Telefonaktiebolaget LM Ericsson (publ) (ERIC) Q2 2011 Earnings Report, Transcript and Summary

Welcome to the Ericsson Analyst and Media Conference Call for the Second Quarter Report. To view visual aides for this call, please log on to www.ericsson.com/press or www.ericsson.com/investors. (Operator Instructions) As a reminder, replay will be available one hour after today’s conference. Ase Lindskog will now open the call. Ase Lindskog – Investor Relations: Thank you, operator and hello everyone, and welcome to our earnings call. Today, we will comment on our second quarter report and also take questions and as always. And with me here today I have Hans Vestberg, our President and CEO. I have also Jan Frykhammar, Chief Financial Officer, and Johan Wibergh, who is Head of our Business Unit, Networks and Magnus Mandersson, our Head of Business Unit, Global Services. As always, I have to remind you that during the call today, we will be making forward-looking statements. These statements are based on our current expectations and certain planning assumptions, which are subject to risk and uncertainties. The actual results may differ materially due to factors mentioned in today’s press release and discussed in this conference call. We also encourage you to read about these risks and uncertainties in our earnings report as well as in our annual report. So, with this introduction then I would like to hand over to our President and CEO, Hans Vestberg for comments about our performance and plans going forward. Hans Vestberg – President and Chief Executive Officer: Thank you, Ase. I will briefly go through the second quarter, but I will just start with a couple of highlights from the second quarter, what has been things that are happening in the industry and for us as well. I think that starting with the tiered pricing or call it all service pricing on broadband, especially mobile broadband is on the top of the agenda of our customers. And I think that is important to understand that many operator looking to that in order to capture larger portion of the mobile broadband word and also share both low-end mobile broadband users to high-end and enterprises, and therefore, tiered pricing is important. So, why is that important for us? I guess, that trend is very important for us when we come to you on the best area, when it comes to how to design the radio networks, the IP networks in order to capture and being able to have tiered pricing in the multimedia segment very much lowers (SBSS), what needs to be done in those areas in order to capture the mobile broadband growth and the charging of it. And then, of course, finally, I mean, the service capabilities needs to be tuned into that as well. So, this is a very important trend and it’s on top of the agenda of our customers. Of course, that is huge from the mobile broadband continued to be the driving in the market. However, as we say here, 60% of world’s population still remains to be covered by WCDMA, HSPA, CDMA, and mobile broadband. And also another thing that is lot of discussion in the market with our customer is LTE. Even though LTE today is fractional, the subscribers of 5.7 billion mobile subscriptions in the second quarter is an important evolution, where 20 commercial networks launched on LTE, where Ericsson is part of the majority of them, and of course, are into discussions in lot of them regularly around the globe. The other area, of course, is the BSS/OSS. We outlined already in the market, Capital Market Day that we see portfolio momentum in the business support system and the operating support systems. And we have a good portfolio there with the prepaid or assessing the networks business, but also other application. And now we had – our intention is to go through the acquisition that we announced in the second quarter to add in third quarter in order to us to be a leading position with BSS. Finally, patents have been on the – in the industry this quarter, of course, Ericsson committed very much on the patent on the 27,000 patents that were generated in the history of Ericsson, very solid and important piece. As many new entrants are coming into the industry and where share in technology patents will be important. That was shown when the auction of the Nortel patent took place at the end of June where we together with other technology leaders in the industry and the consortium won that bid for the patents of Nortel. So, it clearly shows that patents are important and playing an even more important role when we go into the network side and everything is going to be connected. Okay, that was a little bit what we discussed with our customer recently and what is important. Let’s crossover into figures, we’ll not dwell too much. Second quarter sales almost SEK 55 billion, 14% growth, and if we adjust for currency and take away acquisitions which is the main part is Korea, we have 27% growth in the quarter. That I think is a good quarter of course on the mobile broadband. We are new markets coming up. We see strong growth in Brazil, China, Germany, Korea and Russia. If we then talk about Japan, we were earlier talking about that the tragic events in Japan would have an impact in our business. We had a limited impact of that and two reasons one was the fast recovery of the Japanese population and how fast they came back to work, which is just fantastic. The second is a very good attractive work of our supply chain that was earlier on redesigning and buying on the spot market which limited impact in the quarter to see that our customer got as much fulfillment all their desire as possibly in the quarter. Profitability, net income up 60% or 59% to be exact, impact on improvement on core Ericsson. However, increased losses on the joint ventures. Dividend paid to joint ventures, Sony Ericsson reported last week, Sony Ericsson had bigger impact of the tragic events in Japan in the quarter and had an impact of not being able to deliver 1.5 million phones in the quarter of the total of 7.6. That made them loss in the quarter of the five consecutive quarter of profit. 70% of the phones are Android based as well as the new Xperia portfolio is well received by the market. So, I think that was a very clear reason for the loss for Sony Ericsson. ST-Ericsson, however, as we talked about in the first quarter as well as it was announced that 23 of June by ST themselves. It is a totally change in marketplace when it comes to feature phones and smartphones and the strength that or the volume that ST-Ericsson has had is of course has been on the feature phones which certain customers that are transitioning very quickly down on feature phones which means that smartphones is not offsetting, even though taking good design wins with more customer network we had than we are previously when we engaged in these joint venture it’s not offsetting. That we saw in the second quarter with widening of the loss where we are now adding new restructuring program in order to come back and have the right size for the company. We, of course, committed to the ST-Ericsson, I think it’s a very important asset for us. We say also in the report that if this quick change that we’ve seen in the last two quarters continue to worse, then of course we need to look in to what that impact has for ST-Ericsson. But, right now with the plans that we have and the best knowledge we have, we have the plan and the assets that we have in ST-Ericsson is okay. But again if there is going to be a significant worsening which we don’t know today that we’ll revaluate in that moment. That leaves to the networks and as I have Johan Wibergh here, I ask Johan to go through the progress on networks in the second quarter. Johan Wibergh – Head of Networks: Thank you, Hans. So, the good speed we had in Q1 continued into Q2 and being fueled by mobile broadband that’s on set. But, also by a good increase of our IP network products and with that then I mean packet core as I mobile networks, IP edge routers as well as IP based transmission equipment. We also had a good development in China on GSM. In Korea where we had a really good development since the acquisition with several good deals as well as the continued strong performance of CDMA in the U.S. So, we then had a 31% up year-over-year despite and the FX headwind we have due to the strong Swedish currency. When it comes then to the geographical mix, we had a shift seeing more countries now taking up stake from mobile broadband, so we could see the growth coming in Latin America, strong performance in Northern Europe and Central Asia, and also in part of Asia as well as in Mediterranean. We had a somewhat slower quarter than in North America and Japan. Margins then continued fairly strong, but were impacted on the restructuring cost that we took out from the Swedish operations as well as some markets. And you should also remember then in Q1 that we had a one-time path of sales, so all for the same and we had more or less or an equal profit development. Back to the Japan situation then as we said in the beginning of Q2 that we expected a bigger impact, I am very happy with the work that we did and we came out with much better than we expected and we had a very high speed in our production in June. Overall, then we have seen that we had continued to take market share and that has been a very good development. And we also see that we are taking more deals, modernization deals in Europe, which is very good in overall for market position, but of course, also then we will have an impact on profitability. Just a few words about this modernization project since we get questions on how they work. And a modernization project is typically new and then where a operator selects a vendor technology for coming 7, 10 years typically. And usually then the modernization project starts with something like 12 to 24 months of a replacement cycle, where you go in and replace the own technology with a more modern technology. And then the modern technology then usually don’t have full cost coverage for that initial phase, but then when that is in place, you then reap the benefits over the coming years with expansions on both hardware and software as well as additional capacity and coverage. Also then during this 12 to 24 months depending then on the operator, we usually then have less of expansions on the old technology since that is really get replaced. I think with that I hand back to Hans. Hans Vestberg – President and Chief Executive Officer: Yes, thank you Johan. Then we go to Global Services, Magnus Mandersson will present that. Magnus? Magnus Mandersson – Head of Global Services: Thank you very much, Hans. Let’s talk a little bit about Global Services. So we ended the quarter with SEK 19 billion in sales. We had currency effect about 12% over the quarter. Our year-on-year sales has been down 5% and sequentially we are up 9% over the quarters. We are also seeing, I would say, flattish sales on professional services. However, the earnings is about the same level as last year, the same period if we take out the restructuring charges as we now give them out on the result. We have actually had a quite good quarter when it come to order intake signing on new contracts in managed services. We have taken in over 24 contracts, whereas nine of these are expansions. This is almost double compared to year back. If you remember in 2010, full year result was 56 contracts and 26 renewals. So, of course, it’s heavy intake of new contracts. Then we are also seeing the systems integration taking off a lot of new business in the area although with BSS, data center transformations and service delivery platforms to come in. This is of course the change of the total landscape in the [ICT] as mobile broadband is growing and lot of these will happen more in the future as well. Then of course we have network rollout, our product managed services that has been hampered with the higher sales, but earnings is lower based on the supply and situation, where we have had over the past nine months or three quarters as well as the Japan catastrophe. This result was in services that we have only one product is short in our installation, we can’t invoice the projects. So it is a lot of incomplete projects there. Then of course we have large rollouts in India that was also big investment for us, that has taken a little bit toll on the earnings of course the modernization of the European (indiscernible). Overall we have increased our professionals. We have up now to 50,000 and we feel that we have a good readiness for the second half. Thank you. Hans Vestberg – President and Chief Executive Officer: Thank you, Magnus. Then to go the last segment multimedia, the multimedia had minus 2% year-over-year growth, of course adjusting for currency, they would be in growth right now. What has come back is Revenue Management, which is a good to see, which is an important piece and the largest piece in this business. TV Solutions came down, especially on compression, and you can be nice and say there was a weak quarter and it was very strong 2010, but we came down on compression. EBITDA margins improving, definitely because of the cost initiatives, we have initiated here we are focusing not only on taking out cost, I think the most important is that getting volumes. We don't have a gross margin problem here, as what I said before; it is more the volumes to get it out and now also when adding in Telcordia product, over time, we are going to have a nice portfolio addressing OSS and BSS. Regional sales, we have now five regions growing. If you are nice, you can include the currency effects are up to six, seven, maybe up to eight regions growing. So, we have a different pattern and I just want to point out that two regions that are really down, and that is Southeast Asia and Oceania and Sub-Sahara. And for their particular reasons they are down, which I were commented before. If you then look at the ones that are really sticking out for growth right now, India 107%, easy comparison, easy comparison; we didn't sell that much last year, but anyhow 3G is coming out. China and Northeast Asia definitely growing well 96% up, Korea, Japan, China 2G all of it is growing up. So, that’s strong and with our Northern Europe and Central Asia that is up 70%, very much fueled by large projects, many of them being Russia, which is the largest market. Latin America is up 17% very much also Brazil there. So, you see that we have a little bit mix because then I come to North America that has been the growth engine for the company. The last two, three quarters and actually double its size in one year in 2010. That means that we will come to a very good position in North America. We are the leaders in services and infrastructure in telecommunication in North America in less than 18 months. That I think is an impressive job in one of the most important telecoms market around the world. Now, we have a negative growth in this quarter for the first time for long time. Of course, the currency has its toll, so it would be growth, but it’s not the same growth right there before. So, we see here somewhat slower network business quarter-over-quarter here and the reason is, of course, we are very strong with these customers, as any customer we look in the investment in different types of quarters here. So, I think that we have established ourselves on a very high level in North America and we will take the benefit. We can see that the service portfolio is now also starting to get a lot of good traction in North America. So, still North America is an extremely important market for us. I hand over to Jan Frykhammar to talk a little bit about the margins. Jan Frykhammar – Chief Financial Officer: Okay, thank you, Hans. And so we go to profitability and focus in the first slide and on gross margins. Gross margins in the quarter ended at 37.8%. That is slightly down sequentially and down from 39% last year, of course, like all our numbers this year restructuring charges are included in numbers and last year they were excluded in numbers. And I think if you look at this margin slide here, we should remember that when we look at the years 2008, ‘09, and ‘10. Having said that, we started to see in the quarter a bit of change in business mix, more as Johan and Magnus mentioned here, more coverage build-outs, more modernization projects and we started to get in the quarter or so a little bit of an impact of modernization project. It was very slow in the first quarter. We believe then for second half of this year that the network modernization projects will continue to be a bigger portion of our sales and margins. And if we look at the year-over-year comparisons, positive one is that we have a lower share of services, which is impacting the gross margin in the year-over-year perspective. The negative ones are, of course, the 3G rollouts in India, some modernization projects, but some of the under absorption in the service organization related to the supply challenges. Quarter-over-quarter it is more of a change of the business mix or product mix that we start to see impacting the margins a little bit. If we take the next slide and look at operating expenses, 15.8 during the quarter, R&D continue to increase and that is exactly in accordance with our plan, the investment area that we focus on, this year as we have said before it’s to make sure that we have a strong position in LTE and TDLTE. We continue to spend our efforts on IP and the new IP portfolio and then as well we have the impact of the acquired LG-Ericsson operation. If we look at SG&A in the quarter at 7.7. Here we have a one-time hit of restructuring charge in Sweden. I will come back to that, but that’s the main reason for the increase. And then if we then look at the full year we confirm our range our R&D guidance for the full year, which is, we believe will be between SEK 31 billion up to SEK 33 billion. If we take then the operating margin, excluding joint ventures 9.2% as reported that is compared to 11.1% last year. We included restructuring charges this year and excluded them last year. So, underlying it is an improvement if we compare like-for-like. If we then take the restructuring charge, this program that we announced in Sweden had a higher uptake than what we anticipated and we believe that – and it was really the voluntary redundancy offers in combination with early retirements that explains that the program became slightly more expensive, but also the fact that it was more successful in terms of number of employees. We decided to take this investment because we see that it is a good payback here of two and a half years. We will start to see impact of run rate reductions during Q3, but full impact from the fourth of this year. If we then take the balance sheet, we have a decent progress in terms of day sales outstanding and payable days. Where we are going to spend our effort and focus during the second half is to get the inventory more balanced and you can see that’s the measurement here on this balance sheet that are off track. It is in accordance with our strategy to mitigate the impact of the Japan situation. It’s also because we are still building production capacity for mainly RBS 6000 or multi standard radio, but it’s also the result of higher business activity or project activity and you can see that if you read in the report because we disclosed the inventory per region and you can then net out to see what’s remaining in the segment dimension. If you take the next slide and we have changes in gross cash, recovered from an operating cash flow point of view this quarter, we had plus SEK 5.8 billion adjusted for restructuring outlays SEK 7 billion. Net cash, however, was anyway negative in the quarter and that is because to payout of dividends. We ended up with the net cash positive of SEK 42.6 billion. With that, Hans, I hand back to you. Hans Vestberg – President and Chief Executive Officer: Yes, quickly summarizing, our targets remains of course, we have our four targets on long-term ambition that then come downs to the plan that will be presented in next capital market day. It grew faster than markets. I think we have proved in this quarter that, once again we had a very good solid growth of 25% best in class volume. We continue to do improvement on the bottom line. We will continue to do so. Cash conversion so far to six months, we are not on 70%, but it’s our clear commitment and target to get there. And our JV earnings are not going in the direction as we are widening the loss on that. So, that indicates a little bit, where we are put into focus as well. So, by that I’m back to Ase. Ase Lindskog – Investor Relations: So, thank you very much all of you, and by this time, we are ready to open up for question-and-answer session.

Sure. Ladies and gentlemen, at this time we will begin the question-and-answer session. (Operator Instructions) Pierre Ferragu from Bernstein, he is on line with the question. Pierre Ferragu – Bernstein: Hello. Thank you. I would like to ask you some, both clarity on the patent portfolio you mentioned on the call today. Are there major handset vendors, who are not paying royalties to Ericsson at the moments or would you think might not be paying enough royalties. We know that you have litigation ongoing with (indiscernible). Could there be any litigation coming in the future?

I would say that you’ve totally failed there, sound that not paying us and they are try of course in an amicable way to get the settlement with the once that we are not getting that settlement. We are unfortunately needs to go to these several litigation. I think that they are not that main, I think the main part of the mobile handset vendors are part of our sort of licensing. However, you have to see that (inaudible) 7,000 patents and main part is on wireless and that’s also, where we have the most cross licenses, but we also have other patents that we need to look in to what we can do with them and after we will pursue going forward.

Matthew Hoffman from Cowen is on line with the question. Matthew Hoffman – Cowen: Yes, another question on IPR. I would like to explore the company’s motivation for participation in the Nortel IPR auction and if you had to characterize it with motivation more about keeping IPR out of the hands of other infrastructure device players or is that more worry about patents stacking driving LTE device cost higher, which would possibly further rollout of LTE infrastructure. Thanks.

Thank you, Matthew. I think it was more of twofold exactly, one of course as you mentioned the defensive one to see that the patents because this industry still don’t on having people being interesting in the industry. We can use our patents and we think that is important and I think that was from a defensive point of view to see that its ends up in the right time. But we also saw evaluating them and that’s why we had a consortium, where we participate that won these deal and that will work on that. And I cannot say much more about it right now because consortium will be founded and the patents will be transferred and that’s will happen during the third quarter. And then the consortium will make the statements, I mean we are one stakeholder, so we can not really comment as one stakeholder right now. So, we will come back and talk a little bit more on the strategies without the consortium. Matthew Hoffman – Cowen: Thank you.

Odon De Laporte from Cheuvreux is on the line with the question. Odon De Laporte – Cheuvreux: Yes, good afternoon. Thanks for taking my question. I had a question about North America, the trend in the U.S. So, revenues declined sequentially, but frankly speaking it is not consistent with numbers reported earlier today by AT&T and I was wondering maybe you are losing market share or is it matter of timing, anything you can comment on it will be real helpful. Thank you very much.

Thanks for the question. I think I almost answered just now. I mean there is defense, when an operating spend and CapEx and we have revenues that can be everything from three months and nine months depending when they activate and when review the investments. And it can also be whatever is including in CapEx that will be lot of passive that is we are not addressing. So, one need to understand even more when you draw a conclusion of CapEx guidance from the customer, we are not losing market share in North America, I think that’s the most important to say. We are well position on the large operators, where created. I would say a fantastic position in North America and we are continuing doing that and working with our key partners as well. Odon De Laporte – Cheuvreux: Thank you very much. That’s very helpful.

Richard Kramer from Arete Research is online with the question. Richard Kramer – Arete Research: Thanks very much and maybe either for Johan or for Magnus. One of the big disappointments for the past I don’t know three or four quarters now it’s been the service business, which you have been talking about for sometime and its gone from a quarter of sales in 2008 to over 35% now, but the absolute run rate of profits from that business hasn’t changed from about SEK 6 billion or SEK 7 billion. I guess my question for Johan or for Magnus is, when might we see some leverage in this business, especially as it continues to drive up headcount and what’s the prospect of the services business over time returning to the double digit operating margin we saw in ‘08-‘09 timeframe?

Hey, Richard, I will take that question. I think first of all if you go through some of the details in the report here, you can look at the professional services business, which is holding up well. And what we have seen for two quarters is more challenging situation for the network rollout business. Overall, the reasons for that Magnus had highlighted very clearly in his presentation here. The headcount increase in this business is either business-driven meaning that is managed service contract or capability-driven meaningful instance that we billed capabilities, for example, in our global service center in India or in Romania and so forth. So, of course, we keep play good track of the headcount and we try to make sure that we all the time work on efficiencies there. So, I think that each area is to turn the network rollout business around the other business is doing fine. Richard Kramer – Arete Research: And when might we see that happened given the comment you have made about inventory build up and some of the projects in various emerging markets?

I think that if you look at the network rollout business there are certain areas in that business that should recover with supply recovery and that is the comment that Magnus made around the absorption in some of the projects. When it comes to the modernization aspect that is one mentioned a long-term business. Having said that, if you have a modernization contract that last per se 18 to 24 months. You also have an opportunity to gradually improve that both by means of being more efficient in the project as well as sourcing. So, gradual improvement business is probably a good bet. Richard Kramer – Arete Research: Okay. Thanks very much.

Zahid Hussein from Citigroup is online with the question. Zahid Hussein – Citigroup: Hi, thanks very much. I just want to have a little bit more information around recent gaining share in IP. So, I mean, it has been brought up a couple of times today around the agent and maybe around the mobile back or if you can just give me a little bit of color on what you are seeing there in terms of globally, regionally and certainly with sort of tier carriers, is it Tier 1 or is it sort of lowered down? Thanks very much.

The areas that are growing really well is several parts related to the IT portfolio. And today, a big part of our portfolio has become (indiscernible). The things I specifically refer to when I talk here, well first of all the transmission products, it is both IP-based microwave or IP-based optical transmission that is doing fine. Also on the IP edge router, where we are specifically strong on something that’s called SBSS, that’s used on fixed internet connections. And we have some Tier 1 customers on that, but we are also starting to gain in volumes without the customers. And we are also providing IP edge routers to mobile operators as a backbone network for 2G and 3G data traffic. Finer than Packet Core, we are doing well in Packet Core when it comes to 3G and 4G networks. When we step in and take a rage of these on LTE, we, to very large extent, also take the deal on Packet Core. And around these products, you have something called policy control and we do something called smart pipes that is mainly due to have a very good differentiated quality of service that you can charge differently on. We are very strong in that area also. So overall, we are gaining. In Mobile World Congress in Barcelona, we announced a new generation of technology is called SSR, the Smart Services Router that will start shipping end of the year and that has also gotten a strong reception by customers. So, I am encouraged by the development of doing. In some of these areas, we are very strong. In other areas, we have been weak and we are gaining in those. I think we still have less to prove in this area, but I am encouraged by the development during the quarter. Zahid Hussein – Citigroup: Just as a follow-up to that, where do you think you need to invest the most in your portfolio of products right now?

Where we are investing a lot is around that SSR products, it’s really a product I am extremely very proud of. It is I think we have been having a drawback against Juniper and Cisco on capacity. With that product, we are going to have that drawback. We are on par with the most powerful edge routers that Cisco and Juniper has. But on top of that, we have a functionality to hand the both fixed and mobile in the same product and neither Juniper and nor Cisco has that functionality. And I think that’s where we are extremely strong. And we have been investing around that product, in that portfolio for sometime. It brings the best together the Ericsson had on the Mobile Packet Core side to also prepare them for LTEs and combining that with the fixed functionality of SBSS and other things. So, I think that’s the area where we have been investing consistent now for a few years and that was in our bringing to the market with shapeness starting late end of the year and then next year it will be interesting to see. Zahid Hussein – Citigroup: Thanks very much.

Edward Snyder from Charter Equity Research is on line with a question. Edward Snyder – Charter Equity Research: Thank you very much. In terns of North America, your weakness obviously in light of this market, how much of your weakness there would you attribute to the weak economy in the U.S. versus say to the timing of revenue that you mentioned versus maybe the competitive impact on prices, which kind of give a feel for the core demand is there and is it mostly to see economy that’s driving in or you are seeing something else?

I heard perfect, but I guess your question was is the less growth in North America that way, because we have growth, it is currency adjusted, yes, is that attributed to the macroeconomic situation in North America? If that was the question I answer no, not to any significant means. I mean, the underlying consumer demand is there, new devices coming out all the time, apps is coming out, and that is what is driving the investment lane for our customer. But again, in the operator and the word will go up and now the investment a little bit depending on what we are doing at this moment. And I think that’s what we are seeing, but again, remember we have established ourselves, when I talk to different volume in North America whereas we are main supply to all the large operators in North America and the U.S. So, I think that is really positive here. Edward Snyder – Charter Equity Research: So, it’s not a competitive effect, mostly just the economy or is it currency or is it just timing of revenue?

Yeah, the currency is one, of course because in dollar invoicing we have a growth in North America in the quarter. So that – so because we are down 6% in Swedish kronor and that would be different from the year before. But, there are no other changes that you are alluding to macroeconomic that is impacting. We see a little bit less infrastructure sales as we said and that piece of course coming from some operators have periodically doing less investment, nothing range, at the level. Edward Snyder – Charter Equity Research: LTE, I mean, should a big push for that in the US, CDMA carriers, and there has been some talk about it in GSM carriers, but it seems that the roll out is a big more muted certainly here, is this the trend in general, the holding off, maybe more growth before they get into capacity, what do you see as the overall trend based on LTE, based on technologies and most of it will be CDMA push and GSM.

I think that LTE is of course on top of menu operators mind at the next topology and are in discussions or have decided. But, we all need to recognize, it is still a smaller portion on the total market both from an investment point of view and investments from the subscriber point of view. That doesn’t mean that it was important, I think it a great importance for Ericsson to be the leader on LTE because that’s topology. But from an volume point of view and the subscriber point of view, it’s still a fairly small portion of the total mobile infrastructure business.

Alexandre Peterc from Exane/BNP Paribas is on line with the question. Alexandre Peterc – Exane/BNP Paribas: Thanks for taking the question. I’d like to get back a little bit to gross margin dynamics, fully of gross margin before the impact of the restructuring it was down only 70 basis points year-on-year and 50 basis points quarter-on-quarter. So, it seems that most of this is down to the geographic mix with LatAm doing well, with India 3G, so that there has been some gross margin sequentially, I suppose. But we haven’t seen much of network modernization through some. So should we expect that to come on top of the emerging markets mix in the second half of the year, so we should be more cautious in the gross margin going forward? Thanks.

I mean as you said when we met in New York in May, I mean the most important when it comes to gross margin development for us as a company is business mix and what we started to see in the quarter is business mix that is gradually changing towards more and more of the emerging markets. In these markets first of all they are still building coverage and it is often as well have quite big services. And that impact the gross margin as least initially as we discussed a month ago. On the modernization project, I think that for second half we will start to see some impact on the gross margin related to modernization projects and that is also what we highlighted in the report. It’s though with the same statement as we made in the first quarter that as a management team we work hard on trying to mitigate these impacts both when it comes to providing project execution. So, we are seeing other types of upselling activities. But, it is fair to say that we now see in that the modernization element of the business in the second half will be bigger than in the first half. Alexandre Peterc – Exane/BNP Paribas: Thanks very much.

Janardan Menon from Liberum Capital is on line with the question. Janardan Menon – Liberum Capital: Hi, thanks. Just a followup to the previous question, one of your comments on your statement is that the India 3G rollout has sort of temporary peak and could drop a bit. Would that have a beneficial impact on margins in the second half of the year and will that compensate for some of the acceleration in the European modernization? And a second question, if I may, is how long would you expect this European modernization to last? You said it’s 18 to 24 months, but when do you see the modernization, the hardware part of that business beginning to drop off and then the software upgrade part of that business beginning to come through? Would that be something that we can expect, say from the first half of 2012?

On the first question there, when it comes to the revenue for India second half, I mean, I am not guiding on that, but as we said in the report in this quarter, we had first of all a quite easy from a phase of comparison compared to last year and we had big development phase of 3G whether that will happen in third quarter, let’s come back to that then. I think on the modernization project, what we say is that in average these projects last probably between 18 to 24 months from an initial phase point of view, and if we now are stating which we are that these projects have started to impact the business in the second quarter and will accelerate in the second half, I mean, then you have to look at the year-and-a-half or so from the starting point. So, we will have an impact in 2012 as well. Janardan Menon – Liberum Capital: Okay, thank you very much.

James Faucette from Pacific Crest is on line with a question. James Faucette – Pacific Crest: Thank you very much. I just wanted to ask from a longer term perspective historically emerging markets have been a lower margin business for Ericsson. And as we go through the transitions to 3G etcetera ultimately should we anticipate that as emerging markets mature that their margin structure will improve to come closer to that, that we see in the developed markets or should we anticipate that your highest margin business will remain in the U.S. and Western Europe, particularly?

Yeah, I think, I sort of disagree with your statement. It is not the particular market or country that is doing the best of the ability is what Johan said here before is the business mix, the type of business we are doing that if it’s a Greenfield rollout modernization, that’s when we fight for the market share, that’s the most competitive. And then you have upgrades or expansions that is the same basically in all markets, then you had different prices. But I would say, it’s not about the markets here or certain countries, it’s about the business mix, where we are in the (indiscernible) project. James Faucette – Pacific Crest: So, maybe another way to ask the question is as you see the developing markets begin to have more mature networks and you see more of your business with them shifted to software and upgrades, then we should expect your margins will improve in those, as a result of that in those markets, am I characterizing that correctly?

You are basically stating what I said, yes, if they are in that phase they will have a better profitability. So, that’s correct. Then there are many countries in the word generalization and all of them is very difficult, but your statement is logically, absolutely right. James Faucette – Pacific Crest: Okay, that’s great. Thank you very much.

Kulbinder Garcha from Credit Suisse is on line with a question. Kulbinder Garcha – Credit Suisse: Hi. My question is just a clarification for Hans, when you talk about the second half everything that seems to be said today suggest that margins are going to go down frankly, whether it’s the buildup in emerging markets in revenue recovery that you are seeing now, Asia-Pac, Middle East, Africa, I don’t see any reason why that stopped, it’s going to actually recover probably even more, given the one day investment for the last couple of years combined with the fact that the European network modernization. So, my question is what are the positive drivers on margins in the second half if any especially given that North America as you say is a decent high in elevated level. So, I just don’t see what the positive drivers are for especially networking, I guess, operating margins I am thinking? Is there anything positive?

Kulbinder, thank you for the questions. Of course, as Johan said before we are working on the local mitigating factors that our job to keep up the margin and doing profit improvements. I think that we have areas, where we are doing cost efficiency work on. We have market that is coming into another phase than they have been before. So, it’s always going to be mitigated, in fact, important for us as we were so clear on the network modernization from the beginning that we were aiming for growing market share in Europe. We have done that. What we also said that is going to be competitive environment. So, that we were clear from the beginning and talking about that and we just want to be transparent and tell you about that. That doesn’t take away that this management team sitting around the table and the rest of the executives here, all committed to work hard to find upsides mitigating factors. But to single out one or two, specifically and that on the, but of course, we also to the work, but again we used to be very transparent on the net organization which we think is an important piece of our growth structure. Kulbinder Garcha – Credit Suisse: But, I guess, Hans, there are the mitigation factors because you are doing a lot of restructuring in the recent years, you are not doing that much market, you are doing some of the suppliers now, but then you also have the RBS 6000 kind of renewable that probably helped as well and you had North America very strong CDMA. I’m just not sure what is the – can you give me one or two mitigating positive factors?

That we’ve been working on, we do work over a couple of years, but whole portfolio has present at the top of the market, few platforms, hardware and software coming in, so we have a lower cost base on a product coming out. I mean we are working long term with our cost efficiency in minus area we are working with transformation of offshoring all the time and not necessarily going to be in a huge new restructuring. That’s we have done and of course we are coming with a lower base all the time. So, we are working constantly in services and in networks on that and in multimedia where the program that is also in the work and there we need volumes. So, of course, there are, of course mitigation factors, but, so yes, we work daily on that’s part of our work. Kulbinder Garcha – Credit Suisse: One final thing just on China, one of the things that’s been clears, as quite a strong 2G upgrade cycle, sorry, 2G strength, let’s say, I think starting last September Q4, I think it really kicked in. Now, what’s the sustainability of that? I assume that your business in China is probably still very high margin, I’m wondering, are you expecting that to taper off or is that sustained strength because of good sub growth or how should we think about that?

When we look backwards, of course, it’s a good demand on 2G and edge in china at the moment from the consumers and the consumers are growing there. So, we look forward we see China still continue to invest in GSM. It’s going to be on this level and not remains sort of seem, but definitely we see a continuation of the GSM for a while. Kulbinder Garcha – Credit Suisse: Okay, thank you.

Kai Korschelt from Deutsche Bank is on line with the question. Kai Korschelt – Deutsche Bank: Yes, thank you for taking my question. So, my first question was just on the US business and the way I calculated it is if I adjusted for FX, you are still up 16% year-on-year which is still pretty healthy. And I’m just wondering in terms of seasonality maybe in the second half and the mix between LTE and CDMA, how do you see that evolving? And then my other question was just on the revaluation impact in interest line, it looks like it was several hundred million kronors, how much will it exactly if you could disclose that, please and what would be a more normalized run rate for interest? Thank you.

On North America, of course, we have at the same time we have expansion of CDMA and we have new roll outs of LTE that we are doing at the same time. Time to mix of that, I would actually say it’s the consumer demand on the different type of technologies and how our customers are deciding to launch and that we need to ask them for that, I cannot reveal what plans they have. So, it’s going to be a mix of consumer demand and the plans they have for launches of different markets etcetera. But, currently we are rolling out most CDMDA and LTE in the regions right now.

Second question what I will do then is that I will ask IR to get back to you with an answer on that one. Kai Korschelt – Deutsche Bank: Okay, thank you.

Patrick Standaert from Morgan Stanley is on line with the question. Patrick Standaert – Morgan Stanley: Hey, thank you very much for taking my call. I would like to come back on the gross margin projection, if it’s possible. And particularly on the network modernization, this is not new, you have been flagging this for a while now and certainly not a quarter is met recently, this wasn’t a big worry for you longer term. I’m just trying to see if it’s anything new happened recently to really flag this as a biggest threat to gross margin profile or is this something that just wanted to repeat to make sure that we mobile.

I mean, we have said all along that this is an important investment for us in footprint and it’s a long term investment. This has not become any worse than what we originally anticipated. What we said in the first quarter was the activity level on the modernization project as such was perhaps a quarter or so below compared to what we are again we anticipate is now we also report that saying that we have started more of these modernization projects, but that they will accelerate in the second half. So, it’s a little bit of the reminder. Nothing else. Patrick Standaert – Morgan Stanley: Okay. Thank you.

Mark Sue from RBC Capital Markets is online with the question. Mark Sue – RBC Capital Markets: Thank you. Hans, recognizing LTE is small today, does that feel if the rate of commercial rollout of LTE can be further pushed out or carriers waiting for further consumer demand to expand the rollout, I mean the urgency seem to be dissipating. And then separately another competitor Nokia Siemens seems to be rethinking their options after failing to find a buyer. With the price now even lower, would you be interested in further consolidation?

I start with the first one. On the LTE, I think what I have been surprising we can probably ask you want to comment is that. LTE is coming earlier and HSPA is going further. So, I would say that we see a momentum on HSPA, which will be prolonged because of the proliferation of brought back from HSPA, at the same time we see a big interest royalty. If you look at Ericsson because that’s probably what is more important, we will not see significant revenues that impact of the totality on LTE until May 2013. That’s how we see it. So, that is giving your guidance. That’s again its not saying that LTE is most important. Because R&D is there and investing right now, but the site as we remember are all very long in this industry as before it turned into revenue. Before I comment on NSN maybe Johan want to comment something.

No, I think LTE is developing exactly as we saw with even slightly quicker than before and we have out past one million subscribers on LTE and we got much quicker and we are not ready. I think a few years out in time we going to realize that LTE was few years quicker reach volume compared to the 3G. So, it’s growing accordingly to plan until what expected to boom immediately and everything here is really depended on device availability and I think if you look at in the market, you will find that quite few devices are launching initially and then they become more and more and it will pickup in speed. I’m very pleased with the development on Ericsson. We continue to keep our strong market appreciation in LTE and that’s done quite well in Q2.

And I will give you quick answer on NSN. No, we are not interested. Mark Sue – RBC Capital Markets: Thank you, gentlemen.

Operator, I think we can take one final question then before we end this Q&A session.

Okay. Tim Boddy from Goldman Sachs is on line with the question. Tim Boddy – Goldman Sachs: Yes, thanks for question. Really sort of question about the growth and you don’t give growth guidance, but the sequential growth I thought in the third quarter was far below the time for seasonality, we have seen historically in the business. And obviously your year-over-year comparison reflected by the supply shortages of a year ago. But it does still like growth is slowing and the cycle could be slowing a bit here. Can you just help me understand, why in the season the point of peak growth varies in? Thanks.

I think that you alluded to the sequential growth or at least the historical one. Of course we need to remember the first quarter was very strong and we are all on growth rate on the 27% currently adjusted, but that was just fairly high. What we are aiming for and is of course growth asset in the markets. We are bidding because the market is out there as you know on the infrastructure somewhere between three to five years to come. And that’s what we need to beat and at that moment we are doing that. Let’s see I think its portfolio momentum in mobile broadband, portfolio momentum in managed services, its portfolio momentum in voice-based business. We are number one on mobile broadband and number one on managed services and we are building a very strong (indiscernible) with OSS/BSS, I think we are doing the right thing to the company by taking cautious measure at the same time. So, I think we should be able to grow of course this is the task that the expected demand to grow and that’s what the board has told us to do. Tim Boddy – Goldman Sachs: So, the weak sequential momentum is just a reflection of kind of volatility in to quarter rather than a change in trend and you are thinking?

I would include R&D is one sort of factor, which is very important here. We have several different factors in between the quarters and we are also mixed with between markets. But I’m not predicting next quarter is going to be the same growth and also where you are coming the more that we have and again we think the portfolio momentum in this area and we will well position. Tim Boddy – Goldman Sachs: Great, thank you very much. Ase Lindskog – Investor Relations: And by this, we then end our call and before saying goodbye, I would like to invite you to few of our upcoming events. We have our North American Analyst Forum, end of August in San Jose; and the Asia-Pacific Analyst Forum in Beijing, mid-September; and then our Capital Markets Day coming up on November 9 here in Stockholm. So, you are most welcome to visit our – here then in Stockholm in November. So by this, thank you very much all of you for listening in and asking questions. Bye-bye and thank you very much.

Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect.