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Telefonaktiebolaget LM Ericsson (NASDAQ:ERIC)

Q2 2009 Earnings Call Transcript

July 24, 2009 8:00 am ET

Executives

Gary Pinkham - VP, IR

Carl-Henric Svanberg - President and CEO

Hans Vestberg - First EVP and CFO

Analysts

Edward Snyder - Charter Equity Research

Sherief Bakr - Citi

Mark Sue - RBC Capital Markets

Alexandre Peterc - Exane/BNP Paribas

Francois Meunier - Cazenove

Philip Cusick - Macquarie

Nicholas Von Stackelberg - Sal Oppenheim

Neil Steer - Redburn

Kulbinder Garcha - Credit Suisse

Tim Boddy - Goldman Sachs

Rod Hall - J.P. Morgan

Operator

Welcome to the Ericsson's analyst and media conference call for their second quarter report. To view your visual aids for this call, please log on to www.ericsson.com/press or www.ericsson/investors. (Operator instructions) As a reminder, replay will be available one hour after today's conference. Mr. Gary Pinkham, Vice President of Investor Relations, will now open the call.

Gary Pinkham

Thank you, operator, and hello, everyone, and welcome to our conference call for the first quarter of 2009 -- second quarter of 2009. 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 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 spending assumptions, and the actual results may be different due to a variety of factors. We encourage you to use caution when considering such forward-looking statements, and please read our most recent annual report for more details on these risks and uncertainties.

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

Carl-Henric Svanberg

Everyone, if we look at the quarter in summary, this is a quarter of opportunities as well as challenges. We're seeing a general continued strong pick up of mobile Internet services, multi -- multimedia services, Internet traffic that is driving -- driving traffic in the networks. And 3D is actually up by 60% year-over-year in the technology shift that is going on, which means that the SMS is declining. That's a natural technology shift. We have the rollouts, particularly, of course, in Japan, China, and US, which is just a confirmation of that.

At the same time, we see as we -- as we said in the -- at Q4, we said we expected our industry to be much less affected, than most other parts of society, by the economic decline. And we still believe so. But as we also said, it's unrealistic that we won't have some effects. And that is what we started to see in the first quarter where we commented on weaker Ukraine and Russia, and some other East European country. We have a few more such countries also in Africa and Latin America.

And it's particularly -- well operators live in countries with short-declining currencies, where their anticipated budget with CapEx spends translates into fewer dollars or euros, and thereby they can only afford less equipment. But the underlying traffic trends are all the same and the upgrade needs are there. So in that respect, this is more a matter of proponents of investments.

But at the same time, also, for the same reasons with the tougher economy, focus on services increases in outsourcing and other ways -- finding ways of rationalizing the operator's cost level. The services for us is very strong. It's now 38% of our total sales versus 33% a year ago, and 20%, 23%, four, five years ago. Services was actually up by 28% in this quarter. So that's a very, very strong performance. And it also has the highest margins in the globe. So that's encouraging to see.

It's also encouraging to see the margins. Margins are up 2.4% year-over-year from -- as effect of the restructuring. The restructuring is on plan. Charges were high (inaudible) this quarter. And we've come a long way of the $8 billion that we announced in the beginning of this year.

Cash flow finally caught up significantly, which was expected, but still encouraging after the weaker cash flow in Q1, which means that our net cash in the quarter is up $5 billion despite the fact that we have paid $6 billion in dividends. So from our perspective, the long term fundamentals for this industry are there. We expect to be less effective in most other portions of society, but we have some signs here.

If we talk a bit more about services, we've done some major advances here that you're all familiar with. But still, we -- in fact, in the beginning of the year, we talked about the fact that Africa, North America are the two regions in the world where we have the least footprint in managed services or outsourcing. And it's gone -- really, the level while on those (inaudible), of course, is important. A seven-year contract for and up to 5 billion Swedish crones, we've taken over 6,000 employees, which brings us to over 12,000 employees in North America, a significant strength in position versus five, six years ago.

We also did a major deal in Africa in Zain. This is about Nigeria, 500 employees, five years, but we expect more to come in that region and from Zain's Africa -- African operations.

We also did a deal in -- with Telefonica, with our two operations in UK. We are now doing managed services for large players in UK. Our position here is quite impressive when it comes to services. We have better scale and better global presence, and scales in this field. And that is -- that is helping us at this point in time.

A couple of comments on the region, start by Europe, so a decline of 6%, but that is -- that is due to the divestiture of ENP, an enterprise which had most of its sales in Europe. So with that excluding, we're actually up in Europe, still of course with some currency effects there.

A lot of data traffic here, as in now, there are (inaudible) efforts, so most of the infrastructure business is driven by mobile growth and 3D upgrade. We had several markets that were stronger in the UK and still in the Netherlands. The weakest market right now is Spain, which is probably the -- one of the countries that are most hit by the recession here in Europe. We also had another first with our 28-megabits per second MIMO (inaudible) in Italy with Telecom Italia.

If we look at the CEMEA region, if you flip the page, we -- this is -- as you understand, it's a large region because this falls with Russia and all those countries that cover Middle East, goes down through Africa, so big region with lots of variation. And also a region where the need for telephony and the build out is stronger than re-telephony as it is more important than many other parts of the world. But here are also some countries that are affected by the economy. So there are also some countries affected by political constraints, like Sudan or Iran, or -- Bangladesh doesn't belong to this region here.

Russia, actually, came back nicely. And somewhat, that depends on the fact that at those times we were on this call with Russia, then the rubble [ph] was found. I think it was 60%, 70%. Now it has come back almost halfway up again. So the situation in Russia is a bit improved. Here is also where we had the same deal.

We then go to Asia. Asia was a -- was up 10%. China was strong here, but so was Japan, Indonesia and Australia also. Whereas Bangladesh, Pakistan are down. China is the strongest country in the quarter. Well of course, the challenge by the US once Sprint comes in there. India is also still higher and doing well. We have had good profit improvements in India, actually, over the last couple of quarters. Still India can swing a little bit in the succeeding quarters because of its large projects and its -- depends on when those are concluded -- the different phases are concluded.

We then talk about Latin America, had a weaker quarter with actually negative -- and here we have had some effects from the big economic decline. But it's also a very strong consumer-demanding fees across the region here for mobile broadband, so 3D rollout continues. Of course some countries, Central America makes good the (inaudible) as we can end this quarter while Chile and Argentina was stronger. And that obviously varies between quarters here.

And then finally, if we look at North America, that is our strongest region right now, bigger here -- we have dollar effect of course. But it's a strong region, lots of activities, and this is where the consumer demand for mobile broadband is very obvious. Here is also where we had the Sprint deal, which was significant and hopefully will lead to more managed services since now we have a critical mass to leverage on in the US.

With that said, I'll hand over to Hans to give us more guidance on the numbers.

Hans Vestberg

Thank you very much, Carl-Henric. Let me go through with it with more detailed financial figures than as usually stated. I will comment on the figures, excluding restructuring charges. And then when you think (inaudible), I wouldn't mention that.

The quarter we are hearing about, it was 11% growth for comparable units and the units that are coming in and out between the quarters. Of course, the EMP business and the enterprise business have had in the second quarter of 2008. So we'll compare with that 11%. And then we have our model to calculate all the transactions and seeing that will that get encouraged and adjusted. Of course, somewhat theoretical, but anyhow, we do it that's negative (inaudible) in constant currency and comparable units.

Margins, the gross margins are stable at 36.3% equally at Q1 and a little bit down from last year. Now, one needs to note the mix shift here with much more services in one-year time perspective than we had last year in Q2. And of course also, the main reason that -- stable margins is of course the mix shift that we have in our business.

OpEx continued to go down, even though we encountered some challenges with the currencies, but we can definitely see a clear improvement on the cost level on OpEx as from our previous programs and somewhat from the program stock this year.

We have an improvement in operating margins in all segments in this quarter, which is good. We have, in these figures, the 6.9 billion crones, a capital gain of 800 million Swedish crones as from the deal that was announced in the quarter of the divestment of TEMS. That leaves us a 6.1 million Swedish crones (inaudible) income before joint ventures, and an 11.7% operating margins. That's an improvement from one-year ago as well as sequentially.

So then looking into the rest of the P&L. We can see that the biggest swing factor in the factor in the result if the joint ventures, which of course, are having a negative result of 2 billion Swedish crones, compared to 0.1 billion Swedish crones loss here in Q1 -- or in Q2. And of course, this is mainly Sony Ericsson, with 1.5 billion, and the rest, ST Ericsson. Carl-Henric will come back and talk about the joint ventures.

That leaves us with an income after financial items that are similar between years, but then we understand we have quite big swings to Sony Ericsson, to investors, and the joint ventures. Net income, not impacted by the 3.6 billion Swedish crones restructuring charge, comes down to 0.8 billion Swedish crones.

If we talk about the cash flow, the adjusted cash flow -- and remember from the first quarter, adjusted cash flow from operations excludes any dividends from joint ventures, and it also excludes cash out from restructuring. And the cash out from the restructuring is equal to 0.8 million [ph] Swedish crones. So we have a 9.9 million [ph] Swedish crones cash flow from operations. That is good -- it was a good quarter from both the collection point of view and the working capital came down, still -- saying that we see still see effects from operators trying to optimize the cash flow as anybody's doing in these times. So it's not easy times, still we made good cash flow. Here I would like to see cash flow being seen over longer time cycles than quarters because Q1 was down, Q down [ph] is up. I think if you look at the half year, it looks quite good.

If you look in then to what generated our increase in growth cash with 12 billion Swedish crones, our main contributor is of course our operating cash flow. That is the main contributor. We also made dividends as well as we took up new loans. Notable to see is our net cash position and went up about 5 billion Swedish crones in the quarter, and that of course includes the 6 billion Swedish crones in dividends. So it was a quite good job in the net cash.

If you then look at our loan structure, focusing it on the balance sheet, we have done quite a lot on our balance sheet. And especially our loan structure in the quarter, talking about repaying our debt at (inaudible) in May, from $483 million bond. Then we made two new loans. One loan that is for $625 million, together with EKM, the Swedish credit agency, that matures 2016. And then we went out in the market and made a euro bond of almost $600 million euros in the second quarter as well, adding to same ending 2013.

And this is of course important, we have improved our debt structure and moved it backwards. We're taking the opportunity to borrow two good conditions in this marketplace in the second quarter. And these, together with the cash flow, of course, is important for us to have a very good eye on and work a lot with them, and the focus is definitely there.

If we talk about the cost restructuring in the quarter, we -- as I said in the first quarter, we sought lower activities in Q1. And then of course, we didn't have that much. Of course, now we have sought at the main portables activities, some more sequential. So you do one thing, and then you get another activity, but quite many are now going parallel.

3.6 billion Swedish crones restructuring in the quarter, main part from networks, given that we're all doing efficiency gains on sites, but also looking into quite a lot of improvements in R&D. So that is a large portion. But also, services has a large restructuring charge because they continue to optimize their service delivery structure. Optimizing means here they are bringing more centralized resources in order to get more efficiency and scale the business as they want.

Notable on this one, is of course that now on the balance sheet, it remains 4.2 billion Swedish crones to be paid out from the restructuring programs ongoing. That will, of course, impact on our -- on our cash flow from operations moving forward, but at that -- we adjust that also so you can see the underlying cash flow.

Then, if we talk about networks going into the segments, networks had a growth in the quarter of 4%, currency adjusted down. And here, Carl-Henric has already elaborated about the mix here, with a stronger growth in some key markets, and then at some markets where the -- the economic climate are impacting the investments, especially in some emerging markets. And you can see it as well going from -- in the situation in Q4 where we said that it was unreasonable not to have any impact, and then in the first quarter, some impact. And now, it's a little bit more. So it's not any dramatic and it's sort of how well you do all the time.

On the other hand, we want to see that the WCDMA volumes are now high in GSM. And you can also that rollout -- network rollout has grown in the quarter. Actually, it's a bit lumpy coming off their deliveries in Q1. All in all, the operating margins, anyhow, went up with that mix, which is showing that the cost adjustment program is starting to get an effect, but also that we are doing a great job in networks.

Professional services, up 28%, 16 in local currencies continue to have a strong growth, bottom line coming out 16% operating margin improvement sequentially, and improvement year-over-year. With the continuously efficient reward shares getting paid, of course a lot of new deals coming in at the same time.

Two things to note is there -- we talked sometimes information services there is quite a lot of non-insurers. And that seemed important, and it grew 34% in the quarter, and we added some 16 contracts. And two used outside the quarter, which was Sprint and O2. Anyhow, that's important.

But also, our consulting system are going very nicely and being more and more important for us as doing the transformations on networks and integrating the loops in the networks. We have now 7,000 employees, network integration and consulting. And we also emphasized that by acquiring a company in this field in the quarter, Bizitek in Turkey, and this is a typical deal that we're doing in this domain. It's companies with a hundred-plus employees.

Going to multimedia, multimedia had a good quarter growth of 23% for comparable units. Also, a very strong improvement on bottom line, ending on the 9% operating margin, lower 17% EBITDA margin. It's quite a significant improvement sequentially and also year-over-year.

Revenue management with LHS and prepaid continued to be a strong growth generator as well as our multimedia brokering, or somewhat what's called IPX, are fueling that. We still have areas we were doing investment where we have less overall (inaudible).

Margin improvement, two things, the cost adjustments are also impacting here, definitely. Secondly, as we have quite a high level of software in the revenue management area, some software license will come and go in the quarter, and this quarter will have a little bit settlement on that. However, they should be counted, so of course, it was a good quarter from that point of view. It still may vary within quarters, the margins here because one or two contracts can impact the bottom line. But you can multimedia is established and cell phone is on the level right now, compared to last year.

Good. I'll hand it back over to Carl-Henric for the joint ventures.

Carl-Henric Svanberg

Yes. You have already seen the reports and listened to management, I'm sure, in the joint ventures, so I'm not going to repeat that. But it's a challenging device market. And as you all know, Sony Ericsson's stronghold in the market is where the demands are declining the most, Europe, and a little to high end phones. There are some very extensive cost reductions going on to restore profitability to the reality that the company's living in. And at the same time, of course, a lot of focus is on introducing new products that are attractive to the market to defend the position that they have.

ST-Ericsson, and I would say also on Sony Ericsson, that the EFO [ph] there in Sony Ericsson was out committing on the fact that they -- they saw the -- the need for distance financing and that they were talking about that they thought they could arrange that themselves in the market. And I think that's the right way to approach it if they need more money. But they should -- the costs would now start to come down very quickly here.

ST-Ericsson, at the same time, living at the same device market decline, they have also large cost reductions underway, both because of the lower -- slower economy, but also because of the opportunities to leverage on the synergies that are between these three or four operations that are being merged. The fact that they had an increase in sales in the quarter was primarily because of lesser of this talking on what they saw in the first quarter. And the fact -- and the margins that they committed on themselves were stable on the gross margin side. The fact that they -- it didn't come through to the bottom line was more -- was more, actually, differences between quarters, a bit more OpEx should have reported in the quarter, and they committed on that.

But anyway, on the -- on both the joint ventures that are satisfying activities going on, on adjusting to a tougher market. Then of course, it's a matter of product.

Then in summary for the quarter, as we have said, we have some different trends. There are, on one hand, some impact on the economic environment, but there are also accelerating demand for mobile Internet. The cost reductions are on plan. We're having increased margins on all our segments, and we are doing pretty cost restructuring efforts, as you know, to make sure that we are continuing to deliver a good profitable development here even if the market will deteriorate further, which we don't expect. And finally, services is a very -- show a very encouraging development, not just going in higher margins.

So with that, I'll hand back to Gary.

Gary Pinkham

Thank you, Carl-Henric. Operator, we're ready to start the question-and-answer session.

Question-and-Answer Session

Operator

Certainly, thank you, sir. Ladies and gentlemen, at this time, we will begin the question-and-answer session. (Operator instructions) As always, please limit yourselves to one question at a time, and please keep your questions at a broad level.

Detailed information is provided in the report, and Ericsson's Investor Relations and Media Relations teams will be happy to take additional questions and discuss further details with you after the call.

We'll now move to our first question from Edward Snyder from Charter Equity Research. Please go ahead.

Edward Snyder - Charter Equity Research

Thanks a lot. I just want to check, the push of GSM into wideband-CDMA, do you see this as more of a short term economic issue? So the demand that's not being fulfilled in GSM now will be pent up once the recession passes and that you'll see resurgence? Or do you think this is the -- the beginning of a longer term transition to wideband-CDMA that we can look forward to being permanent? And how much of these gains in wideband-CDMA do you think is share gains against competitive, versus just native demand with your normal clients? Thanks.

Carl-Henric Svanberg

The trick here between GSM and 3D is not really related to the economic situation in the world. This is just in the world of the technology transfer. And it would never -- you would never see they'd pick up some volumes without having the clients of the other one. They're all related because that's how the operators plan for the -- for the networks going forward.

It is still -- so with that said, that China is still a big taker of GSM equipment. And for obvious reasons, with so much going on in China, they can't do everything. So they're spending less on GSM, but that's still where the major traffic increase is and new subscribers. So there will be more GSM supplies around the corner in China also, which means that we could very well have -- in a quarter or two, we could very well see again that GSM is higher than 3D. That could happen. But the overall stand is very clear, it's economy driven.

Edward Snyder - Charter Equity Research

And in terms of market share gains, how much of the strength you saw in wideband-CDMA do you think has marketed you against competitors versus just made a demand from the normal clients.

Carl-Henric Svanberg

We have, over a long time, taken market shares (inaudible) here. But it's also a -- mathematically increased, if you like, because we have a very strong position in Japan, and you know our position in China, and you know also our big position in US. So where the biggest rollouts are, we are all well represented. We've got bigger shares of that than our market share normally also. So just by running those, we are increasing market share. But besides that, we are all taking up market shares all the time here in the market.

Edward Snyder - Charter Equity Research

Thanks.

Operator

Thanks. We'll now move to our next question from Sherief Bakr of Citi. Please go ahead.

Sherief Bakr - Citi

Thanks very much. My question's really around the level of deterioration in your tough line underlying (inaudible) currency, which -- particularly the networks business where you've seen the networks business now to negative, somewhere between -- I calculated somewhere between 5% and 10% negative this quarter. Can you perhaps just talk us through your expectations into the back half of the year, how some of the trends you're seeing you think are -- are one-quarter temporary effects or whether you are really seeing something more material?

And a quick follow-up just on collections for Hans, you're talking about you're not happy with ADSL is today and believe that you can do a lot more. Yet at the same time, your customers are clearly pushing back. Can you just talk about the balance between trying to get your customers to pay you early versus perhaps having to be a little bit more friendly when it comes to pricing? Thanks.

Carl-Henric Svanberg

Let me say, first on your question on that, I would be a little cautious on doing two mathematical conclusions on currency differences. We do translate the 11% into minus 3% because we will -- we will loose track on ourselves if we don't follow the same calculation all the time. But when currencies are going up between quarters and over the years, it can make a comparison sometimes a little bit more difficult.

But anyway, I don't think we are -- we are seeing some effects here, but we're not seeing any domestic deterioration of any market condition or anything here. It's just that in a few more of the probably a hundred countries in emerging markets, we have seen operators having less capacity to spend the amount they maybe want to do. I don't think that anyone sees them America -- the overall economy in the world going through any further major deterioration. I think we are probably -- where things are bulking out, it's more a matter of now how it probably could improve.

I'll hand over the -- if you -- are you happy with that answer? I'll hand over to Hans.

Sherief Bakr - Citi

Thanks.

Carl-Henric Svanberg

Maybe we should remember that also that Q2 last year was a bit strong, so the comparison is maybe -- maybe also a little bit (inaudible). I think we need to see this over several quarters.

Hans Vestberg

If I talk about the DSL where I -- we just had at the press conference. I mean we have the target, which is very below 121 days. And when it comes to working with this, we tried to do everything that is in our power, of course, optimize our processes, seeing that we do in collection on everything that is past due, continue with our efficiency gains, seeing to the people that I intend to (inaudible) to do it.

But as you actually point out, there are, of course, things working against us, which are external factors. Operators, for obvious reasons are looking into new customers, are looking into cash flow as well. And that goes also for competition, how they view the importance of this, of course. That's also playing into the game. We are focusing quite a lot on this. And we really want to improve. And my hope is that we can improve here, regardless of the external factors.

So early payments as you're talking about, I mean we don't have that much early payments. We have, as I mentioned, in Q1, I call that -- on high risk markets, for example, we do the recognition or sell off our risks without having any recourse. That we do. That's if you -- you might be doing an early payment. And that market can of course open and close. So we do that, but negotiated early payments for -- and estranged discounts from customers that we don't do.

Sherief Bakr - Citi

I'm just wondering what do you feel those operations and any low-hanging fruit that you can still work on whether the push from now in terms of collection is going to get incrementally tougher.

Carl-Henric Svanberg

I think those low-hanging fruits have been working for a while. I don't have many left. I guess I would love to it. I think it's a long tedious work on our terms and conditions with customers, and gradually improving them all the time, not expecting it's going to rock the boat and everybody pays immediately around it. We're going to do this in harmony with our customers. So we're going to do that tediously worked with all our accounts.

Sherief Bakr - Citi

Thanks. Good luck.

Operator

Thank you. And I move to our next question from Mark Sue of RBC Capital Markets. Please go ahead.

Mark Sue - RBC Capital Markets

Thank you. Carl-Henric, how long do you feel is the duration of this downturn? Are some customers still budgeting months and months, or has that subsided? And do you now feel European carriers will delay LTE plans because of what they're seeing now?

And then separately, when do you think the new CEO will say, "Enough is enough of Sony Ericsson"?

Carl-Henric Svanberg

Whatever you thought of with the -- with your first question, the -- and the second off of it. The European operators' positioning versus LTE, I don't think it's related at all to the economic decline. That's more a matter of where they see the efficiency of HSPA, where that is and the advantage that it has to go with HSPA because it can drive the capabilities and the networks to, I would say, almost unexpected high levels. And there's a huge ecosystem there. But at some point in time, they will take the decision to proceed into LTE. But that is, I think, beyond this whole economic recession. I don't think it's related to it.

When it comes to emerging market operators, I mean, I think you've got that. But just to make it clear, if you are an emerging market operator in your own currency, you have a budget to send a 100. And then suddenly, your currency drops by 30% just sitting there. And you can still spend your 100, but it's not going to give you as much assistance.

Obviously, with on the line traffic, they will have to upgrade, but they're not going to do it probably quicker than they actually have to because they come under pressure. It's not so logical in these countries because they're all countries where the growth is a little bit slower than previous years, but they do out and increase capital spending in their local currency in the same year. So I think we'll have to assume that it at least takes several quarters.

I think I will hand -- I will not hand. I will handover to Hans. It's an outside question to put to Hans. I think you can't think about it for one or two more quarters. But all in all, let's remember -- I'm not trying to defend -- defend Sony Ericsson in an unfair way. But they have been a hugely positive investment for us, and we have five-fold payback on the money that we once put in. Now they ended up in the turmoil where the -- where the decline in their segment was so strong. So now it's a matter of bringing them back into a profit above operations.

Then we have made the comments before on the strategic importance of that and even higher strategic importance of the ST-Ericsson with the platforms. But at the same time, the many opportunities that rises in this Sony relationship, with all their electronic devices eventually are going to be connected.

Mark Sue - RBC Capital Markets

Thank you, gentlemen.

Carl-Henric Svanberg

Hans declines further comment.

Operator

Thank you. I'll now move to our next question from Alexandre Peterc of Exane / BNP Paribas. Please go ahead.

Alexandre Peterc - Exane / BNP Paribas

Yes. Hi, I'd like to touch upon the Nortel situation. Could you please outline the strategic and financial rationale, but especially strategic, but behind your bid for Nortel assets. And how does that tie to your deal with Sprint where Nortel was the key supplier? Does it payroll financially for you? Thanks.

Carl-Henric Svanberg

You may recall that we were once -- moved into CDMA some 12 years ago because at that time, analysts thought and we thought that this will become maybe a third of the world market. It didn't do that. It stopped at 12% or so. And our position with those assets we acquired was far too small to be able to break through, and that's why we closed it down.

This is a totally different story. This is about 10% of Nortel's assets. And this is about an ongoing CDMA business in North America that will go on. They will run that for 10 years, and there will be upgrades needed. And it's like taking over GSM at this point in time somewhere. That could certainly improve our position in the US strategically, especially since many CDMA operators will migrate, first of all, into LTE. It has absolutely nothing to do with Sprint. They never discussed the matter with Sprint, but because our interest have increased because of Sprint.

Alexandre Peterc - Exane / BNP Paribas

And maybe you have (inaudible) because of Verizon, where (inaudible) LTE there?

Carl-Henric Svanberg

No, it's nothing else. And that's all of the CDMA operators are extremely interested in a strong company coming in. And that's because they need this equipment for, say, another 10 years, so. Huge support for -- should we come in.

Alexandre Peterc - Exane / BNP Paribas

Thanks very much.

Carl-Henric Svanberg

Next question, operator?

Operator

Thank you. We now move on to our next question from Francois Meunier of Cazenove. Please go ahead.

Francois Meunier - Cazenove

Hello, good morning. A quick on the improvement on the overall margin, obviously, there is a mix effect. But if you could quantify what would be the share of cost cutting versus currency's effects because to me, actually, cost cutting is a more high quality exercise than just counting on currencies?

Carl-Henric Svanberg

I leave it to Hans to--

Hans Vestberg

We have no specific numbers for there. But of course, there is a significant portion of cost adjustments that they're impacting. But there are also other factors besides currency. I mean, if the pricing how -- will type of (inaudible) so it's a little bit more dynamic than only foreign exchange rates and cost cutting. But definitely, the cost cutting is one component that has a significant impact.

Francois Meunier - Cazenove

And going forward, going into H2 this year and H1 next year is going to be -- what type of carrier are you going to be? Are you going to be sequentially (inaudible) or are you going to be accelerating into H1 in 2010? How is it going to work on the cost cutting side?

Hans Vestberg

In the first quarter, we will have the -- you never know exactly, but the in the past, we had -- we will have is that Q1 was thought of -- very low activity on the restructuring. Q2, Q3, and Q4 are probably going to be higher. And then, we're going to have less of it coming into the second half of 2010. Remember that the program aims to be read or finished in the mid of 2010. But yes, all the activities will be in -- started and much in the works by year-end, so the main part will be taken this year.

Francois Meunier - Cazenove

Okay. Thank you very much. And well done on the cost cutting.

Carl-Henric Svanberg

Also on the -- just to remind us on the -- what we've said several times before when it comes to currency, as you all know that currency -- when currencies are taken, we have a -- we are hedging on it, which means that we will get paid what the price was at the time we took it. Over time, as currencies go up and down, the -- the price -- the competition will adjust for the positive or negative effects from currency because we basically have euro competitors.

We don't have US competitors, which means that if the currency -- if we sell in dollars and the currencies are swinging up and down, that will be translated in different US prices. This is important so we don't fall into the trap of doing it too mathematically -- calculation here on currency effects.

Operator?

Operator

Thank you. I now move to our next question from Philip Cusick of Macquarie. Please go ahead.

Philip Cusick - Macquarie

Hi, guys. Thanks for taking my question, so two questions for Hans, first on the level of receivable securitization this quarter. It sounded like at the analyst day this was really down on the first quarter. And I wonder if it rebounded on Q2. It doesn't look like it from the DSOs. And second of all, if you look at a few years and you think about the services business, how big do you think that this could become as a portion of revenue? It's more stable if it's got a better margin than the networks business and it's growing faster. What does the internal planning look like as we look at three or five years? Thanks.

Hans Vestberg

On the first one, the recognition of receivables in the quarter 2 compared to Q1 was of course somewhat higher because the market was big, but it also had a higher (inaudible), but it was nothing abnormal. It was very normal from that point of view.

If you then talk about -- we don't have any internal targets to say how much shares we should have of the different businesses, first of all. I mean, we want all businesses to prosper so we have no such goal. However, if you look at the marketplace for infrastructure and services, there is, of course, an on tap potential in services, which is two-thirds of the potential market that we are sort of addressing. It's still inside operators, meaning they’re on their networks themselves. They do installation, integration, training, consulting, themselves. That portion, of course, can be dropped down and be used by a third party. Of course, it is a far higher potential on that market. That’s what we have said, that we believe it’s good -- good possibility to grow in services.

On our internal plans, I’m not prepared to share them. But of course, we have internal plans where we want them to be in the long term. But still, that’s how it is.

Philip Cusick - Macquarie

Makes sense.

Operator

Thank you. I now move to our next question from Nicholas Von Stackelberg of Sal Oppenheim. Please go ahead.

Nicholas Von Stackelberg - Sal Oppenheim

Thanks for taking my question, which is rather more short term. As the Sprint contract starts to kick in, how should we think about the margin development in services short term? Thank you.

Carl-Henric Svanberg

Thank you. As we have mentioned before, our costs in managed services deals are sort of in the beginning of the contract when we transit all the employees over to us and we transform them, and put them on our (inaudible) and process. That’s an investment for the case.

In the Q3 or back end loaded ending in Q4, we will have three contracts coming in here. And one is the same -- the Sprint will come in and also the (inaudible), which is a re-scoping where we’re also going to work a little bit different. So we have some of those coming in and that will impact our models. However, it’s not like it’s going to impact our models for several years, not even quarters. But initially, we want to have an impact of that.

We will not quantify it and I only want you to look backwards, and see how it has impacted when we take (inaudible). Of course, a little bit depending on how much people you take over. On the other hand, the guys in local services, where professionals and have improved quite dramatically the time for doing translation and transformation because the faster you can do it, the cost is lower.

So when I was rounding services, we probably took 18 months to do a translation and transformation. And I think the guys right now, they are doing it much, much quicker. So of course there are efficiency gains always on these one time costs.

Nicholas Von Stackelberg - Sal Oppenheim

Can you give us a steal on how steep the impact on the margin could be, knowing full well this is just a transitional period, but just to -- so that people are not too surprised?

Carl-Henric Svanberg

It’s not going to be any large variation on the operating money. But of course, it will take some percentage off, maybe. But then you also need to think about what other mix will come into the quarter. So that has to be taken in count. But some impact it will be. And then we want to see what other types of businesses are accompany it at the same time.

Nicholas Von Stackelberg - Sal Oppenheim

Just as an order of magnitude, are we talking a point or two? Or could it be more?

Carl-Henric Svanberg

I wouldn’t go there because how many (inaudible) giving those and as well guiding for the quarters. And I’m not doing that. As I’ve said, there are other mixes at the same time. But we will have an impact from it.

Nicholas Von Stackelberg - Sal Oppenheim

Okay. Thank you very much.

Operator

Thank you. We now move to our next question from Neil Steer of Redburn. Please go ahead.

Neil Steer - Redburn

Thanks for taking the questions. I actually have two questions. The first is for Hans. You obviously took the $3.6 billion restructuring charge in the quarter. And in the notes in the press release, you say that of the additions to provisions, $1.8 billion related to restructure. Can you say what the remainder of the $3.6 billion restructure charge you took actually relates to?

Hans Vestberg

Good question. First of all, we have a portion where we actually deal with -- I think in the beginning of the quarter, to actually cash out in the quarter. So that’s clear. And then we also had some product decisions that impacted these parts of our balance sheet items that go straight to the balance sheet.

One, if you remember at the capital market day we talked quite a lot about how we now have decided and formulated a very strong focus on our IT portfolio based on our Redback business. That of course brought with it some decisions that also impacted sites, redundancies, products, and assets. And that’s part of the -- of what we’re doing here. But all in all, it comes with the strategic decision and based that we’re putting on the Redback technology for portions of our -- of our next generation network.

Neil Steer - Redburn

A chunk of the difference between $1.8 billion and $3.6 billion is effectively writing off ITR in some form. Is that correct?

Hans Vestberg

Yes. Correct.

Neil Steer - Redburn

Okay. And an unrelated question, Carl-Henric, in your comments you yourself highlighted the recent commentary from the CFO of Sony Ericsson that there are other ways of raising funds. And you seemed to focus on that remark. Does that therefore suggest that it is now strategic decision that you will not commit any more capital to that business?

Carl-Henric Svanberg

It’s just I think it’s logical. Like Ericsson for example, we would if we were in a -- in a need for cash. We would do what we can first in the financial markets. And as a last resort, we would come to you as shareholders. I think it’s the same thing here. I think it’s more a matter of business morale that you do whatever you can first. At the end of the day, it’s money as money. But I think it’s right that they deal with the situation first.

Neil Steer - Redburn

Yes. Thanks very much.

Operator

Thank you. We now move to our next question from Kulbinder Garcha of Credit Suisse. Please go ahead.

Kulbinder Garcha - Credit Suisse

Thanks. I have a couple of questions. One of them really is on just the environment. You mentioned how this kind of CapEx cautiousness has spread from Eastern Europe a little bit, then to Africa and South America. There’s a bunch of carriers in Asia that have also been quite cautious, in Indonesia, I’m thinking in particular. So my question is, Carl-Henric, what is the risk that this gradual deterioration just comes later in this cycle for infrastructure? And I’m questioning what visibility you really have for the second half. So any kind of insights you can give? That would be very helpful.

And then the second question is, just in terms of you mentioned this whole issue of portability in currency rates, how is that coming back to Ericsson? Are those customers that have suffered a 20% to 30% change in their currency adversely to buy dollar best (inaudible), are they now putting more pressure on you from a pricing point of view? And how do you think about that going forward? Thanks very much.

Carl-Henric Svanberg

Yes. I think, first we need to -- we are not talking so much about an increased cautiousness among those operators. More the fact, that with falling currencies, they have less to spend in international value. They may spend what they have anticipated. But we are talking -- there are, if you talk about Sudan or if you talk about Bangladesh or Pakistan, these are countries where situations have changed quite dramatically for these countries. So they are maybe specific cases.

Still, we are -- I think anywhere you meet an operator, they will still conclude that our -- how much traffic and consumer spend continues in their networks. So in that sense, it has -- it hasn’t changed much. I think it’s -- I think we have pretty good -- pretty good visibility as such, in terms of how they are thinking. I think in a -- in economic declines like this, I guess everybody is focusing on following the market and the consumers very closely to be prepared if anything changes. But if it does, I guess we will see it very quickly.

Kulbinder Garcha - Credit Suisse

And just one follow-up on regional sales. How much of the sales in China were boosted just by a one-time recognition of the Unicom build out? Was that significant and should that come back off in the near term? Or can you see that sales business to stay or even rising from where we are now?

Hans Vestberg

No. There are no one-time effects. As I said, we already have, in the first quarter, significant deliveries that was coming into the first quarter revenues. And it of course continued in the second quarter. And that was a full quarter. We got the deal in the middle of the first quarter. So it’s pretty high. But it’s not -- it's not any one-time recognition effects or something like that. It’s rolling on here.

Kulbinder Garcha - Credit Suisse

Okay. Thank you.

Carl-Henric Svanberg

We’ll see in China. These operators, they will continue now for several years to do rollouts of these equipments. And besides that, they will also come back for the GSM upgrades, but the main traffic still will be for several years. So China will remain a stable, good, and growing market for us for years.

Operator

Thank you. We now move to our next question from Tim Boddy of Goldman Sachs. Please go ahead.

Tim Boddy - Goldman Sachs

Yes. Thanks. Just have a couple of questions again on environment, not wishing to overdo it. But when I look at operators in emerging markets, the general trend seems to be slowing subscriber growth and slowing usage growth, in many cases, a complete stalling usage growth. I’ve always thought of the equipment business as being driven by incremental minutes. And if you’ve got fewer new users and either flat or declining usage growth in many markets, not of course every market, that normally means a slowdown in equipment demand, so. And I just wanted -- am I thinking about that right because you were saying that actually you’re seeing healthy traffic. And I’m just wondering what I’m missing.

And I guess the flip is that -- again is it feels like the telecoms market is lagging GDP pretty significantly. So is it logical to assume that, therefore, it would lag any recovery? Thanks very much.

Carl-Henric Svanberg

I’ll start by answering the first question there. Over time, all growth in percentage will be lower as you increase the base. So I guess I need to say, yes to that. But on the other hand, we still see continued growth in the networks and additional subscribers in these regions. And still there’s -- if it’s now a little bit flat, 4 billion mobile subscribers we envision in two or three years more, it’s going to be 1.5 billion more. So still, there’s a quite substantial growth to come. So I think that has to be -- and then of course infrastructure has different waves.

First of course, rolling out and getting coverage. Next step is getting capacity. And of course, that wall is going to happen also in emerging markets. So I think that one needs to have a little bit more blended view on the market situation than you’re saying that now it’s less of growth in percentage. So now infrastructure is softening. I think that would be our conclusion. You have to look at all the other parameters as well.

Tim Boddy - Goldman Sachs

The point about the lag, do you have any views on that?

Hans Vestberg

What exactly do you mean by “the lag”?

Tim Boddy - Goldman Sachs

So obviously, GDP weakened dramatically in Q4. But most operator revenues, and as you’re saying, operator CapEx budgets are only weakening two or three quarters after that. So is this the sort of industry, which would just lag a recovery? Or do you think it’s simply a matter of economic confidence that will return -- give the operators the confidence to come back and invest?

Carl-Henric Svanberg

I think there is -- I mean, as we’ve said all along, that we would be less affected. But it’s unrealistic that we won’t get to take the roll. I mean we’re not immune, and what you’re seeing now is a weaker market and weaker growth. And we are, in fact, in a slight decline in the quarter in costs and currency. So I think that is all related. That is what you’re seeing. But overall, I think it’s a general feeling among the operators is that they’re surprisingly unaffected considering how other -- other consumer spending and other areas of society is affected.

Tim Boddy - Goldman Sachs

Okay. Thanks for that.

Carl-Henric Svanberg

We'll take one last question, operator.

Operator

Certainly. Our final question now comes from Rod Hall of J.P. Morgan. Please go ahead. Thank you.

Rod Hall - J.P. Morgan

Okay. Yes, thanks for taking my question. I just have one and that is that we see unemployment growing globally, and yet we also continuously hear anecdotal evidence of deals being bid at rates that they don't seem economical. I'm talking about network deals. And we haven't heard very much in terms of political reaction to that in Europe. And I just wonder if, Carl-Henric, you and -- Hans, you as well, if you could just comment of your view of what the European Commission and other European governments are thinking about the playing field in telecoms infrastructure, and whether there's any movement at all on potentially trying to level that field. Or if you think that they are just turning a blind eye to it.

Carl-Henric Svanberg

I think that it's fair -- it's fair to say that while a few years ago when you had more of that, and that drove down prices somewhat faster than some of the vendors actually could cope with. That led to this huge consolidation. And it's not unnoticed among political leaders that North America and not -- almost not build its own telecom networks anymore. It has to be imported equipment to a large extent.

I think there is a nervousness that if I don't watch it here, we could end up in an unfortunate situation. And political leaders are aware of that, but so are the leaders for the operators among the world also. So I think there is a -- more hesitance -- more question marks on what is going on in that respect and more hesitance to push those trends too far.

I think we feel a much stronger support around what we are doing for almost every year, every part of our networks, or partners, or political leaders, or operators. I'm not sure if I answered it so clearly here, but I guess if it were -- yes.

Rod Hall - J.P. Morgan

Okay. So just to clarify, so you think -- you're seeing an increasing nervousness, increasing interest in this from the various political leaders that will be involved. Is that a correct way to characterize what you've just said?

Carl-Henric Svanberg

Yes, I think. I think, yes, it is correct.

Rod Hall - J.P. Morgan

Okay. Thank you.

Carl-Henric Svanberg

I would like to remind all of you that our strategy and technology forum on August 12th and 13th in San Jose, where we will showcase our growing presence in Silicon Valley. We have more details on our Web site if you want to check it out. Regarding our interim report, please don't hesitate to give us a call if you have any further questions. Thank you, and good bye.

Operator

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

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