LM Ericsson Telephone Co. (NASDAQ:ERIC)
Q4 2010 Earnings Call
January 25, 2010 8:00 am ET
Åse Lindskog - VP, IR
Hans Vestberg - President and CEO
Jan Frykhammar - CFO
Johan Wibergh - EVP and Head of Business Unit Networks
Rod Hall - JPMorgan
Janardan Menon - Liberum Capital
Edward Snyder - CER
Mark McKechnie - Gleacher
Tim Long - Bank of Montreal
Pierre Ferragu - Bernstein
Mark Sue - RBC
Kulbinder Garcha - Credit Suisse
Alexandre Peterc - Exane
Zahid Hussein - Citigroup
Hello, everyone, and welcome to our call today where we will comment on our fourth quarter results. With me here today I have Hans Vestberg who is our President and CEO; Jan Frykhammar, Chief Financial Officer; and also Johan Wibergh who is heading up our Business Unit Networks.
First of all, 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. The actual results may therefore differ materially due to factors mentioned in today's press release and discussed in this call today. I also encourage you to read about the risks and uncertainties in the earnings report as well as our Annual Report.
With this said, I would like to hand over now to Hans Vestberg for comments on our performance and plans going forward.
Thank you, Åse. I know that some of you have attended the press conference in the morning, so we'll be a little bit briefer about that. Let's start with the Q4 in summary.
The sales ended up at SEK62.8 billion in the fourth quarter, meaning a growth of 7%, if you exclude acquisitions and adjusted currency, which is of course given how we view the year in retro-perspective, was quite good. We had started 2010 with negative growth in the first and second quarter and basically flat in the third quarter, and then we came back.
The growth very much focus around mobile broadband, that's where we have seen the growth and you will see later on that our Networks Segment was growing 14%. The net income up SEK4.2 billion to SEK4.4 billion, compared to only SEK3.7 billion last year. In the fourth quarter three components one, Sony Ericsson of course, quite substantial improvement compared to one year ago, also is that we have less restructuring. But also on the Sony Ericsson we were almost improving SEK1 billion on operating results on bottom line, so all these contributed to a stronger fourth quarter.
On the cash flow side, on adjusted cash flow operations, cash flow SEK16.2 billion in the quarter, which was good, a lot of good work, especially on collection. And here we of course always view our cash flow on a yearly basis and we can conclude that our target of having better than 7% cash conversion was achieved. We achieved 112% cash conversion in 2010.
Little bit more details on net sales, you can see that this is one on the all-time high quarters for us. It's only on this graph to Q4 2008 that was higher. I would say that we were a little different on currency in that moment as well, so this is a big quarter for us. Demand for mobile broadband important, but also that China came back on 2G investments, which is important. And of course the 2G expansions in China are also driven from uses of data, EDGE and GPRS et cetera and not only voice.
If we take the profitability, earnings per share SEK1.34, of course an improvement, as well as the improvement of the Q4 and the full year net income. A same explanation as before on the full year improved gross margins, improved Sony Ericsson earnings and the core Ericsson improving and then also less restructuring in 2010 when compared to 2009.
The regional split, this slide we always use, so I can say, the big difference here is that North America was smaller in size has been around 20% to 29% through the year, but in the fourth quarter ending up on 22%. Not saying that we're not growing, in North America we still have 49% growth in the fourth quarter in North America.
So it's more the other the regions that are starting to grow. And if you look at the next slide, we had four regions out of 10 now growing. During the year we had one region, but also that we had all 10 regions sequentially growing, which is also an important measurement.
If you then take a deeper dive in North America, I can conclude that you will look at the (inaudible) we have establish ourselves on a total different sale flow within North America, we are main supplier to all the major operators. We are selling CDMA, HSPA, LTE as well as having doing very important breakthroughs and services, and one of them of course being running Sprint's networks up towards others service business.
All in all, you can say that in the fourth quarter we were rewarded to be part of the network evolution strategy of Sprint, which also is important. But clearly we have established us as the leader in the North American market with all these wins and of course acquisitions.
If you then look at India, we had a bumpy ride here, starting with delays on 3G auction which halted the investments and then the security concerns that has been ongoing, which also impacted us in the first half. In the second half, we have been starting gradually to increase our sales there basically because of the 3G and also that the security clearance has been there so we could deliver.
But still we are on a lower level and if you see here, we are for full year down 43% and year-over-year down 70%. Sequentially we are growing at 34%, very much over 3G expansions.
China and Northeast Asia had a good fourth quarter, growing 28%. Still this region was flat, and I would say China was one important contributor on 2G, Japan on 3G and mobile broadband, very important. And then finally, we added LG-Ericsson in this sum as well.
That was a quick snapshot on the regions and our role, and I will ask Johan Wibergh to comment on networks.
Q4 was a good quarter for the Network Segment and growth came up to 14% and driven very much by mobile broadband. And then you have to clarify, when we say mobile broadband, it includes such products as access or radio-based products; it's the backhaul solutions, such as microwave and other solutions and impacted core and IP routers. And this is both organic growth in India in the existing business they'll have, as well as the acquired Nortel assets.
Voice business, the voice core etcetera continued to be slow. However, as Hans already said that 2G sales were strong in China during the quarter. Supply has been a challenge for us during 2010, and it started to normalize in Q4 and production achieved very high volumes. So that was extremely good for us.
However then, we are still not fully meeting the increased demand of certain mobile broadband products. So we are now running with long lead times due to strong order intake.
Looking on margins then, and of course we had a positive volume effect on the (total) with a strong net sales in the quarter, though of course it's offset then by more pure bigger business, the rollout products such as 3G in India and also some of the modernization projects that are starting up.
So I mean overall back-to-growth is really good, a strong momentum and continued work then with margins going forward.
Thank you, Johan. On the Global Services, we ended the year by growing the Professional Services with some 5% year-over-year in local currency. Managed Service of course continued to grow, even though at a little bit slower pace with a tougher comparison. Important here I think is outlining 54 new contracts in 2010, half of them renewals and half of them new contracts.
Network rollout is still in decline, and this is the delay from, I would say infrastructure sales. That means that we are lagging one to two quarters all the time when it comes to delivery of infrastructure until it gets the installation. So it's very much related to our own product deliveries. But we can also conclude that the margin has held up very well and actually improved on the whole Global Services in 2010 up to 13%, which is a great achievement. And the Professional Services has held up their margins in that range.
Multimedia, we have had during the year multimedia challenged on volume and special revenue management in the areas of Africa, Middle East and Southeast Asia. We saw a recovery in multimedia in the fourth quarter, adding up a growth of 3%. And that also meant that the profitability went up quite considerably, doing a profitability of 16% on EBITDA level in the fourth quarter. And the TV business is still doing well.
Our joint ventures reported early this week, we can on say on Sony Ericsson, there are now four consecutive quarters of profit. That's of course off the very hard work and they have a good platform for the android phones. And the ST-Ericsson continued to merge together with a product, and of course creating new products for the customers, but also delivering on their own legacy products.
They still have losses, and we are continuing on cost savings and the company is in transition to get that portfolio out. All-in-all, our JV earnings improved quite considerably, even though it was a reduction of loss. So it was a considerable change.
Johan, a little bit on the profitability.
Thank you, Hans, and good afternoon to all of you. Let me then focus a bit of my comments here on the fourth quarter. If we look at the gross margin, we had delivered some sort of 36.6% gross margins, 37% it says here on the slide. It's an improvement if we compare with last year Q4. The reasons for that improvement is really related to cost reductions, which been with us and impacting more than in a positive way throughout the year. There's also lower portion or share of services in the quarter.
If we look at some of the sequential impacts which I think is probably the area where if we look at your various forecasts where we have had perhaps the most deviations, it is really related to a couple of things. First of all, we start to get to catch-up here now on hardware deliveries, which is impacting gross margin. We have had throughout the year, a very good business mix when it comes to more of upgrades. Now we are entering into a phase of more projects again.
Also, we have had some impacts with regards to the 3G rollouts in India and the network modernization project. So all in all, compared to last year in Q4, an improvement compared to Q3, a decline for the reasons I said.
If we look at operating expense then, the increase compared to last year is mostly, or mainly I would say related to our acquired assets. So it's Nortel CDMA, its Nortel GSM, it's our share of what used to be called LG-Nortel, nowadays LG-Ericsson. But it's also related more on the SG&A side and related to integration costs for those assets, as well as high-level of activity around LTE trials. So most of it's acquisitions, some of it still related to LTE trials.
Operating margin, the next slide. I mean, we had an improvement year-over-year in Q4 with deliveries on 13.4%; last year it was 12.7%. Remember also, we had some items around gains on divestitures of companies and so forth in Q4. So overall, it is an improvement on bottom-line. Of course the margin improvement year-over-year is being offset to a certain degree by operating expense. But still, it is an improvement in the operating margin Q-over-Q.
On the net income, I think Hans mentioned all of that. We have seen improvements in the net income for the three reasons that he mentioned.
If we go through the restructuring charges then, there are a couple of things here that I think is important to remember. First of all, of course we had charges in the quarter then of SEK1.7 billion. For the year, restructuring charges amounted to SEK6.8 billion. We have made cash outlays for restructuring activities of SEK1 billion in the quarter and SEK3.3 billion for the full year. We will then take with us into next year most of it I would say, and we will have then a cash outlay of some SEK3.2 billion on the provisions we have on the balance sheet as we speak.
Efficiency is something that we have high on the agenda of our company; we have had it for quite a few years. But it's also important of course to stay focused on efficiency. And if you look at our gross margin development as well as operating expense development you will understand that it's important to continue to work on this in order to safeguard profitability.
And if we then look at 2011 with regards to restructuring charges, from this year, we will then start to focus all our reporting, all our discussions and so forth on an income level where restructuring charges is included.
So what I've done here is that I have given you an estimation of SEK2 billion for restructuring charges for 2011. It is the areas that is mentioned there, service delivery, product development and administration. This is the last time I will give you this disclosure. It is for me to be clear, I mean when we do our forecasting now coming into 2011 to make sure that we get the right margin levels here.
From next quarter, we will focus on the result including restructuring charges.
Okay, let's take then balance sheet ratios. It's a good development of Days of Sales Outstanding. We have had a very good Q4, continued strong focus on collections. It is as well a little bit of advance payments with regards to some of these new projects. So that's a good way of funding your business.
Inventory days came down in the quarter. But still, if you look at the decline that we had for instance between Q3 and Q4 in 2009, the decline is not as big. And this is because of higher activity in the business. It's not so much related to the catch-up of supply chain and so forth. Most of it is related to the higher activity level in the business.
Then looking at the cash, if we look at Q4, next slide, we had a good operating cash flow, SEK15.2 billion. It came from two sources; most of it came from result, but also from working capital.
You can see there that we have made some investments, both in the traditional CapEx, nothing specific to mention there, but also some acquisitions of smaller companies in the quarter. We also have restructured our loan in the quarter and paid back parts of it and prolonged parts of it, entering into the better interest rate situation. So all in all, we have net cash of SEK51.3 billion when we go into 2011.
The next slide shows the full year picture. And we just want to highlight here that we focus the cash flow discussions on full year. We have discussed that in Q1, Q2, Q3 and Q4; we focus on full year cash flow here. Okay, Hans.
Just quickly, on the summary for 2010, you can say that there has been different challenges and opportunity in 2010. On the good side of course are continuous wins on LTE, mobile broadband and in service arena. That's been important for us to create a strong platform.
We also need to conclude that the first half of 2010 was tougher due to the economic environment and also the supply chain. But that all-in-all came together in the fourth quarter then. Efficiency was worked on, were reported; Johan talked a lot about it. And we also started the year by doing a lot of changes to our organization in 2010 in order to really be a strong company and see that we leveraged our full portfolio of Ericsson.
The last slide there on the market trends for 2011, I will not dwell on those. I will talk more about that in Barcelona. But as a change from 2010, I think we would see even more trends around connected devices and affordable smartphones and we will also see more around mobile internet and cloud-based services and mobility, machine-to-machine coming in the trends. But those are the trends that we believe are important for the industry in 2011, but let's see how it turns out and we will elaborate more of them next time we talk.
(Operator Instructions) Detailed information is provided in the report, and Ericsson's Investor Relations and Media Relations team will be happy to take additional questions and discuss further details with you after the call.
Rod Hall from JPMorgan is now on line with a question.
Rod Hall - JPMorgan
I just got a couple of quick ones. Johan, you talked about restructuring the SEK2 billion through 2011. But then it would be a couple of questions I guess. One is by including it in the P&L without breaking it out, are you telling us that you see that now as just a kind of normal course of business charge as opposed to something that is abnormal in your business? So should we expect restructuring to kind of recur every year now as we move forward?
And my second question is regarding LTE. I wonder, Hans or Johan, if you guys could comment on what you expect the profitability level for that to be as you spent more this year. Is it in line with Group average margins or above or below? If you could help us on that, it would be helpful.
And then, Hans, I'd just generally like to hear your thoughts on how healthy the carrier spending environment is? Does it feel like it's a little bit better? Is it the first time you guys have seen underlying revenue growth now in several quarters. And just wondering how you think the health of the overall spending environment looks in 2011 here.
Rod, it's Johan again. Let me start with the question around structuring. I mean it is for sure so that gradually during 2011 we'll sort to look at these restructuring charges. That's part of a normal business procedure. And that is exactly the way we would like you to view these going forward. Whether the level of SEK2 billion is normal or not, I mean let's come back to that, but I think for now the SEK2 billion is what we would call normal for 2011.
We will of course do a close restructuring in our tables as usual. So you can see it. So (inaudible) on that the tables will show it. We don't comment on specific margins on a specific area. But I would say that the most important is the type of products we are doing, if it's coming into a footprint. And the market shares of course will be more suppressed.
But given that we build now our technologies on the same platform, we should be able to do it. We have now GSM, WCDMA and LTE on the same radio base station. So of course, that's an important development as well. But we don't go into specifics on LTE, et cetera. But of course, this scale is important in all we're doing when it comes to the gross margins.
On the carriers' spending, without being too upbeat on it, if I take 2010 in retrospective, of course we see some operators being more focused on the mobile broadband in the beginning of the year. But we also need to say that we have said all the time that mobile broadband have had the portfolio momentum. It's just that our 2G business has been declining more than we have been growing in mobile broadband.
So this quarter, we now see that the 2G is coming down less than we're growing in 3G. And we have four regions growing out of 10. We have had one before. So that's the sort of indication that we have upward 2010. And then let me come back and say, we see what we want to see in 2011.
Rod Hall - JPMorgan
Hans, you got four regions growing. Do you think that that number continues to grow through the years? Did you see evidence that some of the other regions are heading toward growth as we move through the first part of 2011?
We don't give annual guidance about the regions, but we saw a sequential growth in all 10 of them. We have transformed the organization in order to be able to sell the portfolio. We are seeing the organization to have stronger regions.
Of course my plan and the executive team that I'm around together with the regions are of course focused on the growth and having the full portfolio. But that's our goal and our ambition. Let's see how it turns out in 2011.
Can I add something there as well being the accountant here? So one important thing when we think about next year, we end the year with a very strong or fairly strong Swedish kroner both against dollar and euro. And of course that is the starting point for next year's exchange rates. So think about that as well when you model your 2011.
Janardan Menon from Liberum Capital is now on line with a question.
Janardan Menon - Liberum Capital
Just a question on your managed services business. I agree that you had a big base from the Sprint contract at the end of 2009. But the growth rates have come down quite a bit. So I was just wondering how you see the pipeline of new contracts going forward and do you see yourselves of being able to get back to sort of a double-digit margin growth in the medium term within this year.
You've attributed the fall in gross margins to a certain extent to network modernization projects. I was just wondering whether you can elaborate a bit on that. Does that include the RBS 6000? And how do you see those modernization projects evolve over the course of this year?
I will start and then I will ask Johan Wibergh to talk about what is included in network modernization and what does it mean?
On the managed services, we had smaller growth or comparable at least of 5%. Then we also need to understand that we had a tough comparison. We got Sprint into the base in the end of 2009 and the currency impact of it as well.
We have no reason to not feel that this is an important area. Operator looking into efficiency in the networks, we believe firmly that we have the best offering in the industry. I think that's important. And then of course, the higher install base gap in the current business in managed services, the percentage is getting more and more challenging. But as we believe that the market has a good potential growth in managed services and we have a good position, that means that we should be able to follow that.
But again, it's hard to tell what the percentage is given the volume. Johan, something on network modernization and tell about what is the context of that?
We started talking about that, because in Europe there is a fairly big install base of GSM and 3G base stations that there is a need of modernization. I think worldwide, there are some 4 million base stations. We have 40% of those GSM base stations and it is being modernized.
So especially in Europe, GSM and 3G base stations need modernization. It's an important rate. They are market leader in Europe already. We are number two on 3G base stations in Europe. And there is an ongoing modernization rate. It's very much then about replacing the existing technologies with new and modern technologies that have high performance and less power consumption.
And of course, we have been very successful. We have not announced all the orders that we have won. But we have been successful and we have been taking market share in Europe. And that means this should end the business model we have, which means then that we do investments in footprint and (inaudible) in the profitable add-on.
Edward Snyder from CER is now on line with a question.
Edward Snyder - CER
First a housekeeping question. You pointed out component shortages limited you again this quarter, not to the same extent, but you couldn't ship everything that you wanted. What impact did it have on revenue? What products were you not able to ship? Was that demand moved over to a competitor or are customers still waiting pending you're getting those components? And when you might think that might be?
And then I have one on revenue mix affecting your margins in Q1. Given that India is growing, U.S. is a little bit lighter than normal and the competitive environment in India, should we expect margins to remain suppressed maybe through the beginning first half of this coming year 2011?
I can start and maybe Johan would want to add something. But I can conclude that we've been talking in the first quarter about the component shortage that impacted the second quarter together with distribution challenge because the volume came up. In the third quarter, we still had an impact.
What we'd say right now that the component shortage and the distribution has normalized, but we'll also acknowledge that for certain products in our mobile broadband portfolio, when it comes to the products there, the demand has also come up. And that has made us having extended lead times or longer lead times.
So I think it's two different problems. So we've sort of normalized the components and the distribution, but we have extended lead time on certain products where we have higher demand. So I think that is sort of the conclusion on it. Johan, do you want to add something you want on that?
Production is running on such a high levels that it's not really a reason to discuss about component shortages. As Hans said, we have some products, especially some of the newer products we introduced, where the demand has been high.
And when it comes to the question regarding if we have lost market share to the competition, it's too early to draw a conclusion on market share for the full year. My gut feeling would rather be the opposite that we have gained market share. But as I said, it's too early. Everyone reports on how that comes out first. But I feel really good about the new portfolio that we introduced during the last year both in backhaul and radio base stations. That's been received extremely well by customers and generated a good order intake.
And on the business mix for Q1, we don't go into exactly it is on that. But let us reflect on the fourth quarter again. On the sequential decline, we had I would say three reasons. One is the seasonality. We historically are all coming down on gross margin in the fourth quarter, because we're doing more product execution and the products, et cetera.
Johan mentioned higher level of hardware sales coming into the fourth quarter, and then of course we initiated parts of the 3G in India and modernization in Europe. Those are sort of things that there are some of them we will of course continue into this year. Some of them we'll not be there.
So I think that, yes, we are going to have some pressure from these modernization in 3G in India. On the margins, long-term it's absolutely right to get the footprint as Johan said. Then of course we are working with all the mitigating factors we have. But there will be some impact.
Mark McKechnie from Gleacher is now on line with a question.
Mark McKechnie - Gleacher
Two questions. One is on your joint ventures. It looks like you burned cash in both of them. You got a healthy cash position still in Sony Ericsson, but the STE looks like it went to a negative net cash balance. What's your strategy for really STE in terms of providing financial assistance from the parent there going forward?
And then the second question is on India in general. It's obviously fallen pretty dramatically. It's only 5% of your sales now. Do you see that coming back to 10% or better of your sales throughout in 2011?
I'll start with India and then I'll start with STE and then I'll hand over to Johan. On India, of course yes we have established ourselves on the lower level in India because of the spending. And of course, the 3G started, I would say, during the fourth quarter. So that was one reason. And then in the first half of 2010, we actually were not able to deliver market share due to many reasons, both delays and security.
Our current business has all the time been good in India. So it's more of the infrastructure business. How that will pan out in 2011, we'll wait and see. But we can say that still we have a consumer growth both from subscribers and users of data in India, and that of course will finally conclude into investments, and we have maintained our market share on 3G as well as in 2G. So let's see what's happening with our portion of India sales in totality.
On the joint ventures, I just want to say that STE is in the transition, meaning that we are going for a new portfolio that's going to come out during this year. So far, they have been on the legacy products coming from NXT, ST and Ericsson, and that we continue to sell.
So this year, we are now coming into that. And they are more willing themselves to get to the volumes and the cost structure with that. But the most important thing to see this year is that we have the design wins in order to create a very strong chipset company for this industry. Johan, on the funding?
If we look at Sony Ericsson, I mean part of their cash drain, if there is such a word, in the quarter has actually been good, because they have repaid expensive loans. So I think that's one important thing to remember.
The other thing is if you look at ST-Ericsson, as Hans said, I mean they have obviously a challenging quarter Q4. And if you look there in their report today, there was a talk a little bit about the outlook for Q1. And we are a firm believer and supporter together with ST on the prospects of ST-Ericsson being a leader in chipsets for smartphones and so forth.
So therefore, parents have extended the financial support for ST-Ericsson during the quarter. And we will continue to secure that that funding is in place to become a successful leader in this important marketplace.
Mark McKechnie - Gleacher
Do you have a sense of the magnitude of that? I guess they drew down SEK150 million here. Should we expect maybe another pull from there?
I'm not going to give you an exact number on the financial support. I think the important thing for you to know for 2011 is that we absolutely support them. When it comes to the fourth quarter, I don't remember exactly how much that they have utilized of the parent company line. This is shared equally between STMicroelectronics and us. But say it's between $150 million to probably $200 million. Investor Relations can probably check the details or why don't you ask ST-Ericsson's IR.
Tim Long from Bank of Montreal is now on line with a question.
Tim Long - Bank of Montreal
Just a question on two other regions, if I could. First, on the North America market, what's going on in the U.S. with LTE rollouts that you're participating in, in capacity upgrades? Even despite currency, it looks like a lot less of a sequential movement and under-grew the rest of the company. So was there anything going on in Q4 why that growth lagged?
And then on China, it continues to be a market where 2G seems to be carrying the market. How sustainable do you think that is? And by definition, does that mean that the 3G network side has been over the more disappointing in China?
So let me take them one by one, getting some help from Johan there on currency. On North America, on LTE, we can only announce what has been sort of announced. Two operators have announced their networks on 4G/LTE, and we are part of also them in delivering to those networks. And that of course has been sizable volume during 2010. And then we can just rely on the market information that you will have about what we believe about 4G in 2011. So on that, we will have to come back on that.
We have had a good year with LTE worldwide, and of course the North American customers have been very earlier on LTE and also driving volumes.
The other question was around currency impact on sales. Did I understand you right on that?
Tim Long - Bank of Montreal
Just curious, even excluding currency, it looks like maybe around 10% growth sequentially. Normally in the fourth quarter in North America, there's more growth than that. So just curious why you likely lagged the growth despite all these developments in the U.S.?
We had a sequential growth in North America on 9%. Of course, we had had all through the year a little bit of a spending coming up and down from some operators. There has been some holding back as well for decisions that has been taken in the quarter. So I wouldn't take it much into account.
I'll also add to that comment of Hans. I think when we look at seasonality between different quarters here, the business mix we have in North America this year is completely different compared to what we have had last year. And I also think that there has been a little bit more of network freezes earlier in Q4 than what we are used to. And that's for Christmas shopping and so forth. It's a completely new business mix for us. So it's difficult to say anything about it.
Tim Long - Bank of Montreal
And then on China 2G and 3G?
China 2G, yes, we saw that coming up. Of course, still the main part of the customer base in China is on to 2G, and the growth of voice and the data is continuing. That doesn't mean that 3G is not important and it's not happening there. But still a huge base of the Chinese subscribers is on 2G. So that's why we saw investments coming up here at the end of the year, but again, driven to (inaudible) about the data capabilities of the 2G.
Tim Long - Bank of Montreal
Do you think 2G will still be the driver in 2011 rather than the 3G?
I think we'll see it continue, because the consumer base is so big on 2G. It depends of course always on the operators and how fast they want to make transition to 3G. But that means that the old subscribers need also the handsets on 3G, et cetera. So I guess the question is more relevant probably to the operators there about from the low degree point of view, how many subscribers there is on 2G and how fast you can move that to 3G directly.
Pierre Ferragu from Bernstein in now on line with a question.
Pierre Ferragu - Bernstein
There has been some debate at the end of first year on you're going to guide for this year and there is very clearly some expectations amongst investors to get some visibility on key metrics with at least some ranges on topline, gross margin. You gave some guidance already. It would be great to have the same on OpEx.
So my first question is what have you decided on the phones? There is nothing really new in the release today. And my second question is whether there is a change of Chairman at Ericsson? Is that the discussion you're having with your Board at the moment? Should we expect in February some more guidance for 2011?
We have always discussed how to do disclosure, et cetera. So far we have concluded we are not guiding on top and bottomline. We continue with the target areas we have and the focus areas we have on those, but have not decided to do any guidance on them.
On the Chairman, I think that's more to discuss with the nomination committee rather than me. They would probably come back when they have decided.
Mark Sue from RBC is now on line with a question.
Mark Sue - RBC
You have the European and Asian customers express an increasing willingness to move faster to LTE considering what's happening in the U.S. Maybe you could share some of the feedback from your major customers on their 4G plans for 2011.
I will share this question with you Johan. If I go back one year, my feeling is that the 3G is going further when it comes to investment. We have 42-megabit per second right now in the network. We want to get to 84. And I'm certain that you will us going to 100. We see actually more potential on the HSPA than we initially believed, at least maybe I wasn't.
At the same time, we see LTE coming earlier. So I would say we see both of those ends and time levels to go to design the speed, which is going to be the chipset and the devices on those technologies. But clearly the discussion we'd operate in the Europe and Asia is very much around mobile broadband on HSPA or LTE. That's for sure.
Broadband really has a strong momentum worldwide, and it's really pushing on. And even though there is a local discussion around LTE, it is happening in several countries out in the world.
It is important to remember that it is still a new technology. So there are fewer devices. It is more costly. It's very good for North America, because typically there are high price levels on devices. It's a big country, unique spectrum bands, et cetera.
And if you look on the worldwide market and the total volume, even though LTE is coming, the big growth worldwide on mobile broadband is happening on 3G. That's why you have the big momentum on devices, huge amount of devices available even on low-cost level, quite below $100 for Android smartphones. It's built out in so many countries out in the world. And that's why you have the big momentum and traction.
So LTE is important, but the main growth and the main driver in the business is 3G expansions and build-outs.
Mark Sue - RBC
And then if we consider the lag between your business and the global GDP and how the economy has recovered, should we plan for all regions for Ericsson to grow year-on-year in 2011, or should we think of that more skewed to the back-half and into 2012 as a better year than 2011?
As we said before, we had four out of 10 in the fourth quarter. I cannot really say (inaudible) to see the GDP versus our own business. There have been in different type of downturns. We had a downturn at the beginning of 2000. That's where we're not faced with the GDP. This time we came behind it. So I wouldn't draw any conclusion exactly on that.
We will come back during 2011 and see how these regions perform. As I said before, our focus of course is to see that all regions are performing and yet being at the full levels out of the portfolio. That's our job as executive team.
Kulbinder Garcha from Credit Suisse is now online with a question.
Kulbinder Garcha - Credit Suisse
I just want to back gross margins again. And when I look at 2011, I am not asking for guidance, but I see so many negative potential hits on gross margin whether it's network modernization, the recovery you're seeing in all of your emerging markets and your provisions levels are just very low versus history, not to mention LTE. And you are not doing much restructuring this year, only SEK2 billion of restructuring charges.
So what are the positives for gross margin from this level, from the 6% level in Q4 as we go through 2011? Is it that that could be European recovery, the geographic mix could tend back, or you give us some more positives that could offset that please?
I think that the provision we have discussed so much. I mean, I think that that should reflect the best right now and should not be viewed as a negative or positive information. It's reflecting the basis or risk we have today. And I discussed it on a press conference this morning. Knock on wood so far, our new product has been going very well in the field. And that's a very important metric for us.
And then of course, challenging portfolio etcetera; that should sort of be in the base then. We are of course talking about the areas where we have a challenge but it's still coming back to the normal course of the business. I mean, we have not said anything about multimedia nor services in that context. We'll continue with that. We have an efficiency gain from 2010. That would take re-dotting the base in 2011.
So we will continue to do everything we can to see that, as we said before, gradually improve our operating margins. And that's our work and we will continue with that. But we just want to highlight the areas which are a little bit different, but are not different from how we operate. This is how we operate; we take the footprint and then we work with the footprint, and that's positive long-term for us.
And then we just need to work with the challenge that comes with the shorter, medium-term on that. But that we have done before, and we have the company behind us of doing that, then we'll continue to do so.
Kulbinder Garcha - Credit Suisse
And just one follow-up on that
I mean, it was a good question because it is good to be thinking in positive terms from time to time as well. I think that first of all, when there is higher activity level in the business, it also means that we have more things to work on. And I am then thinking obviously from a sourcing point of view, from a scale point of view with different businesses and so forth.
So that's also important to remember. And remember that we have prepared our service delivery machine for better cost structures and so forth going forward. So I think that's an important one to remember as well.
The other obviously important one is that we have had during the year a good business mix. I mean, the business mix may still continue to be good as a result of the traffic growth and mobile data. So we should just remember that as well.
Kulbinder Garcha - Credit Suisse
And just one follow-up on that. In terms of the gross margin pressure in Q4, which of them was the biggest driver, was it network modernization or was it India, 3G or the emerging markets. I am just trying to understand what really swung things the other way after several quarters of very high gross margins versus history.
I think the way we try to (ride these commands) is that we kind of try to use an 80/20 role there. So the things we talk about are the most relevant ones; I guess you know that. And I think of those three things that we talk about there, I would say that the hardware share there is the most important explanation in the fourth quarter.
Alexandre Peterc from Exane is now online with a question.
Alexandre Peterc - Exane
I'd just like to understand the supply and demand situation in the industry and of Ericsson in particular. I'd just like to know how you cannot meet all the demand from other broadband products and why are the lead times so long in this particular business and how is this possible, what is generally viewed as a heavily overcapacity industry. Is this Ericsson-specific or industry wide? Will this at some point give you any pricing power role?
If you could just provide a little bit of clarity what is going on exactly in terms of supply and demand there?
We've never said they were extremely long; you said that. So I think that we have extended lead times right now because the demand has gone up quite quickly on certain products in mobile broadband. That happens time to time. We are ramping up. But remember also, we are changing the product portfolio at the same time. So that's an important parameter.
But as said, this is the quickest introduction of a new product we have ever done in Ericsson history. And so far we have been performing very well from a quality point of view. But we are ramping as soon as soon as we come to see that especially our customers are getting the products they want in time.
So it's more about a timing issue right now. We'll see that we catch up and can do it faster. It's supposedly (inaudible) that we have a high demand for a certain product in mobile broadband I would say.
Alexandre Peterc - Exane
And then just briefly on the lower provisioning, and that obviously registers the end of the restructuring, would you also detail any other factors that are at play there, geography mix, client mix, the new product RBS 6000 as well?
Okay, I'll do that. First of all as you rightfully said, I mean the restructuring provisions will, during the course of next year be used, and thereby disappear from the balance sheet. And when we then look at the business provisions, we use obviously a risk matrix. When we set aside provisions for projects and so forth, it has to do with the complexity of the project, the scope, where we do the type of project, what type of service levels we have agreed with a customer, if we have rolled out a project like this before and so forth.
So all of those aspects we look at when we do the provisioning. And there is also one important element in this, and that is the related quality provisions on products. And we have had a very successful introduction of the RBS 6000, and that is good.
We have also worked with the quality improvement in our service deliveries throughout the year, which is also an important factor when it comes to provisioning. And that goes for the quality of the Managed Service operation as well as the performance of our projects. So all of those are important elements.
Operator, we can take a lot of questions then from the audience.
Thank you. Our last question comes from Zahid Hussein from Citigroup.
Zahid Hussein - Citigroup
Just a couple on Managed Services if I may. Where are you seeing the most intense competition, regionally that is? And also, how should we think about dividend going forward in 2011. Obviously you've taken out this year for rebate. Most of what we are thinking is, is there going to be going some way you are going to start (distributing) cash to shareholders?
And finally, are you going to see further industry consolidation in 2011 and would you be a part of that?
So why don't you start with Managed Services then Johan?
As the formal Service Head I will do my best to answer that. I think that the team in Services have been really successful during 2010. Now we have a true global Managed Service footprint. We have full-scope Managed Service contracts in most regions.
I think we used to talk about the Managed Service business to be more synergy-driven in mature countries and more competence-driven in more emerging markets. To a certain degree, I think that still exists. I would say that it is a very important business model all over the world, and that competition is also eager to win a portion of that business. And it goes also for Global. So I would say that the competition is really a global competition today.
And on the dividend, I have nothing more. We have more time for that for 2011. The Board concluded and suggested through the annual shareholders meeting then the SEK225 per share, which is an increase of 12.5% compared to last year given of course what they have seen in 2010 on the cash generation and also when they look at 2011. Johan.
No, I think also on the dividend and the relating cash position, I mean it is so that having a strong balance sheet is important for us in winning new business. So it is important from that point of view as well. It's also important when it comes to our rating. So both those factors make us convinced that being cash rich is a successful strength.
In this consideration I think that's hard to predict. I mean, we are focused on executing our strategy to continue to be the leader in this industry. That's the most important for us. Of course, we have been benefiting very much of the large consolidation when we required Nortel. That's has been a very important acquisition for us.
So we will look and review what's happening in the market, but I don't have any ideas about what can happen right now, and I didn't have it before. Actually, Nortel went bankrupt. So we will follow it as a leader in the market. We need to see all the changes in the landscape, how that impacts us.
Thank you very much, Hans, Han and Johan. Just a short note on the big industry event, the Mobile World Congress in Barcelona. We are arranging a press conference targeting the media in the morning of February, 14, but analysts are of course also most welcome. And on Tuesday, February, 15, Hans Vestberg will give a key note as part of the GSMA program.
The next IR event then from Ericsson is the first quarter report on April, 27. And then we are happy to invite you to a management briefing in New York on May, 10 again.
So with that we conclude today's earnings call and thank you all very much for listening in and asking questions. Have a good day, bye-bye.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.
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