Telefonaktiebolaget LM Ericsson (ERIC) 2012 Q3 法說會逐字稿

Welcome to the Ericsson Analyst and Media Conference Call for the third 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 call.

Ase Lindskog will now open the call.

Thank you.

Thank you, operator, and hello, everyone.

You are very welcome to our call today, where we will comment on our third quarter report.

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

And then, to start with, 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 this conference call.

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

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

Thank you, Ase.

Let me start to summarize a little bit about the key developments in the quarter; some a little bit longer in term and some shorter term.

It's of course quite difficult to boil them down.

It's happening quite a lot in the industry for the moment.

But, let me start with that we see growing in direction with our customers when it comes to a focus on network performance as a key differentiator.

This, of course, driven that consumers expect very good experience when it comes to using their smartphones all around the world.

And this is also very important for us because this is what we have been focusing on as a company, both from technology and a services point of view to support the customer.

Johan will talk a little bit more about that later on.

We also passed in the quarter 1 billion smartphones and was, how to say, that is a remarkable, of course, development on that type of evolution.

We also saw some flagship brands coming out with 4G phones, which also is, of course, solidifying that this is an industry where smartphones will be extremely important in the future.

When it comes to the macroeconomic situation, as we all can see and read, there are of course some further slowdown and predictions for the future.

We have the same patterns as we've had before, part of Europe being slower, then some other markets, especially the ones that have some political unrest, are impacted and investing lower at the moment.

But, it's just that you need to highlight this.

We are close to our customers and see what's happening.

But, it was more important, of course, the fundamentals in the industry, the long-term and the usage of the networks, how is the usage happening, and the underlying usage of the networks that is continuing to be an important parameter for us.

We have also seen in this quarter consolidations, mainly of Europe where it might be even more important, but we're seeing in the US, cross-boarder and in-country.

This of course is important parameter for us as we are main supplier to many of these consolidators.

I would say the most recent ones we are the main supplier to all of them.

So, this is important for us to be part of that.

And if they are improved, these transactions, to support them in that transaction, transition and to get the benefits they are expecting.

If then you dig down to our financials, SEK54.6 billion in sales, down 2% compared to last year and 1% sequentially.

That means that we are fairly stable on the top line between both year on year and quarter over quarter.

As we know, the shift done inside our sales is growth in services and support solutions and declining growth in networks; very much the same patterns as we had in the second quarter.

There was a market that has developed favorably I would say in the quarter on networks, North America sticking out on the positive side.

We saw the same pattern for Europe and China and Russia.

Korea is somewhat new here.

There is more about that, who had a strong last year.

CDMA.

Can just confirm that -- what we have said before.

The planned or sort of the expected decline has happened and we are down 50% in this quarter as well.

Profitability.

Our focus on OpEx are paying off.

We are, for comparable units, down 7%.

Net income down compared to last year 42%, down to SEK2.2 billion.

But, if we look sequentially, it's up 81%.

And of course, here we are driven of both improvement in services and some in network and, of course, the JVs is helping us as well where ST-Ericsson had less of a loss in the quarter.

We have said it before; we are not satisfied with the profitability and -- but we have -- we consciously come to the situation where we have invested in market share and also both geographically in R&D.

And we are now in the -- sort of in the process of executing on all those projects we have, so it's basically no surprises.

(Inaudible) the monetization and we have a high degree of coverage projects.

Now, it's just to continue the work and, in that sense, we are continuing to look for activity for efficiency gain and cost reductions as we have done all this year.

But, we will just continue with that because that we believe we can control ourselves.

The market around us, of course, we will see, but definitely we will continue with the cost reductions as we have done before.

With that, I hand over to Johan to talk about Networks.

Thank you, Hans.

So, let me briefly then go through Q3.

So overall, on the top line then, the net sales were down 17% year over year.

And looking on quarter over quarter development, it was down 3%, which is in line with normal seasonality.

We saw a good development on top line in North America despite the heavy reduction on CDMA.

In Europe we have lower sales impacting both by more than (inaudible), but also, of course, on the economic, general economic climate in Europe.

China then, we had lower GSM sales; among other things, as China mobile has communicated a focus on 3G investments instead.

As well as we had lower 3G sales in Russia.

In 2011 we had a huge 3G rollout project that ended last year and, hence, we had then a decline in our third quarter of this year.

As said, CDMA sales were down 50% year over year, in line with what we had expected.

It amounted to SEK1.6 billion in the quarter and now was then being dilutive to the operating margin.

Overall, then, we had an operating margin of 5% in the quarter.

It's down significantly compared to a year ago at 13%.

However, then, it's a stable quarter-over-quarter development.

It was, of course, impacted by seasonally low OpEx and also a lower software sales share.

Overall, then, sales were down and this has an impact.

We are top-line sensitive.

And even though we had a very high activity level overall and due to all the projects.

Operating margin was also negatively impacted by down-line business mix.

And there are still more coverage than capacity projects.

And as we've said many times before, the European modernization is still having an impact.

Moving then to the next slide.

And as Hans was saying earlier, it's really encouraging then to see that the increasing interest from operators on superior performance, and also what we can see on some independent research showing that superior performance of networks gives a superior return to the operators on that.

And this is really how Ericsson competes today on providing superior performance.

So, this is driven both by, I would say, a general trend by operators and also by new devices coming out and new apps being the ones that really requires a good performance of the network.

This is not only leading to LTE, even though, but maybe most of the headlines come around LTE.

We see then an increasing interest and need for investment in HSPA, both increasing speeds, but also more capacity, coverage in areas.

And this has very much been driven by the 3G smartphones are significantly cheaper than LTE smartphones.

It's also extremely encouraging to see, then, that more and more operators are introducing tiered pricing plans, i.e., leaving flat rate for data, which gives them an increasing top-line profitability around wireless data, which is really a healthy change in the industry.

So, that is quite encouraging.

Another interesting development during the quarter has been then LTE in Latin America.

Several countries now, some in Caribbean.

We have Mexico, Chile, Brazil, have awarded contracts during the last month and we feel real encouraged to see that we have gained more than 50% market share in LTE in Latin America.

We should keep in mind then that we have been in the range of 60% before when it has been decided in countries like US, part of Europe, Korea and Japan.

Latin America is traditionally a very competitive area and we feel really encouraged by getting more than 50% in that area.

Another thing that feels very good is the positive feedback we have received from customers on our smart services router.

I mean, that's our investment in IP.

It's a product we launched end of last year.

It has gone into commercial operation this year.

It has been evaluated by many operators.

We announced after the second quarter that we had secured 7 commercial orders.

I can now say that we have 20 commercial contracts, orders, and we have several more in finalizing.

So, this is extremely good.

It is extremely encouraging and it's clear that we have the most -- the biggest capacity on a mobile packet core equipment.

And the architecture we are using in both mobile and fixed has been extremely well received.

An internal change is that we have had two business units, one for CDMA, another one for the rest of the networks unit.

They are being merged from 1st of January.

This do not change the external reporting since we have been reporting it together as a network segment, but we just wanted to make you aware about that.

Finally, then, I feel extremely good about our overall position in the market; the portfolio, the performance, the improved quality.

I think we're executing extremely well on that reduction of capital tied up in the supply chain.

The area where I'm not happy is on our profitability.

It's a strong focus and I will come back on the Investor Day on some of the activities we are doing to work on that one.

And with that, over to you, Magnus.

Thank you and hello, everybody.

We ended the quarter with SEK24.3 billion in sales, which is a 19% growth in the business.

Currency adjusted, it's 16%.

I will say that we have a strong momentum across our business lines, very good -- very well driven by the professional services increasing 11% year on year.

And managed services continues to have a strong momentum and we concluded with 11 new contracts in managed services.

Going up 19% year on year.

We're also seeing a strong development in network rollout.

We have very heavy activities in Northeast Asia, in Europe, North America and Sub-Saharan Africa.

So, we are seeing there a strong increase and high project activity.

And we are also seeing, of course, that we are getting better and better in industrializing our data network rollout and taking care of the data explosions that's happening out in the networks.

When it comes to our margin improvements, we can see them a year back.

We had about 9%.

We are now doing 8% on global services.

However, it's -- sequentially we are going from 6% up to 8%, so we are concluding a better quarter sequentially and that, I think, is encouraging.

Professional Services continues to gain momentum.

Excluding the restructuring, we're actually delivering 16% operating income.

We had high activity on restructuring, 2% takeaway, so 14%, which is in line with a year back -- or sorry, a quarter back.

Network rollout, I think Q-on-Q here we decreased the losses from 11% to 6%.

And again, the industrialization is paying off in the projects that we are delivering.

And of course we have a somewhat better project mix there.

So, all in all, I think we have good momentum and I will come back with more details on the capital market days.

We will continue to drive our efficiencies in the business and continue to improve sales and profitability.

Thank you.

Thank you, Magnus.

I take Support Solutions.

We had 14% growth in Support Solutions.

And excluding, or making it organic, it was 4%, driven a lot about from the BSS area, the charging area.

But, of course, also added the sales from Telcordia here.

Operating margin, 14%.

That has one-time effect there of our divestment of IPX.

If you exclude that, we're around 7%.

Still clearly a shift in the profitability of Support Solutions as we now have had good profitability both in Q2 and Q3.

We are in transformation here in this business and we had an acquisition in the third quarter, which was ConceptWave.

That is adding, together with Telcordia and our own assets in the OSS area a very strong position together with services to be the IT provider of the IT networks of the operators, to really be in there and support the transformation for this mobile broadband and mobile broadband charging world that we're going into.

So, that concludes Support Solutions.

Quick on the regions.

We'll not go through all of them.

We have highlighted North America.

16% growth despite the CDMA, but is also infrastructure; is also services.

Sub-Sahara growing 11%, coming back from having been down for quite a while, even though from low levels.

We now see a growth there.

China and Northeast Asia was mentioned.

Johan mentioned China.

I mentioned Korea.

Those are the two important regions there.

On the other end, of course, we have also high -- have high activity in this region, for example in Japan.

The best growing segment is Other and the reason is that we have -- here we report Technicolor that we acquired in the quarter.

So, they are reported in Other.

Other things included here is, of course, IPX, which resides in Support Solutions.

But, from the fourth quarter that's divested so it will go out from the Other column.

And then we have the IPOs and licensing in here as well, which are the stable development in the quarter.

So, I leave it over to you, Jan.

Okay.

Thank you, Hans.

Good afternoon, everyone.

So, let me then talk about the P&L and the balance sheet before we open up for question and answers.

So, we have on the P&L side -- important again to remind everyone that the business mix is the key to the gross margin dynamics.

We have three very important elements to understand our gross margin development.

One is the business mix.

Again, that has to do with coverage and capacity projects.

We also have the modernization projects in Europe and the services share.

During this quarter, if I compare with the second quarter or third quarter of last year, we have seen an increase in our services business, which has an impact on the gross margin.

Also in this report we disclose how big that impact in, which I think is important for you to understand.

Overall, Global Services adds to the stability of our operating profitability and overall, as Magnus said before, you can see how that operating margin and EBIT margins have improved and also been -- it's an important enabler for stability on our operating earnings.

If we then look at the underlying business mix, I know we have said this before, but we will continue to say this to you until we see that there is a change happening, and that is that the current business mix with higher share of coverage than capacity projects is expected to prevail short term.

We also have the restructuring charges in the quarter of SEK0.6 billion.

The main amount of these restructuring charges has to do with the service delivery transformation that Magnus mentioned and that he also will talk more about at the Investor Day.

We also, then, say that our estimate for the full year of SEK4 billion of restructuring charges remains.

So, this means that we estimate to have a higher restructuring charge in the fourth quarter, but we also think, then, that that will be more evenly spread between operating expense and cost of sales.

If we look at the operating expense, so if we compare apples to apples, operating expense is down 7%.

Also, in absolute numbers it'd down slightly.

We have reductions in both R&D and selling and G&A.

All in all, our operating margin in the quarter was 6.7% compared to 11.3% a year ago.

But, if we compare with the second quarter in absolute numbers and in percent, our operating margin has improved.

If we then take a look at ST-Ericsson, we have -- the joint venture is still in a challenging situation.

But, we have seen an improved performance in the third quarter and we start to see impact now of the ongoing transformation work aiming at lowering the breakeven point and that's also visible in the numbers.

We also continue to believe that the ST-Ericsson has a strategic position in the industry to enable the device ecosystem.

On this line we also highlight the exposure, if you will, that we have towards the joint venture.

And you can see that the investment in ST-Ericsson in the quarter then is SEK195 million and the loans to ST-Ericsson is SEK4.5 billion.

If we then go to the balance sheet we have the, as expected, a good development on collections in the quarter because we had -- if you remember, we had a good end of second quarter meeting a strong sales in June.

Those monies were collected.

So, we have now an operating cash flow in the quarter of SEK7 billion.

When we look at operating cash flow, we look at this on a full-year basis, and that we have mentioned before.

Quarters may vary.

We have also had some headwind -- or some tailwind on the balance sheet here thanks to FX.

Overall, I want to say that the inventory level continues on a high level and that has to do with the project activity.

So, I think that's important to know.

If we look at the gross cash, we had -- thanks to the good cash flow from operations, we managed to deliver a net cash improvement in the quarter of SEK3.1 billion.

Gross cash, SEK2.4 billion.

In the investing there you see slightly more than what we usually have and that is related to two of the acquisitions we have made.

Then, we continue to diversify our funding sources and we have announced a new loan from Nordic Investment Bank and also after the closing we have -- of the quarter we have announced a European investment bank.

So, we continue to prolong the debt maturity profiles and this was -- so this year we have really succeeded in prolong the debt maturity profiles and, at the same time, not increasing the gross debt, which I think is work well done.

Thank you.

Now, over to Hans again.

Thank you.

I will do a quick summary.

It will be basically -- or it will be the same slide as we showed last quarter.

This is the focus for the Executive Team and the whole Ericsson.

The strategic execution we're into with the investment we have done to make this to a profitable growth.

I think we all are committed to that and working very hard to do it; but, of course, leveraging our strength in the mobile broadband, in the Managed Services, in the OSS, BSS, where we have great positions.

And we are really seeing that we are executing well on those projects and those footprints again.

We will, as I said before, continue to proactively look for cost and efficiency gains.

That's part of our daily work that we have done so far this year and we will just continue.

That's a part where we can control.

We will -- Johan has already talked about what we have as an expectation of work as for restructuring charge for the year, so will -- so, we have some more to do here.

And it all boils down to the two pillars of our strategy; that's a technology leadership and a service leadership.

And that we really are emphasizing in anything we do when it comes to customer engagements, how we invest, how we execute on our strategy.

So, all in all, that's a short summary, where we have the focus.

And as I see on the last slide, and Magnus mentioned as well, we have the Investor Day in November 6th and I hope that many of you will join that.

By that, I hand back to Ase.

Thank you very much, all of you.

And after these presentations we are ready to take questions so, operator, you may now open up the line for our Q&A session.

ladies and gentlemen, at this time we shall begin the question-and-answer session.

(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 teams will be happy to take additional questions and discuss further details with you after the call.

Please hold whilst we queue for questions.

Pierre Ferragu from Bernstein is online with a question.

Thank you for taking my question.

I'd just like to have some clarification on CDMA.

So, you have SEK1.6 billion reported in the quarter and I assume that it includes your two CDMA clients in the US.

And I would like to understand how directionally your gross margin for CDMA has been evolving over the last couple of quarters, because I would assume that you had a ramp up of the modernization project at low margins, and a run down of more like upgrade type of works at the material margin.

So, is it fair to assume that the CDMA gross margin contribution came down a lot in (inaudible) over the last six months?

First of all, you have to conclude the fact you are right, our turnover on infrastructure from CDMA is SEK1.6 billion in the quarter and that's a 50% reduction.

We'll also say that operating margin is lower than average in networks in the quarter.

So, your conclusion is right, that we have come down in the gross margin on CDMA due to what type of projects we are delivering, I have to say.

Thank you.

Alexandre Peterc from Exane/BNP Paribas is now online with a question.

Yes.

Thanks for taking my question.

First of all, just a small one regarding seasonality.

Do you expect a more normal seasonality this year in networks in Q4 compared to last year's Q4, which was quite abnormally low?

And then just a more fundamental question on gross margins.

I understand that you had quite a few completions closing in the just-reported Q3 and that had an impact on the gross margins.

Were any of those European modernization deals and, if so, would you expect in Q4 a bit less than the usual gross margin seasonal decline?

In other words, do you expect a slight relief from less monetization in the mix already in the current quarter?

Thanks.

Okay, Alexandre, it's Johan here.

I will try to answer your two questions.

If we look at the networks business excluding CDMA, we have -- I mean, if we look at it from last year's point of view, we basically did not have any seasonality in that business.

We had a big business mix shift between first half and second half.

Then, when it comes to seasonality in the networks business this year, excluding CDMA, I mean, I think that it's -- as we have said several times in the report, in the third quarter we had quite normal seasonality.

Let's see what the fourth quarter will bring.

Then, on the gross margin overall, we have -- we said and it's also visible in the network rollout saves growth, that we have a good or high project activity in this quarter.

Typically, you are right in that typically our fourth quarter contains a bigger portion of project completions.

I want to be clear that we feel also that we have had a significant amount of project completions in this third quarter and then let's see what the fourth quarter brings.

But, again, we have a high activity level in network rollout and we had quite amount -- a big amount of project completions already in the third quarter this year.

Thank you very much.

Matt Hoffman from Cowen is now online with a question.

Thank you.

Another question on the gross margins and the competitive environment.

Historically, when we've seen Ericsson's gross margins dip, we've seen other wireless network OEMs struggle, maybe even exiting the market, be it bankruptcy or consolidation.

In this past quarter Nokia Siemens improved its margins, though, while your margins are still suffering, especially in network.

So, the question is what's going on with the competitive environment right now.

Do you think this is just a short-term dynamic or is it really a longer-term where NSN has maybe caught you?

Thanks.

I am -- I have a hard time to comment on the competition, what they are doing or not.

I can only come back to what we are doing.

And remember, on the gross margin we need to be a bit cautious when we analyze that because the mix here is so important, with the high video services, where that is taking down the gross margin.

But, it's clear that our gross margin, even in networks, is down given the modernization and higher proportional coverage.

I think that the competitive landscape for me, I mean, if you look 5 to 10 years, it's dramatic changes.

If you look quarters, it's not much changes for us.

I think the -- on 5 to 10 years, basically all competitors has been changed out and we'll have new ones.

And if you look at the last quarter, it's pretty much the same.

Then, they're coming back in different strength in different quarters.

The focus from this Executive Team is to run out strategy and our execution because we have learned now during the years that it will change who is competing and strong and weak in the -- in this industry.

We just need to see that we continue to excel in what we are doing so we can extend our leadership.

That's really where we are focusing.

So, on follow-up, you would say that overall structurally in the marketplace gross margins, and Ericsson's gross margins in particular, the dynamics really haven't changed for you guys over the last, we'll call it 12 months or so, on the networks hardware side?

Thanks.

I'm not -- I think -- of course it has changed and that's what we are commenting on, that we have a much higher degree of modernization.

We have, number two, we're in the networks.

We have much more coverage than capacity.

And number three, we have a decline in CDMA.

So, those three of course impacting our gross margin.

But, on the overall business numbers that we have been talking on before when you got in -- you go into a network and, of course, that's when there's the competition.

And then over time, of course, then you should be able to leverage on that installed base.

That business model has not changed.

Great.

Appreciate the answer, Hans.

Simon Schafer from Goldman Sachs is now in line with a question.

Yes, thanks so much.

Simon Schafer, Goldman Sachs.

I actually had a bigger picture question.

You started talking to us about some of the margin dilutes of the affects from a mix point of view I think in Q1 2011.

And at the time you cited that that mix affect would last probably 18 to 24 months.

I guess we're in month 18 now, so does that still mean -- does this still think that in the next 6 months you're going to see a meaningful fade of those mix affects or has the timing of that changed?

I guess I'm just trying to get an understanding as to -- apart from the revenue of environment, of course, which perhaps is tougher just because of your -- some of your customer's cash flow and so on.

But, aside from that, has anything changed in the planning?

Thanks.

Thank you.

Remember, we started to talk about this in Q4 2010, that this would happen.

And we were a little bit overestimated how quick it could start.

So, of course, they were distributed over time.

In average, we talked about that they are 18 to 24 months.

That is still valid.

We just kicked it off a little bit slower.

It was a little bit complicated in the beginning there to set up the project.

So, the 18 to 24 months still is valid.

And what we say right now that by yearend or end of fourth quarter we will see a gradual dose project decline.

But, of course, somewhere started in the second quarter or the first quarter this year, so some will also continue.

But, we will now see from this hopeful base that they -- that there will be a gradual decline.

But, of course, some were started much later than in the beginning of 2011.

Makes sense.

Thanks so much.

And my second question would be, actually, along the same lines of what was previously in terms of competitive dynamics.

I guess in this sort of land grab environment that the industry is finding itself in, from your point of view as a competitor, how aggressively are you willing to price and what sort of margin discounts are you willing to take in this environment?

I think you've called our Lat-Am specifically with a 50% market share plus.

But, how aggressively are you willing to be from an incremental margin perspective?

Thank you.

I think we -- as we've said before, we had a target of increasing our market share in the European modernization.

We were clear on that.

We started to talk to the market in 2010.

We have seen that last year [U1] reported increased market share in networks to 38%.

So, we have a good market share, so that means that we are in execution phase of that market share.

And then, that also means that we will be a little bit more cautious of taking new market share, but I think if you have a good product right now and you would -- performance on it you will also have -- you will have the possibility to take market share, but not to the extent of any raises in margin.

Understood.

Thanks so much.

Stuart Jeffrey from Nomura is now online with a question.

Hi.

Thank you very much.

Again, this is a pricing driven question.

A lot of your competitors seem to be talking about stepping back on pricing and saying the pricing landscape's become a bit easier.

And in services we've seen Alcatan and Nokia Siemens walk away from their commitment to managed services.

So, I was trying to understand whether you've seen any of that evidence yourself and if so, how long it might take for those sort of pricing dynamics to actually show up in new underlying margins.

Thanks.

Johan will answer a little bit on networks first then I can come back to Magnus on services.

Just let Johan answer first.

I think the last two years we've gone through a big change in the industry.

I mean, if you go back 2 years you had a -- you had new entrants that wanted to get into the worldwide market and there were some tough ambitions from the different vendors.

And, of course, that's been a very competitive climate form our side and we decided to take certain market share that they reported on last year and it came with -- at a certain cost.

We've also then seen how the competitive have changed.

And I think the best prices you could get in the industry, you could get them in 2010 and 2011; they don't exist anymore.

Also, I therefore was encouraged with the market share we have achieved in Latin America.

That's why we choose to highlight that.

That's one thing which, of course, is not taken at those types of price levels that you had in 2010 and 2011.

And we still have secured a significant market share.

And I think that also shows overall our competitiveness.

As I said, we think we have a very competitive product portfolio and services portfolio.

As a total company we are competing.

We are (inaudible) performing well and we are also being much more stringent on pricing points.

On the service side we think we're a good model on our Adobe services, Magnus and I, here.

So, of course, we believe it's -- we can continue to grow that and has done so with a good audience.

Then, you're right, they're all different vendors that are acting different, but that can go from one quarter to another.

So, I wouldn't comment on anything like that.

We think we have a good model to grow in services and managed services.

Actually, I think we are true to scale to deliver globally and it's -- compared to the competition I think we are very, very strong local services organizations that I will say are very experienced now in modernizing the mobile networks out there.

We are seeing good cross in all the sharing in between the regions and the global centers, which drives out cost and, at the same time, drives the completion rate higher than we have seen before.

So, we feel that we're on the right track.

Thank you.

Odon De Laporte from Cheuvreux is now online with a question.

Yes, hello.

Good afternoon, gentlemen.

I had a question relating your contract in SSR cultures.

I was wondering, when do you expect these contracts to impact positively the margin, and maybe next year 2013 or later?

So, this is Johan, then.

So, I mean, we will see a gradual improvement.

I mean, you should still remember that this business has still a lower volume in the overall network spaces.

I mean, the (inaudible) to date is (inaudible) to various parts.

But, it's -- I can say that we have had the positive contribution of margins already during the year of our IP business.

And of course it will continue to improve during coming times, coming quarters.

And do you expect this to be a significant driver as group lever?

I mean, we don't give any guidance on the -- on overall margins going forward, because we still have a small market share today and -- on the (inaudible) side.

And if we are able to succeed in getting a bigger market share, of course, that will contribute positively.

Okay.

Thanks, Johan.

Mark Sue from RBC Capital Markets is now online with a question.

Thank you.

Hans, on modernization the thought has been that there will be some short-term pain for some long-term gain.

Are we mostly finished with network modernization projects in Europe?

And is there the same confidence from before that eventually margins will improve?

And is your market share protected after your -- after you've modernized?

And is there some assurance that competitors won't resort to a similar strategy to modernize what you have already modernized?

Thank you.

First, I think we're talked quite a lot on the modernization (inaudible) stated (inaudible) 18 to 24 months on the projects and they will, starting end of Q4, gradually decline.

That means they will continue some of them into 2013.

That we're not changed, we're the same thing we've said on the first and the second quarter this year.

So, there's no change in that timeframe.

When it comes to the business model you asked about, I would say that if you perform, of course you have a great chance to stay in there for a long time because the multi-radio standard that we're deploying right now is, of course, having a great opportunity for optimizing frequencies at (inaudible).

But, again, you need to perform.

That's for sure.

So, it's not for granted, but definitely the dynamics has not changed for the business model that we have.

If I could ask just on Europe where you are modernizing these projects, now the carry environment there is actually more difficult than it used to be.

These carriers are resorting to cutting their dividends, leaving very little for CapEx and network upgrades.

There's a financing from competitors now become an increasing concern.

And how do you respond to that or -- and how do you kind of combat that because clearly the carriers want cheaper alternatives?

So -- it's Jan here.

On the customer financing you can see that we have about -- a little bit more than SEK4 billion on balance sheet customer financing.

We work very close with several expert credit agencies and we have very good offering -- total offering when it comes to customer financing, following all the consensus rules and so forth.

So, it -- I would say that our customer financing offering that we work very close with the expert credit agency in Sweden, in Canada and also in Germany makes our way of working here, I think, very competitive, too, that we can use to win more business.

That's helpful.

Thank you.

Good luck, gentlemen.

Andrew Gardiner from Barclays is now online with a question.

Good afternoon.

Thank you.

My question was on the network rollout side of things.

You've indicated in your comments that this is amongst the busiest time that you guys can remember in terms of the level of coverage projects, and clearly we can see that in the 38% year-on-year growth in network rollout.

But, as we look to next year and some of the modernization projects and coverage projects draw to a close, what can you see that's going to replace that nice growth that we've had in this revenue this year?

Thank you.

It's not for us to guide on it but, of course, as we now are in the midst of all of these activities, and as you see in Magnus' figures, a 38% growth in network rollout and probably the highest activity that we ever had in the third quarter.

One might believe that it -- we're not going to be on that type of activity level during 2013 in totality.

So, I think that we all are in an unusual time.

We are delivering more things that ever.

We have larger projects than ever and these are not small things.

There are thousands of people, as Yan Frykhammar said on the conference call today, pulling together, rolling out not only technology but putting together also everything around the site, that it works with antennas and everything.

So, this is huge works that is undergoing right now and we should probably not expect that it will be on that activity level on net rollouts in 2013.

Thanks very much.

[Michael Santania] from Credit Suisse is now online with a question.

Thanks for taking my question.

The first one is on network modernization in Europe.

Can you give us an update as to where we are with the execution of these projects?

Is it 50%, 75%?

And where we could be by the end of 2012?

Any indication around that would be helpful.

And also, how is the ramp of these projects going on?

Is it accelerating or slowing as we move from Q2 to Q3?

And then, I've got a follow-up as well.

Thanks.

Well, -- so, then, Yan will take this answer, then, because I think Hans has tried three times.

We will -- so, what we have said all the time was that all projects that were won was in full execution in the fourth quarter of last year.

In average, all of these projects have a duration of between 18 to 24 months.

As Hans mentioned before, it was a gradual start of the project in (inaudible) starting some projects in Q1 of last year, a few more in Q2, and even a few more in Q3 and then all of them were in execution in Q4.

So -- and that's the timeline that we are following and we do not -- we have not seen any slowing down in progress that will make us change the timeline.

So, that is still valid.

Thanks.

And a follow-up on the mix in -- we talked about the mix in U.S. and in Europe.

How should we see the mix evolve in parts of Asia and Latin America as we go into 2013?

Yes.

So, I think that -- so, first and foremost if we talk about the fact that we have now for a couple of quarters, and I'm aware of that we have said that, we have said that our business mix with more coverage than capacity projects will prevail short-term.

And when we define short-term we define that between 3 to 4 quarters.

And, of course, since we have decided to keep that statement in this quarter we see that that's the case.

And, of course, if you see examples of LD coverage projects now being rolled out in Latin America, that is the reason why we make -- keep the statement.

So, you mean -- so, just to clarify, you mean 3 to 4 quarters from now or --?

Short-term for us is anything below 4 quarters.

Thanks.

Francois Meunier from Morgan Stanley is now online with a question.

Yes, thank you for taking my question.

I've got a question about the cash because for once it's pretty good this quarter.

I was wondering, you have this target of 70% cash conversion for the year.

How do you feel about this target for this year given that you are at 50% today?

First of all, we look at this over a year.

Of course, cash conversion is a yearly target and then individual quarters, of course, can go up and down a little bit.

What's happening, we're (inaudible) cash conversion right now.

As we said, of -- even over the second quarter the target for this team is to get the 70% cash conversion.

We said in the second quarter, we say it of the third quarter.

We're not giving up on that.

There are challenges but we were -- we will, of course, do everything we can to meet that target.

Okay, very good.

Thank you.

Sandeep Deshpande from JP Morgan is now online with a question.

Yeah, hi.

Thanks for letting me on.

A couple of questions for me.

Hans, can you possibly talk about China and the developments in TDLTE?

I mean, you didn't take part in TDS CDMA so next year as China ramps up TDLPE you did in GSM have substantial share in China.

How do you see your prospects in TD in China next year?

Secondly, on the modernization, just to clarify, as I thought that the -- some of the modernization projects would start rolling off end of this year, now you're talking about new Latin American modernization.

So, will there be an improvement in margins starting first quarter of next year year-on-year or is the Latin American or other modernization going to impact that improvement in margin year-on-year starting the first quarter of next year?

I think we need to clarify that immediately.

There are no modernization we are talking about in Latin America.

We have one MT contract there.

European modernization is one thing and that we keep separate.

Then we have, of course, phases where we do more hardware and software in certain regions all the time . That is our normal business.

We'll always have that.

So, we don't mix those two.

And you state correctly that the decline -- at the end of the fourth quarter we will see a gradual decline on this modernization that we have in Europe.

Then is another thing, what type of mix we have for more hardware and software, if I make it simple, between coverage and capacity.

That more is depending on how our customers are purchasing at the moment.

Don't confuse that with modernization because that was something special when we went for market share in a very competitive environment.

I hope that clarified it.

But -- sorry, Hans.

I mean, what about -- I mean, so are you saying that what you have in Latin America is essentially the same -- essentially new LTE contracts and so that should not have an impact on the long-term trends of your overall margin, which should start showing improvement as modernization rolls off?

Everything equal, if everything is equal and they start roll off the modernization, then of course it should (inaudible).

Thank you.

Then you asked about TDLC.

I guess you want that answer on that one as well.

(Inaudible) the other one.

The trend of TDLC, then.

Remember now, Ericsson has already been awarded commercial TDLD networks.

We are only one in Hong Kong, for China Mobile, and we have now Australia.

So, we are well into this process of trialing and testing in China.

And of course we have high ambitions to see that we get the market share there.

Right now is still trials and still test beds, so we will see how it comes out.

We have a good position on 2G on DSM, as you know.

But, on TDS CDMA we have a very slow -- or low (inaudible).

So, we will be there and we think our testing is going well.

We are very satisfied with our product, so we're going to see how that turns out when the market shares are sold or distributed.

I know that many of our competitors has gone out in the market and talked about their fantastic market shares, but we have been instructed from the customer to not talk about any of this.

So, that's why I'm quiet.

I'm following what my customer tells me.

Thank you, Hans.

Richard Kramer from Arete Research is now online with a question.

Thanks.

Hans, you said earlier that the business model for Ericsson hasn't changed.

And it's hard for a lot of us to look at the last year as anything but sort of a lost year with sort of very low sales or negative sales growth and decline in profits and share price and whatnot.

And with Ericsson still depending on telcos for 90-plus percent of sales, and they seem to be in increasing difficulty, have you considered from a strategy point of view whether you need to take actions to diversify your revenue base outside of the telco sector?

Again, it's not just consolidating, but many of them, as alluded to earlier, are really struggling.

And a question for Jan.

If we're seeing such good growth in smartphones, I think you cited a 1 billion unit figure in your statement, and Ericsson has such as healthy IPR position, why are we seeing only stable development in licensing?

And why isn't this IPR business that you created as a separate business unit, the strategy last year, growing and driving much higher earnings in networks and also partly in some of the other divisions?

Thanks.

First -- the first question was diversify outside of mobile operator or telecom operators.

I think we already saw in the third quarter when we acquired Technicolor that we are going into other areas.

We have defined three areas which we are going straight for; utilities, public safety and broadcasting.

Those are using our sort of strength in technology and services.

So, that is happening as we speak.

How much we want to do that and what pace we're going to see, but definitely we're already doing it.

Then the second question was about --?

IPR.

IPRs, okay.

We haven't said the development.

Of course we would like to have a (inaudible) development, but I think that we have a good sort of cross-licensing business because we also have many peers that also have patents.

So, I think we have a good growth licensing in mobile and that we have been working on for quite a long time.

So, of course, there's going to be growth in all this.

We also believe we can grow that and that's why we broke it out, in order to have more focus on it.

Okay.

Thanks.

So, we can take one final question then.

Thank you.

Kai Korschelt from Deutsche Bank is now online with a question.

Yes.

Gentlemen, thank you for giving me the opportunity to ask a question.

I just had a quick one on Q4 on -- more on revenues and networks.

It looks like some of your peers are guiding for sort of flattish or certainly a sub-seasonal Q4.

If I then assume that maybe some of the European activity starts to slow as well, just wondering, should we look at Q4 directionally as maybe a sub-seasonal quarter or do you think that some of the emerging markets can compensate for that?

That was my first question.

The second one was, just on the services business, if I exclude the network rollouts, it looks you had very strong revenue growth, double-digit, but it looks like the margin is kind of stuck in a sort of 16% range.

Just wondering, is there no operating leverage in the business and we should just assume that the margin stays around the same level even as you continue to add contracts and business here, or are there any temporary levers that impact this?

Thank you.

I have a very upset Magnus here to the left of me.

But anyway, if we talk -- Kai, if we talk first about the seasonality there, I think earlier I answered the seasonality question quite well.

I think, typically, if we look at our company and not our competitors, if we look at our company, typically we have the fourth quarter being our biggest quarter in terms of revenue.

And let's see if this quarter will be like most other quarters have been.

We'll come back to that.

On the services side, I think we see significant operating leverage, because what we have is obviously a good growth in Managed Services.

And despite that, we managed to keep the operating margins in Professional Services stable and also somewhat improved.

So, I think that the services business is really performing well.

And it's also a proof point that our service delivery transformation that has been ongoing for a few years, but even somewhat more accelerated this year, is delivering good savings and really gives us scale leverage.

Okay.

Thank you.

So, thank you very much, then.

And I would also like to take the opportunity to invite you to our Investor Day here in Stockholm on November 6. And if you cannot join us here in Stockholm you are most welcome to watch the live webcast then on our .com site.

So by this, I conclude our 3Q earnings call and wish you all a very good day.

Thank you.

Thank you, ladies and gentlemen.

This concludes today's conference call.

Thank you for participating.

You may now disconnect.