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Executives

Andreas Ekstrom – VP, IR

Lars Nyberg – President and CEO

Per-Arne Blomquist – EVP and CFO

Analysts

Stefan Gauffin – Nordea

Sven Skold – Swedbank

Andreas Joelsson – Enskilda

Lena Osterberg – Carnegie

Andrew Lee – Goldman Sachs

James Britton – Nomura

Pieter-Kurt Nielsen – Cheuvreux

Jan Dworsky – Handelsbanken

Barry Zeitoune – Berenberg

Laurie Fitzjohn – Citigroup

Maurice Patrick – Barclays Capital

Andy Parnis – UBS

Dominik Klarmann – HSBC

Jakob Bluestone – Merrill Lynch

David Wright – Deutsche Bank

TeliaSonera (OTCPK:TLSNF) Q3 2010 Earnings Call Transcript October 25, 2010 10:30 AM ET

Andreas Ekstrom

Okay. Good morning. And my name is Andreas Ekstrom, Head of Investor Relations. A very warm welcome to this sunny, but cold Stockholm morning. We will start with Lars presenting the Q3 numbers, and then as usual, Per-Arne Blomquist, our CFO, will go through the financials more in detail with you. After that, there will be a Q&A session, both here from the floor and from you listening in over the Web.

And with that, I think I leave over the floor to Lars, our Chief Executive Officer.

Lars Nyberg

Thank you very much. Good morning, everyone. Welcome, happy to see so many of you here. Well in summary, I think we had a good quarter, growth of 4.3% local currency – local stock, local currency in the quarter; record high earnings in the history of the company, maybe that's not nothing to boast about should we have any (inaudible) record high earnings on – for the sake of my friends. But we have 36.5%, and EPS along 33%.

I think, personally, the growth is the most encouraging thing. You might recall when we started the year or maybe you might recall the last year when we had basically zero growth, which did put us as one of the best operators that year on the marketplace. But when we started this year, we thought we would get some growth, but not much, maybe 1% or so. And already in the – after the second quarter, we had to revise that outlook and say, "No, it's not – it's going to be like 2.9% growth for the full year." And now, we had 4.3% in the quarter and we have to revise it again. And we continue with the same approach. So we say, "Whatever we have in the nine months that will be the outlook for the year."

Where is this growth coming from? Well, our growth end in Eurasia is doing very well again. The economy in that part of the world has improved after the financial crisis. And we reached nearly 18% growth in Eurasia. And I'll come back a little bit more and talk about it because it's quite interesting, obviously the data growth and the mobile – Nordic mobile markets, and I'll give you an example of that, too. And very encouraging is the growth in Yoigo, Spain. If we're going to make the breakeven result this quarter, we need that kind of growth. We needed that kind of growth in the third quarter. I'm not sure we want to have that kind of growth in the fourth quarter because of the sack. But we grew 82% in Spain in Q3.

If you look at the Eurasia, the encouraging is that, basically, all markets are growing, except Yoigo. They're still suffering from the assaults of the war. But our biggest market here is Kazakhstan. And Kazakhstan grows with 20%. That makes a big impact on the result. But also, Nepal and Uzbekistan are growing, and growing quite spectacular. You can see the growth rate from Q1, Q2, and Q3, the rate is improving.

I'd like to spend a couple of minutes on the two investments we did three years and two years ago. We don't talk too often about them in any detail. These are big investments, big decisions to enter a market like Nepal or, in this case, Uzbekistan. The top left picture shows the coverage we had in that market when we acquired this operator, very spotty, not a very good coverage. And below, you see the network coverage of today. That's where we spent all the CapEx on, to increase coverage and increase capacity.

So we had geographical coverage of 21%, and now it's 34%. More importantly, the population coverage was – it was 54%, and it's now 84%. And we're a clear number two in Uzbekistan. And our market share is 31% increase from 12%. And this is basically a little bit more than three years.

And look at these – both the right hand, we have 6 million subscribers in Uzbekistan. We started with 500,000 two years ago. Only Kazakhstan is bigger, we have 7 million subscribers in Kazakhstan. ARPU is lower there, so obviously, Kazakhstan is worth more to us. But there's still a lot of growth in this market.

Market wise, even more possible growth is Nepal. This acquisition we did exactly two years ago. And again fairly spotty coverage on the time of the acquisition; we have a much better coverage today. I think you all asked me about why we invested so much money in Nepal a couple of quarters ago. That's the reason again.

We have grown the subscriber base from 1.7 million to 3.4 million. In this country lives 28 million people. So the penetration is still low. And we have gone from 12% to 30% geographical coverage. Seventy-three percent of the people in Nepal can now have a mobile phone. And we re-branded. This outfit was called Spice Nepal originally, but we changed it to the same model as we have in the rest of this region and for Nepal Ncell. And we have market share around 40%. There are two operators in this place.

Another reason for growth is the mobile data, and particularly Smart phones. It's really amazing. Seventy percent, 7 out of every 10 mobile phones that we sell are now Smart phones. It's totally dominating our deliveries. And I had said many times, I believe the telecom industry. We will look at the industry and say the time before the Smart phone and the industry after the Smart phone. It changed everything, offered those up, traffic explodes in our networks. It's really fascinating.

And the interesting thing now, as you can see on the lower picture is not only iPhone anymore. And it's also Symbian and Android. I believe they will come up with more models and probably take a bigger share of the cake. Finland is somewhat behind. But the other three Nordic countries are fairly similar in the volume of Smart phones.

We had a great quarter, I believe, in mobility. Net sales grew up 8.3% in Sweden. At the same time, we improved EBITDA margin nearly two full points in the quarter. And when you look at this growth rate of 8.3%, I think you need to understand what we compare it to. We compared it to third quarter of last year. Third quarter of last year was a good quarter. We sold a lot of iPhones in the third quarter of last year.

And of course, some of you might have seen, we are extremely happy with the SQI, Sweden's Quality Index that measures the satisfaction among our customers. And we topped it again, both in consumer and even more in business-to-business, very encouraging.

Another encouraging fact is that we have growth in Finland in mobility, 8.4% in lower currency. And it's same day as here. It's mobile data and equipments.

And finally, I think we are seeing some signs of becoming a stable situation in the Baltic States. It's still declining. But the decline rate is going down. And I think other operators have seen the same thing.

Very happy with mobility service. And of course, this is Spain, Yoigo. I said 82% revenue growth. We have 60% growth in subscriptions. We have now 4% market share. And we still expect to make a breakeven result in this fourth quarter and thereafter. If that happens, then we will have done this in four years. And I think nobody has started from green field and operator, and recently be breakeven in four years, not that I know of at least.

We are the clear winner in number portability. You can see who we're winning from. I believe if there's something that is really a bit weaker, it's broadband. I believe the fixed network is an absolute crucial asset to our company. The appetite for bandwidth is unlimited. I've said that many times. And to deliver telecom services in the future where you demand 100-megabit or even 1-gigabit per second, there is no technology better than the fixed network based on fiber, of course. That's why we are rolling out fiber. I would wish we could roll this faster. So I think it's a crucial asset.

The other challenge we have, of course, we have seen for several years the number of fixed line voice offers go down. That continues. And the challenge we have is then to offer other services like broadband and TV. We are the biggest video rental organization in this country, in Sweden. We have, in the first nine months, sold 1.5 million rentals, compared to 1.2 million for the full year of last year because I think of the convenience of it.

On top of that, we have the regulatory uncertainties in Sweden that makes this issue about growing fiber an issue for us. On top of that, we have experienced this quarter, but also earlier some tough times in the national carrier. There's an enormous price pressure in the global markets for transmission. And of course that shows up in our bottom line.

So I think I'll stop there for Per-Arne, and we'll take you to Q&As.

Per-Arne Blomquist

Thank you, Lars. I will start to look at the first nine months, the first three quarters of this year and comment upon some of the five items that you see on this first slide. Net sales are up 3.4%. We have kept the costs unchanged. We are at zero. We have improved the EBITDA margin up to 35% and increased the EBITDA with 6.4% on the line; earnings per share up with 14%; and, free cash flow down. And I will comment on that as well.

We'd start with the growth. Lars has talked very much about this in his presentation. But what I think is encouraging to see is that we are actually continuing to increase the growth rate quarter-on-quarter starting with 2.5% going up to 3.3%, and up to 4.3% in the third quarter, which gives us the 3.4%. At the same time, we have been able to also keep up the margins, 35% for the first nine months; the rolling fourth quarter 34.5%. And what I think is encouraging here is that this is done by all the different business areas. It would take mobility. They go from 29.2% up to 39.7%. We have broadband increasing up to the 33.5% from 32.8%. And we could also see Eurasia going up from 50.9% up to 51.4%; so all the different business areas are actually contributing at this.

Costs are up, yes. If you look at the costs quarter-on-quarter, it's not with more than 5%. Do we see a cost explosion in the growth right now? No, I don't think so. It could take the loss to SEK 4.3 billion [ph], SEK 7.4 billion, compared to SEK 7.1 billion in Q3 loss here, which was an extremely low quarter as such. So this is the second lowest quarter, I would say, for the loss two years anyway. So we keep the costs under control in a good way.

The cost increases we have had are very much connected to marketing activities because you hear about marketing is going up. And two-thirds of this is connected to Spain. If you take Spain, for example, they have increased the top line, if you could see the (inaudible) of ample sampling increasing costs with 60%, so I think that the balance is pretty good. If you take Mobility Sweden, they are increasing top line with more than 8%, but it's close to 43% [ph] coming up to already close to 44%. So I think that we managed the balance of this in a pretty good way. And this is also our ambition going forward.

And I reported here, our development is our associates. You can see now that we are increasing for the first time for a couple of quarters, up with 16% in the result. And it's basically Russia growing, 23% up, compared to Turkey. But the fact is (inaudible) 12% up, which means then overall 16%. Then what I also think is good to see is the movement that we have seen on the marketplace in Russia.

MegaFon today is the second player with 26% of the subscriber market share. But they are the leader when it comes to the mobile data revenues having the 35% of that, and I would say partly leading the 3D rollout and try to take the position as the mobile data operator, revenue now growing with 15%, and a substantial part actually going down here on the bottom line.

We continue to review our different assets. We have been pre-factored over the last quarter. We sold Stofa with a gain of more than SEK 800 million. This was done in Q3. We also sold some shares with Digitel in the Philippines. I don't know whether we – we know that we have that, but we had a small trail left we sold about a net gain of SEK 67 million. And we also looked at our Cambodia operation. As you know, we moved it from Eurasia in the second quarter into other operations. And we now decided to write-down this asset close to SEK 700 million. Tough markets, a lot of operators in place, and I think we need to see some cost innovation going on for us. We have this opportunity to write-down the value, but what we couldn't see that the value was drifting to the assets that we had on our balance sheet.

Thanks. You could see that from two different angles. We had a low effective tax rate going down to 21.5%. At the same time, we have increased our tax payments. And I have said this early this year that given that we paid very low taxes in Sweden in 2009, we will see paid out tax rates are going up to close to 89% to 90%. And that's where we'll be at the year-end. Now, we are close to 100%.

This is one of the explanations also why cash flow then is going down in the third quarter. Taxes we didn't pay and (inaudible) taxes loss here. We also have the timing and accounts to dividends from our associates. We expected this to come in the third quarter instead of – the fourth quarter instead of the third quarter. So that is the timing issue. Taxes are really – should have been paid more this year than we did last year. But still I would say that we have a pretty decent cash flow.

EPS increased with 90% in Q3, which is somewhat higher than for the nine months where we could see 40% of growth. Positive is that EBITDA is contributing 39% of our overall (inaudible). That's coming from our majority-owned operations. You could see that we're having also a positive effect from non-recurring items less this year. Meanwhile, FX is pretty negative with (inaudible), so overall, 44% or about 39% coming from our majority-owned operations. And then you could also see the different plus and minuses to the EPS development.

Well finally, still a very solid financial position. We are close to 1.2, 1.3 in net debt to EBITDA. We made a Euro bond of 15 years, which we are pretty proud of, good pricing, 3.93% for 15 years. I think that's a very, very good pricing if you look also forward what might happen. And I think we partly opened up the market for longer tenures as one of the first companies that would show us the strength of our balance sheet and also the name of TeliaSonera in the debt market.

CapEx, with some comments whether we are not investing enough or not, I think I would prefer perhaps to invest in it more if we haven't had the speed that we expected to have on the CapEx side, especially broadband has lagged behind a bit on the fiber rollout. But that will also claim that mobility as partly suffering from shortage of (inaudible) in the – within the telecom industry, which explains the pretty low CapEx to sales ratio this year, compared to what we actually said that we should do this year.

This low ratio, the rollout today, means also that we have decided to change the outlook for 2010 when it counts – not only to CapEx, but also to some other ratios. But CapEx now is expected to be 13.5%, which means that we will have a pretty – have a comfortable accounts investment in the fourth quarter given that we are at 11.4% right now.

We have also said that we believe that we will be in line with the first nine months when it comes to growth, 3.4%, unless if the costs are somewhat higher given the growth, especially that you could see in Spain; and also the EBITDA margin is higher, compared to 2009 where we were at the 33.6%. Thank you.

Question-and-Answer Session

Andreas Ekstrom

Thank you very much, Per-Arne, if you stand there. And I invite Lars back to the podium as well. We will start with the Q&A session. And we do – like we always do, we take a couple of questions from the floor, and then we go to the conference call. But we can start with maybe Stefan on the first row. Could he have a microphone, please?

Stefan Gauffin – Nordea

Yes, hello. Stefan Gauffin, Nordea. First of all, there was a large increase in marketing, compared to last year. And this was mitigated by FX effects. Marketing has been low for quite a while. And what do you expect going forward in terms of marketing spend?

Secondly, really interesting to see the top line effect in the Nordic markets due to Smart phone sales, could you say anything about what percentage of your customer base in Sweden and in the Nordics that are currently having a Smart phone?

Then finally, given the CapEx that you've – that will come in a little bit low in 2010 and that this is also due to component shortage, i.e. not something that you were aiming for, will this roll over into 2011? Should we expect higher CapEx in 2011?

Lars Nyberg

On the last quarter, we will get you after the fourth quarter. But as a principle, we have sometimes discussions in the company where people say, "If I don't spend the CapEx this year, it's gone." I don't know why they think so because the money's still there. It's there all the time. If you have a good investment, you can get the money in December and January. And then it's for us to communicate to the market, well then.

When it comes to marketing, when we went in Florida this year, I said, "The big programs are basically over. We have to execute a couple of more hundred people leaving the company. But the program's over. And I want to see the management taking care of the costs by themselves without help from a big program.

The year hasn't finished yet. But so far, I think I'm pretty happy. They have managed the OpEx in the company. And if we can spend more money on marketing instead of spending it on back office costs or whatever, I'm all for that because I think market share and growth and defending acquisitions are very important. What I don't like is people spending money like water without a message, without getting results.

You take the – we spent, if I remember right, Euro 2.3 million in Spain for an advertisement, TV ad commercial. And the intake was such – of the subscriber thereafter was spectacular. So yes, you want for a piece of that again when you make money. Okay?

You asked about the – I don't know the number, how many today. But actually, when you were asking the question about Smart phone and how many will be Smart phone. I think the interesting answer is three years from now, all of them will be Smart phones. That's the issue. And that's why I'm arguing at this industry, you should really look at the industry before the Smart phone and after the Smart phone. Because the amount of traffic the Smart phone generates, the ARPU generated are quite different from the traditional voice phones.

Andreas Ekstrom

If I can provide you with some data. As you remember, we stood here in Q2 where we showed the Smart phone penetration in Sweden. It was 28% of that – at that time. Now it's up to 33%. And as Lars showed you earlier, 7 out of 10 buying a Smart Phone today is a Smart phone, so 33%; not too different in Denmark and Norway. Finland is lagging a bit behind a bit as Lars has informed. The figure there is around 20%.

Stefan Gauffin – Nordea

Okay. Thank you.

Lars Nyberg

Thank you, Stefan.

Andreas Ekstrom

Back from (inaudible), Sven Skold, next question.

Sven Skold – Swedbank

Thank you. Sven Skold from Swedbank. I noticed that the churn rate – mobile churn rate was up in nearly all markets in the Nordic area. Despite that, the margin for mobility was relatively flat. And in Sweden, it was actually up significantly. So can you describe the fundamentals behind this? What is changing up? What is changing down? I also noticed that the gross margin for the group –

Per-Arne Blomquist

That's right.

Sven Skold – Swedbank

But that's the group figure, but that was up. Is that related to mobility services or to Eurasia? It could be interesting to have some flavor on that.

Per-Arne Blomquist

Let's go to the gross one. When I started two years ago, we were totally driven by EBITDA. And what we have tried to do is to split the cost components in a different way. It was thought that the OpEx (inaudible) there. But you have a substantial amount of costs on the cost of goods sold. So I mean the improvement you see here is reported that the – yes, we have improved the gross margin. That helps. From the group perspective that has helped. This is something that they're actually focusing on in all different business areas, not only the OpEx. I'm looking at gross margin, OpEx, the sales ratios, and so on, and the margins also. So that is actually helping to improve the margin, even though we have the higher churn rate.

Sven Skold – Swedbank

You have it covered on the churn rate?

Lars Nyberg

It's true that it's up basically in all markets, especially in Finland as we might have noted. But I agree with Per-Arne's statement. That is the gross margin that is improving the EBITDA margin.

Per-Arne Blomquist

And if you take the churn rate – let's see if I remember this correctly. It's up 40%, 50% of people's homes. It's still on a very, very low level.

Andreas Ekstrom

We'd take the next question from Andreas.

Andreas Joelsson – Enskilda

Yes, three questions, if I may? Andreas Joelsson, Enskilda. First, Eurasia, very strong margins, is that seasonal effects or is it something other that is the reason for the strong margin? And then, maybe some strategical questions, fiber, you want to roll out faster. Is it only PTS that may prevent you from rolling out faster? And on mobile data, what challenges do you have in terms of pricing models when you see this growing so fast, and maybe changes from the competitive environment?

Lars Nyberg

Well, if I start with the fiber. No, it's not only PTS. But at this part of the challenge, it's also availability of components and technology. But it's also a challenge on how to do this. I think it maybe useful – maybe I thought that we were really, really experienced in rolling out networks. But it was a pretty long time ago we rolled out a fixed network in this country.

So I think we have actually had a couple of exercises there whenever we discuss, "How do we do this? How do we make of sure that? When did we get success in the marketplace?" Because the number of people who subscribe, who says, "I'll sign on," is actually crucial. Is it 15%? Is it 35%? Is it 55%? Is it 75%? It makes all the difference in the return on the investment. So it's very important that we get the right number. And if we need to spend some more time to understand how you sell this, how you argue for it, so be it then. I can live with that.

The margins in – Q3 is always better margins in our industry, also in Eurasia. I think the – also the reason is of course that – I showed you the Uzbekistan numbers. Obviously, Uzbekistan was in single digits or in the high-teens or something like that in terms of EBITDA margin two years ago. When you grow like this, you grow from 0.5 million subscribers to 6 million subscribers, you start making money. This industry is all about volume. It's all about volume. So of course, if Uzbekistan gets to the level where the group is or towards that level, of course it helps quite substantially to your success.

Now, I don't think we should expect much more than 50% from Eurasia. I think that's the number. I'm also realizing now, it took maybe two, three, or four years out. As the penetration goes up, competition will increase. And I think it will be some pressure on the EBITDA margin in the mid-to-longer term in Eurasia. But I will take that problem any day to be part of the growth rates in this part of the world.

Andreas Joelsson – Enskilda

And also, your favorite question when it comes to pricing models –

Lars Nyberg

Oh my favorite, oh yes. I think the industry is getting its mind around this. At least a number of players is understanding. And fundamentally, if you have an exploding traffic volume in your network, you basically double the traffic every 12 or 15 months and you can double the capacity in that group maybe every 18 months, you need to manage this very well. You can ask Verizon and AT&T. I think they have realized it the hard way, especially AT&T.

And I am convinced that we will not have flat rates. We will have some sort of variable pay. But the appetite for bandwidth is unlimited. And we will be able to be of so much more volume – traffic volume to our consumers for basically the same cost as our upgrades going on networks because our suppliers can supply that to us. I mean, Per-Arne and I also described that last quarter report, how we believe Moore's Law is helping us to please our customers, to satisfy the exploding need and the unlimited appetite for bandwidth. So I think we can manage this.

And the flat rate, I think, is only important when you start this kind of service. So if you would start in Eurasia with this in the big time, I wouldn't be surprised at all if we went in the flat rate for 12 months or 18 months. The IPTV, if you remember, we gave that away for a year, which left us with a bit pressure. But it turned out that the recovery was right. That was really crucial to us to get the volume and get the momentum.

That was a long answer. I'm sorry.

Andreas Ekstrom

I see that there are a lot of questions on the conference call. We'll take one more question from the floor, Lena Osterberg, then we're switching over to the conference call.

Lena Osterberg – Carnegie

Just maybe probably on the – your net debt to EBITDA is – keeps coming down. You have a very strong balance sheet. You have a 10% share buyback mandate. What do you intend to do with that? That's the first question. And also, the addressable cost base, as you said, a large portion of the increase is related to Spain. But also, the fixed broadband side in Sweden and Finland, you can see that margins are coming down. Are you happy with the bottom approach – bottom-up approach on cost cutting in those areas or do you believe that something else will have to be done there?

Per-Arne Blomquist

Well, I think as Lars has said before that it is a question of balance. You can see a bit income or (inaudible) is going up. It allows the sales to have a certain cost in piece. And if income is going down, you need to do – you work with efficiency. So I think that so far is still good, I will say. But we'll see – they have done a great job within the broadband. And they are still negative in this quarter if you look at the down the line in cost development, even though broadband has fallen a bit quicker. But I think that they have to continue to work with the efficiency maintenance and try to balance this as with this account. Remember, they have also increased their margin pretty much also compared to last year as I said before.

And the second question was the – ?

Andreas Ekstrom

Challenge [ph].

Per-Arne Blomquist

Challenge fee, yes. When you come back – you're right. We have the mandate. And we have some (inaudible). We have excess cash. We will look at that. And so it's the same also as before. We'll come back to the (inaudible) and all the stuff after the fourth quarter results. We'll present it at that point in time.

Andreas Ekstrom

Okay. Let's start with the long list of questions from the conference call. Operator, can we have the first question please?

Operator

The first question comes from the Mr. Andrew Lee from Goldman Sachs. Please go ahead, sir.

Andrew Lee – Goldman Sachs

Thank you, a couple of questions on Sweden, if I may? Firstly, on the Swedish retail broadband market pressure, we've seen Telenor come in with an aggressive triple play offer and Com Hem followed suit. I wonder if you can give us some color on how you see competition in retail broadband playing out into 2011. And do you see competitor intensity holding at the current levels?

And secondly, on the international carrier part of your wholesale business, could you give us some more color on whether this is a structural downshift or whether there is some cyclical pressure coming through here? And on top of that, do you feel you have any significant cost flexibility in international carrier to offset any of that top line pressure into 2011? Thank you.

Lars Nyberg

I'll just start with the last one. I think this is not seasonality. This is a – I wouldn't call it structural. It's just a price war, as simple as that, as long as it could end some time. But I don't see the signs of it yet. And it is a business with little margins just not for ourselves. So it is a burden on our results. We can look at costs. We can look at other things. And we're having – are we going to handle this. But I have to live with what happens in the marketplace and manage that.

On retail broadband in Sweden, competition is high. I think we have done a really job. We have more IPTV customer now than ever. As I said before, we are the biggest rental movie organization in this country. We are growing right by 40% from a low number, so it doesn't help enough. But it certainly helps.

Yes, you mentioned a couple of competitors. I think Com Hem by far is our biggest competitor on the TV side because they are in so many places. I don't see the market changing in any dramatic way in the next year. I think it's more of the same.

Andrew Lee – Goldman Sachs

Thank you very much.

Andreas Ekstrom

Operator, can we have another – next question please?

Operator

The next question comes from Mr. James Britton from Nomura. Please go ahead sir.

James Britton – Nomura

Thanks very much. Firstly, just on your gross margin performance, I wonder if you agree that gross margin should actually continue to increase pretty sharply for the medium term as Internet costs keep falling sharply out of the P&L. And so, should we anticipate EBITDA margin growth is also very likely?

And then secondly, I guess handset sales, it appear some people look through that. And it's not really a recurring feature of results in the sense that it can be up aggressively one year and down the following year. So is there any way you could help us focus on underlying service revenue growth for the overall group?

And the third question, please, can you give us any idea of ARPU levels in Spain at the moment so that we can just understand the balance between network revenues and equipment sales? Thank you.

Per-Arne Blomquist

It was also the loss on sales. So we don't – it slows our ARPU in Spain for the (inaudible). Now, (inaudible) it's okay. But it's around Euro 20.

James Britton – Nomura

Okay. Thanks.

Per-Arne Blomquist

And then we had a question about gross volume. And if I understood the question, you were expecting a decline in gross margin or an increase.

Andreas Ekstrom

Increase.

Per-Arne Blomquist

Increase, okay.

James Britton – Nomura

Yes, I mean Internet costs will be falling very sharply as the termination rates keep falling, so gross margin should be continuing to climb quite significantly.

Per-Arne Blomquist

Yes, a decline, yes. I think definitely, exactly. No, but I think we have this every year. I mean you start out for the year where perhaps having the decline in the results probably will be lifted. It started between SEK 500 million, SEK 600 million, SEK 800 million in decline. And I mean that's what you need to offset the rear. And so far, we have been able to do that. So it's a question of coming to – as far as the question about the gross margin, we work through that all the time. But of course, that's a challenge when you have this starting point over here. But that is not nothing new. That has been going on for many years.

James Britton – Nomura

No, I think you misunderstood my question. As the Internet costs fall – as your Internet costs fall very sharply, your gross margin should actually increase quite naturally. And therefore, would you agree that actually that should drive an EBITDA margin increase into the medium term?

Lars Nyberg

That Internet part of our cost of goods sold I think is very small. Compared to all the other sources at cost side, I don't think it has a big effect.

Per-Arne Blomquist

And then, you have (inaudible) offsetting this.

Lars Nyberg

But I think what we have done together in the company in the last two years is, as Per-Arne said, focused very much on the cost of goods sold. And I don't think we had enough of focus on that historically. And it's purely that is the reason why we have improved the gross margin.

Andreas Ekstrom

And then, you had a question on service revenue growth. And just to explain that to everyone, that is if you exclude the effect from handset sales. I don't have that number for the group, what it would be ex that. But you can calculate the service revenue growth in Mobile Sweden, for instance, where you will see that that went from 5% to 6% in the third quarter, compared to the second quarter. And remember that handset sales is only in the mobile part of the business. In Eurasia, we don't sell any handsets. And in broadband we don't sell any handsets. So I would guess it's a minor effect on the top line, less than a percentage point, some would argue. But I haven't done the full calculation of it.

James Britton – Nomura Securities

Thank you.

Andreas Ekstrom

We take one more question from the conference call?

Operator

(Operator Instructions) The next question is from Mr. Pieter-Kurt Nielsen from Cheuvreux. Please go ahead, sir.

Pieter-Kurt Nielsen – Cheuvreux

Thank you. Three questions, please. Firstly, you talked about the Smart phone penetration in the Nordic region. And obviously it's broadly as high in Denmark and Norway as it is in Sweden. Nonetheless, the revenue trends are completely different. I'd appreciate any insight why that is the case. You're not seeing the same Mobile growth in Sweden and – sorry, in Norway and Denmark, as we are in Sweden and Finland.

Secondly, Spain, you're enjoying very good momentum here, as you highlighted, Lars. But it seems as if you're willing to sacrifice that momentum to meet your promise to the market of breaking even only with that in Q4. Have you considered whether it might be strategically wise to continue with or perhaps accept losses for a few more quarters to fully capitalize on the momentum you're having in Spain?

And thirdly, if I may ask you for an update on where we are currently at the MegaFon-Turkcell situation, and how you feel about that situation at the moment. Thank you.

Lars Nyberg

Second question, the answer is yes, I have considered it. And this is the decision. I want to see profits after four years, which I think is spectacular and not only for one quarter. The commitment is we should have profits or breakeven in this quarter and thereafter. I'm happy with the 4%. I think we can continue to grow and still making black numbers.

Very briefly on Megafon-Turkcell, there's always happening something in those things. I'm not unhappy. I'm not particularly happy. I think we are struggling or fighting like we expected us to do. I don't think anything has fundamentally moved. We lost a court case in Russia a month ago. The court case is, from a legal perspective, not important. I think it's more important from a PR perspective.

To dwell upon it one second, we actually have a general agreement. We haven't agreed on all the details and you have to agree on all the details because that's what somebody – and it's actually not the court, it's the parliament, the Duma, and the committee there will have to look at the whole agreement and then judge whether this is in the interest of the Russian stat or not. So if you look at an umbrella agreement high level, and then you go to a court and they say no good after ten minutes, so be it. It doesn't matter. What really matters is what happens when we apply for a verdict from the Duma, which we have said all along we won't apply before we make some progress in Turkey.

And in Turkey, I think we are following the plan. I think there are some discussions right now going on in Turkcell that I won't comment on because that's for the board or the Chairman of the Turkcell Board to make comments on. Fundamentally, nothing has changed. We have joined with Alfa to try to get control over Turkcell because Mehmet Karamehmet sold the controlling shares twice. First, to us and then refused to deliver them. And he's in court in Switzerland ordered to deliver them. He ignores that. And then he sold the same shares, half of them, to Friedman and pledged the other half for a loan he never repaid. So I think we believe we have both legal and moral right to get hold of those shares. And when we do, then together Alfa and TeliaSonera will control this company.

Per-Arne Blomquist

Yes. We had the first question about Smart phones in the Nordic states and why the developments look a bit different in Denmark and Norway. Well, firstly if we take Denmark, it's in a slightly different market with pretty high churn rates. But still, I think we're a bit disappointed with the development there and we're looking into that. It's all we can do to come into a better position. But you should perhaps expect better growth in Denmark than we have seen this quarter.

Andreas Ekstrom

And one thing, if you look at Sweden, one thing that we have done very well I think is that we kept voice revenues flat. And that is something that we have been unable to do in the other two countries that you mentioned.

Pieter-Kurt Nielsen – Cheuvreux

Okay. Many thanks.

Andreas Ekstrom

Thank you. We'll see if there are some more questions from the floor. We have one from Jan at the front row.

Jan Dworsky – Handelsbanken

Jan Dworsky from Handelsbanken. Come back to Finland. Margins seem under pressure in broadband and also in mobile. And we saw from Elisa the other day a similar kind of pattern. Do you see some more intense competition in Finland, or is it more the temporary impacts of cost allocation, et cetera?

Lars Nyberg

Well, it's not temporary cost allocations. But it's also not the beginning of a price war like we saw four, five years ago. I don’t think so at least. We try our best to avoid it. But we did something we called Restart Finland 18 months ago. We had a customer event last week, which was spectacular. Business-to business customers, 700 there and we had a speakers list that read like a who is who in Finland, and then plus me.

I think we have momentum in Sonera. If you look at Sonera, I said that in my speech, if you look at Sonera over the past ten years it's been extremely turbulent. And I think they lost focus occasionally given their ten-year journey. And 18 months ago, we sat together, the whole group, management of the company and Finnish management and said, "Let's restart Finland." And I think we start seeing some signs of success here. We actually are more aggressive. We are pushing harder because we want to regain the number one position in mobile. We are one point behind Elisa in mobile in Finland, and we don't like that.

Now not at any price, but if we could get the same customer satisfaction in Finland we have here in Sweden business-to-business, we are here an ocean or a mile ahead of competition. We are 69% and the next guy is at 63%. If we could get that kind of advantage in Finland, we will regain the number one position. And that's what it's all about.

Jan Dworsky – Handelsbanken

And a question on Kazakhstan. Do you see – or there is a new entrant starting up in Kazakhstan, and –

Andreas Ekstrom

I think we all know who.

Jan Dworsky – Handelsbanken

And I think what we see for the smaller competitors is that mobile termination rates are high in Kazakhstan. What's your view? Do you think they will come down in a dramatic fashion, or –

Lars Nyberg

Well, you are right. It's not unusual that you have different termination rates in different markets. But it's a complex issue. And it's really the regulator in the end who makes those calls. And I know there are discussions going on. And this discussion going on about 3G, we still don't have 3G in Kazakhstan, which is for me even a much bigger issue. And I'm a member of the President's Foreign Investment Council. I go there twice a year. And the normal thing I say is (inaudible) is we need a 3G license. We need to get going. Kazakhstan wants to be the hub of Eurasia. And it's the only country, together with Azerbaijan, not having 3G thus far. But that's for me a much bigger issue than termination rate, whatever their figure is.

Jan Dworsky – Handelsbanken Capital Markets

Thanks.

Andreas Ekstrom

There are still a number of unanswered calls on the conference call. So please, operator, can we have the next one on the call?

Operator

The next question comes from Mr. Barry Zeitoune from Berenberg. Please go ahead, sir.

Barry Zeitoune – Berenberg

Good morning, gentlemen. It's Barry Zeitoune from Berenberg here. A few questions, if I may? The first is on Norway. I was wondering whether you could give us some color on what impact MTR cuts will have on absolute EBITDA going into 2011.

The second question is on Swedish Mobile, very interesting development in terms of the uptake for Smart phones. I would be quite interested to know, though, how the conversion rate of somebody taking the Smart phone to somebody subscribing to a data package is developing and where it currently stands.

And then a couple of big picture questions as well. Just in terms of the situation with MegaFon and Turkcell, I was wondering whether you believe you still have an opportunity to buy the Fintur minority from Turkcell. And if there is a favorable development in the current situation, whether you would still be interested in buying the Fintur minorities.

And then finally, you mentioned Cambodia on the call and that you would expect to see consolidation. Do you think you would be actively involved in that consolidation? Thank you.

Lars Nyberg

Well, in Turkcell, yes, we have an agreement with MegaFon. And everything is done and executed, both in Russia as well as in Turkey. Then we have agreed that they will support our wish to buy Fintur – the minority of Fintur. So that's the last (inaudible) other things will have to happen before we get there.

Per-Arne Blomquist

When it comes to Cambodia, I mean, we're a very small player there, not the 37% to 40%. We need to do something. And we will try to find some way of perhaps getting that above. But there might be assumptions and consolidations. We'll see what happens. We're working on this right now.

Barry Zeitoune – Berenberg

Okay.

Lars Nyberg

You want to take the Norway question as well?

Per-Arne Blomquist

Yes, (inaudible) something that we are calculating that they will have impact of up to SEK 400 million to SEK 500 million on sales with it.

Barry Zeitoune – Berenberg

And the EBITDA?

Lars Nyberg

Well, that's not as –

Andreas Ekstrom

It's much lower because there would be – there is symmetry between us and TeliaSonera now. So we will have – be offset by lower costs as well, so much lower on EBITDA.

Barry Zeitoune – Berenberg

Okay.

Andreas Ekstrom

I'm unable to take care of two things at the same time, Barry. So I was a writing a note when you did your second question, so if you could please repeat that one.

Barry Zeitoune – Berenberg

No worries, no worries. The other question was to do with the Smart phone development. I'm interested to know. I think previously you mentioned that the take from the data package from a Smart phone is increasing. So I don't know whether it's at around – somebody that takes a Smart phone today, what proportion of those people will take a data package and what was that previously? So how much better are you at converting a Smart phone to a data package?

Lars Nyberg

I don't know. I'll have to come back to you on that one, Barry. I don't have that number on the top of my head.

Barry Zeitoune – Berenberg

No problem. Thank you.

Andreas Ekstrom

Okay, operator, next question.

Operator

The next question comes from Mr. Laurie Fitzjohn from Citigroup. Please go ahead, sir.

Laurie Fitzjohn – Citigroup

Hi. It's Laurie Fitzjohn from Citigroup. Three questions, if I can? Firstly on Spain, given the – on the significant contribution to the group's growth in a very successful last quarter, are you now starting to view this as a core asset as opposed to the past?

Secondly on the cash flow, on my calculation, there was a SEK 3 billion reduction in net debt not attributable to cash flows. And I was just wondering is it's mainly due to FX, foreign exchange translation?

And lastly, on the other EBITDA line, you stated there're improvements in the head office costs. And (inaudible) given you told us today there's quite a significant jump up in the other EBITDA line. I just wanted to know if you see this as a sustainable improvement or as some one-off transitions within the other cost lines? Thanks.

Lars Nyberg

Let me take the first one. With these kinds of results, obviously, the urgency to do something or find a solution is not as high as it was two years ago. I will come back and make more of a comment upon the finish of the year. I really want to see the fourth quarter. And I want to have the group there for the plan for '11 before I make any other comments on the topic.

Per-Arne Blomquist

When it comes to the costs on the corporate side, that's (inaudible). I think we have had a pretty aggressive cost cutting program done in the third quarter. And if you look at this quarter, I think we're down with close to 20% in the cost side. No, that can't be sustainable all the time. But we will gain from this another couple of quarters going forward perhaps, but not to the same extent.

Andreas Ekstrom

There was a question on net debt, if that was affected by FX movements.

Per-Arne Blomquist

Yes, to some extent it is. Yes, because the Swedish krona strengthened during the last couple of months.

Laurie Fitzjohn – Citigroup

Okay. Thank you.

Andreas Ekstrom

I see that Sven here from the floor has a follow-up question.

Sven Skold – Swedbank

Just a follow-up on the Turkcell and MegaFon issue. Besides the discussion you have about putting Turkcell and MegaFon possibly in one company, do you also have discussions about the dividend policy from MegaFon? Could that come up independent on the –

Lars Nyberg

Yes. We have the discretion in the board of MegaFon, which I'm not part of, but there are TeliaSonera representatives. Tero Kivisaari is one of them. And they have the discretion. Historically, there are three parties. There's always been one party who is against for negotiation tactics. I think it was Alfa and now it's Alisher Usmanov. We've always been for it, so we'll see. Maybe one day we'll all agree. The company certainly has the resources.

Andreas Ekstrom

We do have time for a couple of follow-up questions from the call. Operator, can we have the next one, please?

Operator

The next one comes from Mr. Maurice Patrick from Barclays Capital. Please go ahead, sir.

Maurice Patrick – Barclays Capital

Hi, it's Maurice from Barclays, a couple of quick questions. You're seeing in Sweden Mobile top line growth with expanding margins, and you talked about the change in handsets, less iPhones, more Android. Is your overall direction of marketing and subsidy costs changing much because of that change in split? And the second question, on mobile data, you talked about handling the exponential growth of traffic, and obviously you have caps and use throttle speed as well. Are you seeing any anecdotal evidence in consumers in terms of the impact of throttling and caps on usage or churn, these types of data points? Thanks.

Lars Nyberg

On the last question, I don't think we see any signs. The caps are affecting very few people. So I think it's a hygiene factor for the industry to have that tool, and I explained that before. But I don't think we have any anecdotal evidence that it has affected our market share or market position or whatever. I have concluded this morning that we have the most satisfied mobile customers in this country. Halebop is beating us a little bit, but Halebop is also Telia, and then there's us. So I think we could be happy with that. And you heard me talk about the three focus areas, which the most important one is world class customer experience. That is world class customer experience what we measure. 69% is not world class but we are trying to measure that.

Per-Arne Blomquist

The first question was about if we have changed our marketing concepts, as far as I understand it.

Andreas Ekstrom

I think that you refer to the slide that that Lars showed, Maurice, if I'm right showing, showing the split of iPhones and other operating systems. Is that right? If we have shifted focus.

Maurice Patrick – Barclays Capital

Exactly, and the impact on overall spend, or subsidy spent. Thank you.

Lars Nyberg

I don't think we have changed focus. I think some of – I think Nokia is trying to position their terminals at a lower price level than the iPhone. You look at Samsung Galaxy, it's the same price level as iPhone. Apple was an early entrance to this market. They created the market, more or less. Now there are followers coming in and they are trying to position themselves in a different position to Apple, which I think is good for us. I think it's good for our company that our customers have a choice between many different kinds of mobile phones and price points.

Maurice Patrick – Barclays Capital

Great. Thanks.

Andreas Ekstrom

Thank you, Maurice. Next question please, operator?

Operator

The next question comes from Mr. Andy Parnis from UBS. Please go ahead, sir.

Andy Parnis – UBS

Hi there, it's Andy Parnis here at UBS. I've just got two questions actually. The first question was just on Norway. I think we touched on this, but mobile EBITDA was down 5%. I was wondering could you give a bit more detail what you're seeing in Norway, and why in particular you're seeing such pressure on the EBITDA margin. And then secondly, in the Baltic region, I know you mentioned that you're seeing some sort of improvement. What are you seeing on the competitive side there? Are you seeing the competitors becoming more aggressive as the overall market environment improves, or has competition stayed broadly the same? Thanks.

Lars Nyberg

Well, I'll start with the last one again. I think the people at TeliaSonera's operations in the Baltic have done a really good job in defending the EBITDA margin, and in most cases, the market share. I think it's clearly the market that's recovering. What we see is the decline is slowing down. So hopefully it will turn this quarter or next quarter into actually a growth. I'm not unhappy with our performance in the Baltic, in general. There are some areas where I think we could have done a little bit better than we did. But the most important thing is the market. And hopefully, and I believe actually, the market is stabilizing and probably will go back to growth hopefully already next year.

Andreas Ekstrom

Maybe I can answer your question on Norway. As you know, from the first of January, there is a relatively substantial cut in MTR that Per-Arne described earlier. And that has led to some more activities on competition. And that has also forced us to be a bit more active on the subscriber acquisition cost, as Per-Arne also mentioned, when it comes to marketing activities. So it is a little bit more active on the competition side, ahead of the MTR cut from the first of January next year.

I guess he's happy with that answer so we'll take the next one.

Operator

The next question comes from Mr. Dominik Klarmann from HSBC. Please go ahead, sir.

Dominik Klarmann – HSBC

Yes. Hi, everyone. Just a clarification on your lower CapEx. The driver is mainly delays due to the component shortage rather than equipment pricing falling quicker than you expected? Is that the right understanding?

Per-Arne Blomquist

I think it could be a combination. We have seen price pressure on the equipment prices, but it has also been delays. I think the biggest delay we have had is actually is actually the fiber rollout, and that's not so much connected to the component shortage in more that it has been perhaps more complicated than we thought to roll it out.

Dominik Klarmann – HSBC

Okay. Thanks a lot.

Andreas Ekstrom

Thank you. We have two more questions. So let's take them before we sum up here. Operator, can we have the next question?

Operator

The next question comes from Mr. Jakob Bluestone from Merrill Lynch. Please go ahead, sir.

Jakob Bluestone – Merrill Lynch

Hi there. Just two questions please. Firstly, on Swedish fixed line. Your line loss widened quite a bit and I was just wondering can you tell us is that driven more by some of the competitive pressures you mentioned earlier, or is that more pressure from substitution to mobile. And then secondly, are you able to share anything regarding any discussions you had with the government about buying stock from them? Thanks.

Lars Nyberg

Well, it's more substitution clearly, more substitution to mobile. And we actually get our fair share of that substitution that goes to Telia. Not everyone though. Somebody goes to our mobile competitors. That has been the case now for five, six years, or something like that. And it continues. And as I said before, what we need to do is to get to speed up on those fixed networks via fiber, VDSL2, and provide not only voice, because voice is not the most important going forward. It is really TV and the internet that's going to drive the need for fixed networks because of the appetite being unlimited.

Andreas Ekstrom

I can just follow-up there. There is a smaller one-time correction in the line loss of 43,000 customers, so you have to adjust for that. And if you do that, you will see that it is fairly in-line with previous quarters, maybe a touch higher this quarter. The second question was on buyback and discussions with the Swedish government.

Lars Nyberg

Well, the Chairman of the Board has those discussions, and obviously this is a board decision. I have an opinion and I wouldn't mind buying back shares, but I'd like to buy back shares also then from the two major owners, the Finnish and the Swedish states. Because otherwise if we didn't, there ownership will go up, which I don't think is wished by anybody, I hope. But I say that I also want to underline how valuable they are to us, to have the Swedish and Finnish states as part owner of this company is really helpful when you deal with Eurasia or Russia or Turkey. Now whether the board will decide this or that, we will come back to when they've had that discussion. And we normally do that when we come with the fourth quarter results.

Jakob Bluestone – Merrill Lynch

Got it. Thank you.

Andreas Ekstrom

Okay. Operator, let's see who the last person to ask a question for the day is.

Operator

The last question is from Mr. David Wright from Deutsche Bank. Please go ahead, sir.

David Wright – Deutsche Bank

Yes. It's David here. Lars, I know you don't normally like to be pushed too much on questions, but I might try my luck a little on Spain. Your business is – the TeliaSonera Group in general is in great shape; great cash flows, low gearing, yet Spain now seems to be hitting its absolute top form and top momentum. Why cut it short with a focus on EBITDA?

Lars Nyberg

Well, because I think it's an important commitment they made to the board when they got the money. And they have got all the money and we have reached now the lowest level of the cash flow and I want to see some money come back. I think it's a very principled issue. If I say, "Guys, you can go spend a little bit more money." They'll send a message in the whole company as well. Three focus areas; quality in networks, cost – we have to watch cost all the time.

And I will tell you, when I came here and Per-Arne came here, I don't think we were that focused on cost. I think cost was automatic sometimes. And we have changed that culture. And if I should start saying spend the money, you don't have to make the profit commitment you made to the board, I send the wrong message not only in Spain, but in the whole company. So that's why I didn't want to – but I will say we did talk about it. And I think there were some people not to far away who thought we should maybe invest. But in the end, Per-Arne and I said no, we're not.

David Wright – Deutsche Bank

Okay. Super. Thanks.

Andreas Ekstrom

Thanks for that, David. Lars, do you want to say some concluding remarks or should we –

Lars Nyberg

Well, no. Thanks for all the questions. There were lots of questions today. I think we're happy with this quarter. It's not spectacular, but the growth is the encouraging thing. I think we missed that at the start of the year. If you would have asked me, I would be totally honest with you. I never thought we would have 4.3% growth in the third quarter of this year. I wasn't even sure of that when we ended the second quarter with 2.9% for the first six months. So the growth is really good. Eurasia is back. It feels really good.

When I came here, there was 20% growth, and then this went to 3% or 4% or 5% because of the financial crisis and the oil prices, et cetera. Back to 18%, 53% EBITDA margin is great. We have a challenge in broadband. That's nothing new. We have known that for five years. I think as I wrote, I think we believe we can manage that transition. It's going to be difficult because of so many unknowns, but we have confidence that we will do a good job in managing that transition. So thank you for coming.

Andreas Ekstrom

Thank you.

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