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Executives

Susan Anderson (ph)

Hans Vestberg – President and CEO

Jan Frykhammar – CFO

Johan Wibergh – Head of our Network Segments

Analysts

Rod Hall – JP Morgan

Zahid Hassan (ph) – Citi

Joan Gabardy (ph) – RBC Capital Markets

Kulbinder Garcha – Credit Suisse

Richard Kramer – Arete

Alexandre Peterc – Exane / BNP Paribas

Patrick Standaert – Morgan Stanley

Anil Krishan (ph) – UBS

Adnan Ahmed (ph)

James Faucette – Pacific Crest

Telefon AB LM Ericsson (ERIC) Q1 2010 Earnings Call Transcript April 23, 2010 8:00 AM ET

Operator

Welcome to the Ericsson’s (Analysts) Media Conference call for the first quarter report. To view visual aids for this call please log onto www.ericsson.com/press or www.ericsson.ccom/investors. (Operator Instructions)

As a reminder replay will be available one hour after today’s call. (Susan Anderson) will now open the call.

Susan Anderson

Thank you operator and hello everyone and welcome to our call today. With me here in Stockholm are Hans Vestberg, our President and CEO and Jan Frykhammar, our CFO and Johan Wibergh, Head of our Network segments. During the call today, we will be making forward-looking statements. These statements are based on our current expectations and certain planning assumptions which are subject to risks and uncertainties. The actual results may differ materially due to factors mentioned in today’s press release and discussed in this conference call. We encourage you to read about these risks and uncertainties in our earnings report as well as in our annual report. I have one comment to today’s report and that is of the acquired Nortel business was reported under the region other in Q409.

We will correct this during the afternoon and however I want you to know that all (photos) are correct. So it’s just a matter of difference between region. With that said, I would like to handover the call to Mr. Hans Vestberg.

Hans Vestberg

Hello everybody. I will go through again a little bit what I did this morning, because we know that we have a quite a lot of people coming onto this call that attend in the morning. But I will try to make it quite briefly. Starting with just what we announced yesterday, so we are all clear on that we made some change in our external reporting. Basically a combination of feedback that we got from investors, how we should we disclose, but also our ways of working internally.

The three that we have done is number one, we are now reporting 10 regions or actually its 11 regions, one region is other but its 10 geographical regions and that’s how we work internally as from the 1st of April when we changed orientation internal in Ericsson as well, so its going to be a clearer transparency of work internally as we report externally. The second one is that we have moved the network rollout business from segment networks and we have moved that into the new segments called Global Services, which then is a combinational professional services and the network rollout. And finally or the third one is that we have also off the discussions with investors changed to EBITA which we have now have replaced that we had before EBITDA, so we’re sort of taking away the depreciation there because that was sort of a feedback and that we have done as well.

Those are the changes in the report and we can also see that the report has touched is now on the table on the first slide, all in all, it should give a best visibility where we are going. As said we are done in both in transparency our work internally as we’ve changed as well as feedback from the market. Good, a couple of Q1 trends there starting with, we see that operators are still varying in their activities and that’s continuing this quarter.

We can say that the trends that we saw in the third quarter and the fourth quarter prevails that there are both macro economic has impact in certain regions but there is also a technology shift from 2G to 3G as well as general quarters in our markets. So I think that is prevailing. We see still that some of the growing markets like in Africa, parts of Asia, and even parts of Middle East are cautious on the level of quite low in terms of investment. Finally we have seen new in the quarter the increased level of discussions with operators regarding their business and now the data (voltage) coming, how they can contribute to a good customer experience when it comes to quality and efficiency.

And of course that is driven by the strong data growth and some of you might have recognized that during the CPIA released the press release where we basically we are following the traffic in the networks presented or communicated that now we have more traffic from the data users that are some plus 400 million in the world than all the voice subscribers which are 4.8 of the closing this quarter. So we definitely see that growth in data. A couple of events that are important that has happened of that quarter which I just want to highlight. The day before yesterday we announced that we acquired Nortel’s share in the joint venture to get to the LG addressing the Korean market.

And of course this is from us is an important thing because Korea is the third largest telecom market in Asia. Very advanced when it comes to technology services and applications and Ericsson has a very limited business in Korea today. This enable us to work with all the three major operators in the Korean market, both with the current portfolio but also of course seeing that the technologies that will come that we will be good represented on the LTE.

We also the day before yesterday announced the cooperation with Datang, a Chinese vendor which we will be working before on research and development as well as a commercial cooperation in order to even get the stronger offering to the TDD customers which is mainly China Mobile in China and that’s part of sort of our view to get a bigger foothold on that technology in going forward.

I will come back to the Sony Ericsson and the two announcements on deals in Asia where I talked about before. Talk about the net sales, we were down 9% in the quarter for comparable unit down 16 but good development in CDMA. Now we don’t have them in the base so we can’t compare for last year because that answer didn’t enough to fit in that form, but we had a good performance on them and we are attracting on the integration and we are definitely attracting on the business plan.

Global Services has also a good growth and we’ll come back to that. On the other side, we had networks that had a continued decline and that is coming back to the same trends that we had in previous quarter. So its nothing new there, its basically same, certain markets and a technology up in the same time impacting the networks business. Multimedia however they had sort of a seems they sort to report the lowest quarter on sales, very much driven by geography. They are very stronger revenue management in the Africa and Middle East region and that’s also where we see a less or (inaudible) and that’s felt through to multimedia.

At the later part of the quarter, we also saw that we got some impacts from the supply constraint or the tight supply chain in the world, especially the semiconductors as you all know the semiconductors are working for many industries. Some industries are coming up right now, so the demand has gone up at the same time the semiconductor investment and capacity has been fairly low in the last couple of years here. So that made some impact for us but more important news to mention it.

If you talk about the margins, we saw the margins holding up on the Ericsson before joint ventures. 10% operating margin base is same absolutely number, 4.5 compared to 4.7. This is, I would say a work that we have done with the business model and sort of getting a lower threshold in the company when it comes to volumes and we can sort of even though we have a decline in volumes we are able to deliver this type of profits and you can see the EBITA level is on 13 and the operating margin on 10.

If then look at the regions and this is a quick one used to get the feeling for the regions and you can see on the 2009 there how the distributed per region which was fairly evenly distributed. In the first quarter you can see definitely the impact of the Sprint as well as the CDMA acquisition which make in North America a little bit larger than all other markets, all other regions.

As we have disclosed the tables, modules and patterns etcetera in that other so we know that. Quick comments on the regions, Mediterranean I would say down 17%, little bit mix but still in a transition, we see the mobile broadband taking off there and of course being part of the growth but we are still having a decline and the quarter in the region. Western and Central Europe with a little bit of an adjustment on currency, they would be actually flat and here we have seen a very good transition on the leadership team in this region because today that is 3G and service business which were 2G business just a couple of years ago. So that transition there done good and now we see also that is LTE and 4G license is coming up in this region.

Latin America 9% down, here we can say that we see a good momentum of services, still in decline but we have some 3G auctions coming up which are planned for this year in the region. Northern Europe and Central Asia, little bit mix as well. We can say the Northern Europe, here we have, Northern Europe will be the portion here in Nordics where I am based right now in Sweden and all the countries around here still have a good growth of modernization on the networks etcetera, on the part of the central Asia including Russia and all these countries, we still see a very cautious investment level.

Just a deep dive in North America and this is what (Susan) referred to in the fourth quarter there we’re lacking the CDMA operation business in that column but anyhow you can see a quite impressive growth in North America. We have both on the acquired and non-acquired business grown quite a lot and you can see from a one year ago it’s a dramatic increase and here we of course where the Sprint managed services where the CDMA assets coming in but not all in that we have our traditional WCDMA business in this region as well.

We signed in the quarter very important for us, the LTE contract with AT&T, the 4G which is important and you can say that we are now integrating the CDMA business quite quickly into all the different pieces of our company and migrating the portfolio as far as, so that is definitely on track. If we take down the regions, starting with Middle East, Middle East is flat now in this quarter even though first quarter of last year was probably little bit down because they were quiet early into this but they were flat.

There is mixed developed and some markets really growing and some are not, but you can see the trend of services and still the 2G decline and 3G growth. South East Asia and Oceania, that is the region that we talked most about I would say when it comes to financial crisis the Bangladesh, the Thailand and Indonesia as which were very cautious. You can see they are still 32% down year-over-year. So that’s still seems that we are little bit cautious in this region and of course we have shift from 2G to 3G as well.

China and North East Asia, 15% down, little bit tough comparison for the region and they are 15% down in China and Japan, two of the most important markets and of course China had the quiet good first quarter last year. Here as we said earlier we had added two important additions in acquisition and partnership with Datang and with joint venture with LG in Korea to strengthen our position in Asia.

With that do a deep dive in Sub-Sahara which is basically half their volumes in one year and here we have three things happening. First we had their overall quarters and the capital constraints and the credit constraints. The other is that we have a 2G to 3G transition in this region and note that we also have operating consolidation ongoing in the region. So that is impacting the whole business and you can see on the left part of graph where it is spited by segment how had decreased in both I would say networks but also in multimedia and this is the region where multimedia is very strong when comes to revenue management but one of the regions right now very strong and this has impacted multimedia in the quarter.

If you then take the segments starting with networks, networks down 14% in the quarter. Of course year-over-year comparable positively impacted by the acquired CDMA assets. As I mentioned before we had at the later part of the tight industry component supply in the networks business but that is more than offset by the CDMA business so we are clear on that but just important note that down, its an industry wide challenge right now with the semiconductor industry.

We see clearly the continued sort of trend of 2G or products around 2G coming down and 3G is growing to the course about the data growth and technology of the two thing. We can also see that the EBITA levels are positive and are improving. We’re up to EBITA level of 16. Here we can say that we have both efficiency gains with the hard work on that. We have of course a product that always have that it is good and that we have a higher degree of software in networks in this quarter. On the Ericsson values we are clear on that, we had a normal quarter on software because when we come to multimedia we’ll see that they have come down and then of course they are very software intense but in networks rather somewhat higher level of software.

If you then take Global Services, Global Services had a good quarter, all the three parts of Global Services that we now reporting were growing, Network Rollout with 33%, Professional Services with 12% in local currencies and Managed Services 17% and of course fueled about the efficiency view from the operators we signed some 16 contracting Managed Services in the quarter. Our modules on the whole Global Services including in the row where 12% and for Professional Services were up to 16%. So the efficiency work has definitely paid off here. We still have a couple of Managed Services contracts in transformation, the larger ones. But that we have had for other quarter as well.

But it’s important to know that we have still the Sprint in the base in the beginning even though it’s declining over the time whereas it was a little bit bigger to transition in the fourth quarter. Global Services, just some key highlights 410 million subscribers now in the network over the managing, and two billion customers on the support contracts in the word and we have more than 40,000 service professionals right now in the company.

The last segment is multimedia, put a lost core Ericsson segments. As said this was the lowest quarter since we thought report multimedia, you can see we’re roughly a little bit over $2 billion in sales, which has grown us. (Inaudible) I said before by the slower revenue management in certain regions where the foothold is strong hold lower revenue management in Sub-Saharan Africa, Middle East, and South East Asia and Oceania.

And honestly that is all is important to highlight is that, when we came into the crisis, the TV area was one of the first total areas where operators has investment as to return on the investment was a little bit longer. We can now see that we have development in that and operators are definitely looking into TV investments. All in all you can see that our EBITA is now negative in the quarter. I would say that’s predominantly the reason is the volume, the volumes in (inaudible) its more the volume game here on multimedia as we’re seeing that in the fourth quarter with roughly three little bit more in $3 billion which has grown us turnover we had 17% EBITA.

Joint ventures, you have read about Sony Ericsson and probably this ST-Ericsson quickly. Sony Ericsson has come down in volume with 20% still compared to last year its of course a dramatic improvement from EUR358 million in last two positive result of 21. That has come from the reduced operating levels and the hard work on the portfolio of course on the management that is very focused. I would say there is still of course a lot of work to do we’re just breaking even but the track is definitely on the right track.

ST-Ericsson reported yesterday night, 18% down adjusted operating income at negative $114 million. We are still in the ST-Ericsson doing the restructuring to come together as a company and the volumes are still with the main customer there. So is not that, its more about getting together now the company and the restructuring plan is going as planned. Fine, with that I’ll leave over to you Jan Frykhammar to talk a little bit about the financial data.

Jan Frykhammar

Thank you Hans. Hello everyone, let me now spend and talk a little bit about the Q1 financial highlights. I think the first thing I would like to start with is that we have during today the course of the day today heard lot of question regarding the gross margin and of course we are extremely happy about the improvement year-over-year and sequentially when it comes to gross margin. I just wanted to highlight the fact that there are several components in the gross margin improvement. One is of course the impact of the efficiency programs, but two other important factors is of course the one around product mix, but as well business mix or market mix if you may.

So I think with that clarification, I think it’s important to consider all of those three things. If you look at the operating income than in absolute money, we have managed to keep the numbers stable basically compared to last year excluding restructuring cost and that is something that we are satisfied about and I think that we have seen now impact from all the hard efforts on the efficiencies.

If you then look at the sharing our earnings of joint ventures before tax that you can also see the impact of the hard work, that’s Sony Ericsson done but also of course the hard work that ST-Ericsson is doing but Sony Ericsson obviously did major contributed to the improvement. If you now look at net income, net income of SEK 1.3 billion in quarter compared to SEK1.8 last year. This then includes of course the restructuring charges that’s one of the explanations of the decline.

The other important thing to take note on here is the impact of the financial net and we are seeking on the very strong cash and the interest rates than are coming down so we have a negative impact of financial net but there are some currency impacts in that. On the cash flow side, SEK 2.3 billion positive compared to SEK 2.9 last year, I’ll come back to cash flow in a moment. If we look at the debt maturity profile, this is nothing new rates this is the same situation as I reported in the fourth quarter. We think we are, we have a strong debt maturity in the hands that we have no maturities within the coming two years and a good balance in terms of duration for the loans.

We should also remember that we have a backup facility that we have in due store close to $2 billion. So overall we have a strong financial position which is very important to have in this marketplace. If you now look at the change in gross cash. We have an improvement here between Q4 and Q1 of SEK 1.1 billion improvement in gross cash. On the operating cash flow side if we exclude the impacts of restructuring SEK 3 billion in improved cash flow there, worth while to note as well is the around SEK 900 million that we set aside for capitalization of our pension trust majority of that is in Sweden.

I also would like to mention that we paid dividend here last week, SEK 6.4 billion, that then will impact the financial numbers in Q2. So if we go to the balance sheet and the ratios there, we see a Days of Sales Outstanding at 117 in the quarter. Improvement compared to last year Q1 sequential increase part of that this is volume driven. We continued to work hard with a balance sheet. We have our long term targets there of less than 90 days of DSO, that is what we are working on.

The inventory days, some seasonal buildup of the inventory continued to do hard work there, the internal target is less than 65 days. This is obviously very difficult to say yes on a single quarter basis but we should look at it more of a rolling 12 months or at least calendar year basis, but these are internal targets.

Strong equity ratio of 53%. If you now look at the cost reduction program, here we’re still now talking about the original program if you like that we presented in the beginning of 2009 and we estimate the savings by midyear 2010 to be estimated to between SEK 15 to SEK 16 billion. We estimate then the restructuring charges for this program overall to be SEK 15 billion, this means that there is around SEK 1.5 billion that remains to be taken in the second quarter.

It’s also worthwhile I think to mention that there will be cash outlays of this program in the second half but no more restructuring charges in the second half. With that said, let me turn over to, hand over to Hans again.

Hans Vestberg

Thank you Jan. Just summing up then and you will now, most probably familiar with our focus areas here. And this is important for me because now we’re modeling the company based on these areas. The three on top pair of course very much according to our core areas of some business and the last one very much geared to our joint ventures. And the first one is of course growing faster than the market and as I said the, it’s a little bit hard to say the first quarter here when the market is how much has it grown not but definitely where we focus on growth, that we will that’s partly what we have geared up on you to go to market with the 10 regions to strengthen up because we think this is very important. We think also we have a portfolio that should be in over the stronger regions.

Best in class margins, yes as I said before we continued to work with our profitability and our profit levels and we all said that we are working to improve that, so that’s an important target for as well. And then strong cash conversion, I think that we are now proving that we are rating cash here for every quarter for quite a while. Important here is of course that we still see as you all mentioned more improvements to be done on the capital structure, how much we’re tying up. Now these of course in these (inaudible) but at least you should feel that we have a targets internal to where it comes on that as well. And then finally growth in the JV earnings, right now we’re basically flat on them but of course that is a target to see that they are again rating the earnings for us as well.

So these are the four focus areas that we’re deploying in the dimension either regions or segments internally to see that we’ll have the drive to deliver that because we believe if we can deliver on these four, we can deliver a value for our customer, shareholders and for our employees. Thank you very much.

Susan Anderson

Okay operator, we are ready for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) As always please limit yourselves to one question at a time. Please keep your questions at broad level, detailed information is provided in the report of Ericsson’s Investor Relations and Media Relations team. We’ll be happy to take additional questions and discuss further details with you after the call. We now have our first question from Rod Hall from JP Morgan.

Rod Hall – JP Morgan

Yes, thank you for taking my question. I just have a couple actually quickly. On the – and they’re going to be on the gross margin obviously. The first one is regards to the mix within the gross margin, I noticed that you’ve got some of the more hardware oriented regions or countries like India are slowing quite aggressively and I wondered if you could comment on the degree to which that has impacted the mix shift towards software that you talked about in networks, Hans, maybe you could comment on that. And then I also would be interested in knowing whether that particularly on the slowdown in India whether that you would expect that to see, or at least partially see it in the next quarter or two, we’ve heard other competitors talking not only about the slowdown ahead of 3G builds but also the fact that there is a major security review going on in India and if that has slowed investment in a short term but its not expected to last indefinitely. So if you could comment on that, I would appreciate it?

Hans Vestberg

Okay, if you’re talking about the mix we’ve done on the discussion, yes of course user we have been more driven of the type of business we’re doing, more than maybe the type of countries we’re into, I mean as we had said before but of course we are predominant to 2G market in India and as 3G are doing the auctions as we speak, there are very little 3G, there is one operator has 3G in the country only. So of course that is impacting because its more hardware on 2G than 3G so that’s correct but that’s for the time of course we will probably see more 3G deployment in India and on the second question I would now wouldn’t guide if this is going up or down, but the only thing I can conclude its an ongoing auction in India right now, what we are seeing is of course a little bit of slowdown in Q4 and the still in the Q1 when it comes to investment especially out there waiting to get spectrum for the 3G auction. So we’re going to see how that turns out but probably if they get spectrum the operators, they would probably deploy 3G and that will have an different profile then.

Rod Hall – JP Morgan

Okay, Hans could you just specifically comment on the security review point, those of you, have you guys seen that and is it having an impact outside of those the 3G builds situation, I mean is there a security review underway?

Hans Vestberg

So we read the same reports that you were doing and I couldn’t comment anything more than you were doing at the moment.

Rod Hall – JP Morgan

Okay, great. Thanks a lot.

Operator

And next question is from Zahid Hassan from Citi.

Zahid Hassan – Citi

Yes, hi thanks for taking my question. Just a couple again. In terms of the gross margin, you’ve been talking about some of it not being too much software orientated and sort of being ongoing. Given some of this is going to be some cost savings, how sustainable is this going forward, I mean should we be thinking about a gross margin above 36, 37% or should we be thinking of moving parts which could actually be below 30, 35%. And just wanted to get your feedback on that and also I’ve got a follow-up after this.

Hans Vestberg

First of all we don’t guide on gross margin or something like that. What we can say, we have a sustainable impact on our efficiency improvements, that’s for sure and that we’re mentioning and of course there is always moving parts when it comes to product based regions and competitions but we are doing the cost savings in order to improve our margins of course, but to guide where it will end up that we are not doing.

Zahid Hassan – Citi

Alright fine, and then more importantly on the market, you’re sort of talking about growing fast in the market. We haven’t really got anything to benchmark here, you haven’t given anything about what you think the market will grow at this year or in terms of way you see compared to that, so just saying that you’re going to grow faster than something and not giving us anything to measure that bias, is almost to use this metric, I mean are you going to give us something to judge your bias so we just as can.

Hans Vestberg

I think that we will continue to do as we’re done before. We will conclude after the quarters, how we’ve done and then we reflect over that not giving any guidance where we’re going and when the (inaudible) its closed we can measure if we have the ($4 million). We as said I mean we decided for a quite a time ago not to guide and its always pros and cons with that. We are now concluding that they are most pros when I’ll say not doing it and that’s why we are not doing it, but we would like to show the performance of the company and then we can measure that against the facts that has happenings over the guidance.

Operator

Our next question is from Mark Sue from RBC Capital Markets.

Joan Gabardy – RBC Capital Markets

Hi this is (Joan Gabardy) on for Mark. Are you seeing operators in developing markets return to investing in their networks, or do you perceive them sitting on the sideline for an extent of period?

Hans Vestberg

I see in the relevant market, we still see technologies but also some quarters as I said before and then we will of course, and we still see some of those markets being fairly week down but again there is no new trend, it is same trend that we had in the third quarter and the fourth quarter that we had now in the first quarter. So its nothing worsening like that but we don’t, we see that there are some cautioness but also the technologies as well as the macro economies. So you have three of those factors and then of course now with the 10 regions, that we’re elaborating on we’re trying to talk about each of the 10 regions so you get the flavor for what is happening in all 10 of the regions instead of doing a general (inaudible) which is quite big.

Joan Gabardy – RBC Capital Markets

Okay, and the recent pullback in China on the 3G network build out. Do you see that delaying transition to 4G going forward or could that rate if it -- adoption continue?

Hans Vestberg

No I think that of course last year was a very much of focus on initiating 3G in China and then this year is continued deployment of it. So it could little bit different between the (DSOs) kicked us off last year and this year sort of our rolling and I don’t think consumers on it. So it’s a little bit different, but we don’t see on the any difference in from what we thought were the plans at least.

Joan Gabardy – RBC Capital Markets

Thank you.

Operator

And next question is from Kulbinder Garcha from Credit Suisse.

Kulbinder Garcha – Credit Suisse

Hi another question on the growth margins and quantification on revenues. On the gross margin point, Hans, I just want to be clear. So if you to run the reasons for this sequential and higher year-on-year gross margin, is efficiency first then mix and then software, is that right, is that how you would run the order of the drivers in just saying the efficiency could be sustainable. Its that how you want to communicate, and that’s my first question. The second one is on sales. It seems to be that if India depressed because of 3G auctions and South America to a degree in Sub-Sahara you got consolidations holding back investment and your component constraint. At some point in this year we can debate, we should have a very strong snap back in revenue shouldn’t we? Thanks.

Hans Vestberg

On the second one, you know that we’re not going to guide on that one but let me start with the gross margin again then. As said in the network segments we had efficiency gain, product lease and software that are impacting the gross margin and the overall margin. On the overall Ericsson, as I said before, the software was pretty normal as we came down quite a lot, almost 30% in multimedia which is very software intense. So that’s what I am trying to say. Then of course its always going to be different between different quarters, but we have been working with efficiencies in a company of course that this somewhat paying off but all other things equal of course you can always say that the gross margins are where they are, but we are of course in the market as well that is dynamic in that sense.

Kulbinder Garcha – Credit Suisse

And so Okay, on the revenue side then, are the component constraints still hindering your ability to supply equipment in the near term, I think Q2 a lot still had your ability to (ship sales)?

Hans Vestberg

I think that as we elaborated that we saw that semiconductor industry, little bit having high in demand and then supply at the later quarter. We had a certain impact of that in the first quarter. And maybe it was a little bit too and even I believe its just going to go away in one quarter but we have a very strong and proactive sales supply and so we’re (seeing on Ericsson), I think is top class. They have been working proactively to see that we can actually meet the customer needs, but I cannot say at this stage that we will not have any impact in the second quarter.

Kulbinder Garcha – Credit Suisse

Okay, and finally just one very quick thing. Hans, this is I guess you’ve been CEO now for several months, I’m just thinking Ericsson is a world class company in terms of market share, but you honestly believe with the guidance you gave, you are giving world class communication and giving no real up (screw) margin targets and no real revenue targets for the business, not even for this year, even over the longer term. Is not become something that should be considered do you think?

Hans Vestberg

We have always considered what types of things we should disclose and as I said we now took a step forward to couple of disclosures here which we have discussed with the markets which we think is important I guess that the market also think is important measurements that we won't both internal to be followed than externally. We’ve always debate these types of things, at the moment we have most pros in not to doing any guidance and that’s why I have not decided not to have that. But again we always review what we have but that doesn’t mean that we will do it. It’s just that we review all these to see that we are doing the best.

Kulbinder Garcha – Credit Suisse

Okay, thank you.

Operator

Our next question is from (inaudible).

Unidentified Participant

Good afternoon. A question, how fast do you need to run to stand still in the market and the meaning, the question regarding that is if you think the traffic the traffic is growing very, very rapidly for the moment especially data traffic, but at the same time prices on (base stations) are falling, the equipment is getting more efficient than bringing out more (inaudible). So how fast do you need to run to the grow the market to say, how fast when you calculated, how fast do the traffic need to grow in order to grow your topline given the price pressure, given the more efficient equipments you’re brining out?

Hans Vestberg

It is of course a fairly complex question, but I think that this is of course a certain element in what is lower in all the technology we’re doing, where all the time get the more technologies being more capable all the time. So that’s true but on the other hand we see the data growth right now, and as I said I mean we are now some 400 million mobile broadband users using more capacity than the two, the 4.8 billion mobile subscriptions that we have. So of course it will have an impact if that continues to grow that way and we talked about before that maybe we saw in one-third of the 2G footprints worldwide that is 3G today and even less if its going on HSPA. And so its still quite a lot that has to be covered that’s of course what we have disclosed before. So I think that’s the important parameters.

Unidentified Participant

But if you think about the hardware, if you think 10 years back, your sales is half roughly what it was 10 years back. You’re probably shipping three times in amount of equipment as you did then, prices has come down quiet a lot. So your topline is halved and the traffic is being exploding, so to say, how do you see it in the future, how fast does it need to go in order to get to topline?

Hans Vestberg

The number for here that you are asking for I think that again remember also we are moving from having a lot of hardware on 2G to less on 3G and even less on 4G or LTE, that’s also a reality we’re leaving, but we also need to remember that we now more than 40% (RBSs) in services which also is important part of the company and the combination of the technology leadership what to have in technology to get to the services is going to be even more important going forward when the networks is out there and you need to modernize.

Unidentified Participant

Okay. Thank you very much.

Operator

And next question is from Richard Kramer from Arete.

Richard Kramer – Arete

Yes I guess, just a follow-on from that question and to dig into it a little bit more, we’ve now had a couple of quarters where there has been sharp declines in core network sales on an organic basis and can you break down a little bit or give us a little bit of color on the pricing environment. It seems that several of your larger competitors certainly European ones are extremely aggressive right now trying to rebuild share and there is a new Chinese competitors also very aggressive and maybe one other question for Johan, we’re seeing against the sort of 14% organic decline in sales or 16% -- 13% increase on year-on-year on headcount and it seems to be that your saying the restructuring programs of the current restructuring program will end fairly shortly. Are you telling us that we’ll quarters later in this year where there will be no restructuring charges, or would you anticipate looking at another restructuring program over the course of the year given how quickly headcount has risen in the other direction from sales, thanks.

Hans Vestberg

Johan, may start.

Johan Wibergh

I’ll start and I think first of all the -- as Hans mentioned the business the services business is growing and the services businesses is headcount driven obviously business that doesn’t mean that we are not changing or transforming that business, we are doing that on a daily basis and that we will continue to do of course. On, with regards to the restructuring program I mean what I’m saying because here clear is that with the program that started in the beginning of 2009, that will not an a restructuring charges in the second half, if there is a new program, I am convinced that Hans and I will go out and tell you that in advance, if we don’t then from the second half of 2010 we will start to look at the bottom line in without excluding restructuring cost I would say.

Hans Vestberg

Yes, if we then take the price pressure on the question about what I’ll elaborate on the trends that we see the 2G going down including core and the pieces of (RAM) whatever is going to be in 2G is going down at the same time 3G is going up. We think we have a very competitive portfolio in the 2G and as well in the core business regardless of it’s a 2G or 3G but by nature its going down on 2G right now. When it comes to prices pressure, I got the question so many times right now maybe I sound a little bit, but strange here but we have had this price pressure for quiet a while right now and tough competition for a long time as well.

So I mean we actually used to believe as a company and we used to fight with it bring out our strategy and we spend firm a lot of strategy, we need to continue with the way the things that Johan is talking about, efficiency gains and continued to work on our strategy. So I think that’s the most important for us, competition will always be there and it’s going to be tough but and we need to understand it but its more about driving our agenda and our strategy right now.

Richard Kramer – Arete

And just to be clear there has been no lessening of price pressure given how many of your competitors seemed to be keen to get share right now.

Johan Wibergh

At sometimes you have flavored to the law of (inaudible) remember what has actually happened on that but as usually I will state on the longer time when we have not seemed it, now its no changed, its equally tough as I usually say.

Operator

Alexandre Peterc from Exane / BNP Paribas is next online with the question.

Alexandre Peterc – Exane / BNP Paribas

Yes thanks a lot for taking my question, I’d just like to understand (inaudible) on an emerging markets that remained fairly softened not just in India but in other markets as well and remember you called and say that that your cycle is lagging the macro cycle by six to 12 months. Now given this credit markets bottomed out and the macro bottomed out, about a year ago, how should we time then this recovery in emerging markets and then there is a very small follow-up will be on CDMA and its not even quiet strong, are you surprised and can discontinue? Thanks.

Johan Wibergh

On the emerging markets, I will just go back to reflect what happened in the first quarter and of course we tried to go through region-by-region right now but sort of the growth markets as I call them and so the emerging markets like Africa, part of Asia and etcetera. They have a combination of couple of things. They have the sort of the cautioness of operators of the road ongoing financial turmoil, but at the same time they have a transition with 2G and 3G and especially in Africa we also have an operator (inaudible) that is taking down the pace a little bit. But again you see also in those regions mobile broadband is a very important piece of it going forward. So that’s the sort of where we are on that, not saying about the future more about what we see right now.

On the CDMA, I think that we are happy with acquisition, we position ourselves with the largest CDMA operators in North America. I think that they have also have seemed the data growth in the CDMA networks as we see in the WCDMA networks, which of course are brining business to our CDMA business. So now we’re happy with that acquisition and we think its performing well.

Alexandre Peterc – Exane / BNP Paribas

And are there market share gains there, against competition in CDMA specifically?

Johan Wibergh

It’s a little bit too early to say, I mean it’s just one quarter that we’ll had it but so I will come back and elaborate on that one when we have a little bit more time behind us.

Alexandre Peterc – Exane / BNP Paribas

Thanks very much.

Operator

We now have Patrick Standaert from Morgan Stanley online with a question.

Patrick Standaert – Morgan Stanley

Quick question on the CDMA business. I’m trying to understand a bit, if yet side you’ve seen on the sale really had a big impact the profitability and trying to understand one issue, you could tell us what the profitability came out from the Nortel business and if you can't tell us how much more significant it is versus the group average?

Hans Vestberg

Okay, as we said in the fourth quarter we talked about CDMA being well above average and remember we got CDMA pieces for the last six weeks and they are usually the strong weeks of the year. This quarter is a little bit more normal but still a little bit above the average to (normal) but that’s where we are, but remember when we made the comment in the fourth quarter that we had the last six weeks which are very important weeks for year, so this quarter it was more normal but still good profitability on the CDMA business.

Patrick Standaert – Morgan Stanley

When you talk versus historically do you speak and versus average do you speak versus Ericsson average or do you speak with Nortel’s historical average?

Hans Vestberg

I always talk about more to Ericsson average here, I mean this is in Nortel ever because we took out in North American CDMA only, so that’s we had no historical data on that one.

Patrick Standaert – Morgan Stanley

And when you look at your pipeline for the CDMA business and your reason to believe that, despite that you’ve seen in Q1 will continue in the beginning of the year or this should slow down, and then on that similar trend of question. If you had some component shortage in 1Q, is there any reason to believe that the sequential gross for Q2 will be higher than the historic leverage.

Hans Vestberg

We don’t comment on seasonality or something like that, that we don’t guide but secondly when it comes to CDMA again I think what we bring to the table on CDMA is of course the financial stability of our company I think that’s important and then of course we want to see other customer reaction how the investment CDMA. So far it’s progressing as planned and a little bit above plan as well, but it’s finally going to be driven by the consumer demand on CDMA in North America, I think that’s the most important and that’s where it goes.

Patrick Standaert – Morgan Stanley

Thank you.

Operator

We now have a question from (Anil Krishan) from UBS.

Anil Krishan – UBS

Hi thanks for taking my question. First of all thanks for the additional disclosure around network rollout that’s very useful. But just trying to understand over here the profitably within that portion of the business. It appears that it is quiet lumpy from quarter-to-quarter, can you help us sort of understand how profitability, how we should look at profitability within that and how it sort of fits in within the overall Global Services business. And secondly if I may on the R&D, we understand that you’ve not changed your guidance at this stage but looking at the R&D spend in Q1 it would appear that based on normal seasonality we might end up being higher than $30 billion. Can you help us understand the sort of drivers within that and how we should look at R&D spend going forward? Thank you.

Hans Vestberg

We start within the row, yes you can see from the disclosure that we had been quiet lumpy on the rollout and then the reason of course depending a little bit of the project we take on and what type of or projects is ongoing in that quarter, but you can also see that we have improved our margins over the time here with the lot of focus on probably execution and product management but remember its an very important need for our networks business, you sell it together and that has not changed. So that’s important on this, on the R&D maybe if you come I will comment on that.

Johan Wibergh

Absolutely I think the one more thing on the network allows, its very easy we have to formal heads of Global Services in the room but, it is a low margin business, and as such is extremely important for us to work very hard as long as that good project management so I think that is also an important addition to make. On the R&D side, I don’t see that there is a reason to change the guidance on the R&D spend. I think we are, I agree with you that there is a bit of Q1 number there but we have, if we feel that there is a need to change the guidance, then we will do that, so I think why that would be a (inaudible).

Anil Krishan – UBS

Alright, thank you very much.

Operator

We now have a question from (Adnan Ahmed) from (inaudible).

Adnan Ahmed

Hi guys, a question for and actually two questions for Hans. First of all are you seeing any increased activity from operators to bundle services and deals together with network deals, if you look at the industrial market, vendors such as Kerner and group ThyssenKrupp, they sell equipment at a cost of low margin and make the money on services at multi-year deals. Are you seeing an increased activity of that in your pipeline over the next 12 to 18 months and the second question for you Hans, is just on the other CDMA strategy obviously you’ve taken up in Nortel business in the US and you’ve recently struck the deal with, I’m taking the Nortel position out of the LG for the Korean market opportunity. What’s the type of strategy do you have for CDMA and other markets such as in China, India and Japan over the next 12 to 18 months. Thanks.

Hans Vestberg

Okay, regarding business models I think of course its always some innovation in that area and but nothing domestic over trench something, I think that in our case, we are also looking into using our assets when doing business deals where we have the strength in technologies and quality on our network performance to get that we do our service business to see that we can do tailor deal for our customers, I think that we are doing it as well, so but its nothing big (venture).

When it comes to CDMA, you’re rightfully pointing out that that was an North American CDMA business, what we have said on the international business we will do CDMA business outside North America if it makes sense for us. We have already announced one in the Nordics on the 450 CDMA which is Rural mobile broadband. So when it makes sense we’re going to do it, using again our assets which is the global reach, using that (paid) channel and their service capabilities to get CDMA out in other markets, but we will do it when it makes sense and sort of when its make financially sense I would say.

Adnan Ahmed

Okay, thank you.

Operator

We now have a question from James Faucette from Pacific Crest.

James Faucette – Pacific Crest

Thank you very much, I wanted to ask a little bit of a longer term question, as if we look at the way networks are moving particularly with new introductions of things like femtocells etcetera, how would you expect that this will impact your equipment business in the current position going forward particularly as these new network elements seemed to allow the smaller companies to compete effective at least at this stage. That’s the first part of the question, the second part is then as it relates these new pieces of the network, how are they going to change what needs to be done from a networked management standpoint etcetera. Thanks.

Hans Vestberg

Let's see if I (honestly your questions), when it comes to the network and continue to evolution on the technologies on the networks, we of course are following that closely on the sort of for us the radio technology for example is much based on the micro, mico and picot cells at the moment and that’s where we are making our investments in order to meet these demands from the network with more usage from smartphone user or connected PC devices. That’s how we want to support operators to manage the loads, at the same time its very important that of course the transport and the routing of it and IPfying all the backhoe of it as well. You need to balance that on top of that, the provisioning and the data management is going to be even more important when you’re brining many new devices tune in that very different usage from those type of devices so that’s what we are doing in the multimedia business.

You can historically say that’s on voice, has been innumerous tariffs on voice but very few on data and of course going forward we’re going to see more different type of tariffs on data and then we need to understand that in network what type of devices these even what type of service it is in order to have different type of tariff. So that is sort of how we are gearing up to meet this market going forward.

The second question, what was that?

James Faucette – Pacific Crest

Yes sorry, I was just trying to understand what challenges are introduced as you basically introduce more network elements and more basic things are that you need to control, I mean is that changed for you, what capabilities you need to have within the company or is that basically continued enhancement of the things you already own?

Johan Wibergh

I think we have the main assets for the radio technology, but of course if you get more dense urban business you need to think about how you deploy that because maybe cannot have more sites, so you needed to have more smarter than (10) or more smarter (cell sites) etcetera, so that type of things we are developing all the time. So I think we have that in the portfolio, its going to be more based on the assets of the operators one by one to understand you have what they need to go what type of load do we have in networks, how you build it. So I think that’s on the radio side and all the that side we feel that we have the products.

James Faucette – Pacific Crest

Thank you.

Susan Anderson

With that operator I think we have to conclude this call. So with that we thank you for joining us today and we hope to see you all here in Stockholm in a couple of weeks, May 5th and 6th for our Capital Markets Day. Thank you all.

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Source: Telefon AB LM Ericsson Q1 2010 Earnings Conference Call Transcript
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