Telefonaktiebolaget LM Ericsson (publ) (ERIC) Q2 2007 Earnings Report, Transcript and Summary

Welcome to the Ericsson's Analyst and Media Conference Call for their 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 call. Mr. Gary Pinkham, Vice President of Investor Relations will now open the call.

Thank you, operator. Hi, everyone. This is Gary Pinkham. With me here in Stockholm is Ericsson's CEO, Carl-Henric Svanberg and Karl-Henrik Sundstrom, our Chief Financial Officer. Before we get started, I would like to remind you that we will be making forward-looking statements during the call today. These statements are based on our current expectations and certain timing assumptions. As you may know, the actual results may be different due to a number of reasons and we urge you to consider any forward-looking statements with caution. With that out of the way, I would like to hand over to Carl-Henric for comments about our performance and plans going forward. Carl-Henric?

Hello, everybody. Let's gets started here. We had a pretty interesting and eventful, and inspiring quarter. We passed 3 billion subscribers, subscriptions in the world, which is obviously a milestone for anybody in this industry. We see accelerating data traffic. In fact, if we look particularly in Sweden, we've had a quadrupling of data traffic over the last 90 days. We've had solid performance on sales, 8% growth with stable margins still with the dollar decline hitting us and I will come back to that. But we have continued to take market share in basically all of our important areas. You will also see and I will come back to that when we talk through the regions, how we got some fluctuations because of large project completions. If we turn the page and go to the success of mobile broadband, that's pretty exciting. I mean, today, mobile broadband is becoming part of our daily life. And it will overtime it will exceed fixed broadband. We have in Sweden an interesting example here where the 3G cards sold by Telia exceeded every other mobile device in the month of June. And you can hardly open a newspaper without reading and [until you see] people that are using mobile broadband are reporting from their summer houses or sailing boats, or what have you. 164 networks worldwide today 117 in HSPA, up to 3.6 megabits being upgraded right now to 7.2. We are in the vast majority of the HSPA networks. Not just in matured markets, while the CDMA is now in 73 countries around the world, and growing quickly. This will obviously have huge effect overtime, and how to close the digit and divide, as many people will experience internet over the mobile phone the first time and maybe always. This is a lot about internet, anytime anywhere, and in that context devices that come out now in services that are being introduced are very much web-centric. This is what, will many of us, Karl talk about Web 2.0, web-centric devices is much about how to get to internet, and how to use the internet, one button search or one button clicks for any kind of service, I think it's extremely important when it comes to handsets. We show on a chart here what happened in the Vodafone KK's network in Japan, when it was sold to Softbank, which is also Yahoo in Japan, where the first up the thing they did was to introduce shortcuts into Yahoo, and the second step was to introduce a one button click handsets, and rather quickly searches was up 60 fold. Lot about user generated content this is a different development and this is [all some] years ago we have as much demand for uplink and downlink. HSPA is really a prerequisite, if you don't fast network it doesn't really fly. Lot of course business development around business models, how to charge for day time and drive data revenues for the operators, but all in all an exciting development. If we go in to the financial highlight; as I said we were 8% up, 2% of that was acquired, 6% was organic. To be seen in light of 9% dollar decline year-over-year. Half of our sales is in dollar, obviously there isn't a pull-through of all that, because some of this is quoted at different times and adjusted for currency fluctuations. But we were clearly been into double digit numbers had we had stable US dollars. The gross margin was stable sequentially up 0.4 from last year, and the operating margin at 19.4% is up 1% year-over-year, and it's up 0.9% sequentially, when we look away from Sony Ericsson. And we need to follow the margins at Sony Ericsson here, as we do the equity counting to understand Ericsson's underlying performance. If you look at the operating income SEK9.3 billion in the quarter, SEK1 billion up, that is 12% increase year-over-year. This is also, I think you've read in the report, we had SEK0.1 billion negative impact on the P&L from that provision. Operating cash flow was 4.23 compared to SEK0.2 billion last year. This is an area of a lot of focus for us. We continue to see faster growing turnkey projects in emerging markets. Clearly, a lot of focus from the company on this matter, and we expect the cash flow generation to continue to improve. EPS-wise we are at 0.40 versus 0.36 last year, which is 11% up. We then look at the different segments; networks grew with 7%, a stable growth and increasing margins actually from 17% to 19%. Also quite encouraging is we grew faster now in fixed networks than we did in mobile networks. So far that was driven by transmission projects, product transmission, also from Marconi. Overtime we will see growth also there driven Drutt and IP broadband. We had a breakthrough on IP broadband with AT&T in the quarter, with an order there for their big fiber-to-the-home rollout. Obviously this was an important project as such, we are fairly overtime here. But it was also a vote of confidence on us as a supplier after seeking a strong second parallel supply [solutions] there. We've had record GSM volumes. We have delivered 1 million radio base stations. This is an area where it's about technology leadership to be in the fore front and to be the third partner, but it's also lot of scale and operational excellence and we are gaining market share every quarter here. Professional services saw 11% growth, 14% in local currency which is more reflecting the activity level margins of same stable 15% sequentially here. Managed services is up 24% in local currencies, still 11 new deals in the quarter that are not just in the numbers and actually also several deals in the first quarter including the Vodafone type of management and deals in [Holland] and Belgium that area also in quarter. So a pretty good outlook there for coming quarters. We have in multimedia, as you have already seen, we had a slower quarter. This was very much due to a couple of delayed projects and prepayments. And as we said also in the first quarter, performance in multimedia will vary between quarters. It's a segment and it's going to buildup, and it's had large projects versus the relative size of multimedia. This is also an area with more software-intensive products and solutions, which mean the downfall on the top-line actually has a pretty big effect on the bottom-line. But, the overall outlook is stable and exciting for multimedia. We have acquired Mobeon, Tandberg and Drutt. Tandberg is consolidated since May. LHS is the world leader in the post billing. And we have put in a public offer there, which together with our leading position in prepaid build a foundation for leadership in converged charging which is happening now. If we look at the regional update, we start off with Europe that had an encouraging growth in the first quarter, where we had effects here in the second quarter from consolidation talks in Italy and in UK. I think we could very well see several consolidation initiatives in Europe for the years to come. We have 40-50 operators in Europe versus four or five in U.S. And such consolidations are basically good we think for the industry trading stronger and few operators. But whenever such talks happen, it tends to put an hold to investments, although the need for radio capacity on telecom equipment as such isn't effective really long-term. We have strong accelerating data traffic. We have the same bottlenecks in transmission that we talked about. We are starting to see some early investments also on the radio side. Lot of management is there, services discussions, and several of all these since we have disclosed them. But it was a particular quarter with a 0% growth. We then go to the CEMA region we have the same 0% growth, which is not reflecting the activity in the region at all. There is lot of activities throughout the region to be expect from the Russia that is down now since lot of Birla's estimate for 2G. They are on the other hand now preparing for 3G rollouts with several of the operators. But generally lots of activities, lots of logical objects Africa it's 140 million subscribers potential which is up 5 normal from only a year ago 500 million potential a year. So this is more fluctuations between quarters due to completion of larger project. We then go to Asia, Asia was up 32% continues growing strongly, lots of activities in many markets, Japan continues where we are prime supplier in several networks; Bangladesh, Indonesia, we can mention more countries there. India is regularly strong we just received as you all see in the 2 billion Bharti deal and US $2 billion Bharti deal and BSNL after lots of delaying matters and decision, they are operative as seems to be in it's final making and I think we would get clear inspired by very soon and we are well positioned that won both the commercial and technical evaluation. We have continuous strong growth in China the 3G, Chinese 3G trials is ongoing and we will not be concluded before year-end. So the 3G decisions are not likely this year, but the strong subscriber growth of 6 million both in India for that matter and China continues and drives the expansion needs in the marketplace. If we then go to Americas, starting off in Latin America we predicted the turnaround in Q1. It is happening we are 7% up continue to be in love for 2G network throughout the continent, but also starting 3G rollout in many markets and services, 3G services have already been launched in Chile and Argentina. This is also now an area of growing interest for managed services. And then finally U.S., North America is now 18% down, which is an improvement from the 42% that we had in the first quarter. And as we said, we will continue to close the gap as we go through the year partly because of easier numbers to meet from last year and partly because more activities. We have secured the IP broadband agreement with AT&T as we said, we will see little over this year, but it will gradually start and as I said we believe had a launch overtime. Cingular is about to accelerate there, 3G well off, it will still however take time before it comes to invoicing. So it's doubtful how much we will see over this year, but their ambitions for the next year are quite much up. We have also strengthen opposition here more than probably anywhere else through the acquisitions of Redback and Tandberg and Entrisphere. So, positive trend in North America, If we just make a very quick run through of the acquisitions where we are, we have now completed everything around Marconi, the last piece was a supply chain changes and also down and the integration is complete and as I said we also had increase growth there, which was encouraging. Redback we have aligned on the supply side with Ericsson, which means that Redback in average the Ericsson supply agreement with better for chasing condition there. And we are in the pace of aligning the safe channel, which is a matter of switching from thereof franchise to Ericsson's and we will up scale and competence within the Ericsson market units. But we evolved with a secured several contract in combination where probably Redback wouldn't have won them long before. Entrisphere, I have said talked about AT&T there, we also had other deepen contracts outside U.S. Tandberg is consolidated from May and obviously it since only few months little to report, but there were certainly an exciting add-on to the company. Mobeon and Drutt has both been acquired and in fact integrated since that is a simple thing to do both of these smaller companies have already been part of our offering and our competence. So, they are basically all in place. The LHS public offer has been made. We have got over 75% acceptances, which is important here. On Sony Ericsson we are 59% up in the second quarter to 25 million phones year-over-year. This is an encouraging development, not only the Sony Ericsson enjoying a good position in the made it to high revenue of the market but we are also expanding into the inter segment but seeking the premium positions in the various sub-segments and leveraging our strengths from their Walkman in their Cyber-shot phones. And this is so far successful we have an ASP that of course comes down with its changed product mix where we're holding up our margins well. So if we look at sales, we're up 37% to EUR3.1 billion net income before tax is up 55%, that is down some EUR30 million from EUR362 million to EUR327 million. This is basically the effect of increased current royalties. Partly because we're aligning more with royalties payments we have to other external parties, partly because we pay more royalties in Sony Ericsson to Sony, because of the use of their Cyber-shots and their Walkman brands. We have continuously gained market share we're now at 9.6% in units and if you compare and evaluate its better than that. And we are not too far away in value from where Motorola and Samsung actually is. So when we look at the outlook for the year we haven't changed our outlook which is to reflect where we see business activities around the world. We continue to believe in mid-single digit and we continue to see good growth in services. So from an outlook perspective, market conditions around the world are unchanged and we are well positioned to continue to take market share there. I will leave it to Karl to make financial comments.

Good afternoon. Good morning, ladies and gentlemen. If I start with my first slide, I would like to say that Carl-Henric said and I think it has been a very solid performance and we had some encouraging margin developments, growing sales by 8%. We've also been able to increase both the operating margin as well as the EBITDA margin both sequentially, as well as year-over-year. The operating margins both the EBITDA and the operating margin excluding SEMC, Sony Ericsson has increased and I think that's a good sign that their operation excellence is paying off. We then take the next slide. Income after financial items has increased year-over-year, 12%. The tax rate was slightly higher in this quarter compared to the previous and the reason for that is that we have slightly little difference in distribution of where we are making money in this quarter. Earnings per share up 11% and the equity ratio is down by 2.2%, and the reason for that is that we have made a dividend of SEK8 billion as well as we have acquired a goodwill and intangible assets for about SEK9 billion, explaining the slightly lower equity ratio. And if we then go the cash flow analysis here, I would like to explain a little bit what has happened in the quarter compared to what happened in the first quarter. In Q1, you will remember this slide, we received a prepayment from Sony Ericsson of SEK3.5 billion the equivalent amount of what we would have received if the with dividend were paid in the first quarter. In this quarter, we had received a dividend from Sony Ericsson, but at the same time we have also reduced the prepayment for all the services and products being delivered from Ericsson to Sony Ericsson at SEK1.4 billion. So the net effect of the Sony Ericsson in our cash flow in the second quarter is SEK1.1 other SEK4.2 billion. Working capital excluding the prepayments from Sony Ericsson has increased to SEK6.4 billion from SEK4.7 billion and it's actually considerably better than a year ago SKE1.7 billion. And if you go to the next slide, this is cash conversion analysis and we managed in this quarter to reach cash conversion 49%. And I would be very clear here in that is included into SEK8.8 billion, it included SEK4.6 billion of dividend and prepayment from Sony Ericsson. And we have started fairly well this year with cash conversion, it looked better than last year. And I would like to remind you all that we believe that cash the conversion will be better this year than last year. However, we also know that our second half usually has a stronger and we expect it to continued cash conversion because of the way we terminate project and get final payments, usually linked to a lot of the big operators budgeting process. If we then go to the last slide, operating efficiency trends; we ended with a DSO of 106, one day better than last quarter. Even though we grew a lot more in markets with longer payment terms, I think here the Ericsson team did a very good job. Inventory turnover is increasing both compared to last year and to the first quarter. We've got the little bit lower on payable days but we are still above the target of 60. This is an area where we are working on a long-term target today but through operational excellence to improve the way how we run turnkey project. And with that I'll hand it over to Gary Pinkham.

Thank you Karl. Operator, we are ready to start the Q&A session now.

Thank you Mr. Pinkham. Ladies and Gentlemen at this time we will begin the question-and-answer session. [Operator Instructions]. Detailed information is provided in the report, and Ericsson's investor relations and media relations team will be happy to take additional questions and discuss further details with you after the call. [Operator Instructions]. And now we'll take our first question today from Edward Snyder from Charter Equity Research. Please go ahead.

Thank you very much. If you look at your distribution by geography, its clear that Western Europe is still looking at a lot of data traffic in terms of accelerating data traffic, but we don't see commensurate increase in value it looks as if. And similar trends seem to have been working in the US, where you have certainly seen the slow down and rollout of the 3G networks for Cingular. And although their data traffic is starting to pickup, we don't see it bumping up against capacity or the value of that traffic looks like its not increasing significantly. I guess, the real question is, we've talked about 3G for a while here, and we certainly are seeing an increase in traffic, but it doesn't seem to be translating in either capacity requirement increases or necessarily in higher value. In other carriers may be discounting in order to get that traffic. What's your long term vision of this? Is 3G going to generate significantly more revenue for the carriers and not flow through to U.S. CapEx? Or are we going to see kind of an adjustment by the carriers so that they can load the networks, but it's not going to reach the point where we are going to see a lot of follow-on pending?

I think there are differences here between US and Europe, because Europe, there is an initial coverage that has been down. And so far the network capacities are basically being dimensioned by the voice traffic volumes. So, its voice traffic increases that are driving further expansions. And voice tariffs in Europe are coming down and traffic is generated. So, of course, that will happen, but underlying as a much faster growing data volume. And here you have unutilized capacity and that will be filled first. But there will come a moment when data will of course be the dimensioning factor and not voice, and that will of course happen at different times in different networks. It has already happened in Japan as an example. And we are starting to see some of it in some markets in Europe. If you look at U.S., it's a different story, because there we've done initial coverage in some markets. And there you will see next year accelerating spend again from the carriers. Basically they have to continue to cover the market. What we see in Europe though is quite some excitement among users of data services, and there is hardly newspaper where you don't read about it. It's a real breakthrough here on what we can do on the mobile networks.

In terms of your business, should we look to minutes of use for voice as an indication of follow on spending in 3G or as you've quoted here should we look at data traffic as the metric?

Well, I think in US it will be coverage for quite a while actually, and you can look at the subscriber pickup in the networks, the minutes of used in the networks. But overtime clearly, it will be data traffic. And here, if you think about the networks and data, they're fairly little traffic, when people are coming from 2G doing SMS only. And then you can see; when they start to do a YouTube application or video application that almost immediately jams the network. The data acceleration is pretty dramatic. But it goes hand-in-hand obviously with what kind of services that the operator introduces, and what kind of handset they are supporting and so on.

Thank you.

Thank you. We'll move to our next question today from Francois Duhen from CM-CIC Securities. Please go ahead.

Hello. My question will be about gross margin. Can you share with us, because I believe the 43% level is assisting the lower level for the second half of the year or especially any leverage based on the volume effects, we could expect from one plus two?

Well I think, as we've said several times before that the gross margin as such we are not guiding precisely on the margin as you know, but we are quite comfortable with where the margins are. We will always have the mathematical effect if service business is growing much faster than networks. That will be an automatic dilution because services have lesser gross margin, but also lesser overheads. But beside that point I think we are fairly comfortable with where margins are, but it's a fight everyday that our competition and its unusual that becomes put on the previous quarter that can always fluctuate up or down 0.5%, 0.25% or so that as you have seen it, it do over the last several years.

Okay. And if we take your last acquisition from Redback to Tandberg when should we expect very significant increase based on mobile sales, based on the fact that the joint in Ericsson group?

Well most of the companies already had good growth, actually strong growth before they joined the Ericsson and obviously joining Ericsson is an advantage with the opportunities to accelerate growth, but also to maintain it. Because they were both coming to such situations that it became difficult for them to drive a $300 or $400 company in hundreds of market. It seems it does implies so they needed to join in worldwide organization. These are companies that run with high growth, but obviously when you compare $400 million or so to the whole of Ericsson its takes a while because it has major impact on Ericsson from a revenue point of view. But from our total offering its strengthening us considerably.

Okay. Thanks.

Thank you. Our next question comes from Alexandre Peterc from Exane BNP Paribas. Please go ahead.

Hi. I would like to ask a question regarding the royalties paid by Sony Ericsson to Sony. I would like to know what exactly your take was in that. I mean we haven't exactly been warned of that happening before hand. And so I was wondering how did the negotiation with Sony go, if Sony going to stop here with the royalties or would they increase if Sony Ericsson even successful with Sony brands. Maybe also comments on whether is it PSP Phone coming out at some point would that also give subjects in the royalties, a little bit of color on that? Thank you?

I can startup there and Carl has been -- are the one that in contact with on Vodafone his colleague and Sony in dealing with these matters. But principally when we started up Sony Ericsson we were charging somewhat less for our technologies and they were for their brands and so on then maybe prevailing market conditions would call for this was a unit that was making basically losses that we are making some, they are still small, while they were just making some small modifications to become better inline with other external partnerships we have and that has been the whole idea. There is another elements and that is that the royalties that Sony Ericsson is paying for Cyber-shot brands and Walkman brand and so on, they will accelerated those sales successes.

I think it's also from the Sony side very clear in the agreement that we signed it that it was kind of step-up function and also it's important for Sony Ericsson to pay for when they use a brand that's called [Ericsson] that is successful as well as when they use radio technology and IPRS that's coming from Ericsson that they pay for it so it's not for free and that has also not only that its important but is also for tax reasons.

Okay, was that predetermined or did Sony come back to you and say hey we were lucky to charge more for this very successful brand?

It is with push by Sony here in the beginning of the year. But it was sort of in its making but they were more urgent from the master than we were.

Okay. Thank you very much.

Thank you. And I move to our next question today from Peter Dionisio from Morgan Stanley. Please go ahead.

Thank you. In Western Europe you talked about the negative impact on the Telco spend of network sharing negotiations in the UK. And the question is why were these CapEx pass not extend to other European Telcos as they also considered potential network sharing deals and tends impact your market growth expectations for Europe and indeed for the rest of the world for 2007?

Well I think it is important to understand that our equipment normally is fairly fully leveraged. If you have a network with 5 million subscribers you have ready capacity in other 4 million, 5 million subscribers. So, it's not an overcapacity there that means that if you merge to networks you will say that kind of capacity. So, in the longer run consolidation of that kind that will have a major impact on us but remember that when you deploy a network more than 85% of the cost is everything around the radio equipment and the telecom equipment it's a tower to land, the batteries, the meters, antennas, air conditioning and all that. And that's why you make the savings. So, the reason why it's probably short is more that when you go into such a discussion, you are not really sure if you are going to go through with it and around who's network, if you are going to move your base station from your site to another site and that's the one you had go. All these matters are then certainly open methods and that means that the desire to make further capacity expansions in that phase is slowed down, and basically ends up with a pent-up demand. If you are not in particular talks, there is no reason whatsoever because there is no potential savings on our equipment to be made.

Thanks. Carl-Henric, outside of the UK, are you seeing an acceleration in terms of negotiation among telcos in terms of network sharing deals?

Basically with the fragmentation that we have, I think we will see operators search various forms of leveraging synergies and consolidate, whether it's a takeover that Telefonica has made [separate all], whether it's network sharing, or whether it's managed services, where in the managed services field, we would leverage this capability of letting others into size and you would have almost all of the savings even through such a deal but you would still own your own network. So, it will take in different forms. The network sharing discussion as such creates some quite a lot of attention here and there, but one should be aware, that means that two operators subsiding with the same network and really want to expand, then whether one should go into different build outs and technologies, sort of this and that. And we see actually as much enthusiasm among the potential such discussion parties that is. There is equally frustration among those that do network sharing and are I'm wondering how to find ways out of it. So, I think there are many opinions here. Thank you.

Thank you. Rod Hall from J.P. Morgan has our next question.

Yeah, good morning. I've got a couple of questions. The first one is with regards to the faster growing fixed business. I'm just wondering you're giving us a mid single digits growth on mobile and I wonder from your point of view is the fixed market, the portion of it that you're exposed to growing faster than your expectations, than that mobile market?

There is a difference between mobile and fixed in the way that in mobile, we can deliver the complete network or at least complete core or radio network. While just on the fixed side, these networks exceeds, when you go through a gradual bill outdoor or migration, which means that different parts of the fixed business is growing fast than the other parts. And that parts that we're in like the EDGE routers from Redback or the IT broadband access or transmission, they are growing faster. They are of course the networks that are growing faster than what we predict for mobile networks. We have a smaller position, but it's pretty promising.

Okay. And then also in Asia, the growth was obviously pretty high this quarter, and the proportion of revenues is that if I calculate it right, it's moved up pretty significantly to 35% from about 29% in Q1 or something like that. Your margins are amazingly stable at 43% at the gross level. And I guess the question is, there has been, I think, an assumption that the margins in these emerging markets are lower than the group average and net worth. And I wonder if you could just comment on whether that's still a good assumption, and give us any further color that you be might be able to on that?

We' have repeatedly got the question whether margins are lower than emerging markets, and we always stated the same that we don't that is not. And I hope this proves it.

Right, and then, lastly just a boring kind of cash flow question. Your DSO is well over target now, this is second quarter that you are running high and I realized that it still you are doing a good job given that turnkey revenues you are selling, but is that 90 days target still realistic, given the success that you are having with turnkey?

You should look at it at year end because that's a major cashing period, for various reasons and I'll let our cash flow manager to talk about it.

Okay.

I would like to say that it is a tough target, but if you look upon the DSO development last year we also went up a bit and it is usually a big flash especially in the fourth quarter. But it is a tough target and we are working very hard and remember we have met the target every single year in 2003, when we put it up the first time. But I say this is the tough target.

Okay. And then is one last quick one and that it. The cash conversion distribution between 2005 and 2006 is clearly much different with it being much more backend weighted in '06. Which are those two years is '07 likely to be like, are we looking at an '06 type here or we've got heavy weighting towards the backend or just trying to get a feel for what the proportion of splits likely to look like from your point of view?

It will be backend loaded.

More like '06.

Yeah, but I don't want to be so precise, because then you're going to hang me if it doesn't go exactly that way, in any way, but it's backend loaded.

Okay. Okay, thank you very much.

We will take next question today from Matt Hoffman from Cowen. Please go ahead. Matt Hoffman - Cowen & Company: Hey good morning. It seems like the infrastructure business was more or less in line, may be a bit short of normal seasonality but still maintain market guidance for the full year, and you also spend a little bit time here this morning outlining the 2H opportunities. And it seems like you are talking about a backend loaded year. How should we characterize the visibility and how solid those opportunities are? Are we are talking about solid bookings and fine contracts, which are driving outlook or is it more of a forecast? Then second on gross margins. In 2Q they were not without expected contribution for the multimedia unit which is heavy software with high margins. Did it suggest that pricing and infrastructure is getting better or is it the cost [sales] that's improving? Thanks.

The margins, the cost of sales and so on, that's a constant battle of growth rationalization and pricing in the market, but the total equation haven't really changed from before. I would say, yes, it is very much the same conditions as before. A bit of desperation from a couple of years ago has left the market some or more stability there. When it comes to the second half, basically what is going to be delivered in the second half is in books already, averaged lead time for project is his sort of minimum half a year or so. At the same time when we look at the numbers as they come out, whether we are SEK0.5 billion down or SEK0.5 billion up or this and that case, so a lot of discussion actually in the market. And that can still be a short term service orders in the last month. So, on the final numbers, it's not in the making yet, but basically this in the books. So I would say that one thing that maybe you should keep in mind is that, I think we will have, when we talk about seasonality probably, slightly more like last year probably a bit back loaded. As larger projects tend to have more of conditions in the fourth quarter, but they ultimately looks fine. Matt Hoffman - Cowen & Company: And in terms of the regions that would give you that sort of contribution, should it be roughly what's -- does the back half look like the front half in terms of where we would expect it to come from? Thanks.

I think actually that we had a bit of a known situation in the CEMA region. It doesn't reflects the performance of the activity level in the region, so that's should not stay at that level. Like it's always, Asia steaming on whether it's going to stay exactly on that level is may be difficult to predict, then we should have a bit of a closing in US. Matt Hoffman - Cowen & Company: Great, thanks.

Thank you. We'll move to our next question today from Kulbinder Garcha from Credit Suisse. Please go ahead. Pardon me. Our next question comes from [Andreas Windberg from RAM]

Hello it's [Glenn Standat from RAM]. The cost in your P&L had fallen the most thanks to the new provisions you've made. You made about 9% to 10% a few years ago of sales, now it's down to 0.2%, if you could comment a little bit on that. And secondly also if you could explain, how the liabilities can be transferred into provisions, I think you've done a little bit of that this quarter. Thank you.

[Andreas] as we have talked a number of times, we have consistently from every quarter since first quarter of 2003 have had net increases in net provisions of bigger and smaller amount. And it's important to remember that the amount of provisions that you put in to the balance sheet is reflecting what kind of risk you look forward to. And right now, we are at the level of great acquisitions that we believe is adequate. And [it has] to do also that, during all these period, we have introduced in volume 3G, we have gone through a lot of deliveries. Here's the reason why we have a level of provision that we feel are adequate. When it comes to the tax provisions, the movement is the classification coming out of Brazil of how you should account for certain, if it's other liability or provision. And we have had discussion with the auditors and they have come to the conclusion that this is a provision and not another liability. It has to do with indexation of certain items in Brazil.

Okay, thanks. Secondly on Sony Ericsson, I understand you got a big prepayment on Ericsson Mobile Platforms. What does Sony feel of that, that you are getting prepayments and various attractive payments terms from Sony Ericsson? Is there any an issues or discussions there?

I don't know if you recall the story, but it's much more straightforward. The total Sony Ericsson dividend is supposed to be paid in the first quarter. For various reasons, Sony asked us to do an exception this year and pay us in the second quarter through capital redemptions and that was fine with us, as long as we get the money still in the same way.

And it's good to remember now so. As Carl-Henrik said in the second quarter it was a dividend. The remaining part which is 300 to be divided between the two quarters will be in the second half of this year being paid after the capital redemption. So, this has been a Board decision and Sony Ericsson with all parties included and found a good solution.

Okay. So, on top of the dividend you still have received a little bit of prepayment for Ericsson mobile platforms or is that not correct now, when we closed the second quarter?

This is what we've said versus the dividend paid of 2.5 billion. We were actually right now 1.1 billion ahead the payment fee there as the effect of how they arrange it. That is my comment, thank you.

Okay. Thanks.

Thanks very much. We'll now move to our question from Kulbinder Garcha from Credit Suisse. Please go ahead.

Hello, can I be heard. Hello, can I be heard.

Please go ahead Mr. Garcha.

Yeah, hi it's Kulbinder from Credit Suisse, sorry about that. I've got couple of questions by region. And first of all on North America, are you saying that the year-on-year declines were less than or do you actually expect that region to return to growth because it does seem that Cingular spending levels are very depressed in the first half. So, my first question is, is the North American actually start growing or is it year-on-year decline that simply going to lessen? And the second thing is, in terms of this disruption in Western Europe around network sharing, as the carriers decides what to do, is that now a multi culture issue also shouldn't affect Western Europe throughout the second half? And then the third and final question is on pricing, and you said consistently I think for the past six or nine months, the excessive pricing few years ago has gone away. However, will most of your major competitor seems to be complaining about the pricing dynamics specifically identifying Ericsson is a price aggressor and is also be a finale now when looks at the price hasn't quite turned out as whole, you may have thought six or nine months ago. Firstly, are you still confident the pricing environment isn't deteriorating or is and about to deteriorate over the next 12 to 18 months?

Starting with North America that is of course a good question, whether we just going to close the gap to small or minuses, so whether we got to make it all the way up to the pluses this year. I don't think we can actually answer that question precisely, but it's in the reach to go into plus numbers. Cingular is planning for acceleration, its more doubtful how much they can get things going before year-end that ends up with sales. But remember that we have lots of other customers in U.S. as well. So we are somewhere there on getting closer and closer to last year's figures, so we may make it over in the plus side. When it comes to network sharing, remember that the development in the networks continues also during talks. So you end up with a sort of pent-up demand. There is no way that you can get away from the spending that you will need to make. Its hard to take decisions when you're not really sure am I going to run your networks or you are going to run my networks are we going to create the new call, run it outside, the third party and what kind of needs do we see and so and so. I think its more sort of foot at a bit at a standstill, it doesn't really effect long-term build out on radio equipment, which is the majority on it, of course you can find some combined core networks and so on. When it comes to the pricing pressure, let me just say a couple of things, the BSNL as an example hasn't moved since the bids were handed in and you should be a little careful to drawing conclusion on all the information that comes out there. The different numbers that you can see quoted on Austin and other bidders, administers ambitions and so on tend to be basically differences in scope. How much is included and how much is not included. So, so far nothing has really been addressed on pricing issues and this was a bidding that took place and has been publicly open. We do not see that the pricing environment has changed although remember that it's fierce all the time, but obviously if you have smaller scale and that's the capabilities there, we will find that it is tough. Ericsson is the leader in terms of both technology leadership and local competence and so on. So, we are not the price aggressive, we are the one that typically gets the premium and that is the price against us. We know that in the battle and shake up that has taken place there are smaller players that are not coping with the trend and they are being the players. And obviously with such market share of gains that we have we are typically won the company in many places and they get disappointed. But I would say the overall environment is basically and constantly fixed.

Okay thanks, I just clarify two things on North America you are saying is you are not sure whether for the full year you see growth that should be some sort recovery in the second half is that correct?

I mean if we talk quarter-on-quarter…

Let's see year-over-year in the second half of the year?

For the full year we will not come to positive numbers, that's clear.

Okay.

Thank you. And now move to our next question today from Mark Power from Redburn Partners. Please go ahead.

Thanks very much. I guess it surely easy to argue this that Ericsson is somewhat using its balance sheets to support sales growth and possibly even to support reported margins in the near term. I am just wondering would you accept that you are using your balance sheet to extend these market share gains? And crucially, if that the case can you give us some confidence that when you negotiate these large contracts that the negotiations are done with long-term internal capital and not just margins in mind? Thanks.

Well I think you are, I would totally object your view because that is not the way business is being done. But it is sure that if -- for example if you take Asia, the Asian region and so the same thing with Africa and Middle East, Eastern Europe, these all markets were 10 years ago [Greenfield] has started to build their business and were under heavy, heavy financing needs, customer financing was being every financial parameter was stretched which means that you would have longer payment terms and there is also more turnkey projects because these operators do not have the local expertise and own competence to a rollout. They basically didn't have enough to do with versus in Europe and U.S. were we ship the products and come back and it's our own stuff. This is building up working capital needs this is not something you negotiate around, these are prevailing conditions in these market. And we're also stronger in these markets and other market then mathematically we get longer payments to get bigger working capital build up. The question is obviously the other way round if we are working now with cash generating companies like Maxis or Bharti or whatever and they enjoy longer payment terms than may be colleagues in Western Europe. Can we gradually move them back to pay faster? Can we sort of align with rest of the world? That's a challenge, because nobody gives up one territory. But the effect it has on the balance sheet is purely because growth is stronger in parts of the world by different market condition today.

How effectively you think the returns can improve over time back to where, they were used to I guess over stability years 2004, 2005?

Yeah. I think clearly that we will over time come to a level where there is balancing growth. So, we are invoicing as many turnkey projects as we are building up new ones and we are gradually going there. We are also addressing this heavily because there is still some merit if an operator say in Maxis in Malaysia has turned to cash positive but it's starting regional operation in India. So, it's still under the financial constraints, that is not the time you easily go in and change things. But other times, there is no reason that we act as a bank for them if they are cash positive. So, that is something we are pushing very hard. And I think you will see a positive development but it's not something where you -- where we send call out on it only to see if and all the things comes back with very conditions. So this is something you have to work very, very consistently through quite a while but balance in growth for the rest of the company and better performance should turn this through a much better development.

Fair enough. Thanks very much.

Thank you. We will move to Stuart Jeffrey from the Lehman Brothers. Please go ahead

Hi, there. Thank you. A quick question on wireline, you are say here that wireline growth in the quarter was particularly strong? Now, certainly if you could perhaps elaborate on that little bit more, is that principally existing customers or is that new customers who are signing up and it seem to me that there hasn't been not many press releases with regard to new customer. So, do you still think you can sustain group average margins in the next couple of years, while you build brand new footprint or do you think you can start [divesting] in lower margins for example the [DuPont] contract presumably is a lower initial upfront margin, your targets have always been the wireline type of group average margins?

Well, I think, it is in this business, as in the rest of Ericsson's business that is the mix bag of everything. If you look at the [DuPont] contract it is like, it will be not very exciting margins rather than the initial rollout. And then and as you go on it will build margins, but at the same time you have equally much expenses of transmission and whether it's Minilink from the old Ericsson or whether it's [Frank] radio or optical from Marconi, which is have margins well in line by the Ericsson. So, I'd say it's very much mixed situation. This is not different, besides the new DuPont wins, where the rollouts have hardly started. This is not a win with new customers. This is basically existing customers and in that perspective, a lot of the Redback customers are also old Ericsson customers, whether it will be Telefonica or Deutsche Telekom or China Unicom or what have you.

Thanks to elaborate. I'm assuming that your footprint in wireline has [grown] quite a bit over the last two years, and you're looking to expand that footprint. I'm assuming with the bulk of new contracts going forward over the couple of years will be brand new footprint. And a new part of the network that you haven't previously been involved with that particular operator? I'm assuming if that's going to be significant lower margin than say, supplying more optical equipment to BT?

Now, I mean that is an element of that that is clear. But remember that a lot of it is in suspicion, not in, which is a well known territory for us, where Marconi and Ericsson from their respective product program are old suppliers in to the networks. Redback is well know and are working with good margins and so on. But there are other areas where we are newcomers and we have to show what our capabilities are. And maybe to larger extent, if we expand or accelerate that goal. But it is not a clear case, but it may be an element of it.

So we should see margins then fairly deteriorate in wireline in the next couple of years or next year or so?

No, I wouldn't say so. Not any significance anyway.

Thank you.

Thank you. We move to our next question today from Richard Kramer from Arete Research. Please go ahead.

Thanks very much, a couple of questions for each of you. For Carl-Henric Svanberg, can you help us understand how investors should judge roughly SEK30 billion that you've spent on acquisition since the start of the year? It's very difficult [outside] of backing out the organic sales to judge the P&L impact of those acquisitions. And is it contracts, is it profitability, how might we understand better the internal rate of return on those sort of deals? And also just more broadly, can you talk about when you expect Ericsson will move towards more of a software mix within its networks business, where we might start to see both gross margins improve, but also more of the dynamics software company where you have regular release schedules and say the profitability fluctuates more in the quarter. And then for Karl-Henrik Sundstrom; can you just help us understand since there's no longer a disclosure on IPR. What the material impact of 3G royalties might be, as 3G becomes a much wider portion of the handset overall market, specifically thinking about settlements like Samsung deal? What sort of impact might that have on the P&L longer terms? And maybe if you could help us understand on the cash flow side, one of the 55 billion of receivables might be sitting in [Escrow] account with clients whereby when you hit certain milestones, it's just a matter of releasing the payments that are sitting as oppose to renegotiating collection terms? Thanks.

Let me start by your first question of the 30 billion. Obviously, Marconi is now a company, that is, the integration is behind us. This was a company with lots of different [strong] back coming from different companies within Marconi, four different companies. Fully integrated into Ericsson, the Marconi product have group average margins as our target or even slightly better than that. They are now part of Ericsson, it is not possible for neither us or anybody else to really follow it, because products have been launched with our own product on the broadband side and the services side, some of which has been merged and so on. But the targets we set have been reached group margins and with that, of course, better growth. And that's part of the better growth and fixed as we reported here in the quarter. So, that's specially how we can talk about Marconi. When it come to Tandberg and Redback, these are two relatively smaller companies where we obviously have paid quite high premiums for companies that are doing [occupies] very well. And we have no reason whatsoever to expect so the earnings numbers to come down, with rather the opportunity as we mentioned on Redback to leverage Ericsson's supply agreement and thereby improved margins, which is in fact already what have started to have on Redback. The whole critical phase will be to follow sales for both Redback and for Tandberg, and we will try to guide you through that process. And when it comes to being a more software-oriented company, already now software is a significant part of work to do, and it's a substantial part of what we do in R&D. That's the bulk of what we do in R&D for software development. To what extent would we come to a similar situation as Microsoft where we would have one revision yearly and so on? That is clearly a dream scenario for us. But we guess it is not really easy to come all that way, because these networks are very complex in the world, and different operators have different ambitions and seeking different features and so on. So we won't get there very, very soon or in the foreseeable future. But we certainly find better of ways obviously to grow solutions, and those are in the making where we don't charge like sort of our own fixed or hardware culture. But we actually have a lower upfront fee and then you spend more for applications or capabilities of the network that you open up. That is in its making not only from us but also our peers, Cisco and Nokia and others.

Okay Richard. When it comes to IPRs I think its important to remember that the earlier faces of IPRs and royalties on 3G that we do sign were higher, but as volume kicks up those goes down overtime, and you have to remember that our prime drive is to make sure that we have a very competitive IPR portfolio, so that when we do have the cross licensing agreement that we are obliged to have when we entered into this fair agreement and every standard is to sit on a better pie than anybody else with more essentials. So that's the main focus then we also on top of that trying to make some money out of it, but we are not trying to maximize that because we benefit from low IPRCs on the handset. But we also would like to make sure that people are using our technology are paying for it. So, if I explain it is, it's a good thing that comes in extra and this Samsung deal doesn't really move the needle for us, but it is a good extra money but the prime driver is to make sure that the IPRCs on a total industry or on a recent level which means that handsets will be and devices will be affordable.

Okay and on Escrow account and money took in the handheld operators.

First, I also have to say it's not in Escrow in anyway more than like a comparison, in any given point there is always a couple of billions depending on the regions, where you might argue with the clients about if it's due or not due. And that has to do with when you have turnkey, you might have bigger arguments, but that turnkey is also in regions, where you've clients for different reasons or on a startup base who also would like to pay us late as possible. When you have box deliveries or drop shipment in some other regions you might get paid faster. But it's always a couple of billion and it varies between quarters depending on where you have the lot of saved in that quarter, but it can be big money.

And just maybe to be helpful for investors can you breakdown the 55 billion of receivables in terms of duration. What about our effective rate had been billed in the past quarter, and what about our longer term in nature that fall into this category of Escrow type arrangements with clients?

I'd like to say they are not Escrow per se it's where they argue that we haven't fulfilled. So, we think, we have fulfilled. So, but I will take that and look into, if we consider that going forward.

Okay. Thank you.

Operator?

Thank you. And now move to our next question from Per Lindberg from Dresdner. Please go ahead.

Yes. Thanks very much. I'd like perhaps to have your perspective on the growth prospects in the parts of the world not at least India in the wake of this Maxis contract face them partly and more coming along. When we just takes that number the 1 billion per annum, 2 billion over two years, 1 billion compares with approximately tenth billion of Ericsson and Global Mobile Networks, plus professional sales last year. This single contract alone is 5%, and that's not an isolated phenomenon it seems. Could you shed more light on where you can see bump or changes in terms of this overall business activity not only of course in India, but China, Brazil with 3G licensing soon coming on stream. Turkey, we understand why don't do they make contract in North America that I think could be helpful for industries. Thank you.

It will start with a strong rollout of new networks and the growth of subscribers being at 3 billion and heading towards sort of 4.5 billion or so in the next three years. I think India is bit of a special case because of not too clear rules from the regulators as early, they started their development later than other markets, 3-4 later than China. And when you combine that with very aggressive operators and a pent-up demand growth become very, very strong. And you have 3-4 operators that are now pushing hard to try to grow fast than one another BSNL and Reliance and Bharti and also Maxis there and Hutch. I mean there are several operators and it's a race of being first. So, that is a little bit unique, but its not unique in wireless heading, it's a little bit unique in its speed. If you look at Africa being at 140 million subscribers that will go to 500 and the importance of mobile telephony there is huge. So, in that sense I would that emerging market is beaming on, its not slowing down.

Per that was our last question.

Thank you. Tim Boddy from Goldman Sachs has our next question.

Yes. Thanks very much. Just to finish I would like to get back to the very first question, which was around data, and I just want to clarify that I've understood this correctly? If you are saying two things that need to happen, first the operators need to deliver the services continue with, which would drive accelerated date usage you mentioned usage and then we need to fill the capacity that's already being built and then after that we see a demand picking up for your equipment. Can you give a dimension for us, even it's a question of half year time period when we'd see that impact Europe and you are talking first half of '08, the first half of '09 what's your best guess so when data actually begins, we see that in second wave? Thank you.

When I think it is a question that is a bit difficult to answer, because there are many different answers there and you know already about the comment about Japan and the second carriers and so on. We can see, for example when in Swedish networks, video service being introduced immediately jammed transmission. I mean that goes on market-by-market and it does it usually bit dependent on how aggressive the operators are pushing the network. We're having operators in Europe for example that are saying well we can call for the lot goal and not of course if we introduce video or services like that because then we will immediately need more capacity. So when are they going to be build up? I don't know. I think this is a little bit different answers with different operators, and it is competition driven. But it is interesting to see what happens in countries like Japan or Australia or North America, where you have operators pushing each other head-on with new exciting services. But there is shift in trend in Europe I mean that is lots of new excitement coming in.

And to what extent do you think iPhone could catalyze interest in these services?

I think iPhone is an interesting phenomenon. There are many things one can say about the iPhone. From our point of view, may be we are specialist in our field. But we feel that the iPhone is obviously slow being a 2G phone. That is an unfortunate combination with an exciting phone, but when you look at it and its ease of use and the excitement that it drives; incredible excitements. I think that shows a little bit where the market is going to go. And I can tell you, I mean among all the handset vendors and operator, everybody is after the master. They relate to it somehow, either they want it or they want something different, but not they are not sitting there and saying I am going to do nothing.

That's very good. Thanks.

Operator?

Thank you. I now move to Paul Sagawa from Bernstein. Please go ahead.

Okay, thanks. I guess on kind of the [water] I thought there is only one more question. A [coupon] really, when you talk to operator around the world, particularly European operators, they had a tendency to talk about CapEx as a percentage of their sales, and the constantly are selling at drum beat, Oh! This time we are going to be a little bit discipline, and we are going to take our CapEx to sales down to 10% or lower. So if we put me the picture out over the next five years our revenues go up and our CapEx goes down, it will be a great cash flow to our shareholders etcetera. And from my view I've sort of heard this kind of discussion from the carriers for long time and we haven't really seen them deliver that perspective. Is it realistic to think about carriers of the future, existing on a substantially lower CapEx-to-sales kind of ratio? Is there something happening in the efficiency of these networks that will allow that to happen, this growing happening competition most carriers that will allow that to happen looking at your perspective.

Let me first say to the operator here we are trying to come and bring this conference to a close you obviously don't hear us, but this is the last question we are going to take and then again I will let Gary in to finish off the call. But on your question we need to remember that when you rollout the network you have huge cost in land and towers and all that, then you can expand your capacity for quite many years without adding towers or land or so, which means that you can actually see your CapEx comes down in percentage while your spending on telecom equipments from us is not effective could even go up. If you take Cingular's obviously we are hit by the slowdown on Cingular but that dramatic savings they are making is from this effect. Typically you can double your capacity in a consecutive year with 40% more spending or so. So keep that in mind we also see more of this argumentation I would say in Europe where operators have been more focused on cash for generation and I think in this industry when as you compare that to North America or Japan for example where lots of investments goes in, in a fight of having the best and most attractive service in the market, and be first to market those service so that of kind, is great for a strong operators are doing very well. So I think it's distance attitude around the world but there is no magic around this, its they still need their equipment.

Thank you.

I'll hand over to Gary Pinkham to close this call.

Thank you, Carl-Henric. Before we finish today I would like to inform you that our next Strategy & Technology Summit is scheduled for 11th of September in London. Space is limited, so I encourage you to register as soon as possible if you expect to owing to attend. Agenda and legislation information is available on our site shortly. Regarding our interim report, if you have anymore questions don't hesitate to give us a call. Thank you.

Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen.