Thank you, operator, and hello everyone, and welcome to our call today. With me here today I have Hans Vestberg, who is President and CEO of Ericsson; also Jan Frykhammar, who is our Chief Financial Officer, and Johan Wibergh, Head of our Business Unit Networks.
Before we open up our presentation, I must remind you that during the call today, we will be making forward-looking statements. These statements are based on our current expectations and certain planning assumptions which are subject to risk and uncertainties. Keep that for remind that the actual results may differ materially due to factors mentioned in today's press release as well as discussed in this conference call. I would also like to encourage you to read about these risks and uncertainties in our earnings report as well as our Annual Report.
And with this said, I would like to hand over now to Hans Vestberg who is our first speaker today.
Thank you, Ase. Yes we will briefly go with the material together here, me Johan and Jan and then we will of course open up for questions. Let me start with the sales, sales ended in the third quarter of SEK 47.5 billion, that was sequentially basically flat and year-over-year up 2%. If we make it more comparable units, it was down 5%, its comparable unit and adjusting for currency. So all-in-all, it has less of an impact, negative quarters that we have had earlier. We have had four quarters of negative growth; this was the first quarter in the four quarter that we've actually had a positive growth of 2%.
Even though. it's small it's an important one for us and if you look at the segments and we will come back to them but the basically it was Networks with Mobile broadband, that's growing well and Global Services continuing to show good growth, both of course are impacted by currency as well where we see professional services of course in local currency being up 10%. We will talk later on and Johan will talk about the component shortage that we talked about in the second quarter, where we are already then said we will have an impact in the second half of 2010.
On the other hand we said also we should see some gradual improvement. So we will come back to that, multimedia, I will come back to that as well, but multimedia stay on the same pattern as before with negative growth of some 30%. So we will come back to that as well. So Johan, let's hear about networks.
Thank you Hans. So sales grew in the quarter with 6% year-over-year and it's been driven by mobile broadband and that's specifically very much related to the success of iPhone and broad based devices and especially a strong market for US and Japan, but there's also of course a correlation to where smartphones are growing. If we had a positive impact from the acquired Nortel business and its CDMA, EV deal and same connection to mobile broadband there before.
And 2G sales picked up somewhat in India and China, but we have still overall slow voice sales. As we said in the second quarter we would then have an impact on the second half of the year from components shortages. It has eased somewhat, but we still have an impact of SEK 2 billion to SEK 3 billion due to component shortages.
Margins have improved as you saw and the strengthening is basically coming from business mix. We have a favorable product portfolio and but also the cost savings we have been doing and then also as we usually in third quarter, we have a seasonally low operating expenses. Hans, back to you.
If we talk about the global services, then up 3% for the whole global services. We see a slow Network rollout business is very much connected to that, we have less of turnkeys contracts at the moment and we have had that for a while right now. So it's no news in that, but professional services continue to grow in local currency with 10% and we can also say that Managed Services continued to a very good growth, up 46%. However there, we need to remember that this is the last quarter where we have spring in the current quarter but not in the previous year's quarter and the fourth quarter will be more comparable.
Still good growth and we signed up from 13 new Managed Services contract in the quarter which eight of them was renewals. The margins on Global Services basically stayed stable, a little bit up. The same goes for professional services and then a (inaudible) of 16%. So very good stability on the margin side and the growth side. And on the margin development, we see some impact from the supply chain, both the mix as we need to go out and do installation a couple of times so that is not the concern [ph]. Some on the other hand is less of turnkey project. So those are sort easing of each other.
Multimedia, we're not in three quarter, running around SEK 2 billion, SEK 2.5 billion in sales, down from 30% and same reasons as well seen in three previous quarters and even in the fourth quarter last year. Southeast Asia, Middle East and Africa which is a stronghold for revenue management and many of the applications and provisioning seasons that we have, have had a much lower investment levels from operators, much due from cautiousness and that is continued impact though. The TV business that was the first one that we alerted on from an investment point of view when we came into the more of a cautious period of the financial crisis or in the financial crisis that is now coming back and we see more increasingly we see a growth in the TV business.
All in all the margins came back to a EBIT level of breakeven, improvements on the last quarter even with a flat sale. However the management or multimedia is continuously working to get back to profitability and they have initiated plans to see how we can get back and that will encompass how to sell more because it's more a volume problem than a modem problem here, but as we are looking into all other improvements when it comes to product rationalization at that front and so that's important.
If we move the slide and talk about the joint ventures and here you see Sony Ericsson is there. Sony Ericsson running on the sales of €1.4 billion to €1.6 billion has now turned for the third quarter making profits which we think, they have done a tremendous job coming from those volumes and turning it around in such a short period. That doesn't mean that they are sort of out of a challenging time, but definitely the product portfolio and what they are doing is encouraging. And they had some 4% operating margin in the quarter.
ST-Ericsson reported late yesterday night, basically same volumes over the quarters, some improvement on the losses especially due to the cost efficiency. Here we are continuing to bridge together or merge together the three companies, NXP, ST and Ericsson mobile platforms to get out with the new models and those are planned for next year mentioned in the press release that we'll have some design winds on the new product which is very important for us and here we continue to see efficiency gains, but most the important the new product portfolio coming out.
You can see on the last year that Ericsson share in the earnings has turned and are now flattish in this quarter coming from huge losses in last year and the main reason is from Ericsson turnaround that is really what is making difference here. If we then move to the regions, you can say in general that we have had some impact on this from Swedish Krona in the quarters on several regions as we're trading in dollars and selling hardware and software in dollars and euro.
That's huge, but still has an impact. We also as Johan mentioned, there is very much the component shortages and very much sort of in the mobile broadband portfolio and the product that is crossover all the regions. So it's no regions that is less or having more favor or less favor situation, all are impacting unfortunately. And we talked a lot about the modernization in Europe, in the second quarter we can say that we have no impact in the third quarter, I would probably thought having impact in next year. So for the decision or modernization as we can view it from our side, had a good positive development for Ericsson and we will come back when can communicate when the deals that have been closed. If we look at the regions in general I would not dwell too much on it but you can see that mobile broadband and services order that parts of the portfolio that has a good momentum. You can see also we have more regions now having a year-over-year growth we're have a sequential growth and before North of all America's off course speaking out with a very good growth 220% than very much fueled by the mobile broad band both on CDMA, HSPA, HSPA parts that's sort of where it comes from.
But it was in North America at the Springfield which is important in the service piece of it. India, quickly mentioned that second quarter brought the low points in 2005 on the equipment side both security issues that we are going to ship. Secondly, the 3G auctions that had come up just made a stop the market until they have defined. Second, the third quarter was thought the shipping to the equipment that were up sequentially 58%.
However, in our 3G equipment shipped in that quarter but decision of 3G vendors will done in very much to a large extent in the third quarter and we can say that we maintain our market share in India on 3G most versus to the 2G. And the ones that have been communicated as we continued to be the main supplier to Bharti on 3G for example. That will start rolling out in the fourth quarter and then during 2011.
China and Northeast Asia as I said that is the region. That had good development as well 24% up year-over-year and 51% sequentially. Here we have Japan being one important driver with mobile broad band. We saw also in the quarter investment on 2G in China, in the quarter we also we included LG Ericsson the Korean photo company that we have working with the Korean market. There are no significant or immaterial sales and margins from that in the quarter. However, important to say that the LTE rate is now on in Korea, and we have now a company that can address that which I think is a good timing however if we want to win or not, that's a later question but we are well positioned with our Korean company now.
Jan I leave it over to you.
Then we are on the slide with having profitability. I think yes, the few remarks on this slide. The gross margins of 39% same level as in the second quarter improved compared to last year. There are no changes into the reasons why we stay flat, its business mix as well as continued impact of the cost savings. On the operating expense, main reason I would say if you look at a sequential reduction is the seasonality and basically we have also higher costs thanks to the fact that we have integrated acquired companies to same reasons really as in the second quarter there as well.
If we take the next slide and go to the balance sheet ratios, here it was not easy to be a CFO of the company in the second quarter and report negative cash flow then, on the other hand I am really happy to talk about the improvements we have made on the days of sales outstanding in this quarter. And I think we have really focused in on collecting cash and improving also the inventory levels. However, the inventory levels is high still, a part of that is related to the seasonal build up but it's also sold at time of the impact, our supply chain is still impacting inventory.
I would say that the third reason is that we also are driving or buying material now for volumes in Q1 and Q2 and that has a small impact on inventory. If you then take the next slide and look at the slide that is called change in gross cash. Here you can see the green nice box that have an operating cash flow of $11.8 billion in the quarter, and an adjusted cash flow if you are going to adjust for cash outlays related to the structuring where we then add SEK 12.7 billion of operational cash flow in the quarter. That's something we are happy with. If you look at the change in net cash improvement in the quarter of almost SEK 10 billion.
Next slide, cost efficiency, we have said all the time that as a company we continued to have both capital efficiency as well as cost efficiency high in our agenda. The main area of selectivity that we are carrying out in the company is with regards to [rationalization] of products seeking synergies and efficiency gains in a service delivery as well as of course the transformation activities in our managed service business.
In the quarter now we took charges for restructuring of SEK 900 million and we did cash outlays of the same amount. Now if we look at what remains to be paid for in terms of cash for restructuring its SEK 3.8 billion. We have also done guided for a number for the fourth quarter as we feel that that's important for us and in our dialogue with you to get the better transparency on the expected restructuring charges and you see the number there of SEK 1.5 billion. It's with the same reasons I would say. So with that, I'll had over to Hans?
Thank you very much and I would just come back to the four focus areas that we have in the company. You have seen them many times and but this is how we're probably the company put up incentives and we try to really to create value and see that we are doing a great job and grow forth in the market as it was outlined in the report. The first half year of 2010 on the CapEx side has a negative growth. I would say that there's second half in 2011 it still remains to be seen from the market point of view. We came back somewhat from a declining business to having a small growth that's important.
We'll continue to be very focused on that and we're doing changes in the company to address our portfolio and be stronger with our customers and see that we sell the full solutions when we did the regionalization. Best in gross margins, we continued to work hard within the margins; we've seen a sequential and a year-over-year improvement. For couple of reasons, I think both the mix but also the cost efficiencies that were done. We will continue to try to find the best efficiency gains even though we will not have a global program as you had.
The cash conversion, we have our target of about 70%. The cash conversion, we are there right now when we continue to strive for that. We had a strong third quarter but it should be viewed over a longer period. We usually say and looked over year and that's where we have the focus to continue to generate at least 70%.
Our JV earnings is coming back to zero. So it is growing or not, that's probably a different question but definitely coming from big losses last year to being seeing right now, very much driven by Sony Ericsson and we will continue to support them in that transition. That would be then our presentation.
Thank you very much Hans, Jan and Johan and operator we are ready to take questions now.
We now have the first question from Mr. Edward Snyder from Charter Equity Research.
Edward Snyder - Charter Equity Research
Thank you very much. Hans, I had a quick question. You mentioned in the release that there was an increased interest on the part of operators in network sharing, particularly in Europe. Is this LTE or wideband CDMA? How large of an impact do you expect us to have on the size and timing of rollout of say 4G? And if you could comment on what you think the pace of rollout in 3G in India is going to be, I'd appreciate it. Thanks.
Hi Ed. When it comes to network sharing we have seen that for quite a while in Europe especially in the markets where there are several operators. And its everything from passive and in some extent there was also active sharing and we are seeing couple of them, we are going to see going forward at least the interest and the discussion is quite high on the passive side. But on the active side we are going to see what's going to happen. So it's a little bit early to say yes, I will come back on that when we have those type of development.
But definitely there is a lot of discussions around it. When it comes to 3G in India we will as soon as the contracts are cleared we will start shipping as soon as possible. So of course we will, already in the fourth quarter, ship some 3G equipment but much will also be shipped in the 2011 India is a large country, so we will not be able to deal with all whole country in the quarter, so it will take some time, but it will be shipment for certain regions or cities which some operators are focusing on in the beginning.
Edward Snyder - Charter Equity Research
But this should affect your margin profile, should it not, given that you're doing a lot of 2G there which I would expect to be much higher margin product than your 3G?
Depends on how they select to do with, but it is going to purely the new footprint on 3G that there will be some pressure on the margin. On the other hand we don't know the pace this can be done in because it's quite a lot and a lot has been decided in the third quarter of course but we will shift 3G equipment in to India in the fourth quarter.
Rod Hall from JPMorgan is online with a question.
Rod Hall - JPMorgan
I have two actually, I wondered Hans could you just comment, I mean, we've seen now revenues kind of creeping their way back up for the whole market not just Ericsson. So levels that we saw maybe in 2008, 2009 not even quite at that level and at best it looks to us like next year, we're looking at maybe low single digit growth to the overall market. I just wonder if you could comment for the radio access network in particular, whether you think the market is actually a growth market or not. I mean, do you think that that market can accelerate to double digit growth on an annualized basis or you think it's more like a low single digit growth market that just continues to grow that way over the next couple of years? And then I have one follow-up to that.
I think on the radio access we think that if you go start from the outside and thinking about the consumers and the smartphones and all of that, we think that radio access will be very important piece or that business to really meet the demands on the consumers. At the same time we'll have modernization coming as installed base that is installed and manipulated. It is actually can be very much in groove from a technology point of view, but also from a power saving etcetera and all of that.
So yes, we believe it will grow but if its low single digit or whatever that is too early to say, but given the underlying market trends with smartphones and all of that and modernization, it should be a possibility for growth.
Okay yes this seems like the equipment, just gets more and more efficient and as a result, the effective price per unit of bandwidth keeps coming down. So it's just not clear whether we have a market that's a low growth market or something higher. At this point it looks like a lower growth market. So okay, I guess there is nothing else you could say about that.
The second question I had is on provisions. It sounded this morning like you are saying and maybe this more your Johan. You were saying that structurally you're taking lower provisions on the RBS 6000. Is that correct when you compare the RBS 6000 provision level to prior generations of base station. I mean should we be expecting provisions to kind of run structurally lower as we get more and more RBS 6000 in the mix.
Unidentified Company Representative
The question that I got was LTE and my answer was that so far that on LTE as we say I mean provisions usually reflect the risk level and off course, if we get new technologies coming out, usually we have the preparations without the quarter fail rate is a little bit higher. We have not seen that on LTE and LTE is on a RBS 6000. So that was my answer just to clarify that. So its about plans, what my answer, just to clarify that. Johan?
I think also that when it comes to the overall provision level, you have to look at the business mix as well. I mean the business mix during this year is really much more of upgrade and I mean if you were here a few years ago, we had much more of turnkey projects and so forth with a different risk profile. So I mean let's see what happens in the future but right now the provision level reflects the business mix.
RBS 6000 is our latest generation of base stations that we launched in the second quarter. We have a tremendously good reception of it from our customers. It's a base station that can handle all wireless technologies and it has also then be used to LTE as earlier. It continues to go quite well and it will be an important product for us in the coming year.
Mark Sue from RBC Capital Markets is online with the question.
Mark Sue - RBC Capital Markets
As carriers enter the second phase of mobile broadband, will that be the event that pulls a lot higher demand for more networks? Is tiered pricing a catalyst for a step function that will increase also demand for networks? Maybe if you can let us know, what investors should look for to be a positive catalyst to accelerate demand for networks?
I think you mentioned two of the important trends that we should look forward. I think tiered pricing is very important piece so that then operators can match the cost in revenues in other way and they can address both high end users and low end users and probably also machine to machine overtime. So tiered pricing on mobile broadband is an important indicator for the market when it comes to the possibility about gaining growth from an operator point of view and of course consequentially with investments. The other indicator that we are (inaudible) I think smartphones is a very important indicator as well and then when it comes to the networks and the usage from them and it was initially of course iPhone but today it also goes for many other types of phones like the Sony Ericsson's Android phones.
So I think that those two are two important elements. Then which operator and which moment they are going to invest is a little bit different how they built the network from the beginning and what they were expecting and then preparing for. So but as a leading indicator, tiered pricing, smartphones are important.
Mark Sue - RBC Capital Markets
And on these things, you feel maybe there will be a point where things can actually accelerate so that networks is just not a GDP growing segment?
It's a little bit difficult to say because when I generalize on the whole word, it is sometimes difficult because there are of course regions that are investing quite heavily right now in mobile broadband and there are others that are not but in general, the transition that we see in new ones, basically networks that based that mobile broadband is growing well and that the voice related equipment thought is declining. So we see investment on mobile broadband definitely.
Alexandre Peterc from Exane BNP Paribas online with a question.
Alexandre Peterc - Exane BNP Paribas
Just a question along the same lines as the previous one. Really when we look at the US and Japan now that are in a very strong growth phase, and you underscore the importance of mobile broadband there, I'm just wondering how long do you think it will take until that comes to Europe as well? And is the network modernization you're talking about in Europe, is that part of that mobile broadband spending that we're going to see investing in Europe as well, perhaps at lower margins than what you see in the US because it's more competitively priced? Thanks.
I'll start and Johan will follow up. I think that yes, right you mentioned the growth that we see in Japan and North America is very much driven about the smartphones and the mobile broadbands. Johan can talk about Europe and what's happening in Europe.
I mean we have seen a clear development of mobile broadband over the last year. It was initially driven in by pieces and dongles but the quarter, at least last two years the most important growth factor has been the smartphone, plus iPhone and then the Android based phones which according to Google are now activating more than 200,000 per day right now. And of course, those are then the factors that are driving up. Mostly the iPad will have a positive impact even though still volumes have been small.
So we then expect that we can then say that where up take or smartphones are increasing, that of course then it drives traffic in the 3G networks and hence made for more expansion and capacity upgrades and some may have a lot of capacity already, other maybe strained and depending on that investment come the timing, various depending on how much it's being used.
Modernization in Europe will support this. Fourth generation LTE will also support and drive this and of course due to these factors, they are different development in different countries.
Finally, as the question said before, this is supported by the different business model. As you get more advanced business, you get the bigger uptick and the bigger usage.
Richard Kramer from Arete Research is on line with a question.
Richard Kramer - Arete Research
If we look back to 2007, I think this is just to Rod's question as well. There seems to be very little growth in the core networks business despite this huge boom in mobile data traffic and despite acquiring Nortel. So my question for you Hans, is do you think Ericsson needs to widen its addressable market to reach other end segments of operators that's in cable or satellite or other markets and how do you see potentially using now the $35 billion on net cash to try to hasten some consolidation in the industry that might ease some of the pricing pressure that clearly operators are quite happy about. And then a quick question is for Jan, where there any sales of receivables in the quarter and do you anticipate for 2011 having a further restructuring program as we've seen for many of the past years? Thanks.
On the first question, I think that as long as our portfolio can address the needs of other industries and other operators we will definitely pursue that as well and we see that traction that more and more the industries are looking into sort of standard technologies. So I think your question is right there, that yes we will see possibility with cable companies, utilizations companies doing either managed services or technology. And so yes, it will be natural for us from our portfolio point of view and on your other question which regarding what we are going to do with the net cash that we see any possibility for industry consolidation. I think good industry consolidation was the Nortel acquisition that we made was not apparent, that we needed CDMA in the portfolio. We will follow whatever is happening in the market. That's a leader and this is something we need to do in order to keep or strengthen our position. At the moment nothing specific on the radar screen but we are all the time browsing and seeing what's happening in the market.
Richard, let me tell to your answer your two questions then, the factoring was at normal levels in the quarter. When it comes to the continuous improvements or ambition we have to work in a more efficient way and so forth, I mean that's something that we as a company will continue to do of course. We will come back in the fourth quarter with or after the fourth quarter with more of a guidance if I may say, so on the level of restructuring charges for 2011. Now we gave a number for the fourth quarter, but that's come back in January with a number for 2011.
Richard Kramer - Arete Research
And can you say what normal level of factoring is in a kind of giving quarter?
Anuj Krishan from UBS is online with a question.
Anuj Krishan - UBS
First one for you on perhaps, on the OpEx side, you've made a couple of comments around costs related to LDE trials and also CDMA integration costs kind of speaking right now, so just wanted to understand how should we look at the OpEx seasonality going into Q4, if I look at the last three to four years the SG&A charges have increased by about $2 billion to $2.5 billion in Q4 over Q3 and R&D has increased about $1 billion. Should we expect a similar kind of level in Q4 or will there be any differences given the drivers? And then a second one for Hans perhaps, if you could just maybe talk about some of the drivers for gross margins going into next year, I know you've discussed network modernization, HSPA in China, 3G rolling out in India. But putting it all together, what does it sort of imply for gross margins for the group? Thanks.
I think first of all on the operating expense, I don't expect any different pattern than the normal seasonality on the operating expense. I think on the ISIT mainly integration costs related to the acquisition from Nortel. I think we have peaked there in the second and third quarter. So that portion will probably go down a bit. On the other hand we have a big activity level when it comes to LTE trials and that will continue throughout the year.
On the gross margin drivers, I think the one of the most important drivers is volume of course, and that is an important driver on the infrastructure side of it. Then of course it is the type of business we are doing, not the country we are doing, as I said so many times before, if it is expansions, upgrades, or if it's a new footprint, of course that mix is important. In services, it of the drivers of course so it's more our way of transforming business and off-shoring, on-shoring, doing everything that as smooth as possible. That is an ongoing work everyday. Those are the drivers for us to keep up some audience.
And of course the new product is also an important point that you wrote up and then when we come up with a rate to base family which is also important from a cost point of view. So, I think those are the drivers for us when we are looking into the cost of sales and what are the drivers to see that we drive costs down.
Stuart Jeffrey from Nomura is online with a question.
Stuart Jeffrey - Nomura
I had a question on balancing growth with margins. I think you said in the past that you wouldn't really want margins to go above 20%, perhaps for fear of upsetting operators, and it has now gone above 20%. And the last few quarters we've seen some of your competitors perhaps win a number of contracts that might suggest they'll start to gain market share. So I was just trying to understand why perhaps you haven't been as aggressive chasing some of those contracts, whether you are holding back for network modernization or whether Q3 is just a little bit of an unusual quarter? Thanks.
Not really recognizing a couple of the comments there. I mean I think that as I said before I think we are doing well on network modernization in Europe. That said, sometimes we cannot reveal the deals that we have won because a customer want us to deal with. I think we are doing well. We are definitely keeping our market share in Europe, and we all the time balance the growth with the audience but also sometimes growth is important for, because volumes also drive in the bottom line. So I think it's a balance for us, but we all the time, I don't think we have changed any view on how we work on that. It's nothing unusual.
Stuart Jeffrey - Nomura
I guess I was just wondering whether or not you might use that profit, that margin, to be a little bit more aggressive going forward?
That was another question. I thought about the history now. We are going to use it in the best way to balance growth. Growth is important for us so we are going to balance it in the right way, but on the other hand we have said that we wanted a good profitability as well in orders to make our investment in R&D. Technology leadership is so important for us so we can generate that. We are going to balance it going forward as well, but of course when we see opportunities of the market share or new footprint, we are going to be as usual be very keen on it.
Let me add there as well, Stuart, I mean when we met here at the Capital Market Day, we said that we are not tapped with the current level of profitability and that we over a long term period would like to make sure that we would gradually improved, and I think that is something that is important for us and still as Hans said of course footprint drives volume and so forth as well. But over the longer or mid term period, I mean we are trying to improve both the lines.
Pierre Ferragu from Bernstein is on line with a question.
Pierre Ferragu - Sanford Bernstein
Thank you. Could you give us a bit of a sense of how your clients in North America are spending money with you, because there are a lot of controversies around what sort of spending really mobile broadband triggers. Is that mostly spending on the core network, on the backhaul, or it's on the radio network? And on the radio access network, do you see a steep increase in the number of sites, the number of base stations that operators are deploying to cope with the growth of smartphone usage or is it mostly money spent on upgrading existing equipment and existing sites? Thank you.
I will let Jan comment, but before we start commenting, first of all you know how sensitive we are to disclosing what our customers are investing, and I think that's very important. So sometimes we ask to ask them, but you want and in general terms probably talk about what we see in North America.
I mean when we speak about mobile broadband, what product drives, first of all, on the radio base station side then there's backhaul, and then there is something called the [control at ROC] and then might be a further more transmission. So these are the products involved. So in some cases, operators are in need to deploy a bigger coverage because if you still look there is something like, if you take where we had GSM today, 2G coverage that's going at 5% of the same coverage that has a 21 megabit per second, 3G coverage. So that's still a lot of coverage; that means we built out.
Secondly then, there are capacity increases and they go all over the change. So the capacity increases in the radio base stations, we need to buy new carriers or upgrade the hardware to handle higher speeds in need to store more mobile backhauls, so that's more transmission equipment, and you need to increase the capacity on the RMC. And then I might get further on capacity increase in transmission.
And each operator having an individual situation on what do they need and to buyout et cetera. But are the general areas that are benefiting from mobile broadband growth.
Pierre Ferragu - Sanford Bernstein
Thank you, and perhaps a very quick follow-up. Why don't we hear about network modernization in North America as we do in Europe?
I think in North America, you had two things. First of all, you have more capacity upgrades on 3G because what America has invested in [three years] quite recently. So there is no need to modernize it.
And then secondly, North America is deploying LTE fourth generation also, which is the modern of course.
Matthew Hoffman from Cowen is on line with a question.
Matthew Hoffman - Cowen
It seems as though most of the change in operating profit quarter on quarter was due to the steep drop in SG&A which was down by about SEK1.4 billion sequentially. Can you specify what drove that? I think I heard you say something about FX in the press conference this morning, but I was hoping you could clarify your comments there and help us to quantify that and comment on whether it's sustainable or not into the fourth quarter and beyond. Thanks.
What we said this morning was that it was seasonality and it is seasonality. So that is the way you should have been completed the answer. What's the other question? As we said in the second quarter, it is important to understand this different element. I mean we have had a bit of an IT integration cost related to Nortel, CDMA and GSM. The bulk of those costs were in the second quarter and the third quarter. We think we have peaked in that respect but those are not billions of SEK just to be clear on that. The LTE trial activity however is intense and we think that that will continue throughout the year. The other reasons are simply seasonality.
Matthew Hoffman - Cowen
Okay, and then a follow-up for Hans. I think you made a comment in your prepared remarks about the Sprint deal hitting its anniversary in the fourth quarter. Was that a way to talk to us about our models which have 30% sequential or so revenue increases in the fourth quarter and comparing -- and looking at the basis for comparison of that and worrying that maybe it's too high for the fourth quarter?
I was more referring to year-over-year. When you start comparing Q4 last year with Q4 this year that will have then on the manager as a side, we will have sprint in both quarters. That's what I was referring to and nothing else.
Zahid Hussein from Citigroup is on line with a question.
Zahid Hussein - Citigroup
Just wanted to ask little bit about North America again. Looking into the news, it looks like we're trying to team up a lot more closely and then to try and get into some of the larger carriers with sort of recent hires such as (inaudible) England. Just wanted to get your take on that. Is that a concern for you? Or do you think that margins will remain structurally higher?
And then just a second one in terms of India, are you seeing a little bit more of bundling with services or equipment from some of the Chinese vendors? And is that going to cause you further margin compression? Thank you.
It's a little bit hard for me to comment on their movements in either of the market seminar. I think you have breath in the self, but we face the competition all over the place and I think there's nothing different from before and we're going to see what's going to happen in North America.
In India I think that the operators define quite much, how they want to buy et cetera. So that's sort of how the solutions are made for the customer. So not sure to answer any question perfect whether I'm not sure how you won't be to answer because I mean, I don't sit with that knowledge or at least the knowledge that I can talk about.
Zahid Hussein - Citigroup
Would you consider bundling services or anything like that in India, or potentially like professional service or spare parts, anything like that? Or would you kind of keep those two businesses separate?
No, we're already doing it. We haven't done that for quite a while in India. We bundled our equipment with services, and we sell different sort of capacities or voice related business or whatever it is. So that's where I moved on since 2003-04 in India. But its more depending on how the customer wants to buy, its much smaller but we have flexibility. When we have a technology leadership, when we had service arm, and then we can bundle it as the customer wants a new business with us.
One final remark there on Paris. I mean we have the spare part management service as part of our portfolio and that has been a global offering for quite a few years.
Kulbinder Garcha from Credit Suisse is on line with a question.
Kulbinder Garcha - Credit Suisse
I've got a couple of questions. On the restructuring, the SEK1.5 billion in Q4, I was under the impression that your major program was over, so what specifically is this for? And just in terms of magnitude, Jan is this kind of level we should expect going forward or is this inflated for some reason, just to give us some idea like? Because I think it's important for investors to understand if you're going to keep restructuring, to leave estimates out there, this is going to be a major SEK5 billion or SEK7 billion or SEK10 billion charge to depress earnings, that leaves a lot of volatility I think in the shares potentially.
And then for Hans, on the gross margin, everything you speak about, unless I'm interpreting it wrong, really seems to emphasize network modernization, India 3G, LTE, all things that we would associate at least for the next 12 to 18 months being low gross margin. Are you basically telling us gross margins have peaked?
On the provisions I think that first of all as I said before, we have always had a certain level of restructuring. I mean we are in 175 countries and we have a quite a big portfolio so its always going to be up and down but we will not have a global program. Now we have a little bit higher in Q4 and the reason basically that we come from the reutilization that were made in the second quarter that is now coming together and see efficiency gains.
Regarding next year, I think Jan is already answered that that we will come back on that. But again we will not have the leverage that we had in the last couple of years. If you don't announce any major programs, we will run on a lower level but we will never have CRO. That you can never expect from a business like ours. Jan is fine with my answers. I am looking at him.
Gross margins, I want to give some color on what type of business were in front of us. Of course we're going to have expansions and upgrades as well. Now we talk about Europe monetization and 3G, that's the two things we are talking about, there are other business as well. I mean services has consistently been very good and managing; they are modern as well. So I think it's the balance of it all, and we talk little bit more about the new footprint, where its coming and where do we see the pressure coming. That doesn't take away, we will continue to work with efficiency, rationalizations, new product portfolios et cetera, all the time to see that we can keep it. But of course there are some impact of modernization during 2011, and 3G in there as well. But let's see where it ends up.
Kai Korschelt from Deutsche Bank is on line with a question.
Kai Korschelt - Deutsche Bank
Yes, I had a couple please. Hans, you made a couple of questions I believe a few weeks back in a Swedish newspaper around competition, I think particularly from the likes of NSN increasing for deals like network modernization. So I'm just wondering if there's been any update in terms of how aggressive your smaller competitors have been and whether that has had any impact on pricing.
And my second question was, I think you alluded to 2% year-on-year growth but could you break out for us please what the organic sort of ex-M&A and ex-FX growth was both on a year-on-year and sequential basis, please?
And then my third question is on CDMA revenues in the US. Is that still strong and for how long do you think that the strength continues? Thank you.
On the first question, I probably need to change your view a little bit. I have never talked about NSN doing something. I never speak on the competition. The only thing I have said, as I always had, when new footprint comes up, that's when competition is, that happened on 3G in 2002 and 2003 in Europe and it happens now in the modernization. So I don't see any different view on that than, the Swedish media might portray them little bit different, but the same story as before. Competition is tough, has been tougher long time that's what we've seen. When it comes to CDMA, we had a normal quarter on CDMA, maybe little bit less because it has been strong in the first half, but I think the more the operators is going to define how long CDMA will be around, but it will definitely be for quite a while. The consumer base on CDMA in North America is very large, so of course it's going to require investment on CDMA for quite a while.
It's too early for me to speculate when that is going to end or when is it going to start decline et cetera, that way we have to come back with. But we basically are focused on a couple of really very important customers in North America, so we have to come back on that.
I can add there a bit Hans. I think if you look at the overall, if you remember what you once said in the beginning here, we have of course a positive development on that business thanks to the EV-DO or the mobile broadband in North America. I think in the quarter we saw some seasonally lower revenue from CDMA business nothing to be worried about I think and also we had a couple of percentage points impact from the FX. So yes to Hans comments.
Our last question comes from Mark McKechnie from Gleacher & Co.
Mark McKechnie - Gleacher & Co
My question is on the component tightness and specifically two things. One, for Q4 again, I know you don't give guidance but it's typically up pretty strong 25% to 30%. Do you think components might limit that to some sub seasonality here in Q4 and then maybe if you can tell us some of the components that are tight and how you see those playing out into next year. Thank you.
When it comes to the components, as I said already in the second quarter and Johan mentioned as well, there is a shortage of components that would also impact the fourth quarter. We see however gradual improvement. Everything relative depending of course on the demand and this is specially now to our mobile broadband portfolio. What
Johan answered when the question was raised, what is actually messing the mobile broadband, those type of equipment. So we will have to come back when the quarter is over to see where we ended up, but there will be impact in the fourth quarter from the component shortage.
And it is important for me to mention that because I have customers that want to have deliveries but I cannot really meet the demand, so it's equally important that they know it. It is actually top situation, but we are working very hard and we have seen a gradual improvement as said and our organization is doing everything to meet the extra challenges.
Okay. And an addition there is that if you look at this fantastic currency of Swedish Krona that is very strong right now and I mean if the currency stays on this very strong level, we will start to see an impact as well in the fourth quarter and let's see where we end the year and where we start next year, but you have to look at that as well.
Mark McKechnie - Gleacher & Co
One more follow up on the component side and I'd appreciate it but it's interesting. I know you don't like to talk about competitors, but Nokia Siemens, your friends in Finland, their margins were pretty weak; and they mentioned they had tight components at the high end. It seems like you bucked that trend of little bit. Is it fair to assume that you did a better job on your mix? Maybe you allocated the scarce components to higher-margin business relative to your competition?
Well yes you're sitting on better facts than I am because I cannot draw the conclusion because I don't know how they have worked in the quarter. I think that our organization has worked very hard. Still I have to emphasize that I have customers have not been satisfied with the delivery from us they want more. So I don't know how they have handled it. So I think we are handling very professionally. We have a very good supply orientation, we had diligence over this still we had an impact. But we have this as a number one focus for the quarter, all over the company and we will have it in the fourth quarter as well. But I am not sure how our friends, as you say, have been working with us in the quarter.
By this we end today's conference call and I want to thank you Hans and Jan and Johan for this call and today and many thanks to all of you who listened in and ask the questions. Our next earnings report will be posted on January 26 next year. So for now then I wish you all a very good day and good bye and bye for now.
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