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LM Ericsson (NASDAQ:ERIC)

Q4 2008 Earnings Call Transcript

January 21, 2009 8:00 am ET

Executives

Gary Pinkham – VP, IR

Carl-Henric Svanberg – President & CEO

Hans Vestberg – EVP & CFO, and Head of Group Function Finance

Analysts

Mark Sue – RBC Capital Markets

Pierre Ferragu – Bernstein

Sherief Bakr – Citi

Edward Snyder – Charter Equity Research

Jeff Kvaal – Barclays

James Faucette – Pacific Crest

Rod Hall – JP Morgan

Alexandre Peterc – Exane/BNP

Matthew Hoffman – Cowen

Stuart Jeffrey – Nomura

Kulbinder Garcha – Credit Suisse

Gary Pinkham

Thank you, operator, and hello everyone, and welcome to the New Year and to our conference call for the fourth quarter 2008. With me here in Stockholm is Ericsson’s CEO, Carl-Henric Svanberg, and Hans Vestberg, the Chief Financial Officer.

As you know, we will be making some forward-looking statements during the call today and these statements are based on our current expectations and certain planning assumptions. There are risks and uncertainties associated with these planning assumptions and the actual results may be different due to a number of factors, and we encourage you to use caution when considering such forward-looking statements.

With that out of the way, I would like to hand over to Carl-Henric for comments about our results and plans going forward. Carl-Henric?

Carl-Henric Svanberg

Thank you, Gary, and let me be rather brief as several of you may have followed us on the webcast, and let me start on an overall comment on the telecom market in 2008.

We passed a 4 billion subscription milestone, a pretty amazing number, especially for us working for an old communicating world. It was also the year of the mobile broadband breakthrough, which no longer concepts, ambitions, ideas, it is happening. And I’m sure that most of you around this call, you’re using your Blackberries are smart phones or laptops and your existing Internet and dealing with your mails wherever you are, at every moment, whenever you want. There is also, it is basically becoming standard with built-in modules, be it HSPA modules in PCs. But we’re also seeing a real convergence trend now focused on migration of networks to all IP convergence, and all IP networks, and it is also affecting our way of working.

The financial crisis is obviously of focus and I’ll get back to that. But we must remember that the long-term positive fundamentals are intact here for where we see this. It is not a telecom crisis, it is a financial slowdown with the effect it has on the society. We just reminded everybody on a call that Jeffrey Sachs, the Special Adviser to UN Secretary General about telephony where he says that the mobile phone is the single most transformational tool for development in Africa. It is important to remember the huge importance of build out of mobile telephony in all parts of the world, and that only as a first step. Then comes the connection to Internet and then (inaudible).

But going into 2008 and how we performed, we reached sales of 208.9 with a growth of 11%. And here it is important to note that the currency rates that have been swinging up and down are basically back where we started, which means that the 11% growth is intact even with the currency changes. Operating income of 23.5, which is on par with last year, but last year started with a stronger first half; 2007 started with a stronger first-half, weaker autumn in 2008, it was a weakest start and a stronger autumn. So we have actually turned the trend and we have a positive trend here through the last half here

Cash flow reached 24 billion after a lot of hard work. We have seen a year of 11% growth. Also working capital is up 3%. Cash conversion reached 92% and well exceeded our targets of about 70%. We are now at with a cash position of 34.7, and I think this is a strategic – a matter of strategic importance in this time of the bank crisis and financial crisis. It is important that we have the strength and the capabilities for difference scenarios here.

Restructuring charges were announced a year ago, with ambitions of reaching 4 billion in savings and 4 billion of charges. We accelerated that as we saw more opportunities throughout the year and we ended up with 6.7 billion. The board is going to propose a dividend to the shareholders meeting of 1.85. This corresponds to a total dividend of 6 billion to be compared to last year’s 8 billion, basically reflecting the fact that the Ericsson earnings is intact, but we’ve had a dramatic decline in the contribution from Sony Ericsson. So in terms of the dividend versus our earnings, it is an unchanged ratio there.

Of course, we are all aware of how Sony Ericsson has been affected and the whole handset market is. So I’ll come back and talk more about that in a second. If we then look at the global economic slowdown, first of all, as I said, this is not a telecom crisis, this is a financial crisis that has turned into an economic slowdown. If we look at our market, operators are in good shape. They have strong financial positions, most of them with very, very few exceptions, four or five exceptions, the networks are fairly fully loaded, and there is strong traffic increases almost everywhere. And therefore there a fundamentals in place for continued expansion and investments in networks, and the effects on the mobile network market for that will not be that significant.

So far we have hardly seen any effect at all in the mobile network investment. We can see some on the fixed side, people this time are rather abandoning their fixed lines but they keep their mobile phones. However, having said that, when we are experiencing in the world today the most severe economic decline that we have seen since the 30s, and now it is across the world. It seems unreasonable to assume that our industry would be untouched, and that is also why we’re taking precautionary actions here. obviously, the handset market is affected, primarily on the replacement side. So far we haven’t seen much of a fall in buildup of further subscriptions in the world, that continues. But replacement phones sales is declining as people continue to use their existing ones and they don’t call us, but they use the existing phones.

When it comes to the cost reduction in 2008, I can be brief. We wanted to do 4 billion, we ended up doing 6 ½ billion. All of this is now basically is in place, so we should have full effects from the first of January. More importantly is that we will continue to do more, and let me – what we will do is basically the same amount of charges, but we will, this time, we believe we will have effects of around 10 billion by next summer, by mid-year 2010, against 50-50 split between total sales and operating expenses.

But it is important to understand that the underlying rational for this cost efficiency actions is the fact that we would be moving towards all IP technology. This means that we will be able to use or we are able to leverage synergies between different technologies, to work with fewer software platforms, to have an higher degree of hardware we use, and that means that we can simply put work in a more efficient way. So the savings we are doing or plan anyway to come for the during the next several years. We are accelerating it because we want to make sure that we prepare for tougher times here. But it also means that we are not changing our strategy, we’re not losing any of our capabilities by doing this.

It will result in further consolidation of R&D sites we have done already through the years. We will do more of that. There will be some lay offs, but it will also be fewer temporary workers and consultants. All in all, it will affect some 5,000 employees in the world of which 1,000 will be laid off here is Sweden. This is on par with what we did in 2008.

If we then look at Q4, we had a strong quarter. We ended up at 67 billion. This obviously corresponds to a growth, a strong growth of 23%, not fully half of that were currency effects. More than half was the effect of an higher business activity than we I guess expected. It was not any particular market, not any particular product area, just generally across-the-board. And even with no currency changes, it would at least would have been our strongest growth quarter throughout the year.

And operating income, we reached an operating income of 9.2 billion with a capital gain from the Symbian share divestiture offset by the loss in Sony Ericsson. And excluding Sony Ericsson, this number, 9 billion for the Ericsson business, is on par with the highest earnings that we’ve had before. Cash flow was 7 billion as I talked about. Hans will come back and comment in a minute.

I will just give a couple of comments around the regions before I hand over to Hans. Europe showed a break of trend here, getting back to growth 5%, obviously with some effects from the currency side. We are generally seeing a growing demand from mobile broadband. Services is obviously a bigger part of our sales in Western Europe than anywhere else in the world, close to 50%, and even increased focus now on managed services in various forms. We had countries like Germany, Denmark and Italy that are sticking out little stronger than others. But you can see on the graph that Q4 was a strong quarter here.

If we look at the same region, certainly Europe, Middle East and Africa, sales are up 24%. You have heard us comment on several times that we were seeing an underlying business activity, healthy growing, and now it translates into sales growth, and you can see on the graphs again that that’s an interesting trend there. It is about 2G, it is about 3G, across the region. Nigeria, Saudi Arabia, South Africa, all involved in primarily 2G and some 3G projects, but we also have Russia where we have major 3G rollouts going on.

If we then go into the Asia-Pacific, the strongest growing region in this quarter, 49%, with a lot of activity in many markets. For the first time, India for the full year is our largest market and it’s also the fastest growing market. Japan and Indonesia are other strong markets. Japan, we’ve talked about Japan several times, we have had several great years, but we were slower in the beginning of the year. Q4 was a strong quarter in Japan is now the fifth largest market. Indonesia is another strong growing market here. We have also 3G licenses that were issued just a few weeks ago, immediately leading to RFQs and an award process going on. It won’t take long before we see the outcome of the wideband CDMA rollout for Unicom. And we continue to hope for a good outcome as we talked about before.

If you look at Latin America, and you can look at the chart, you can see it’s a strong – the strong growth continues there, but the comparison got a little bit tougher because Q4 2007 was strong. Here again it’s a lot about both 2G and 3G new builds and expansions. Mexico and Brazil are obviously still the most important countries, Brazil the biggest, but Mexico the one right with the strongest growth. We haven’t really seen any financial implications yet, but obviously Brazil like Indonesia and there are some other markets here where we have seen a very strong decline in the local currency. That may get some effect here over time. But 3G is well established across the region.

If we look at North America, we have 13% sales growth, less than we have seen in the previous quarters. But if you look at the chart you will see that that it’s more the comparison that gets difficult here, more challenging. Q4 last year was when the stronger sales started. It is all driven by a consumer demand for mobile broadband. It is really picking up in the US. Everybody wants mobility wherever they have are now, and it’s a lot of focus on continued rollouts on HSPA and expansions. Obviously, we have currency effects here as well in the US as dollars had come up as much as it has.

So let’s go into more details on the financial numbers. Hans?

Hans Vestberg

Thank you, Carl-Henric. Hello everybody. I will comment the financial figures a little bit more in detail and I will comment excluding restructuring charges if I don’t state otherwise. Sales were 67 billion Swedish kroners in the fourth quarter giving a full year sales of 208.9. The full-year growth is 11%, and as Carl-Henric mentioned, the currency impact is very limited on a year-to-year basis. In the fourth quarter we grew up 23%, we have an impact of the weakening Swedish kroner by the year-end, which has given us some extra growth in the fourth quarter. However, even excluding that, that still would be our best quarter, the strongest quarter, the fourth quarter.

Margins, the gross margins is going down to 35.2 percentage, which is a decline with some 1% compared to the fourth quarter last year, more I would say a mix issue. We have a lot of completions of projects, especially this new network rollout, you can see on acceleration of network rollout services, that has a sequential growth of 61%. OpEx continued to come down and we can see that our cost rationalization program during the year has given effect, however somewhat offset of the currencies in the fourth quarter, all in all ending on an operating margin of 13.7% for Ericsson, whereas we have a negative contribution from Sony Ericsson of 0.6, and then a positive contribution from a capital gain from Symbian in those numbers.

Net income ended at the 3.9 billion Swedish kroners, and that’s a number including restructuring charges and also the full contribution from Sony Ericsson, which includes also restructuring charges, so that is coming down to earnings per share to 1.21. If you then look at cash flow, the cash for full-year ended at 24 billion Swedish kroners, which in the fourth quarter we made some 7 billion Swedish kroners in the operating cash flow. This has been done through hard work of all companies, of course, with the focus we had on cash flow.

On the working capital side, we have improved our inventory and the trade payables and the trade receivables went up in the fourth quarter, and the main reason is of course volumes at the end of the year, but also the currency exchange rate that we used, the closing rate here, so we now we get them – it’s an increase on our receivables there. Anyhow that led to a 92% cash conversion compared to 66% cash conversion last year.

And if we then just to get a little feeling about our financial situation, we added some 10.4 billion Swedish kroners in net cash last 12 months, going up 34.7 billion Swedish kroners in net cash, adding some 4.4 in the quarter. And if we also look into our debt structure, which has not changed since the last quarter we reported it, but do have some repayments falling due in the second quarter of 3.5, the rest is fairly good spread out well up to 2010 to 2017. All in all, a very balanced situation on the balance sheet. An addition is that we have revolving credit facility is of some 2 billion US dollars as well.

So let us look into the three segments starting networks which had a very strong ending on the year, growing some 22%. Of course, there is a dollar effect in the quarter, but full-year, a growth of ten has very little currency changes, so still a good year and good growth for networks. We can see that last year we had record deliveries for GSM, and Carl Henric mentioned, we have now the two largest markets basically going 3G. That’s China, that’s decided, India most probably will be taking the final decision in this side of the year. So that is very encouraging.

But also we have the very good progress in our IP broadband portfolio with a lot of first contracts. Of course, based on Redback and Entrisphere business. We can also say that Redback had a very good fourth quarter, continued growth, really very good growth. Finally clearly the shift in the soft switch and the blades after which is next soft switch or switching technology which also is very important. All in all, leading to an operating margin of 14%, and that increase or improvement during the year is of course driven by volumes, but not only that, also the cost efficiency gains, and that was down during the year.

Multimedia, growth of 4%, but for comparable units 21% in the fourth quarter. We can see that we had good growth and in both Tandberg Television revenue management in the fourth quarter. We can see some slowdown impacting the EMP, Ericsson Mobile Platform, due to the global handset market. Other than that, we ended on operating margin of 12%. That includes of course the 0.8 on the sale of the Symbian share. So that will lead multimedia in the fourth quarter to a slight loss, and also for the full-year. As I said before, this is a business where we have good growth areas and good profit areas and we have investment areas, and that is panning to be somewhat slight loss for the full year.

Professional services, the last segment, had a very good quarter, growing some 34% in the quarter and 26 in constant currency, full-year growth of 14%, which is good. You can also see that now that we have sales growth in all the different segments or private [ph] areas within professional services, from managers to system integration, customer support, education and consulting. Managers have definitely been developing good this year and we believe we are the leader in the managed services industry for telecoms, ending with 11 new managers (inaudible) and 250 million subscribers in our operations right now. So that has been growing nicely.

Finally we recorded all time high operating margin of 18% for the quarter in professional services and full-year 16%. This is of course driven by the high volumes in the fourth quarter but also of the continuously efficiency gains that we’re doing global services and the favorable mix in the fourth quarter.

So by that I hand you back you, Carl-Henric.

Carl-Henric Svanberg

Let me just say before we hand to Q&A here, Sony Ericsson’s handset market is well known I think. We are seeing declining in demand for handsets, especially replacement phones, and Sony Ericsson is effectively 23% decline. They are therefore taking very strong measures, they are adjusting their OpEx cost structure with some €480 million, which is quite a lot for a company with about 11,000, 10,000 employees. We are confident that these are activities that will be very meaningful in the situation that they have. They continue to bring out great phones to the market, so they are – they should be well equipped to drive a good turn around here, but of course it is a challenging market that they are in right now.

To finish off here with our focus for 2009, it’s quite obvious. We are spending more time than ever to be close to our customers, make sure we understand not only their principles and ideas, but how they are actually going to run projects, and if there is any sign of any delete or any change in their view, make sure that we are well positioned to grab every opportunity that is out there. We are preparing for tougher times.

There are uncertainties and it’s not easy to predict exactly how things are going to develop here. We will have a continued focus on margins and cash generation. There are lots of opportunities to take market share here, and I don’t think this is the time to buy market share, I think it’ll come a little bit by itself because there are weaker players out there. We continue with tight operational governance and make sure that we are well positioned to take, to grab opportunities as they come along and extend our leadership.

So with that I’ll hand back to Gary for Q&A.

Question-and-Answer Session

Operator

Our first question today comes from Edward Snyder of Charter Equity Research. Please go ahead. Mr. Snyder, Mr. Edward Snyder, your line is open to ask a question.

We will take our next question from Mark Sue of RBC Capital Markets. Please go ahead.

Mark Sue – RBC Capital Markets

Thank you. Recognizing what’s driving your full-year guidance, can you perhaps give us your thoughts on how we might see seasonality develop for 2009? And also maybe if you could tell us which regions you feel most comfortable with, and conversely which regions you are concerned with from a growth point of view as we start the New Year? Thank you.

Carl-Henric Svanberg

Let me just remind you of the obvious in our report. We are concluding that fundamentals are in place for continued investment in our space, but there are higher uncertainties due to the very dramatic economic decline that we usually see, and that is why we are more focused on presenting how we see things, and presenting what we do to makes sure that we stay competitive and get decent margins even in a tougher scenario. So with that said, there is nothing fundamental that should be out there changing seasonality. But with a larger uncertainty, I guess that could influence even that part. And I don’t think that there is any fees or any particular factor that could make one country more or less attractive than it would normally be. One can of course argue that the countries with very sharp declining local currencies, an operator, some of them depending on how they have structured their balance sheet, could have lesser capacity to invest. I mean that is a clear one. But I think it is also clear that these markets tend to be the fast-growing ones in terms of subscriptions. And everybody knows that this is a competitive game where it is about grabbing market share. So anyone that hesitates on their build outs would immediately lose to someone that is more aggressive. So even that has its pros and cons. I don’t think there is anything in the situation otherwise that would change an normal year.

Mark Sue – RBC Capital Markets

Okay. And Carl-Henric, you didn’t mention anything about swapping out Nortels here, is there a plan in place for that?

Carl-Henric Svanberg

Well absolutely yes, in the sense that if you look at where we were in 2003 with a market share of 30 plus some, and there were 12 competitors. Today there are maybe 3,4 strong ones left, and we have well over 40. All of that is market share growth as a result of companies leaving or contracting here, and Nortel is one of them. So obviously Nortel’s market share is gradually picked up. I guess we haven’t seen the analyst story of Nortel yet. They are doing Chapter 11 and they may come back in a new format or sell bits and pieces, but certainly that’s market share expansion opportunity.

Mark Sue – RBC Capital Markets

Thank you.

Operator

Thank you. We will now move to Pierre Ferragu of Bernstein for our next question. Please go ahead.

Pierre Ferragu – Bernstein

Thank you for taking my questions. With regard to managed services, you had a very strong quarter, and a lot of that of course. But I was wondering how much of that is more one-offs like consulting related to your 3G rollout contracts for instance and how much is more of a recurring nature? And when looking into 2009, we saw a lot of operators considering outsourcing to cut cost, so I wasn’t reading how your pipeline looks like and if you expect significant number of outsourcing deals for 2009? Thank you.

Hans Vestberg

Okay. Regarding everything that is reported in managed services is the recurring business, so there is nothing else. But if you looked at the whole professional services, roughly two thirds is recurring business and the rest one third is more projects or assignments or system integration together with some solutions on consulting et cetera. So that’s how the structure is. Regarding going into 2009, I tend to agree with Carl-Henric.

There are of course opportunities also in a little bit more uncertain marketplace going into 2009. For example, managed services could be a very interesting product for operators if THEY seeking efficiency gains. So then we are feeling pretty comfortable. We had a good solutions and we are leader in managers, so if that market will grow in importance, we would be definitely well-positioned.

Pierre Ferragu – Bernstein

But do you see already an increase in your pipeline of projects or operators asking you for to bid on the outsourcing?

Hans Vestberg

I would say that all operators, not all, but the main portal operators of the world are all considering managed services in one form or another, then of course decision-making is a little bit different. But I would say that we probably see a little bit more operators looking into that right now.

Pierre Ferragu – Bernstein

Thank you.

Operator

Thank you. We will move to Sherief Bakr of Citi. Please go ahead.

Sherief Bakr – Citi

Thank you very much. My question really relates to competitive pressures and pricing dynamics. You alluded that some of the smaller players are sort of going away. Can you maybe update us on how you see the competitive dynamics changing over the next 12 months, specifically on pricing of new contracts? And may be added to that given a lot of concerns about credit availability, what the role of credit export agencies will play or have played in your market share gains over the last 12 months, and perhaps more importantly for your competitors, particularly the Chinese? Thanks.

Carl-Henric Svanberg

I would say in general that in such situations, if there was, which we haven’t really said, but even if there was a market decline or a tougher situation, I guess you could on one hand argue that everybody will be more cautious around their margins and protect their bottom line. One could probably also argue that one would protect the volume and make sure that you fill up your business. Now most of us are not sitting with any many factors, we don’t have that issue. I am not able to say whether it is going to go one or the other way. I would rather say that, I don’t expect pricing pressures to accelerate here. I think it is also quite important to remember where everybody is on their earnings. We are making some decent margins, and so we have a pretty solid cash position. I think we’re the only one in that position, everybody else’s basically in various forms of debt with poor margins. So I think we do not foresee any particular increased competitive price pressure here. And maybe Hans should focus to the financing?.

Hans Vestberg

Yes. As you know we have a clear policy in the last five years on the financing that we’ll use our balance sheet to a very little extent and you can see it on the balance sheet. However of course we’re working with the credit agencies around the world to support our operators, especially of course the Swedish credit agencies. I would say lately they have been supportive in supporting us in making these all around the world. So I cannot quantify if that has increased our market share particularly or not, but they are important, the times of course when operators are looking in to their cash position in a little more challenging times ahead. So yes, we work with the credit agencies as usual.

Sherief Bakr – Citi

Just as a quick follow-up here, are you seeing any evidence of your Chinese competitors seeing any form of financing strains in the current environment, is that may be causing it to be slightly less aggressive or if it is probably less favorable payment terms to your potential customers?

Carl-Henric Svanberg

I think in general, with the sort of growth that they have seen, they are, they are not living in another world than we are, so they will have the same constraints as anybody else. With strong growth, they need strong finances, and that is probably not their best game right now. I think they have in an pretty amazing way been able to support a lot of growth from a not too strong position, and they seem to be able to do that.

Sherief Bakr – Citi

Thank you.

Operator

Thank you. Next we will move to Edward Snyder of Charter Equity Research. Please go ahead.

Edward Snyder – Charter Equity Research

Thank you very much. Can you hear me now? Good. Carl, you’ve seen a very strong performance in network rollouts in Asia, how much of that is an effort do you think that use of money budgeted for 2008 for say the end of the year versus ongoing spending? And should we expect the new network rollouts in 3G in China which you alluded to RFQs to also carry the lower margins typical of GSMs initial network rollouts? Thanks.

Carl-Henric Svanberg

I think that every time that you look at projects that where there are very large quantities, where there is a lot of footprint being secured and many years of expansions, you can’t expect the battle to be pretty tough, and that is always the case. There is no difference whether it happens to be China or Latin America or anywhere else. So, of course, it will be tough margins initially there, but it’s one of the greatest business opportunities since several years and for several years, I would say.

Edward Snyder – Charter Equity Research

And then in terms of the strong performance in the fourth quarter, especially in India and the rest of Asia, do you see that more as an ongoing business, or how much of this was to use of budget that already had been allocated for 2008 before the end of the year?

Carl-Henric Svanberg

That’s – I mean these are not state owned companies that have budgets where you can use up money, otherwise it is getting lost. I mean these are private companies, so public companies, and they are – it doesn’t matter if they spend it now or late, it is the same investment any way. But there is an element of what you are saying. There is always an element of Christmas shopping and, some years it’s more, some less, some years, it is less. We would probably have expected it to be a little bit less this year, and it wasn’t. It was a pretty good year in that sense.

Edward Snyder – Charter Equity Research

Thank you.

Operator

Thank you. Next we will move to Jeff Kvaal of Barclays Capital. Please go ahead.

Jeff Kvaal – Barclays

Yes, thanks very much. Carl-Henric, on the dividend, it seems just looking back a bit that the dividend reduction is higher than Sony Ericsson’s contribution has been in the past. So should we be – should we read this as worry about Sony Ericsson going forward, or are you being just careful about your cash heading into 2009 given your uncertainty uncertain view? Thank you.

Carl-Henric Svanberg

I think the – if I should speak for – just interpret the board discussion, I’m part of the board by the way, but this is not a management decision obviously, and eventually it’s going to be a shareholder decision. But I think the view is that, to reflect the fact that our earnings including Sony Ericsson has come down, and therefore our total earnings have gone from 31 to 24. So a reduction a similar reduction of dividends seems appropriate. I think also the board wants to on one hand saying that it is good to be cautious in these times, and on the other hand not overreact, because we are in a good position. Ericsson is well positioned to grab some opportunity and continue to develop well.

When it comes to Sony Ericsson, they have a quite strong financial position. They have a net cash of €1.1 billion, so they should be able to deal themselves with even a tougher development, of course, not for too long, but there’s nothing around the corner that we are planning for that.

Jeff Kvaal – Barclays

Thank you.

Operator

Thank you. James Faucette of Pacific Crest has our next question. Please go ahead.

James Faucette – Pacific Crest

Thank you very much. I wanted to follow on the questions related to your especially Chinese competitors and I’m just wondering obviously you’d think they’ll be subject to the same decisions of tough [ph] repayment or payment terms, et cetera, but I’m wondering how if any the impact of currency moves may have affected their competitiveness, particularly in emerging markets where contracts seem to be driven primarily by price? The yuan obviously has been quite strong whereas the Swedish Kroner has been weak along with a lot of these emerging market currencies, so I’m just wondering if you’ve feel like this improves your ability to compete with them specifically n price or if we haven’t seen much change in that perspective? Thank you.

Carl-Henric Svanberg

I think they are hard to read at times and they have done I guess we must just conclude that they have done a good job in building up their position in a rather rapid time. Obviously, it is easier to take reference project and so when you take your first one, the more you grow your portfolio and your sales and you have considerations to left and right to kind, you cannot sell cheap to one customer to someone else and so on, they will end up in a more normalized way I would think. They will I am sure continue to fight hard to grow their position.

If you look at currency wise, they are not winning on the strengthening dollar and RMB. Their cost position is, we are gaining possession versus them that is clear. Exactly how it’s going to play out, I think it’s hard to say, but I don’t think it is working against us right now.

James Faucette – Pacific Crest

But as of yet, at least in the contracts that you are conversing now, that hasn’t been an issue. It’s just one that you would anticipate coming into play?

Carl-Henric Svanberg

I didn’t quite catch that.

James Faucette – Pacific Crest

(inaudible).

Carl-Henric Svanberg

Operator? Operator, can we have the next question please?

Operator

Thank you. Our next question today comes from Rod Hall of JP Morgan. Please go ahead.

Rod Hall – JP Morgan

Yes, hi. Thanks for taking my question. Hans, I just wanted to ask you as the CFO, if you are finding hedging costs are going up with all of the currency volatility that we have seen recently, and I wonder, I know there is a practice at Ericsson to hedge costs on deals you are bidding, and there are a lot of deals up for bid at the moment. Do you find it now more difficult to hedge costs moving forward, do you think you'll be able to hedge less cost than you have been able to in the past, or do you still feel pretty confident that you can lock in margins that you bid these deals going forward?

Hans Vestberg

Yes, you're right. We're pretty conservative on the hedging and have been keeping the same policy for quite a while. There might be some currencies that are a little bit more difficult to hedge in these times, especially some emerging market currencies. But other than that, I don't see any major challenges with that. Of course it is always a course, but if you have a policy, and you follow that all the time, I think that's the best way to do it.

Rod Hall – JP Morgan

Okay. And then just a follow up on the margins, multimedia now this year is a negative margin for the full year and it has been very volatile as you guys know. I wonder if you could talk to us about how we should be thinking about that going forward. You know most of us keep taking the last quarter and then sort of extrapolating an increasing margin off of that. It doesn't really feel like that that business is going to necessarily generate any kind of significant positive margin in the next year. Can you just talk to us about how you see that developing?

Hans Vestberg

I think it is our smallest area obviously and it is a new area, a growth area. And we have, as we’ve said, I mean we have – the majority of the business activity is charging service delivery platforms, Tandberg Television and so on. These are areas where we have both strong earnings and – strong growth and strong earnings. But then we have the large investment areas. And the nature, especially maybe on the charging side, are pretty large projects, and we can have more of that in one quarter, and we can have less of that in another quarter. So I can understand that it can be hard for you guys to model it. The important thing for us is of course that we have that strong growth that we have, 20%, where we are because this is an investment area. Obviously it is important to maximize profitability, but how that swings is more how each quarter gets the combination of the different businesses, how they coincide in each quarter.

Rod Hall – JP Morgan

Okay.

Hans Vestberg

Add to that, that we have been reshaping the multimedia segment quite a lot during the year, I mean (inaudible) being divested. We will during the year 2009 also make the joint venture with FC [ph]. So of course we're going to have a little bit smaller unit that's probably going to be easy to follow because we have a couple of other areas in there. So, hopefully, it's going to be easier to model for you going forward.

Rod Hall – JP Morgan

Okay. Thanks, Hans. And I just one last question and I know Carl-Henric, you have addressed this to some extent, but I wanted to get more specific about the cuts in R&D personnel. In your annual report in 2007, you were talking about something of over 19,000 people in R&D, and you are now talking about this incremental cut across which adds 5,000 cuts to the R&D staffing, if I got that right, and then you're talking about that being on par with the original 2008 restructuring program. So that feels like you are reducing R&D staffing by almost half, I mean down toward maybe 10,000, 12,000 people.

And I wonder, I know you're saying that the convergence of networks toward IP and its implication that comes along with that allows you to make those decreases, but those are pretty – those are very extreme decreases in those levels of staffing, and I just wondered if you could get a little bit more specific and talk to us about maybe some of the – give us a couple of examples of how this move toward IP is allowing you to get rid or reduce certain areas of R&D that you previously would have needed to staff?

Carl-Henric Svanberg

Well, first of all, I'm glad you put the question. It is a misunderstanding that the 5,000 are primarily in R&D. It’s the opposite; it's primarily in other areas than R&D. And therefore it is important if others have arrived at the same conclusion. We are not cutting back particularly much on R&D. However, we are, and the bulk of the cuts actually is across the company, in services, in general and administration, in sales support and so on as we simplify our product portfolio. But it does mean that when we arrive an all IP technology world, it means that we can reduce software platforms. I mean we believe that of the today’s 15 to 20 R&D platforms we have, we can probably reduce that over time down to say five.

When it comes to hardware, if you just think 20 years back, you guys all know this, but if you think 20 years back, how every category of people had different computers they had. Today whether you are a music composer or whether you are an engineer or whether you are a journalist writing papers, you are all sitting with your laptops, and it's all different software. It is the same thing here. We get less hardware bulk, it's less software platforms, more the use of technology. We're building ramp up capability into base stations, so every base station can deal with its IP traffic directly from the base station backwards on basically a router technology. So this is all what actually takes down the need for both R&D, but also for support through the company.

Rod Hall – JP Morgan

And could you – that isn’t completely clear, could you talk about how many R&D staff you expect to have by the time the program is finished, say mid 2010 roughly?

Carl-Henric Svanberg

No, we are not necessarily want to tell that number in that detail, that level of detail, because we are in the midst of these activities, and we start by talking about that internally with everybody that is related, the unions and so on. But eventually, of course, we will be able to show you how it develops. But I think it is very important to state, we're not going to compromise on our technology leadership. That is what brought our success, and that is not the route we're going to go.

Rod Hall – JP Morgan

Okay. Thank you for that.

Operator

Thank you. Alexandre Peterc of Exane/BNP has our next question. Please go ahead.

Alexandre Peterc – Exane/BNP

Yes, hi. I'd like to ask you a question on mobile broadband and the impact it has on your business, can you really confirm, because you’ve been rather coy previously on this, that the growth in Europe in particular is now effectively down to the impact of mobile broadband, or are there any other mechanisms in place there?

Carl-Henric Svanberg

We have said already before that, first of all, the uptake of mobile broadband is strong. It is strong across the world of course this year. It has really taken off in the US, it is the same thing in Australia, same thing in Japan, same thing in Europe. We said in the last report I believe that we have already a pretty good growth, pretty strong growth actually from operators investing in capacity for 3G. For example in Europe, so far it's been offset by a parallel decline on the GSM side. But now we have crossed the level of, the 3G build out or expansions are now higher than GSM in Europe, and therefore the trend should get stronger and stronger.

Alexandre Peterc – Exane/BNP

Yes, I remember you saying that, particularly in the Nordic countries, but also – and also you pointed out some countries where you had a strong mobile broadband uptick that actually generated growth. So, are there any other countries that you can point to now like the UK where you see that, or Spain maybe?

Carl-Henric Svanberg

Well, Spain in particular is probably the worst country in Europe when it comes to economical development. So they are actually somewhat touch go. But in general, my comment was for the development for Europe as a whole. And the countries you are mentioning sticking out even more so in this development, but this was the case. Remember also – but maybe that was not your, exactly your question, but we have equally much it is also affecting the transmission part of the network as it is, the radio interface.

Alexandre Peterc – Exane/BNP

Okay, thanks very much.

Operator

Thank you. Matthew Hoffman of Cowen has our next question. Please go ahead.

Matthew Hoffman – Cowen

Hi Carl-Henric. You singled out China Unicom’s WCDMA build out as I guess the primary opportunity for Ericsson, and I'd like you to outline your expectations for Ericsson on that Unicom build out? Specifically, would you be disappointed if Ericsson was anything less than the primary contractor on that Unicom buildout? And also outline whether you would think Huawei and CT, whether they have the capabilities to lead such a huge effort? Thanks.

Carl-Henric Svanberg

Well, it's – as I said, Ericsson’s sales is extremely distributed around the world in 150 markets. So there are always more exciting project than others, but it's nothing that – no projects ever that sort of makes a huge difference from us, however they turn. We have good hopes that we will play the lead role. I'm sure that it could better well be that we could end up on par with Huawei or something here, because this is a major Chinese roll out and like it would if there was a major rollout in Sweden or the US or whatever countries there is orders, better to be local than to be a foreigner. But our position in China is very strong and we have – we have actually good hopes that we will continue to hold our position well in China. We have been there since 1892, so we are foreigners, but we are foreigners with quite a strong local touch.

Matthew Hoffman – Cowen

Right. And in terms of the margins on such a contract, should we anticipate that if you were to be a strong co-lead or some type of major part of that rollout which we assume would be solid margin business or margin that is on par with your network rollout business historically? Thanks.

Carl-Henric Svanberg

I think we would expect that to be a good margin business over a three, four year period. I think we can expect it to be a pretty tough initial period. There's no difference for that rollout and for any other major rollout. It is the same thing as it goes, maybe the American rollout or others in Australia or whatever. I mean the initial rollouts are always rather toughest competition. It then follows many years of expansion.

Matthew Hoffman – Cowen

Right. Thank you.

Operator

Thank you. Stuart Jeffrey of Nomura has our next question. Please go ahead.

Stuart Jeffrey – Nomura

Hi there, thank you very much. I’ve got a question on your wire line infrastructure business. I was wondering if you could just give us an update on you progress in areas like optics, broadband access, perhaps an update on whether you're happy with the margin structure there, and whether you might be inclined to try and look for ways to improve your scale in those businesses, perhaps using your balance sheet, to look at some of the M&A opportunities out there? Thanks.

Carl-Henric Svanberg

Well, if you look at how much money that is spent on mobile access, fixed access transmission and core, those four areas, when you include even routers and big routers, in these four areas, they are about equally big. And you know that we are the clear world leaders in the field of mobile access with mobile core is almost part of that thing. But there we are strong leaders. We have invested in core, in key technologies to pick up the most important strategic pieces in fixed broadband, for example GPON where we see that this technology shift like that is when you can break in and actually grab a position. I don't think we're particularly interested in expanding other areas in fixed access and in the fiber area. When it comes to transmission, that is where both Miconia [ph] and Redback matters, so they were important. I would still think that transmission, fixed transmission is an area where we could probably grow even stronger, and we are always looking at alternatives. The basic strategy is on development and if something comes around, maybe we will evaluate – we will also evaluate it. On the router side, it is again where Redback came in. I don't think we want to deviate too much from our base strategy with organic growth. That has served us well, that's how we have advanced our position through the years. It could be of interest to look at something but I don't think that we would be particularly interested in acquiring something just to restructure and close down activities, that's particularly our focus.

Stuart Jeffrey – Nomura

Thank you.

Carl-Henric Svanberg

Operator, we can take one last question.

Operator

Thank you. Our final question today comes from Kulbinder Garcha of Credit Suisse. Please go ahead.

Kulbinder Garcha – Credit Suisse

Thanks. A few questions mainly around currency, and can you just clarify, did you say that because the impact was just on the half of your sales growth year-on-year, so that would have been I guess around 11% off? And also what was the sequential currency impact? That's my first question. The second one is what was the bottom line impact to US, some quantification on that? And the third is, on your receivables, I take the point of exchange rates, but if you look at receivables as a percentage of sales, it is probably 46% of annual sales now, the highest level it's been five years, and I'm wondering what steps you have done with respect to the quality of your receivables, whether you are confident you can collect, or you having to in the current credit environment extend more generous terms to your customers? Many thanks.

Carl-Henric Svanberg

Okay. Let me see if I can sort out the questions that you have. The first was regarding the currency impact year over year, meaning quarter four to quarter four. As we said before, it is an impact, a significant impact in the fourth quarter, less than half of it. We don't go into an exact number because (inaudible) as we are moving so much in the quarter what we're doing or not doing. But it is less than half of it. We still have the strongest quarter, the fourth quarter for the year excluding that. That means sequentially we also had with us some improvements on currency using the translation, the average rate on the translation effect on, and of course we've also got wind out a little bit from the nine first months into the fourth quarter as well, that's correct. In the fourth quarter, you asked us how the – but the main impact – and we – that is basically a very small positive sign, but nothing else than that, because we have also the hedge is going one way, and then offset by the transition. The receivables, yes, they are high, and I’ll try to explain, in the beginning, we had very strong sales by year-end. Then we also need to remind ourselves that we are using the closing rate on the balance sheet, when we close the receivable side. So that is of course a substantially higher, for example, dollar rate than the average rate, which we divide with, which giving a high proportion when you do it. And I think it’s also an important to remind that we have been running on, for example, US dollars, which is one of the most important currencies. We have been running on an average rate of 6.6 for the full year. Now we go into 2008, and of course, we start with a high ending currency here of almost 8 Swedish kroners, and depending on how we will continue in the quarter, that will of course be a big important factor as well when going into the first quarter.

Carl-Henric Svanberg

Let me add just one thing about currencies that I think is important. Remember that if you go back to 2003, we were at about 47,000 people, half of which was employed in Sweden. Today we are 78,000 people, and we have some 19,000 in Sweden. Even if 5% of all our employees are outside Sweden, which means that they are principally affected by the same, when they currency goes up, it affects cost as well. If you look at our supply chain, we have similar effects in our suppliers, and where we buy components. So I am sure this is all clear to you, but it is far from when you have manufacturing in Sweden and selling it at a foreign currency. There's a lot of natural fluctuations also on the cost side.

Kulbinder Garcha – Credit Suisse

And then just one follow-up, just on the currency rate you translate your revenues for the fourth quarter, will that just be a Q4 average or the year-to-date average, which way do you actually use just that I know how to model this going forward?

Hans Vestberg

It's the year average for the 12 months.

Kulbinder Garcha – Credit Suisse

The year average for the 12 months. Okay, thanks.

Gary Pinkham

Okay, very good. Okay, thank you for participating in today's conference call. And if you have any further questions, please don't hesitate to give us a call. Thank you and see you next time.

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Source: LM Ericsson Q4 2008 Earnings Call Transcript
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