Telefonaktiebolaget LM Ericsson (ERIC) 2012 Q1 法說會逐字稿

Good morning, everyone.

And a warm welcome to this morning's presentation of Ericsson's first-quarter report.

A special welcome to those of you that are joining us via webcast.

Once we get the speakers also in the room, we will start the presentation.

And we will, as normally, start with a presentation by Ericsson's CEO, Hans Vestberg, followed by our CFO, Jan Frykhammar, followed by an open Q&A.

So with that, Hans, why don't you start?

Thank you.

Good morning.

Let me see if I find my technical devices.

Good morning.

Let me start by talking a little bit before I dig into the figures on the key strategic developments in the quarter and a couple of things that were done, some unknown, of course.

But it's still important to highlight them because they are very much the things that we are focusing in the Company.

The first one is around the portfolio momentum.

We have talked for quite awhile how important we think that mobile broadband is and our service portfolio.

We can only conclude that the continuation of data growth and new additions of subscribers and new types of smartphones are continuing.

And that of course is fueling the mobile broadband story going forward.

Services, you're going to see in the figures later on, is continuing a good momentum, very much driven again by both a lot of deployment on networks in the world, but also the possibility that we have with our portfolio to address efficiencies, everything from managers to system integrations to support operators in the transformations.

We in the second -- in the first quarter also announced as or now have reported our market share gain in 2011 in mobile networks.

We went from 32% to 38%.

And we think that is a very big achievement that we have created that market share right now.

We also in this quarter took a step in our strategy in Support Solutions, where we -- that was the former multimedia.

We're just now very focused on OSS/BSS, where the acquisition on Telcordia came into the quarter and plays a very vital role in it.

But it's also TV, media and M-commerce in that area.

And M-commerce we talked a lot about in Barcelona, where we now are coming out with our M-Wallet, where we believe we can have a very attractive platform.

And we're starting deploying that with MTN, Africa's biggest operator, in order to get that mobile wallet out.

Then on the joint ventures, we have had a lot of activities in the quarter on Sony Ericsson.

We concluded the transaction and sold our shares, which you see in the figures as well, which created a profit of SEK7.7b.

At the same time, ST-Ericsson, we have been working with the strategy.

And early or late Monday afternoon, ST-Ericsson announced the next step on the strategy, where we are focusing in the Company, leaving processors and moving that over to the other parent company, STMicroelectronics taking over that, and also a second step on restructuring given that the Company now are coming to another level.

That means that we're going to be focusing on modems and ModAps in ST-Ericsson, which is very important, an area where we believe we can be competitive.

It's not going to be a quick fix, as I said before.

But this is a good step forward that we very much support.

Let's dig into the first quarter, SEK51b in sales, negative growth of 4%, sequentially from the fourth quarter down 20%, which is the seasonal effect that we usually have.

Mobile broadband continued very well.

We saw North America, Korea, Japan, both on LTE and HSPA continuing very well.

But we also see Europe being still weak, not deteriorating or anything like that, basically same.

And then we have the specialties, I would say, with India, which has now for a couple of quarters not had any investments at all and still on a very low pace on investment in networks.

And Russia, there we have had a cycle of 3G investment that is now coming to a much slower pace.

I will come back to services, growing 18% in the quarter.

And Telcordia was concluded in this quarter, added some SEK0.9b in sales.

Just so we know, we split that revenue 50/50 between Services and Support Solutions.

That's how we split the revenue.

Profitability, SEK8.8b in net income, of course coming a lot from the profits on the sale of the shares of Sony Ericsson, but also coming from the operations of Ericsson.

And then we have a negative effect from ST-Ericsson.

That leads our EPS non-IFRS at SEK3.14 compared to SEK1.61 last year, again very much from the Sony Ericsson gain.

If we take that away, it's SEK0.77.

So let's look at the networks, starting with the Network segment, and 18% down in sales year over year.

Here one needs to remember that, of course, first half last year Networks was strong.

We have a decline in CDMA that continues.

We talked about this starting in the third quarter, coming into the fourth quarter.

40% decline in CDMA business in the transition to LTE as we see right now.

If you look sequentially, going from the fourth quarter into the first quarter on Networks, basically normal seasonality in between them.

So it's more that the trends and the volumes from the second half of last year is prevailing into the first quarter.

We talked both in the third and the fourth quarter about cautious operators and that they will be cautious in this macroeconomic environment.

And they will be cautious on spending and infrastructure.

If we now conclude the first quarter, we can see that we're not seeing any deteriorations.

It's very much focused on Europe.

We see other regions that doesn't have any effect of it so far up in the first quarter.

Then we have the regions, like North Africa and Middle East, where there are countries with political unrest, which for obvious reasons are not investing very much.

And it will take time until they come back.

So I think those are the two macro-level statements.

So it's more focused on Europe than anything else at the moment.

If we look at the regions, I talked about North America.

You can see up here that North America had a little bit unusual movement.

This is going from Q4 to Q1, going up in North America.

And for the ones following us, remember why, because we had two things happening in North America.

We had the planned merger that did not happen.

And of course that means that we have seen some investments coming from at least one of those operators.

The other was CDMA decline, and that continues.

So one of them went away and you can see that we're growing again there.

And here, you can see India that is just coming down dramatically when it comes to networks, volumes.

Due to the uncertainness in India, we don't see much investment.

This is the region Northeast Europe and Central Asia.

And that's going down as well.

And that's again what I mentioned about Russia.

EBITA margins year over year, here we see a clear decline from 20% to 9%.

This is the prevailing mix we have, much more coverage projects right now in Networks and less of capacity.

The European modernization is in here as we speak right now when it comes to the margin impact.

We have them in full swing in fourth quarter.

That means of course we have them in full swing in the first quarter as well.

We had a little bit better as we -- the capacity upgrades is coming in certain market at the same time.

So it's a little bit of both there.

But still the mix prevails.

We work with a lot with the mitigating factors here to see that we improve.

But, as we said before, short term, this mix will continue for Networks.

And an addition in the quarter we talked about was of course that we acquired BelAir.

That is adding to our smaller network or HetNet story, smaller sales story of WiFi capability, which we think is a very important addition.

Services, here is 18% growth basically across all different product and service portfolios growing.

Network Rollouts growing 18%, Professional Services growing 18%, Managed Services growing 16%.

Notable is of course that consulting and system integration is growing very well for us.

And that is an area where OSS/BSS and all the transformation of IT is happening.

There we have a very good position and we're growing well right now.

EBITA margins, 7% maintained.

Professional Services going up year over year.

And, in fairness, we are more restructuring here compared to last year.

So the underlying margin is clearly better.

We had 2% impact of restructuring in Global Services in the quarter in -- both in Global and Professional Services.

And we had 1% last year.

So here we see a trend going up on margin, despite that we have a heavy impact on Network Rollout, of course, where the margins are not good, given that we have a high level of activity on modernization and coverage projects.

Professional Services, as you can see on the black arrow there, fairly stable around 15%.

Support Solutions up 33% in sales.

If we exclude Telcordia, it's up 12% in the quarter, meaning that we see a good development, especially in TV, multimedia brokering or the IPX business has fueled that growth.

The Telcordia integration started in this quarter is going according to plan.

As you can see, OSS sales were flat, meaning that we are basically on the same level as Telcordia was for one year ago when we now have had them in for part of this quarter.

EBITA margins, significant change from minus 7% in the EBITA margins to 8%.

I think there are two things, the volume, as I said before, we have not a gross margin problem in this business; it's a volume problem.

And as you see, the volumes comes up then it falls down to the bottom line, as well as the new management has been working a lot with the efficiency work as well.

So -- but here we're on a journey.

It's just started, I have to say.

Regions, I will quickly go through the regions.

Notably I talked about North America.

Latin America, 20% up.

Really good growth in Latin America, basically driven by network rollout, system integration, service business.

The other highlight I would like to take out is really in Southeast Asia and Oceania, growing 9%.

Almost all last year was down.

Now it's turning around.

Here we see Australia being an important piece of the growth and the LTE deployment we have there.

In the other area, region other, which is not the region then, here we see growth of 9%.

The IPR business is very stable.

It's a stable development there.

The main contributor to the growth here is the IPX business, the content settlement.

We have brought that out from the regions, the IPX.

And that's sitting in the other column.

So that's the main part of the growth here.

Good.

I leave the pen and I leave the gadget.

And I give Mr.

Frykhammar the floor.

Thank you, Hans.

Good morning.

Let me then go through some of the highlights on the P&L.

So I think a lot of the discussions today will be around the gross margin.

We had about 3 percentage points improvement compared to the fourth quarter and a significant drop if we compare with Q1 of last year.

If we start with the sequential improvement then, we come back to the discussion we had several times last year.

And that is typically, if you look historically, our fourth quarter has the lowest margin.

So that's, if you may say, a seasonality effect.

That has then contributed positively in this quarter.

We also had some positive impact for normal broadband capacity investments in the quarter.

And compared to the fourth quarter, we also had a lower services share.

So those are the main impacts.

The impact of the network modernization projects is in the margin.

We said all the time that the projects are in full swing.

And they were in full swing in the fourth quarter.

So we have a similar impact in the first quarter as in the fourth quarter.

Underlying business mix is there.

We have more of coverage projects.

This business mix will prevail short term.

You see it also visible in the inventory.

That's mostly project-related inventory.

So -- and this is of course high activity in the project I mentioned, related to the business mix there.

I think that if you compare to first quarter of last year, a lot has been said.

Network modernization had basically not started first quarter of last year.

We had full impact in the fourth quarter.

So that's one clear impact.

The other impact compared to Q1 of last year is services.

And then we had this business mix change that hit us in the second half of 2011.

Finally, also if you read the report carefully, you see that restructuring charges on cost of sales is actually higher in this quarter.

And that also has an impact in the comparisons year over year.

I'm sure we'll come back to the gross margins.

On the modernization projects, again it is important for us with footprint.

Hans has mentioned the strong position we have in market share, 38%.

We took this decision in 2010 to try to strengthen our position in Europe and we have delivered upon that.

Now we will have to live with the financial impact of that for the duration of these projects.

And in average they will be with us for 18 to 24 months.

So again, if we come back to that some of the projects were started in Q1 of last year, some more were started in Q2, even more in Q3.

And all projects were started in Q4.

And then we will have to model the impact from this as we go forward.

Restructuring charges of SEK600m in the quarter, slightly more than last year.

The outlook for the year is -- continues to be SEK4b.

We have now worked through all the activities that we have around efficiency in the Company.

And we can now conclude that these activities are being executed as we speak.

And they will be more evenly distributed throughout the year.

So nothing dramatic in terms of explanation of the gross margin is really a message in this slide.

If we then look at operating expenses, good progress on efficiency reduction here or cost reduction here.

We have the impact of the consolidation of Telcordia in Q1 of this year.

Obviously, for obvious reasons, Telcordia was not in the number Q1 of last year.

R&D then, as we said in Q4, our technology leadership is one of the cornerstones of our strategy.

We have -- we decided last year to have a bit of an extra investment in certain areas, TDLT, the CDMA baseband on the RBS6000, and also to secure the IP strategy with the SSR.

That meant that we ended the year last year with a high run rate.

And we will now work through this run rate throughout the year.

And it will be a gradual reduction, so no change compared to the messages as in the fourth quarter here.

The range, SEK29b to SEK31b, as I said in Q4, it is a bit of a challenge in that range.

But the range is still here with us for obvious reasons.

Then sales, general and administration, SG&A expenses, down SEK200m year over year.

And here we see some good impact of efficiencies already in the first quarter.

And this is -- typical examples that we are obviously executing in the companies is using now much more of telepresence for meetings, reducing travel expenses, overall work-smarter programs that is gaining good traction in the Company, and also thanks to all employees for really executing on this important strategy.

Operating margin, as Hans mentioned, 5.5% then if we exclude the impact of the JVs and if we also exclude the impact of this gain of the sales of Sony Ericsson.

And this is -- the explanation is sitting in lower volume and gross margin in networks.

ST-Ericsson, new strategic direction was announced a few days ago.

It typically has four different pillars.

The first one is we want the Company now to focus all their efforts on modems and ModAps.

And we also then announced a partnership with STMicro for development of application processors.

We also -- as part of this we will then carry out consolidation of R&D sites and efficiency or effectiveness work in R&D to secure that we really get products out in time.

And then overall, the result of all of these activities should lead to a lowered breakeven point.

But it's not only cost here; it's also gross margin and top line that is needed for this equation to tie.

The share, it actually said SEK1.3b on your first slide.

It is SEK1.4b.

The -- we also have a one-time impact in this SEK1.4b, and that's -- our share is SEK300m of that.

And that is some capitalized development expenses that we now have impaired because of the product decisions related to this new strategic decision, so a one-time impact of SEK300m in this SEK1.4b.

This is then an operating loss of minus $297m.

And, as Hans said, this is far from a number that we are satisfied with.

We're working hard to reduce the breakeven point.

It will take some time.

And I think that we have, if you're listening into the calls that both Didier and Carlo had with investors the other day, they will in detail explain how they are going to reduce the breakeven point.

Balance sheet.

Collections, good collections in the quarter.

DSO days of 104.

That's a volume impact in those numbers.

But overall the message is that with accounts receivables we did good work in the first quarter.

If we look at the inventory, two important stories here.

One is if we look at the inbound inventory, meaning the inventory that we procure of components to the factories, that's been going down, reflecting then the lower volumes in networks.

Once the inventory tied up in projects towards customers out in our regions has been going down as well, but not as much.

And this is reflecting the project mix or the business mix, as we have discussed so many times.

So this means then that the main focus for us during this year is really around executing the projects faster and with the right quality so that we can bill.

And so the main focus in terms of improving the working capital throughout the year is really in project execution.

Finally, accounts payable days, up a few days compared to Q4.

But if we look at the trend for last year, we're operating now on slightly lower levels.

Also two reason for that.

First and foremost, the procurement of components are coming down.

And it's much more services.

And when you do services, you work with small service companies.

And there we have not as long payable days as we have with the big suppliers.

Cash flow, so a net cash that went down SEK2.4b in the quarter, so from SEK39.5b to SEK37.1b.

Still a very strong net cash position.

You know us by now that this is very important for us to keep a very strong net cash position.

We had cash flow from operations of SEK0.7b.

If we exclude impact of restructuring it's SEK1.1b.

The main reason for the cash flow not to be even better, considering the good collections, is the project-related inventory.

Cash conversion of 17%.

The target of more than 70% is a full-year target.

And as Hans and I have said many times, let's look at these numbers on a full-year basis.

We also had a net impact of some investments and some divestments.

And you can see there that we have now minus SEK1.7b net-net of the divestment of Sony Ericsson and acquisition of Telcordia, BelAir, and also the increased share of LG-Ericsson.

So net-net minus SEK1.7b.

We also have, as we always have in the first quarter, we did a capitalization of the pension, Swedish pension trust of SEK1b.

That's something that we do every year in the first quarter.

And last year I think the number was basically the same, perhaps SEK1.1b then.

The dividend is there and then the record day for dividend payment May 8.

Main message here, cash conversion is in focus.

Project execution is in focus.

We continue to work hard and securing a strong net cash position.

And I think this is your slide.

Yes, I think it's a summary slide from both of us.

I think that when it comes to what we're focusing, it's of course a strategic execution to create the Company that we want to be, of course very much driven on services and software.

The areas that we have chosen, mobile broadband, services and OSS/BSS, we are definitely going for being number one in those areas.

And we are number one clearly in mobile broadband and mobile infrastructure and services.

And OSS and BSS, we are creating a leadership position there.

It's a little bit harder to measure.

But that are the three areas that we're measuring.

And as we see from 2011, we distant our competition there.

And that's very important for us to see that work.

We continue with the cost and efficiency.

We see the industry having a tough time.

That means that we increase even harder in order to take even stronger grip on our leadership in this industry.

This is an extremely important industry where telecoms and ICT will play a wider role long term in all our society.

And Ericsson is the number one here.

And we are continuing very focused to see that that continues to be there.

And we build it on two pillars, technology leadership and service leadership, that we have been investing in, in both in technology leadership and service leadership because those -- if we are doing that well, we will be continuing to be able to keep our number one position in this industry.

That was the summary of the first quarter and a little bit more.

Okay.

That brings us to the Q&A session.

And, as always, we ask you to wait for a microphone since we have the webcast.

So we start here in front.

Good morning.

Daniel Djurberg from Nordea.

I have a question when it comes to cash flow, so I guess it's to Jan.

When it comes to other adjustments of SEK7b negative, if you can explain that.

Now you have to repeat the question.

In the cash flow, you had an adjustment of minus SEK7b.

I can come back to that later if you would like to --?

Yes, I don't --.

Okay.

And another question when it comes to the network modernization, it was in full swing in Q4 and in Q1, as you stated.

Have you so far seen any gradual decrease, i.e.

some projects being finalized?

And when should we expect to see a gradual decrease on the P&L from the network modernization?

No, I think that -- so, do you want me to answer?

Okay.

Regarding gross margin, Jan, I guess.

Yes, no, I understand.

So I think that the modernization projects, the impact of the modernization projects we will live with throughout this year.

The duration, average duration of the projects is 18 to 24 months.

And as I said before, all projects that we won were in full swing in Q4.

And that is still the case.

Then if you do the math, of course projects that were started in Q1 then, they -- and had 18 months, they will then be disappearing here in -- during the third quarter, right?

But I think the most important thing is -- the comment from me there is that we will have this impact during this year.

Same comment as well as on mitigating actions.

The more we execute these complex projects, the better we will be at it so the learning curve improves.

And also the advantage of these projects is, of course, that we can learn both execution and we can be better on procurement and so forth.

So those mitigating actions are still there.

But they will be with us throughout this year.

Okay.

May I have another question when it comes to Support Solutions on the OSS/BSS?

It was quite a soft quarter.

And I think I recall that in Q4 you were quite optimistic on new projects within the OSS/BSS area.

If you could say what's happened on the outlook.

Okay.

Yes, okay.

On the OSS side we basically -- we got Telcordia in the middle of the quarter.

And the only thing we have is, of course, the pro forma from last year.

So that's why.

And what we can see from that pro forma is basically we're on the same level of sales.

And so we have just kept them over.

The integration goes well.

Now is of course putting this in the hands of all the regions that we have and push it out.

So I think it's too early to say something about that.

On the BSS side, it is a little bit different story because as India is quite a vital part for BSS, and for the ones that have a good memory, which I have sometimes, the first half year last year was strong in India and investment in BSS.

Now it's very slow due to the circumstances.

So there is no lost momentum or something.

I see rather an increased momentum, especially as we're now building new applications on top of our [charging] system, like the M-Wallet and things like that, which is creating a very good sort of interest for it.

Okay.

Do we have anymore questions?

Yes, up on the stairs.

Good morning.

Mats Nystrom, SEB Enskilda.

Two quick questions.

Firstly, sorry, I came in a little bit late.

I know, Hans, you elaborated on North America.

But could you just clarify to me or us whether this strong HSPA sales, capacity sales -- I know one-off is not -- definitely not the right word.

But is this a sign of some operators accelerating their investments again?

And would you foresee this type of investments in Q2, Q3 as well?

And secondly, on gross margin, you didn't elaborate on potential impact from Telcordia.

Maybe I'm totally out in the blue there.

But was there a meaningful impact of Telcordia consolidation on gross margin?

No, it was no meaningful impact on the gross margin for Telcordia.

It's SEK900m.

So it's a small piece of it anyhow.

So no, there are no significant impacts on that.

If we take North America then again, the second half of last year we started to tell you about that.

We're going to see some slowdown.

One was because of consolidation.

Another was from the shift.

And a third one, I would say, was they had been very heavy on investment for awhile, the big operators in North America.

Some of those factors has gone away.

The merger did not happen.

So of course that means that at least some of the operators that was planning are now investing.

And they did not invest especially much in the second half from a revenue point of view from us.

So it was very low in the second half.

The second part is, of course, the shift from CDMA to LTE.

That is continuing, to be clear, 40% down on CDMA in the first quarter.

And we don't see that will come back.

CDMA may phase out.

It's still the case, or I would say much better case than when we acquired Nortel what we have seen.

It were -- it continued longer.

So those two things are -- then of course we also have an increase of some operators that are in the midst of a transformation, that are transforming the networks that are investing more right now than they have done before.

Let's see.

The underlying factors in North America are still good.

I don't see the cautious operators there as I have been talking about before.

They see new handsets coming out, new users on the network.

We saw the posting of the result of some of the operators yesterday night from North America and they seemed to do pretty well.

Thanks a lot.

Yes.

Please continue, yes.

Lars Soderfjell, Alandsbanken.

You talked about the R&D guidance, Jan, maintaining it at SEK29b to SEK31b.

And you said it's going to be a challenge.

Could you give some more clarity about the profile over the year and what factors that will impact R&D going forward or in specific projects that you're finalizing right now and so on?

It's always projects that we are finalizing in R&D.

But in more specific terms then part of what we are obviously doing in R&D is that in the second half of last year we started a project on reducing consultants in R&D.

And we recruited people second half of last year.

And that project then is being executed as we speak.

So that's why I say it's a step-wise approach because people need to be up to speed and so forth.

But the aim is that we are going to reduce consultants working for us in R&D with own staff.

And the staff investment was made last year.

And now it's a matter of shifting out here.

We will take it gradual.

That's why I said the run rate [is strong].

So would it be fair to assume that R&D relative to sales would come down quite sharply during the second half of the year?

Well it depends on sales.

Obviously.

That was a very good question.

But, again, as Jan said, of course technology leadership is important for us.

We made extra investment last year and we think that was absolutely right.

Now we're in transition, and that transition we do cautious.

We are moving to more own headcount, which is important.

And that investment is done.

Now it's just phase out of the others.

There are other activities as well, but those are the main.

Okay.

But what Jan said is we remain committed to the target that we came out, if we missed to say that.

Absolutely.

I was not -- I was just trying to make sure that -- when it comes to operating expense reductions in R&D, this is -- R&D as -- as goes for all functions in the Company, there are certain things we are driving that are common for one, whether you work in service delivery, in the factories, in my organization as well, of course, and in R&D.

And those are the travel smarter, work more effectively and so forth.

I'm sure that all companies are focusing on those things.

But then there are some specific programs.

And then the consultancy reduction there is one example of that.

We have another question?

Yes.

Hakan Wranne, Swedbank, here.

I have a question on ST-Ericsson and the restructuring announcement the other day here.

And they said that the new breakeven target is at $600m in quarterly sales.

Currently it's running below half that.

So my question is what will make the top line come up that dramatically, even as you take out a big chunk of the business to STM?

And also if you could explain how ST-Ericsson is strategically important for Ericsson going forward.

Should I take the revenue, and you can take the strategic question?

Yes.

Please speak.

So as I said on my slide there, it's very important.

We are -- this is today basically an R&D company focusing on and will be focusing on securing leadership in modems as well as in ModAps.

And of course being basically, with these top-line levels, an R&D company, we cannot reduce breakeven levels to make breakeven on these $250m, $260m of revenue.

That's not possible.

So of course there is a top-line element related to new products being shipped.

And we have successes with some phones now in the market, as you -- if you follow media, right?

The other impact is, of course, on gross margin.

And the third impact is on OpEx.

So all three of these things needs to materialize for this breakeven point to be delivered.

First of all we have to be clear we are not happy with the development of ST-Ericsson.

And it's not been a tremendously good development.

That's clear.

And we are now taking the next step in this strategy.

You see that we are improving.

So I think that's the main focus for me and the Ericsson side right now to see that whatever Jan is talking about right now, the top line, the quality of the products, and we're getting on modems and ModAps with these customers and smartphones, that's the most important to have.

Strategically-wise, I can only go back to what we said when we initiated this some three, four years ago.

The connection between the networks and the modems have, of course, a relevance when it comes to what we are doing in networks everyday.

Whatever technology we're coming out there of course need to be supported by chipsets or modems.

And that is a strategic intent.

However, the main focus right now is to see that we recover this with the strategic changes we're doing.

And just to follow up on that, on funding, was there any funding to ST-Ericsson in Q1?

And how much do you expect to have to fund them with going forward until they reach that breakeven point?

Yes, there was additional funding to ST-Ericsson in Q1.

We can take the details.

I'm sure the details is in the report as well.

The -- so what we are working on of course, together with our partner STMicro, is to work -- and the JV, is of course to find all different means of funding the JV.

Like all companies, they need to focus very much on working capital improvements and so forth.

That's not going to be sufficient.

That's obvious with the current loss they have.

And therefore we have this short-term parent company facility in place.

And I think it's reasonable to believe that we will continue to support the Company with that facility for the foreseeable future.

And if we change that we will of course communicate that to you.

But from right now, of course, the only way we have to fund the Company is by means of that parent company.

But on the other hand, all the activities doing right now should lead to they need less funding.

That's what -- if you look at the strategic intent we're doing right now and the change we're doing, that should of course require less funding.

So you're onto the right question.

We are on the same page.

Okay.

Yes, [Ivan] comes running with a microphone.

Good morning.

Helena Nordman-Knutsom from Pareto Ohman.

Just a question about Global Services.

What about the business mix going forward?

If we look at the balance sheet and the inventory, project inventories and so on, how should we look on that?

I think that's -- I think it's a very good question.

Right now we're basically at crossover growth in all areas.

What one can say is of course the network rollout will continue given how much we have.

So of course that mix will be there in the whole Global Services.

Then, as said, we have good momentum in CSI, Consulting System Integration and Managed Service at the same time, due to efficiency and transformations.

But I think the only thing I really would say is that network rollout will keep in.

The rest will have so much projects.

And that will not go away in the short term, and so that is important.

But overall, the momentum that we saw come in the second half, remember where we were standing here last year and the only question was will ever services grow again, I think that we said already then we will have different phases between technology and services.

And I think this only shows the strength of Ericsson that now we have 18% up on services and we're 18% down in networks.

And I would say -- if I was standing here one year ago, it would be totally opposite.

And of course that's how we work and that's why technology leadership and service leadership is becoming so important for us.

So -- but network rollout will continue.

And the good momentum in the other areas will have -- we see good funnel.

We see good tractions with the customers.

So -- and on top of that, I have to say the service team is working extremely much with efficiency.

We talk about efficiency on a high level.

They do it every day.

They offshore, inshore all the time to our big centers.

If you look at the headcount, it's going up because we are building up our global centers, taking out local competences.

And they do that every day.

And sometimes you don't get that feeling when we explain what we're doing.

But tremendous efficiency work every day.

And that you can see in the P&L, adding 18% and continuing with the same profitability and even improve.

Yes.

We have two more questions here in front.

Start in the back?

Thank you very much.

Martin Nilsson from Handelsbanken.

Returning to networks in Europe, might only be me, but I'm a bit puzzled.

At one hand you mentioned that network modernization projects are running at some very high activity levels and pretty much all of the contracts you have are up and running.

And at the second case you talk about European operators being rather cautious in their investments and sales are down quite a bit in euro for networks.

And so the combination of very high activity and sales drop doesn't strike me as completely obvious.

So could you share a few secs on that?

Yes.

It's a good question.

We did probably not explain well.

First of all, not all operators are doing network modernization in Europe.

That's one.

So that of course explains that we see.

If you take the South European countries that we talked about before, in some of those countries there are no modernizations, but there are no investments either.

The other is of course the modernization projects, as we have said before, are the most competitive projects because then it's when we're fighting for the installed base.

That means that the revenue from them are low, and that's why you have a low gross margin.

So in total that means even though the activity level is very high, revenue point of view it's low because modernization is not bringing revenue that is high enough because of the pressure.

And secondly, the other markets where you're not doing modernization, they're not investing.

The combination of that is making a fairly bleak outlook or a bleak business in Europe.

That is excluding services because there we still have growth.

So it's more the networks business where we see cautiousness.

Okay.

We have time for one more question.

We have time for one more question.

So we go to the front, yes.

On the last bit there, I was just wondering -- Sven Grundberg from Dow Jones.

I was wondering, did you say there was a bleak outlook for Europe or a bleak business?

I said we had a bleak -- we have a bleak business in Europe because of those two elements.

And then, as Jan said, if we talk at our own business going forward, we will have that mix with modernization in Europe.

So it's nothing different.

If I come back to the macro discussion, if that's what you're asking for, the only thing I can conclude is that we see the same pattern in -- from the third quarter, fourth quarter and the first quarter in Europe.

It has not deteriorated.

That's not getting worse in Europe.

So it's the same.