Telefonaktiebolaget LM Ericsson (publ)

Telefonaktiebolaget LM Ericsson (publ)

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Telefonaktiebolaget LM Ericsson (publ) (ERCG.DE) Q3 2011 Earnings Call Transcript

Published at 2011-10-20 15:39:55
Executives
Ase Lindskog – VP, Head-Industry, IR Hans Vestberg – President and CEO Johan Wibergh – Head of Business Units and Networks Jan Frykhammar – CFO
Analysts
Matthew Hoffman – Cowen & Company Sandip Dishpandi – JP Morgan Tim Boddy – Goldman Sachs Stewart Jeffrey – Nomura Securities Odon De Laporte – Cheuvreux Anush Krushan – UBS Mark Sue – RBC Capital Markets Andrew Gartner – Barclays Capital Zahid Hussein – Citigroup Kai F. Korschelt – Deutsche Bank Ed Snyder – Charter Equity Research Edward Snyder – Charter Equity Research
Operator
Welcome to the Ericsson’s Analyst and Media Conference Call for their third quarter reports. To view visual aids for this call please go to www.Ericsson.com/press or www.Ericsson.com/investors. (Operator Instructions) Replay will be available one hour after today’s conference. Ase Lindskog will now open the call.
Ase Lindskog
Thank you, operator, and hello, everyone. You are welcome to our call today where we will comment on our third quarter earnings report. With me here today I have Hans Vestberg, President and CEO of Ericsson; Jan Frykhammar, Chief Financial Officer; and Johan Wibergh, who is head of our Business Units and Networks. So to start with, I have to make the usual reminders that during the call today we will be making forward-looking statements. And these statements are based on our current expectations and certain planned assumptions, which are subject to risks and uncertainties. The actual results may differ materially due to impact as mentioned today’s press release and discussed in this conference call. We also encourage you to read about these risks and uncertainties in our earnings report as well as in our annual report. So with that said, I would like to hand the call over to Hans Vestberg.
Hans Vestberg
Thank you, Ase. Before we dwell into the figures, just giving you a highlight of the quarter. I’m trying here to just outline more or less the topics that we discuss with our customers, or have had discussion with our customers the last couple of weeks. As I’ve said, today’s press conference I have roughly spoken or met some 7% to 8% of the Ericsson revenue in the last 30 days, and these are the main topics. The main discussion is still on mobile broadband. We have now passed 900 million mobile growth on subscribers. We had a prediction the beginning of the year if you might remember that we will pass 1 billion. With the pace that we have right now, we will definitely add 100 million in Q4. So it’s continuing to grow. And, of course, here also, the new types of devices, smartphones coming into networks and PM pricing is very important in discussions we have that we have and operate. And, of course, finally understanding our technology, everything from radio, IP and billing and OSS is working in order to support that type of business. So that’s top on the mind. Secondly, even though we have seen a lot of discussion around outsourcing and Managed Services throughout the year, we see an increase in that discussion. Of course driven by OpEx reduction, but also to find resources and confidences handling this somewhat more complex networks that we see as the broadband and data traffic increases. Finally, or not finally, but IPO is in focus. There’s a lot of discussion going on in the industry. We of course believe strongly in share technology, and that’s the reason why we have more than 5.5 billion mobile subscriptions in the world right now, because we’re sharing technology. Ericsson of course having the largest portfolio in the telecom industry when it comes to patents have of course an important part in this discussion, but customers want to understand how this is impacting them and what’s happening. And here we have a very important role with our patent portfolio. Finally, we of course also discuss what is happening around us. There are uncertainties, and we read the news and seeing of course the macroeconomic information coming out from different banks into (inaudible). In our case, I would say that we cannot exclude that operators might be somewhat more cautious when it comes to short-term spending. If we look back on the third quarter, second and first quarter, we see roughly the same pattern we have seen, the southern European countries have taking down their spending. We have seen the Arab spring being part of that as well, seeing the lower spending. So – but again, we stay close to our customer that’s the most important, understand? Will they spend less, be more cautious in this environment? That’s the most important for us and of course, understanding that economic environment can kind of have an impact on that. We will then go to the figures starting with net sale. 70% year-over-year up. 24% growth currency adjusted fueled by mobile broadband and the services. And of course, when we talk about mobile broadband, we just need to remember it’s not only radio access, it’s the whole portfolio on that where it’s including many links, mobile back calling, IP, et cetera. Services came back and had a growth of 7% in the quarter and professional services currency adjusted was up 13%. If you look at the profitability, we increased net income with 6% year-over-year and the quarter-a-quarter up 18%, impacted by higher volumes but also less restructuring to some extent. And then, we had lower operations costs but a little bit lower gross margin as well. That Jan will come back to where we sort of will go there. Joint ventures. They have both reported. I can only say that Sony Ericsson came back to profit as we expected. They had a tough quarter, too, due to the tsunami, now they made a profit. They have a growth of 33%. The transition is almost done. 80% of all the phones they’re selling are smartphones. A trend that’s quick turn around on the portfolio for Sony Ericsson. SPX, on the other hand, it’s not through the transition, they still have a majority of the revenues from feature phones that are falling and now ramping up on the smartphones and new mobile phones that we have. And they had a slight increase on top line and somewhat less of a loss, even though the loss was big. Here we – as we’ve said before, we continue to do both restructuring and efficiency work in SPX Ericsson Sony in order to see that the comeback to profitable as soon as possible but I need to say also that that will take some time. This is not a quick fix. It will take time to shift out of portfolio work with the new customers and that’s where we’re committed to supporting them with. That means that the joint ventures had a negative impact on our operating income with 600 million SEK in the quarter. Then I hand over to Johan to talk about networks.
Johan Wibergh
All right. For networks then, we had a strong quarter again. Growth was up 25% year-over-year. If you do currency adjusted for about 30. And it was – (inaudible), we see then looking on more conservative, we had a good development during the first six months. Let’s see how we do in the third quarter now that all of the numbers have been all reported. (inaudible) mobile broadband, as Jan said, is really driving the growth. And let’s just say, it’s ready. It’s ready to go on ready bay stations and we are successful to manage from the previous generations of portfolio bay stations over to the new RBS 6000. It’s going very well and very good reception by customers. Shaping a high volume. There’s also invested in mobile broadband was to driving then and new generation of microwave-based back quarter that can handle high speeds, high capacity. Driving (inaudible) packages and its driving (inaudible). The effects and the challenges we have had of the supply chain, that’s gone. We are back now to normal lead times. We are performing well. And we did an extra inventory buildup during the second quarter to take down some of the risk due to the Japan situation and we will normalize the inventory situation with – over the coming months. Quarter-over-quarter, we were down 3% and that was more or less normal seasonality. Of course, that was – that’s normal then affected by the decrease of CDM inspect in North America. Big drop in the EBITDA margin, down to 16% from 21%. And but that was flat sequentially. And of course we see a pressure on the margins due to the recent that we mentioned before. Varied pressure on margins in our business. And of course we had some competitors sometimes desperate and appear they’re doing overall great in the situation. And looking forward and we can’t exclude somewhat more cautious short term operating spending due to the uncertainties we see in the world. Okay? And with that, I hand it back to you, Hans.
Hans Vestberg
Yes. Thank you. Global Services has had 13% growth in Professional Service in the quarter. As we’ve said previous quarters we have not seen that our service portfolio is not competitive. It’s just that we had both a lag from the infrastructure sales as well as the currency gains so we now see that growth. 40 new managers is contracting the quarter, 24 in the second quarter is, of course, fueling the Managed Services but also important to point out on the Professional Services that system integration is growing as we’re both vesting and taking new deals in that area. Network rollout also growing 7%. However, we continue with loss in that rollout very much connected to the modernization work that is done throughout Europe. And where we take a hit on the P&L on that rollout. Indeed Morgan increased quarter on quarter with 3% as units driven by the volumes, of course, but also on the efficiency work that has been ongoing in services. And as usual, there’s always some work to restructuring in Global Services and therefore you see a 1 percentage unity contributed to restructuring the third quarter. But that’s normal, that’s what we always do. Multimedia. Came back to profit in the quarter. Had a phase of 2.6 billion SEK, 11% growth. Revenue management is developed favorably year on year. We can also say that (inaudible) solutions especially like the TVs doing well. Winning several of these in this quarter. Indeed Morgan is possibly with 11%. The reason is two folded. Of course that we have the more favorable development in revenue management but also that we have restructured and taking down the cost base in multimedia. Here of course we want to get even stronger on OSS/BSS and we’re waiting from the acquisition with headquarters to come into the portfolio here. Regional Sales. Quick summary of the regions. We have in this quarter 8 out of 10 regions growing. Notable is that we have a couple of new regions growing here and a couple of regions growing very, very well. So let me start by talking about the regions that are not growing. North America. North American down sequentially and year-over-year. This is what we said in the second quarter that we’re going have a slower second half in North America. First of all, the underlying drivers as we can see it are not changed in North America. We see more Smartphones. We see more data usage in networks and all of that. We’re not losing market share neither but it’s just that we’re in a cycle where our customers are spending a little bit less due to conservation in the market and also shift from 3G to 4G and adding also that CDMA is now having a slower pace on investment. So again we’re coming from a high level but we’ll have a slower second half in North America. But it’s not due to that we’re losing market share or anything like that. Sub-Sahara has for several quarters been down. And now we have a growth of 14% and that’s fueled by the 3G rollout now happening but also to the service portfolios doing well. India, we had 94% growth in the second quarter. We are now down to 7%. Here we can say that we have done the initial coverage on 3G and we’re going to probably see a little bit go slow down in India especially because there are conservations and growing discussion around legislation et cetera. But we can also say that we took the first TD-LTE deal in India with Oger in the quarter. Finally, we see continued strength in China, northeast Asia region, Japan, Korea and China are all continuing with development in mobile broadband but of course still China is doing a lot of 2G rollout. We can also emphasize that we are doing trials with China mobile on TDLT and those have now been finalized and here of course we continue to see that we will like to take a number one position on TD-LTE as the ST, LTE and continue as the leader in this industry. That was a quick summary of the regions. And by that, I hand over to Jan to talk about the profitability.
Jan Frykhammar
Thank you, Hans. So let me now mention a few highlights on the gross margin development. The gross margin in the quarter ends at 35%. That is reduction of four percentage points compared to last year and a reduction of 2.8 percentage points compared to the second quarter. There are some positives in this, and the positive is that we have started to see growth in the Services business again and another positive is that we’ve feel quite confident that we have strength in our position in the marketplace, meaning gained market share. What of course is the reason for the decline is really that we now start to see the impact of the modernization projects, which we discussed already in the second quarter, but also that we now start to get into more of coverage build. And that is not only in emerging markets. It’s also, as Hans mentioned for instance, in North America, where we now start to go from capacity-related investments into more coverage, for instance on LTE. If we take next slide, I’m trying to explain then this mixed shift and the dynamics and I think that most of you have saw this slide when we had management update in New York in May, and it is extremely important to understand the dynamics of this business. And then, when we are in the coverage cycle, we have more hardware, there is more site material, there is more construction type of service work that comes with a lower margin. Then, of course, that is the footprint that we will live out of for a long time. Then we enter into the capacity or expansion or upgrade phase. That means, in case you buy Ericsson base stations at least, in most cases, software upgrades and more integration type of service works, and that comes with higher margin. What has happened in the quarter is that the mix has shifted towards more coverage build out and that impacts the margin. And we have then visually tried to explain the proportions here in terms of gross margin. You can also see that the modernization project has an impact in the quarter. We – if we look at the pace of the modernization project, we have a higher pace in the third quarter than we had in the second quarter, but we will be full speed ahead with the modernization projects that we have won during in the fourth quarter. If we take then operating expenses, not so much to talk about. We continue to invest in the areas that we have said before with regards to R&D, and those are to secure that we are becoming a strong supplier then for TD-LTE, that we focus on investments in the IP area and the small service routers, but as well, securing a multi-standard radio base stand for CDMA. So those are very important areas for us this year in terms of investments. If we now look at SG&A, it was flat year-over-year. We have in the numbers started to see a small impact of the positive impact, meaning reduction of the program that we announced in Q2 related to reduction of step functions in Sweden, but the main impact I would say, is that it’s typically a lower run rate for SG&A and R&D in Q3, and that’s simply because vacations in many parts of the world. If we look at operating margin, 11.3%, a lot has been said already about that. Last year’s number is excluding restructuring charges. The main excluding restructuring charges in the second quarter and they both align as flat, and that is really again, related to the fact that we have a leverage on volume. I mean, the gross margin has gone down, but thanks to the higher volume, we managed to deliver good bottom line anyway. If we take the balance sheet, and we have gotten a lot of questions today on the balance sheet and whether we have lost focus on working capital management and things like that. I think to everyone that is worried about that, I can assure you that we have not. This is – there is a couple of reasons for both accounts receivables and inventory. One reason is, of course, the currency development. The other reason is the business mix and we are now in a phase to recycle that this more project heavy and that means that we tie up more capital in the project. So we have not at all lost focus on working capital. It’s very important for us. We have an ambition and an objective to have a good working capital turnover. On the inventory side we have still some remaining effects of the mitigation actions that we took in March due to the tsunami. So we have still some buffers in terms of inventory. And as you once said we will gradually work ourself out of those. But still we have also learned from the supply issues we have had here. So we will make sure that we keep a certain buffer in inventory. If we don’t take the changing gross cash we had a changing gross cash of minus $1.8 billion. The main reason for that is that we have paid down the investment in – for the Nortel patent that we acquired. We had an operating cash flow adjusted for restructuring of $2.4 billion SEK excluding $1.6 billion. The big change from that cash is the recalculation of the post employment benefits mainly for the Swedish defined benefit plans. And this is something that I’m sure you will see in quite many Swedish companies and it has to do with a lowering discount rate. So that’s something that – it is what it is. It doesn’t impact cash flow but the liability increases. Hans?
Hans Vestberg
Thank you, Jan. You’re summing it up here for performance targets and long-term ambitions growth faster than the market. As Jan said we feel that we are growing faster than the market, gaining market share. Besting those margins, yeah, we’re managing that staying quite stable even up even though we get a tougher time on the gross margin for very clear reasons. And that’s what we’ve been discussing before. Cash conversion the area that we will focus a lot on because the year has not ended yet and we still have a clear ambition to get over 70% cash conversion even though our growth rate has been high so far. JV earnings is there. The losses are not improving compared to last year. So here we have more to do. Finally, if I summarize it up as I said at the Capital Markets day we have three ways of growing and the main part of our growth should come from our portfolio management. That’s mobile broadband, its managers, its OSS/BSS. Those are the three areas that will grow faster in that market and welcome here we are number one in mobile growth and number one in Managed Services and we are today probably number three for OSS/BSS, but with acquisition of Delcordia we want to aspire to be number one there as well. And that’s the main part of our growth strategy. Then we also have our market share gain which is a smaller portion but of course important and here we have discussed that after the half year clearly that we are gaining market share and are feeling in our – right now closing a third quarter is that we continue to gain market share. But of course we need to come back when the final figures is out and have the full year to review it on. Finally, we also have one growth lever which is acquisition and the thing we have in the family right now is the quarter that we expected previous. Communicated we closed in the fourth quarter and added to our strength in OSS/BSS. Finally, we heard Jan and Johan talking about that we have technology going from more capacity to coverage. And, of course, some uncertainty in the macroeconomy. We just want to convey that management is working proactively as usual to see that we are managing whatever outcome it will be. Equal much as it will go up as down, we are prepared. We have continues the plan and I think that compared to 2001 we improved our cost base from a flexibility point of view, from (inaudible) 2008, 2009. And if something would happen now I would say that we have even improved from that situation in 2008 and 2009. That was all for me.
Ase Lindskog
Thank you very much, Hans. Then, operator, we are now ready to take questions.
Operator
Ladies and gentlemen, at this time we will begin the question-and-answer session. (Operator Instructions) Our first question comes from Matt Hoffman with Cowen & Co. Matthew Hoffman – Cowen & Company: Good morning. Hans, thanks for the color on gross margins and rollout. But you mentioned in some of your remarks this morning that competitors have gotten newly aggressive. Is that comment related more to network rollout sales where losses are well at advertise and understood? Or the remarks on competition, are they incrementally affecting core margins in legacy products? And I have a quick follow up. Thanks.
Hans Vestberg
Hey, Matthew. I think maybe you picked up some comments where I was going through a different type of business that we are doing. Of course when we are going for coverage, that’s usually the install base that we’re fighting for over market share, and that’s typically when also the competition is the largest. And right now, as you can see, we have more coverage work at the moment than capacity. So of course that could be a sort of a perception on that. But I wouldn’t say that our competition has changed. We have for quite a long time had tough competition when it comes to market share and install base, when it comes to networks. But remember also we have other areas of business with other type of competitors, but I wouldn’t say that if I look back one year, we have the same competitors and we’re competing on the same type of projects. And they are different in nature, if it’s the coverage or the capacity or build out. Matthew Hoffman – Cowen & Company: All right. A quick follow-up here, could you speak to the profile of the network rollout business that you’re doing right now? Indicate which technology is driving that increase? Is it due to more LTE in the build outs right now? Or is it really related to HSPA, WDCMA coverage? Thanks.
Hans Vestberg
I think it’s a blend. In Europe still it’s very much in 3G and HSPA. That’s a lot of them. We have not all the licenses and frequencies released in Europe for going 4G. There are very few countries that have that. If we then talk about Korea and North America, we’re still at 4G as well. We can also see that we have 2G rollouts when it comes to modernization in Europe, because you’re doing modernization on the whole hardware that you had before. I have said it before, but maybe I should say again, we have more or less 5 million ready base stations in the world and 1 million of them were deployed very early in the mobile network cycle. Those are I wouldn’t say obsolete but almost. Then there are some that doesn’t exist anymore, or their power consumption is so high, so you can have a best of case, and it cannot handle the Smartphones. The main part of that 1 million is actually in Europe, because Europe was first out, and that’s where we see a total modernization in Europe. And we were clear already in Q4 last year that that was an area that we wanted to increase our market share. We have increased our market share in that modernization, but that was also when sort of backed the install base has taken place. Johan? Matthew Hoffman – Cowen & Company: Thank you.
Jan Frykhammar
I think Matthew if you read the Industry Development section in the report, there we mention a little bit around the coverage ratios right now. And you can see for instance that we estimate that the HSPA coverage is around 40%. And we think that by 2016 that coverage will be basically on par with where we are or with GSM today and by 2016 LTE will be where HSPA is. So there is a lot of coverage being built. It’s still being built using to the greatest degree multi-standard radio. Matthew Hoffman – Cowen & Company: Thank you.
Operator
Sandip Dishpandi from JP Morgan is on line with a question. Sandip Dishpandi – JP Morgan: Thanks for letting me on. Just a quick question on services, you’ve talked about improving service revenue trends at this point. I mean, typically service revenues, Service business has had a lower margin. So would you say that the higher growth in Services will have an impact on the margin going forward? And secondly, I mean, do you see a changing competitive environment in networks? Or is it the same more or less competitive environment, but you’re seeing more aggressive behavior from competitors in some markets like Europe? Thanks.
Hans Vestberg
So I can try to answer the services question. I mean, this is – if you look at the company gross margin, I mean services overall has lower gross margin. But remember then that there is not a lot of operating expense in the services area. So if you look at the quarters both the line for services has improved a lot. But purely mathematical if services would continue to grow it has an impact on the gross margin. So that’s the explanation.
Jan Frykhammar
And then you have the follow-up question on the network side on competition. When I was talking, yes, I was talking mainly on networks. That’s the broad competition. That’s as we talk more in the coverage space, when we build install base of course then everybody wants to get that install base because if you perform and do it well you sit there for a long time. But you need to perform, you need to invest in R&D so the technology develops but of course that’s when the biggest competition is coming up. Sandip Dishpandi – JP Morgan: So you’re saying in new installments is where you’re seeing greatest competition at this point?
Hans Vestberg
As we’ve soon the last five years. So it’s nothing new this quarter. Sandip Dishpandi – JP Morgan: Okay.
Jan Frykhammar
Because when you build install base like you did in Europe or greenfield or rolling out new network then of course you sit on the market share for a long time, as long as you perform. And of course then that’s where you have the biggest competition. Right now we have more of that type of business due to first of all Europe modernization but also that we have other coverage build out in the world. Sandip Dishpandi – JP Morgan: Thank you.
Operator
Tim Boddy from Goldman Sachs is on line with a question. Tim Boddy – Goldman Sachs: Yes. A couple of things. It’d be helpful to understand your confidence that the sell growth you’re seeing is going to translate into healthy earnings growth midterm. The first quarter where you’re having the tougher comparisons took from last year without the kind of easier comparison created by the disruptions in the supply chain. And while sales were up 17, EPS is only up one. So why are you so confident this is the right strategy to drive long-term earnings growth rather than just sales growth? And then secondly, can you give a little bit of macro color, more by region if possible? Do you see this uncertainty being a North American issue where obviously CapEx sales is at relatively high levels? Is it also a risk in Europe even though CapEx sales there haven’t really recovered and is there a risk that spreads into the emerging markets? Thanks very much.
Hans Vestberg
Thank you, Tim. Maybe the first question, not 100% sure – but we’ll take a try on it. I think that what we have done in several technology changes is that we have the coverage phase and then the capacity phase and that’s our job to see that we have the same similarity on this one, there’s coverage phase and the capacity phase. And I think that’s what you alluded to that now we’re in a coverage phase and we see the margins coming down for that reason. And there are three reasons that Jan has explained. And our whole ideas of course when it comes to capacity it’s much more of a software, so by nature that has the higher gross margin. But to get that software out you need that hardware first. So then it’s a fairly natural process of our business. Not sure I answered you 100% correct. But I made an attempt at least. Tim Boddy – Goldman Sachs: No, I think so. Just saying when will this sales growth you’re seeing translate into earnings growth? Because at the moment you’re seeing sales growing but not earnings.
Hans Vestberg
Yes, I take a little bit longer view on it. If you look beginning of the year of course and the part of the a lot we had then earnings growth. So it will come in cycles. Long term, we still believe firmly in mobility and mobile broadband asset driver and we are well positioned and we should take care of that. Then it can come up in quarters. But we just need to see that we do the right for the company long term as well. On the second question if we see the in the spread outs over the turbulence in the economical uncertainties, I have to go back to say I didn’t say that North America, our business is not impacted right now of the uncertain macro economy in North America. It’s other reasons that takes our volumes down right now. So we’re clear on that. Other than that I think that all regions talks about this right now. As I said, I try do a little priority in the number or the list of priority how we discuss with our customer right now. And they are foremost focused on mobile growth and managers services and then they discuss the uncertainties. That doesn’t exclude that something can happen quickly or operators or more cautious in the short term. But as said, up until third quarter we had only the signs that we talked about before. Southern Europe, and their offspring. Tim Boddy – Goldman Sachs: Thanks very much.
Operator
Stewart Jeffrey from Nomura is online with a question. Stewart Jeffrey – Nomura Securities: Hello. Thank you, everybody. Just a clarification question, please, on the business mix. You talk about the network modernization being 18 to 24 month contracts. Typically as contracts get older, margins improve. The first question is, is there any reason why these contracts shouldn’t have a similar margin profile, i.e., gradually improving over time? And then secondly, on an aggregate basis firm-wide, it sounds like we have a big step-up in the percentage of revenue coming from coverage in Q4. Should we assume that’s then a normalized level for the interim? Or is it possible that the percentage of revenues coming from coverage balance further increases as we go through 2012? Thank you.
Hans Vestberg
I think on the first question, the 18 to 24 months, it is of course, from the start of the project. Some started in the beginning of the year, but there has been accelerating and then all won deals will be started and then ongoing when we’re into Q4. That’s how we see it. And then, of course, it’s an average, so what we saw in the beginning of the year, as we said, it went a little bit slower because it’s quite complex modernization we see in Europe. It’s line networks and you need to be very cautious when you do changes in them. So it takes a little bit longer. But when – during that period of course, it’s going to be more (inaudible) when they roll out and then after that, there’s no reason to see that they wouldn’t be normal.
Jan Frykhammar
And I think as we have talked about before, these projects have been sold as a project with a certain scope. So we know fairly well the revenue profile for the coming 18 to 24 months on these projects. Of course, what we can work with is the learning curve in terms of the project execution and things like that, but I think that what our view is, of course, and we are long-term here, because we know that this installed base will generate a lot of add-on business once it’s been installed, but the projects themselves have been sold as a project for the initial phase.
Hans Vestberg
And when it comes to the question about how you should model Q4, I mean, we don’t do guidance, but of course we have the fairly – a fair amount of coverage for this rolling and as Jan says, we know that they will impact in the fourth quarter. And that’s what we all said that the modernization project will impact the second half and it will accelerate in the fourth quarter. So yes, we give an indication there, but not guiding, but that’s – and the other factor is that we say that North America is going to be slow in the second half. Stewart Jeffrey – Nomura Securities: Thank you.
Operator
Odon De Laporte with Cheuvreux is online with a question. Odon De Laporte – Cheuvreux: Yes, thank you for taking my question. I understand very well your explanation in terms of business mix in Europe, but I’d like to understand the trend on a global basis. I mean, do you expect a more sticky customer base, like two years down the road on the global basis? Or do you think that a lot of (inaudible) bid will continue to take place maybe in other regions when 4G is coming?
Hans Vestberg
Thank you for the question. I think the question is well put. Now, we believe of course that this is – we have a tight delivery, I don’t know, 10 to 15 years, when we change the hardware. This is one of those cycles. So of course we perform well and invest enough in our mobile networks, then with this market share gain, it should be more stick. I would never say that to my customers, but of course, that’s what we really want to do. And if we’re in business, we have so much subscribers in the networks right now that are so dependent on the mobile network and when it was small network, it’s fairly easy to switch out equipment. That’s will be more complicated over time and of course, as we perform, invest enough in research and development and mobile networks, we should be able to keep the system (inaudible). Odon De Laporte – Cheuvreux: Thank you, and I have a quick follow up. Do you expect any positive impact from the acquisition of Nortel’s IP portfolio on the gross margin?
Hans Vestberg
We are in the midst of a transition right now, meaning that we get approval and we want to see if patents will be moved to the entity that will handle them. At the moment, I will wait with comment because there are several shareholders owning these patents right now. So when that company has formulated and they have the patents, they will do communication around them. So I will wait with that comment. Odon De Laporte – Cheuvreux: Okay. Thank you very much.
Operator
Anush Krushan from UBS in online with a question. Anush Krushan – UBS: Hi. Thanks for taking my question. Firstly, just on the RBS 6000 deliveries in the past you’ve sometimes give figures and what percentage is RBS 6000 ? If you could perhaps update us on that. And just related to that, as over time the RBS 6000 becomes larger and larger part of the shipments overall, do you see opportunities for cost savings by nationalizing the portfolio further? Taking the 2,000 and 3,000 perhaps end of life?
Hans Vestberg
Here is year one then. So we are continuously increasing the share of RBS 6000 in production. And in Q4 it will be more than 90% of total volumes. And we have already announced last time buy dates to our customers for RBS 2000 and 3,000. We have started. But it happens during the first six months next year. To that point we will start shipping new cabinets for those, but we will for quite a long time still be selling and delivering capacity upgrades on the install base on RBS 2000 and 3,000. But that is a very good business for us. The RBS 6000 is going extremely well. We are making production records on that, and extremely well received. Performing extremely well in customer installations. We will see that we are outperforming competition. I think that can also be a reason why we’ve been gaining market share, because it is performing extremely well. And I’m extremely happy with how this shift has gone. Quarter then going forward, we have a long track record of all it’s doing and substantial cost reductions in our portfolio year by year. And we will continue that going forward. And two years from now, most of the parts in RBS 6000 will be complete and modernization. And the pace of technology is extremely high in our business. It is extremely costly in R&D to be competitive and win this race. That’s why some other competitors are struggling, because pace is really high. The really high pace is putting out new technology with new features at lower costs. It is becoming difficult to some of our competitors to keep the rates up. This is far from commodity. It is extreme volatile and new things happening all the time. And I feel very happy and confident about the progress we’re having. Anush Krushan – UBS: If I could just follow-up with a related question on that. There’s probably some sense of higher level of R&D spending this year because of LTE, or because of the services router on the IP side of things. Can we assume that R&D spending overall will tend to normalize to maybe slightly lower levels for next year?
Jan Frykhammar
It’s Jan here. I think first and foremost, we are all the time looking at the investments needed in order to support our strategy, and that is to be technology leader. We have said that we have a bit of an extra spend this year in order to safeguard certain products and certain wins. We will come back in January with the guidance of R&D for 2012. And I mean what we have said all the team through this year is that there is a bit of extra investment this year. If there is going be a need for next year, that depends a bit on the pace of technology and so forth. But let’s come back in January. Anush Krushan – UBS: Okay. Thank you very much.
Operator
Mark Sue of RBC Capital Markets is online with a question. Mark Sue – RBC Capital Markets: Thank you. Longer term, when you hit your strides with LTE, could it possibly change the economics for Ericsson? For example, can you get back to gross margins of 39% and high teens operating margins? Or is the Network business still tied to the coverage and capacity cycle implying 4G transfinancially when it’s all said and done which still looks similar to 3G trends?
Johan Wibergh
So this is Johan then. I mean, the profitability is more linked to the cycle that both Jan and Hans have talked about when it comes to coverage and capacity. It is extremely important to understand that right now and during 1211 and 2012, the market shares affecting many countries that affect business in the many coming years. We’ve established a platform, and with that platform in place, we then sell upgrades on hardware and software. If you fade on that; you have a very tough time in those countries for a long time. With those things in place then I’ve got a competitive climate. All this depends on the number of players overall and the competitiveness on your products. I... Mark Sue – RBC Capital Markets: So...
Johan Wibergh
I think we are showed history wise that we enable you in the capacity phases to really provide good profitability. And I don’t see what will be different going forward. And... Mark Sue – RBC Capital Markets: So...
Hans Vestberg
I think you can see that if you look on the profit or the values vendors in the market. That it is really big guys that is being out of profit and some other guys are really struggling. And some of our other competitors have a tough time to really keep this up. Mark Sue – RBC Capital Markets: So with that being said is the strategy still to just get bigger, get bigger and do these modernization projects? Or is there something that you can do differently? For example to improve your financial profile as opposed to saying it’s the bigger you are the better you are?
Hans Vestberg
We are doing many things here related to for instance capacity upgrades and hardware. But also local software. And we provide twice tier software releases that goes out that provides new features. There’s a lot of mandatory software but there’s a big amount of optional software features that gives you benefit in the network. And of course with that hardware in place then we work a lot on selling out the add-on software, the optional software features. And then that enabling more hardware upgrade. Johan Wibergh That’s helpful. Thank you. Good luck, gentlemen.
Jan Frykhammar
One more comment from me then. If we refer back to the LTE objective that we have in the company which is done between 2010 and 2013, we should show a bottom line improvement between 5% and 15%. Of course in that equation, all the segments need to contribute in that value. And as Johan said that is very much in the network segment to make business on the install base to a large degree software base.
Hans Vestberg
I can also find it if you what as a final comment of course if you – what we’ve been saying over the last couple quarters and what we talked about the Capital Markets Day in May is of course that we had some pieces of our portfolio that is under-performing when it comes to profitability in that our investment area, such as our IP portfolio. And we made substantial investments and then for the coming years our plan of course is to harvest on that and that again contribute and also nicely to the overall profitable segment. Mark Sue – RBC Capital Markets: Thank you, Gentlemen.
Operator
Andrew Gartner from Barclay’s Capital is online with a question. Andrew Gartner – Barclays Capital: Thanks very much. You mentioned slowing in the U.S. primarily around CDMA and then followed it up saying you’re not seeing a macro impact. Other than the industry you’ve also mentioned slowing around the major merger activity that’s happening in the market. I’m just wondering whether you can indicate whether you’ve seen any slowing in spending around that as well.
Hans Vestberg
I think I mentioned that. There are several factors in North American market. One is, of course, operator conservation. That, of course, is putting some caution into the market. But also the 3G to 4G shift that is happening as well as the CDMA that is now spending a little bit less than have done at the moment. So there are several different factors in North America. Andrew Gartner – Barclays Capital: Okay and also as we look to next year and considering the slide that Jan put up around the business mix, is there any reason to think that modernization and services and the business mix wouldn’t continue to shift into the direction that we’ve seen in the third quarter and that you’re alluding – that it’s going to go in the fourth quarter?
Hans Vestberg
I think it’s a little too early to say that and of course it depends a lot about what’s happen in the marketplace and we continue to see mobile broadband continue to grow new type of devices, more usage, more application use in mobile broadband. Of course, we want to take capacity upgrades as well on the networks. But as Johan said there’s always a phase right now where the technology have evolved so fast and we see a modernization on networks that we have not seen in mobile networks because mobile networks has only been around 20 years and they were all geared for voice and now it’s for data. So of course we’re going to see some coverage but that doesn’t take away we have capacity as well. The final mix we’re going to see when we come into next year. Andrew Gartner – Barclays Capital: Thank you.
Operator
Zahid Hussein from Citigroup is online with a question. Zahid Hussein – Citigroup: Hi, thanks very much. And just a question on SSR. I know it’s scheduled to be shipping on Q4. Can you give us any commentary in terms of what carriers have said so far about it? I know you guys are very excited about the product and the road map into 2012. And really the second one on Sony Ericsson, obviously there’s been a lot of press speculation lately that Sony could be interested in acquiring that off you. It doesn’t appear to be core to your business. Can you just give us some comments around that? Thanks.
Johan Wibergh
This is Johan regarding the SSR question. So I mean we are shaping SSR to the first customers in Q4 and it’s going according to plan. We’re very happy with the product. It has shown to be very competitive. We will process the unit they can offer. And we’re looking forward to that. I cannot disclose which customers that we are shipping it to first but it’s looking good and it’s on schedule. Zahid Hussein – Citigroup: Did you say customer or customers?
Johan Wibergh
Customers. There will be several customers. Don’t worry.
Hans Vestberg
And when it comes to Sony Ericsson there have been rumors and speculations lately but also before. And it’s not unusual that there are rumors and speculation around Ericsson in different areas. We never comment on any speculation or rumors. And of course if we would have any information that is significant if it’s a new deal or if we are acquiring companies or whatever we would go to everyone and inform at the same time. So I don’t have any comment on those speculation rumors as we always have.
Zahid Hussein
Is it core to the business?
Hans Vestberg
If we go back to what we have said before we have been in the 10 years we have done a remarkable transformation and of course also two – I’d say four quarters of losses in ‘07 and ‘08. We have come back and making profit right now. I think they are doing well and we are supporting them.
Zahid Hussein
Thanks.
Operator
Kai F. Korschelt from Deutsche Bank is online with a question. Kai F. Korschelt – Deutsche Bank: Yes. Good afternoon. Thanks for taking my question. The first one is really on the gross margin delta where on adjusted basis I think there was about 280 basis point impact Q3 versus Q2. I’m just wondering if you could maybe give a bit more color on the individual components, CDMA Europe, from a relative perspective at least. And my second question then was really on these RBS 6000 deployments. And you do talk about obviously HSPA and LTE down the line. For those markets where you already deploy RBS 6000 now or today, isn’t HSPA or LTE then really more of a high margin upgrade pass because you then simply add a few more line costs and software. Thank you.
Jan Frykhammar
I’ll start with the gross margin then. I think that we have actually tried to give you a lot of color with regards to the gross margin in the presentation. So I think first of all when we talked about business mix in the business mix there is an element of lower capacity sales. And if you go into the numbers you can see that the networks business for instance in North America has shown a sequential decline in the quarter. We also have other important markets that are holding up well like Japan. But we can also see now that in some of these markets there is also coming a bit of a coverage phase. And if you take Korea as an example, there we have one, two important LTE contracts with SK Telecom and the U-Plus. So that business will change now to more coverage as well. So the main – these impacts is really what we mean by business mix. So I think that is the main reason. You can actually look in the report and in the regional commands and you can make those conclusions based on that. And then Johan?
Johan Wibergh
On the RBS 6000 it has been deployed to more than 230 customers in all continents. So it is going into all our customers network more or less. And it is as you said. I mean that is part of the reason why it’s so important to get the footprint. When you have that in place then of course all the ad expansion as you say with more cards whether it’s radios or baseband or software it’s normal then with a best-of-price point. You have to of course remember that the initial contract may not only be – I mean it might be over substantial time. It might be a year or so the total project. So exactly when those things kicks on it depends a little bit project or customer-by-customer. But the concept you mention is exactly right.
Ase Lindskog
Operator, this is Ase Lindskog. We’re ready to take one final question.
Operator
The last question comes from Edward Snyder from Charter Equity Research. Ed Snyder – Charter Equity Research: Thanks for squeezing me in there. Couple ones. Used to say a couple years ago that the Handset business was strategically important to winning networks and vice versa. But if you look at the landscape today, none of your competitors in the infrastructure have handsets and almost all the handset OEMs don’t have infrastructure anymore. Has the world changed to the point where you don’t need it longer? Do you think it’s strategic? The question has been asked, but you answered a margin question when he asked that. I’m trying to get feel for is it really essential to have handsets? And then secondly, it’s no secret that there’s a banking crisis brewing in Europe in the entire Euro zone. That usually involves high-ticket, big-dollar items. Do you see – how do you feel like that’s going to it develop? And will it have an impact on vendor financing? Or are you prepared to have a change in philosophy in vendor financing if it does develop that way? Thanks.
Hans Vestberg
Going back to Sony Ericsson. We have said before there has been in the beginning cycle of 10 years that we have been in Sony Ericsson correlation between the networks and the handset. And there still. They’re the same customers. The same customers are buying handsets that are buying network infrastructure. So Jan?
Jan Frykhammar
Yeah, so on the vendor financing side, first and foremost we have decided to keep a strong balance sheet and be cash rich. And that is, of course, one of the reasons is that we should be able to continue to also in tougher times implement and execute on our business strategy. If we look at the last crisis, if I may say so in 2008 and ‘09, we did – we had uptick on customer financing then. And we had the expert credit agency both in Sweden and in Canada that supported a lot on take risk with our customers. And what you see on our own balance sheet, customer financing is the receiver risk that we take. So we are in constant and close dialogue with the expert credit agencies, and they are I’m sure that they are prepared to support us and our customers also this time. So it is important for us, and what we learned from the last crisis was that just an uptick in customer financing requests. Edward Snyder – Charter Equity Research: Thank you.
Ase Lindskog
Thank you very much. Hans, Jan and Johan, and I would like to remind you all about our Capital Markets Day taking place here in Shyster, Stockholm on November 9. So by this time we’ll conclude our call, and I wish you all a good day. Thank you very much for listening.
Operator
Thank you ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect.