important for us is to stay close to the customers in these times to understand how they will act in this market.

When it comes to political uncertainty, there is no change there neither.

The markets that have political uncertainty are, for practical reasons, not doing much investment, and that will, for a while, continue.

And that's predominantly markets in the Middle East and in northern Africa.

But that's no news on that.

It's basically the same as in previous quarters.

The customer dialogue has been very much around network performance and quality of the networks, as that has become a key differentiator.

Spectrum, with the expected data growth -- of course, spectrum will be an important point to have both more of but also doing it more efficiently in the rate of technology.

And very high on the list is monetizing the mobile broadband with tiered pricing and quality of service driving a lot of changes in their OSS and BSS.

And, finally, we have had it for quite a while.

That's, of course, efficiency discussion and focus more our customers very much when it comes to both network sharing, outsourcing, and other types of efficiency gains by using our service or product portfolio.

Looking at the quarter, I will be brief here.

Growth of 1% year over year, down 6% year over year for comparable units and adjusted for foreign exchange.

That's basically the same as we had in the first quarter.

We had a sequential growth of 9% and the normal seasonality -- which in normal seasonality is around 5%.

We will come back, but both Global Services and Support Solutions had a strong quarter and are now contributing to around 50% of the turnover in the quarter of Ericsson.

In Networks, Johan will come back, but, here, we have the expected impact of the equipment sales from CDMA.

That is declining.

And then we had weaker sales in the quarter in China and Russia.

If we then look at the profitability, the core Ericsson had a profit of SEK3.3 billion.

Net income SEK1.2 billion, clearly down from last year, driven by Networks -- with the profitability of Networks but also that we have a wider loss in ST-Ericsson year over year -- not sequentially but year over year, leading to earnings per share of SEK0.78 in the quarter compared to SEK1.60 last year.

And, of course, here, we need to remind you that Q1 included a one-time effect of the gain from the divestment of Sony Ericsson by SEK7.7 billion.

So, by that, I hand over to Johan to talk about Networks.

Thank you, Hans.

So, today, we have two slides on Networks.

So let me start by going through a little bit on the financials on the first page.

As you've seen, then, we are down 20% year over year if you do an organic, FX-adjusted sales.

And, quarter over quarter, we are up 2%.

You should remember first half 2011 was a somewhat tough comparison after a tricky 2010.

But, still, we're down 20%, which is a lot.

And, year over year, it was lower GSM sales in China, and we also see reduced operator investments in Russia and India, among other places.

And, as Hans said, then, CDMA was down some 50% year over year.

We started seeing decline back in Q4, and then it has continued.

Operating margin ended 5%.

We were 14% in Q2 2011.

And the drivers for this, of course, is overall lower volumes.

We are quite volume sensitive with the high R&D spending we have.

We were also negatively impacted by underlying business mix with the [same] coverage and capacity as before.

European modernization projects, then.

There's been somewhat less capacity expansions in Q2 versus Q1.

If we then move to the next page then, I think we see, as Hans (inaudible) -- we see a very positive discussion among operators, an increased focus and discussions around competing on performance.

That's important.

That's really a leading indicator for us when it comes to doing future capacity expansions.

So I think that is one positive thing.

Secondly, then, we see LTE is reaching outside the initial rollout countries.

So far, it's been the US and Korea that are the major LTE countries.

We have right now about 2 million new LTE subscribers per month.

We have Canada and Japan also going on, a few countries in Europe.

But now we see more expansion in Europe.

We see more Latin America coming up -- Mexico, Brazil, and some more countries -- Chile.

I think we are really encouraged here by our well-proven LTE solution that is really outperforming competition, both technically and market share-wise.

As we wrote in the report, (inaudible) equipment, then, up until the end of last year.

We have some 60% market share.

I have still to read an analyst report that doesn't put us as being the leader in this area.

And we also here, then, have established ourselves with a really strong platform product, and that is performing extremely well on quality and performance.

Now we're adding on.

Now pace in development is rapid.

There's a lot of new features coming on.

Pace is quick, and we are in the most important countries when it comes to smartphone usage.

This feels good for me.

And key priorities then moving forward is, of course, the improvement on profitability.

I mean, we are, of course, not happy with the 5 percentage points (sic-see presentation slides "5%") that we have.

And, of course, we are working both, as Hans and Jan said before -- that we will have -- the effects of the modernization projects will have an impact at the end of the year and beginning of next year.

We are also working a lot both on the revenue side as well as on the cost side to make sure we do what we can without jeopardizing our strong portfolio position and the technology leadership and the things we've done.

I also feel encouraged about the seven contracts, the seven customers that have chosen SSR when it comes to IP.

This is important to us.

It's still small money in revenue this year, but it's really important going forward.

It's real encouraging.

We also, then, see a next step when it comes to the voice business.

Those operators investing in LTE -- they are now starting to prepare for launches on moving voice over to LTE.

And, there, we are working really hard to capitalize on both our strong position in LTE as well as in circuit switch core.

And then, finally, we are working on supporting our customers to migrate over to LTE, and I think we had Sprint being out yesterday also then launching LTE markets (inaudible).

It was only Ericsson markets that they launched.

And also, then, we continue to be obsessed by superior performance in our projects and our product developments.

We believe it's a key aspect for us and our customers to focus on that.

And, with that, I hand over to the Head of Services, Mr. Mandersson.

Thank you very much, Johan.

Hello, everybody.

We had a very good quarter.

We have again demonstrated that we can deliver profitable growth.

We are seeing 26% growth in Swedish currency.

Adjusted, we are doing 18% year on year.

All our business lines are driving high growth, as you can see on slide 1 (sic - See Slide Presentation).

I think we have, over the past 12 months, worked very much with capability buildup in the front line but also in our Global Service centers.

And that has driven a profitable growth for us.

We see continuous, strong demand for transformation of services delivered by the consulting and consistency integration team.

And, of course, it's a great focus for the operators to reduce OpEx and also do technology shifts.

That's driving these sales.

We continue to lead in managed services with 17 contracts over the Q2 here.

Of course, the sales are very much driven of all the 70 contracts that we took last year.

So, all in all, I think we have very good momentum on professional services.

Network rollout.

We still have an effect of all the new contracts that we have done with networks.

And then, of course, it's very much driven by the European -- the result is very much driven by the European modernization.

I think you spent time on that already in the morning.

And, of course, Johan and I -- we are driving as much as we can in network performance and execution in the projects we are having around network rollouts.

I think we also demonstrated good, sequential, profitable growth in professional services.

I think, again, it's very much driven by the setup we're having with our local and global delivery structure, which is unique in itself.

We will continue to drive that throughout the year.

Also, I will say that, a year back, we had 5% operating margin, and we have improved that with 1 percentage notch in Q2 this year.

So, all in all, I think we are quite strong in driving the operations at the moment.

And, with these few words, I hand over to Mr. Vestberg and Support Solutions.

Thank you, Magnus.

So, if we look into Support Solutions for the quarter, up 47% year over year.

Here, of course, we have the impact of the acquisition of Telcordia; excluding that, growing some 16%, including adjusted for foreign exchange rates.

So we are growing well in billing solutions in the Middle East and sub-Saharan Africa and also in the TV area in this quarter.

Telcordia did roughly SEK600 million in the quarter in the segment of Support Solutions.

We are splitting this between Services and Support Solutions, 50/50, the revenues from Telcordia.

The operating margin is 12%, which is the highest since we started reporting this segment, at least, as I can remember.

This is driven very much by the favored product mix and the increased volumes.

We are volume sensitive in Support Solutions, as it's a lot of software and a fixed cost in R&D for that.

At the same time, we are taking down the cost levels, and that creates this 12% operating margin.

The key priorities right now for Support Solutions, besides to execute on the strategy that we outlined in the beginning of the year, is, of course, transform this momentum to sustainable profit at this level.

And the second is that, of course, integrate Telcordia in a good way to see that we get all the benefits from that acquisition.

If I then continue with the regions, out of the ten regions that we report, six of them are growing year over year, and eight of them are growing sequentially.

Some highlights.

North America we talked about.

Still growth in North America, despite the decline in CDMA or the expected decline in CDMA.

Latin America has been growing for quite a while right now and grew also in this quarter with 9%.

Northern Europe and central Asia.

Here, you see the impact of Russia, down 26% year over year.

Western Europe and central Europe, down 6%.

Still good momentum for Services.

Here we have a proportionately higher share of Global Services and Support Solutions, which is higher than 60% in this region, indicating that the investments in equipment is lower here at the moment.

Mediterranean is also growing 12%.

Middle East 4%.

They have been now growing for, also, some quarters.

One region that is really coming up after some tougher times is sub-Sahara, up 26%, driven by cheaper smartphones coming out in the region but also Nigeria, which is one of the most important markets.

India we have discussed.

Equipment sales in India is fairly low compared to last year, down 39%, the whole region India.

And that is, of course, a reflection of the uncertainties of the regulatory environment.

However, quarter on quarter, you see that they are coming up now 20%.

Then we'll discuss China and northeast Asia.

Of course, what is sticking out here is that China 2G is lower compared year over year.

Last year, we had strong sales of GSM, but we also decrease it quarter on quarter, sequentially.

Here, there's a lot of LTE happening at the moment.

Southeast Asia and Oceania, up 21%.

Here, of course, Indonesia, a very important market, growing, and it's a lot of 3G.

In the Other area, where we have our [IPR] licensing, we had a favorable development on that, but we also had the multimedia brokering, IPX, growing in this area as well.

So, by that, I hand over to Jan.

Okay.

Thank you, Hans.

Then, let me give you some brief highlights on the P&L and balance sheet.

We start with the very important three indicators that are impacting the gross margin and the dynamics of the gross margin.

The first one is the business mix.

And, by that, we mean the share of coverage versus capacity projects and also the modernization projects in Europe, as well as the overall Services share in the Company.

So let me then start with saying that we had in this quarter, as far as I can remember looking back, probably the strongest Services share ever in the Company in terms of revenue share.

And, for you then to understand a bit better on what that does to our gross margin, we have then said that, if you look at the 32% gross margin we have in the quarter versus the 37.8% we had last year in the second quarter, about half of that reduction has to do with growth in Services, which I think is important for you to know.

Fundamentally, of course, growing Services is good for the business and good for the bottom line, but it has an impact on the gross margin.

We also had the impact of the European modernization projects if we compare with last year because the projects were all in full execution in Q4.

So there are these impacts.

And, if we then look at this quarter specifically versus last quarter, I think we have already commented on the fact that the Services share has increased again.

We also have the same impact of the modernization projects in Europe as we had in the first quarter.

The only big difference, I would say, is that we had somewhat more of capacity sales in Q1 than -- what we have in HSPA than what we have in this quarter.

Overall, we have also said that the current business mix, which means, then, that we have more coverage projects than capacity projects than if you look in historical perspective, that business mix will prevail short term.

And I'm fully aware that we have said short term now for several quarters.

But, with the current visibility we have with the projects that we have won, this is the best assumption that we have right now.

Then, if we go to the operating expenses, let me then also start there by saying that we had operating expenses of SEK15 billion versus SEK15.8 billion a year ago.

A year ago, we also had a big restructuring charge in the second quarter.

But, if you look at an organic operating expense, excluding restructuring charges, it is down year over year.

If we look at R&D, we had a run rate in the second half of 2011 that was high.

Our aim and our ambition was to gradually throughout the year reduce the run rate, having then in mind that technology leadership is absolutely key for us as a value driver.

In this quarter now, we have increased the guidance a little bit, from SEK30 billion to SEK32 billion versus SEK29 billion to SEK31 billion.

That new guidance is still a reduction compared to last year, and it has simply to do with two reasons.

One is FX, and the other reason is to secure the potential we see in the radio area.

And, for us, whether we have a guidance increase of SEK1 billion or not is not important here.

The important thing is to capture the value of the opportunity in radio.

When it comes to operating expense overall, our focus is to optimize, and to optimize -- that's extremely important for us.

Operating margin, 5.9%, as Hans mentioned, impacted by the lower profitability in Networks.

And, if we compare to a year ago, also, we had a high restructuring charge.

If we then go to ST-Ericsson, ST-Ericsson has had a conference call earlier today, so I refer to that conference call for more specifics.

The aim here is really to look at the ownership perspective of ST-Ericsson.

The main focus of the Company is to secure the successful execution of the Company transformation and also the revised strategy that was communicated in April.

Sales in the quarter improved somewhat, and operating expense continued to go down.

All in all, that meant that, if we compare with the first quarter, the operating income improved.

Still, a significant loss.

Then what we have done this quarter is that we have highlighted the exposures we have at Ericsson towards ST-Ericsson.

So we have the investment and, as well, the loans to ST-Ericsson, just to be transparent to all investors how -- the exposures we have.

Then, if you look at the balance sheet, I think that we have -- due to the fact that we have more projects in the mix and we have had so for a couple of quarters, the inventory working capital level is higher than in the capacity cycle.

In this particular quarter, we also ended the quarter with a very strong June.

That meant that we had some impact on the accounts receivable.

That should be timing.

Then, if you look at the inventory, slightly up versus the first quarter.

Both on accounts receivable and inventory, there is some FX impact.

But, fundamentally, it has to do with the higher project activity.

So our main corrective measure here is really to continue to focus on delivering these projects with as short lead time as possible.

Then, finally, on the cash flow, minus SEK1.4 billion in the quarter, driven mainly, then, by accounts receivables.

And this is -- from our point of view, you can understand that we are not happy with this cash flow.

Our ambition is to have cash conversion about 70%.

But I think also that we understand the reasons behind it.

We also paid a dividend in this quarter.

So, all in all, we had a net cash of SEK25.9 billion.

I will then end with some comments on the refinancing activities.

We have been very active in the quarter to extend the average debt maturity profile.

But, in doing that, we also had an objective not to increase gross debt.

We have tapped into the US bond market for the first time ever in our Company history, and the purpose of that is, of course, to diversify the funding sources but also to create a natural hedge.

At the same time, we have repurchased some EMTN bonds and paid back some SEK bonds in order to keep the gross debt level at the same level.

The final result is a more diversified source of funds and an extended maturity profile.

With that said, Hans, please.

A quick sum up.

Of course, we have invested in both R&D and market share the last five or six quarters, and we are in the midst of that execution.

That's the most important thing we have in front of us.

But, if you look (technical difficulties), of course, it's really to take that investment to do something (inaudible) to make profitable growth.

I think that is the whole management's focus right now.

That means that cost and efficiency is very high up on the agenda in the whole management team.

We are doing quite a lot of cost and efficient measures at the moment, which we, clearly, believe will have an impact.

And, finally, we will not compromise on, of course, our technology and service leadership, which is paving the way for us to continue being number one in this industry.

That, long term, should pay off in the greater value.

So I think that's where we are, and we really are focused on continuing taking this forward in a good way.

Thank you, Hans.

And, by this, then, operator, we are ready to take questions.

(Operator Instructions).

As always, please, limit yourself to one question at a time, and, please, keep your questions at a broad level.

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

Please, hold whilst we queue for questions.

Edward Snyder, Charter Equity Research.

A couple.

Jan, why was delayed billing in the quarter -- I mean it's one of the reasons you had cash flow and inventory issues.

I'm just curious how that shook out.

Was it an anomaly?

Do you expect it to occur?

And, Hans, in terms of the CDMA sales dropping off, which obviously was expected, it sounds like you're not seeing commensurate increase in LTE.

Is that just market share loss or not spending as much?

Is it macro?

And do you expect that to reverse?

And then, on profitability, I understand you've got a lot of coverage projects going on right now, and you expect things to pick up as we head into the fourth quarter.

Is that mostly -- ? What's the profile of that, first of all?

Do you expect it to be evenly spaced over the next year or so, the return to profitability, just on the different business mix?

Or will the macroeconomic environment help you out in the longer term?

Thanks.

The answer with the first question -- the answer is very simple.

I mean, if you have a very strong June and your average credit days is around 100, they end up in the balance sheet.

And, also, maybe adding, as well, the high project activity.

A lot of projects are finished by end of the quarter, and that was part of it as well.

So that's why it was late invoicing and collection was not feasible.

I think I heard your second question.

I'm not sure.

You have to correct me.

I heard it like CDMA falling in the US -- asking if that is offset by LTE or not and if we will see CDMA rebound.

I think that was the question.

Of course, we see an uptick on LTE.

That's for sure.

And North America is one of the few markets that are doing quite a lot of investment in LTE.

The CDMA decline is expected, and we're not expecting that will come back.

Remember that this -- we talk about CDMA equipment.

We have CDMA services, everything from maintenance and all of that.

That will continue for a long time, as it's many, many subscribers on CDMA.

But, from equipment, we don't envision at this moment that these investment levels will go up.

They will continue to go down.

Was that the question, Ed?

Well, primarily, it's not a commensurate increase in LTE to offset your CDMA.

Verizon and, now, Sprint, of course, are augmenting the CDMA networks with LTE.

But it doesn't sound like it's a one-to-one swap for you.

Is that share loss?

Is that just less spending on their part?

Or is it something that, in the future, you expect to pick up more LTE as they start rolling out more?

Again, you're cracking up a little bit.

I will try again.

I think you asked is there share loss because -- in North America.

It's just that loss there -- of course, it was quite heavy investment in CDMA and very little right now; of course, the lower LTE investment not really offsetting totally how much we're seeing on -- we saw on CDMA.

There are, of course, other investments, (inaudible), et cetera.

But now we are just talking about that small in between.

But, of course, over time, LTE will offset CDMA, but CDMA will continue to decline.

When it comes to the profitability on Networks, we just need to split those two questions.

And that's what we tried to do in the quarter report as well.

There are two things if you isolate impacting the profitability on Networks.

One is the European modernizations, and Jan talked about they started -- some started 18 months ago.

Some started all in full swing Q4 2011.

What we're saying about the European modernization right now -- they will start to gradually decline by end of 2012.

So that impact will start to gradually decline by end of the year.

When it comes to the mix, worldwide mix in Networks between capacity and coverage, then we say that, short term, what we can see in the funnel and in ordering is that will prevail in short term, that mix.

We're doing a lot of coverage projects.

But there are two different things.

The European modernization is one, and then the mix between coverage and capacity.

And that we say will prevail short term.

So I think that's sort of what we are exactly describing in the report.

Mark Sue, RBC.

Hans, if we look at the network modernization winding down, can you share us what exactly happens to the gross margins in a quantifiable, metric way?

And then, if we consider the Services share, the business mix of coverage and capacity, overall, when you put it all together, can gross margins get back to 35%?

Does it improve to 39%?

How should investors kind of think about gross margins near term and then, maybe, longer term?

Now we don't guide on any gross margins here.

It depends, as you said yourself -- depending on how good we grow in Services versus Networks in Support Solutions.

That's going to be a mix issue on the gross margin.

So that is really hard to say, and we're not guiding on that.

But, everything the same as -- if everything goes the same and you have a gradual decline -- starting to have a gradual decline by the end of 2012 of modernization -- that should, of course, have a positive impact on the gross margin, everything else the same.

So that's what we're saying.

Hans, if everything is the same, what would be the impact of the network modernization then?

Should it be 200 basis points, 100 basis points?

Or is there a range of how investors should think about (multiple speakers)?

No.

We are not giving any range on that one, how much it is.

But, of course, as we talk about these two elements in the gross margin impact on Networks, those are the big ones that we have there, meaning the capacity coverage and the modernization -- of course, they are of importance for modeling the gross margin, but we are not giving out any range how much it will impact, et cetera.

But, everything the same, mix and all of that and start to have a gradual decline of network modernization by yearend, end of 2012, we'll, of course, see gross margin going up.

But, again, everything the same.

Got it.

And subsequently, there would be no further modernization projects around the world?

Now, remember, this was a distinct effort we made.

And we were clear to the market.

Maybe we should have even been clearer on talking about it.

But this we started to talk about Q4 2010 -- that Europe came up.

We had low market share of the 3G.

We wanted to come back there because we believe that a footprint will create a much stronger Ericsson long term.

There are normal deals all around the world all the time, and that we are dealing with all the time.

And that we'll continue to do.

But there are no specific regions, no specific thing that we need to do right now to gain market share that we need to announce.

But there's going to be deals all the time, but it's nothing as distinct as the European modernization.

That's helpful.

Thank you, gentlemen.

[Sandeep Deshpande], JPMorgan.

I have a question, Hans, on the strategic view of the Company.

I mean, Services continues to grow as a percentage of revenues, and the Services margin remains double-digit.

I mean, you've recently acquired Telcordia.

How do you see the Services margin, even the EBIT line, growing over the next few years?

I think, if you look at the Global Services, I think the professional services has been in the band and the bracket on an EBITDA level of [13 to 16] since we started to report it.

And that is, of course, driven about how much growth you have in it, as well, because, when you have growth, you will capture some more impact on the gross margin.

But that's where we are.

And, of course, we have all the mission to keep that.

The big swing factor in Services, of course, is network rollout, which is very much impacted by the European modernization that, of course, we are far from happy with the profits we have on network rollout.

But that was sort of a conscious decision we made.

Then, of course, expansion in Services into media and broadcasting, et cetera, with SBSS is very important for us.

This quarter, I tried to mention also system integration and consulting that we don't talk so much about.

Magnus tried the same.

This is an important area for us that is growing very fast, coming very much from our investment in OSS/BSS.

Okay.

Thank you.

(Inaudible), Credit Suisse.

Two questions, if I may, to Hans.

On European modernization contracts, obviously -- basically, we expect the gross margin impact to stretch out until the end of this year as to earlier expectation of probably ending by the end of Q2.

Now what I'm just trying to guess is -- Is it due to spending cautiousness from operators, or is it to do with the complexity of these kind of projects?

And, also, is there a risk that some of the southern European countries may actually lead to further stretching out of these modernization contracts into early 2013?

And then I've got a follow-up for Jan.

When it comes to the European modernization, the only change we made was initially, when we thought they would start earlier.

But the timeframe of 18 to 24 months has been there all the time, and we kicked in -- all of them were in full swing in Q4.

So we have not changed when they will gradually start to decline.

That is basically the same, because they have the maturity of 18 to 24 months.

We thought they would start maybe in Q1 2011, more of them.

And they started a little bit slow because they are complex.

But, since then, it has been exactly sort of the plan that we have seen.

So far, we have not seen any impact on the current modernization due to the macroeconomics.

We are not seeing that.

Thanks.

And, basically, Jan, on the OpEx side, if I look at your revenues in the first half of this year, they are slightly down, 1%, year on year.

But the clean OpEx number, excluding restructuring, is actually flat to slightly up.

And, given that you've taken over SEK2 billion of restructuring in your OpEx in the last year and a half, shouldn't that OpEx run rate be much lower, because -- I guess my question is -- Should we expect this OpEx run rate to actually slow down in the second half?

Or is it something that you think -- that the current level is the normal level for your business?

For the question -- please, also remember that Telcordia came into the numbers in mid-Q1.

And their operating expense is actually predominantly selling and G&A expense.

So you should know that as well.

Having said all of that, our plan has all the time been to work ourselves down from a run rate point of view.

And all the activities that we are running, both in terms of continued transformation in R&D and work on efficiencies in administration and so forth, are ongoing activities that should start to yield here gradually.

Great.

Thanks.

Stuart Jeffrey, Nomura.

Hans, you mentioned you'd seen most of your customer base in the last 25 days.

I was hoping you might be able to share a bit more sort of insight as to what's happening amongst operators.

Specifically, just going back to last year, everyone was very surprised by what happened in the second half.

And you had an exceptionally unusual network dynamic in Q4 in terms of seasonality.

I know you don't like to talk about specific, quantified guidance, but could you just take us through what's similar and what's different this time around, just to help us have a bit of confidence as to where the second half might be trending?

Thanks.

You're right that we don't guide on specific quarter or half years.

But the discussions -- I can relate back to the sort of -- of course, we all discuss the environment around us, the fundamentals for the industry, new subscribers, usage of mobile broadband, new devices.

My conclusion is that that remains.

That fundamental remains.

The other is, of course, in certain markets, we talk more about macroeconomics.

And, here, you got the feeling that they are more continuously planning than before or equal as in the first quarter, but they're doing a lot of continuous planning.

In the discussion, we have not seen any major change, as I said, on macroeconomics when it comes to modernization in Europe or something like that -- that they are halting them.

That's what we have right now.

And, for us, it's to stay close to the customer all the time to see what's happening and see if there are any changes to that.

But that's what we have right now when we close the books by the June 30, 2012.

In terms of your developed --

If I could add there a few things.

I think, if you look at Networks per quarter in 2011, it was a quite strange year in the sense that it was really no seasonality.

But a lot of things happened within the year, as we all remember.

I think, now, in 2012, our supply chain is working excellent, and we have -- as Johan said as well, in this quarter, we made a comparison to normal seasonality.

So I think that this is, from many respects, a bit more normal year when it comes to supply chain.

Stuart Jeffrey% Thank you.

Gareth Jenkins, UBS.

It's a bit of a follow-up between two of the last two questions just on seasonality in OpEx.

I wonder if you could just help us understand the OpEx movement into the second half of the year, Jan.

You talked about maybe being able to work it down somewhat.

But I think, typically, OpEx splits 50/50 during the course of an average year.

I just wondered whether you feel that's the case and, obviously, related to that, what you see Networks' margins doing through the course of the back half of the year as a result.

That's the first one.

And then, just a second one, given, again, that you've spoken to lots of your customers.

I just wonder whether there's any sense of panic among those customers, given the financing position of at least one, if not two, of their vendors currently.

Thank you.

So I talk about my favorite topic, OpEx.

I think that -- so, if you look at the -- if we start with the research and development, then, we ended last year on a high run rate for a couple of reasons.

First and foremost, we wanted to secure the timely launch of our IP router portfolio, the SSR, smart service router.

We also wanted to secure that we could deliver a CDMA baseband into our RBS 6000.

And, finally, we wanted to secure the TD-LTE part of our portfolio.

So those were three priorities that we focused a lot on in the second half of [this] year.

Now, we obviously, then, are working ourselves down in terms of research and development, still with the important disclaimer, as I said in the beginning, because I think that research and development and the ability right now to have sufficient funds to capture more markets or expand leadership is very important.

But we also work with efficiencies there.

It is a gradual decline.

CDMA is obviously one area where we work with reductions and another area -- or, really, an area that does not impact what I would call productive R&D.

It's more around how we perform testing and things like that.

So it should -- it's normal, good improvements that we're talking about.

Then, if we talk about selling and G&A, I think, on the G&A side, we have good programs in place, both with finance, ISIT, and HR in order to work down the cost base.

These are multiyear programs, and they yield quarter-over-quarter improvements.

So those are -- just continue with those programs.

Finally, on the selling expense side, as I said, the Telcordia numbers are now in the picture.

But, having said that, the whole new go-to-market model that we launched two years ago aims at sharing sales resources and presales resources in a better way to become more effective.

So, short answer, run rates should gradually come down.

Then you had a question about Networks gross margin coming back.

I can only refer to what I said before.

Everything the same, network modernization will start gradual decline by end of 2012.

Short term, in the funnel and in the orders, we have still more coverage than capacity in our delivery networks.

That's the same comments we made in the report and, I think, I've said a couple of times.

Then you asked if some operators' customers were worried for their indebtedness, et cetera.

I cannot go into specific customers.

But it's clear that some have pretty high indebtedness and, of course, are trying to preserve and to reduce that.

That can lead to more opportunities in services and in transformation, but nothing particular to point out on any particular operator.

All right, Hans.

Could I just follow up on the second point?

That question is actually referring to -- are you seeing any panic amongst the operators regarding the financing position of their vendors and, therefore, picking up some business as a result of that.

I don't see any new behaviors.

I think we have nothing new, really, to say around the competitive dynamics and the relationship with the operators.

That's really for our operators to comment rather than us, I would say.

Okay.

Thank you.

Francois Meunier, Morgan Stanley.

Actually, I wanted to follow up on Gareth's question, given what's going on with (inaudible) to some extent.

The pricing last year was pretty bad for hardware.

Is it getting better now because of what we are seeing in the competitive environment, which looks like it's improving?

Was that a question or a comment?

No.

It's a question.

Is the pricing improving?

If you look at the pricing, it's less of the distinct European modernization, of course, in general.

But we have not seen any change in the competitive landscape.

Big deals sort of where you compete for footprint -- that is, of course, competitive.

However, we see change in who is competing from one quarter to another with, very definitely, quite a lot of things happening in the industry at the moment.

We meet different competitors in different markets that, for one year ago, were probably others that we met there.

So, yes, they are changing.

But, on the pricing environment on one quarter, I wouldn't say that I have seen any major changes.

And do you feel that you have to be as aggressive as you've been last year in terms of pricing aggression, basically, to take market share in general?

Or is market share coming to you more easily?

We don't feel that we need to be that aggressive because we have no such goals at the moment.

Okay.

Thank you very much.

Kai Korschelt, Deutsche Bank.

Just another question on the business mix.

I fully understood what you're saying about maybe the rest of the year.

But I'm just wondering, if we think about, more at a high level, sort of going into next year and beyond.

It looks like, in Latin America, there will be 4G contracts tendered too and possibly China and maybe, at some stage, Africa.

So I'm just wondering if the majority of your regions that are still in 3G mode move to LTE, will those sort of deployments and rollouts also impact gross margins negatively?

And I guess the question is -- is there a risk that this may just sort of happen and cancel out the margin improvements that we could see in Europe?

Or do you think the LTE deployments in those sort of regions won't happen next year and they're really more maybe a 2014 type story?

Thank you.

Still we need to understand that the majority is deployment on 3G.

There, of course, are going to be 4G.

But that's clear.

That type of mix we have all the time.

That we always have technology shifts.

So that we need just to manage.

I think the modernization was something distinct.

We're going to have, of course, new 4G networks coming up in certain markets, but that means also that some 3G markets will be in capacity.

So that is a mix that we're going to see how that turns out in 2013.

What we say right now, short term, the mix that we have right now with the capacity and coverage -- that will prevail in short term.

Thank you.

Also, Kai, one comment more from me there.

Also, I think we revert back to the discussion we had when we met here in Sweden last year.

The importance of knowing and understanding the advantages of the RBS 6000 -- it is hardware heavy in the beginning.

And, then, also feature expansions and annual software upgrades and so forth is there.

So I think there is also a possibility to upsell with new software whether traffic is coming or not because this is still a lot of new features asked for.

Secondly, as the ecosystem continues to expand, both on 4G and 3G, more and more smartphones, more and more usage is also, of course, driving the needs for more software and feature upgrades.

Okay.

Thank you very much.

Operator, we have time for one final question.

Richard Kramer, [Arete].

A couple questions that I don't think really have been touched on exactly yet.

Hans, you made the comment in your -- in the statement that the focus is now on translating market share gains into sustainable profit growth.

And that was something we haven't heard before.

And, yet, it's kind of hard to see how Networks is making much money now beyond the IPR income.

When you look out on a 12- to 18-month view, are you expecting increased volumes to change?

And, if not, why wouldn't we see a much wider restructuring program than the gradual cost reduction that Jan just mentioned?

And then one for Magnus as well.

Back at the capital markets day, I think you were suggesting that NRO in a normal world should be breakeven business and that you had one-offs that had led to the SEK1 billion of losses up through the nine months of 2011.

And now, the last three quarters, obviously, the losses are much larger.

What's causing the losses in these rollout deals?

Can you be a bit more specific, because it seems to be odd that you should be losing money on rollout contracts.

Thanks.

On the Networks, then, again, I think that -- I think it's a natural step here when it comes to profitable growth.

We're not changing the strategy.

We're going from being number one in everything we're into -- mobile network services, OSS, BSS, et cetera.

The [strategy] and the combination of assets is still the same.

However, as yourself said, we have been in a phase of investment in R&D, as well as in market share.

That we don't see at the same level going forward.

And, therefore, we also believe that we can bring down the costs over time here.

And, of course, everything equal, with this project, over time, it should make the profitability [to higher] Networks.

Not saying it's now or tomorrow, but saying that that is, of course, the management's focus right now.

And we are not satisfied with the profitability, as such, right now.

But there are reasons why we're there, and we will do everything to work ourselves out of that.

On the question you had there on network rollout, just to be clear that the network rollout business -- the ambition is there this should be -- this is a business that we should make money on.

It will, however, have lower margins.

The reason for the losses is related to the European modernization projects.

But what's gone wrong in those contracts that you have so many persistent losses?

Why isn't, over time, your -- you starting to reduce those losses as opposed to seeing them at the same level?

We are in the middle of the rollout of the European modernization projects.

I think we have talked a lot about the dynamics of those.

And we have said that all projects are in full -- was in full execution in Q4, and we will continue to have an impact of these projects throughout this year -- gradually, improvements end of this year.

So there is -- I don't really understand what you're after.

I think that this is very clear that this is related to the European modernization.

Okay.

And, Hans, just to be clear on your comments, you're not expecting a volume uplift.

You're saying it's about bringing down costs in the Network business over time?

I think that we do not -- to begin with, we do not guide on volumes.

What we say is that we have an impact on gross margin, both on networks and network rollout when the mix of network modernization starts to be reduced.

Then we also have the other important impact that we discussed at the investor day, and that was the fact that, once you have the hardware out there, for instance, for multi-standard radio, the next cycle is more software heavy.

And, finally, as Johan also mentioned here, the importance of winning deals, for instance, with the smart service router.

So there are opportunities to improve gross margin also in a volume scenario that is not growing.

Again, we are not guiding here for future revenues, but we are, broader, saying that we understand what we need to do in order to improve gross margins.

Okay.

Thanks.

Thank you, Richard, and thank you, everyone.

This concludes our call today then.

So bye-bye, and have a good day.