Telefonaktiebolaget LM Ericsson (ERIC) 2013 Q1 法說會逐字稿

Welcome to the Ericsson's analyst and media conference call for their first quarter report.

To view visual aids for this call, please log on to www.ericsson.com/press or www.ericsson.com/investors.

(Operator Instructions)

As a reminder, replay will be available one hour after today's conference.

Helena Norrman will now open the call.

Hello, all, and welcome to this conference call for the presentation of Ericsson's first quarter results 2013.

I'm here today together with our CEO, Hans Vestberg; CFO, Jan Frykhammar; and the three Heads of our Business segments -- Magnus Mandersson for Global Services; Johan Wibergh for Networks; and Per Borgklint for Support Solutions.

In a second, they will be making a presentation and then open for Q&A.

But before that, I would like to make the usual reminder that we, during the call today, 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 differ materially due to factors mentioned in today's press release discussed in this conference call.

I also encourage you to read about these risks and uncertainties in our earnings report, as well as in our annual report.

And with that, Hans, why don't you start by taking us through today's report?

Thank you, Helena.

I will be fairly brief.

Some of you probably listened to the press conference, but I will go over the highlights.

Just try to summarize the key developments in the quarter.

And this has been a quarter with a lot of events, some at the Mobile World Congress took place in this quarter, the Consumer Electronics Show, as well, and many of us here on the Executive team has been touring the world and meeting customers.

And a couple of things you can highlight is, of course, we see a continuation of, also the focus on, how this industry we are developing, in our terms, a networked society.

More and more operators are subscribing that mobility and broadband will have a big impact on our society, not only in the telecom sector as such, for other industries.

And I think that is, of course, long-term, something very fundamental and very important for a company like Ericsson, which are number one in this field.

If then look, of course, when comes to the date consumption, that is continuing.

On our dialogues with our customers, it's very much about data.

And the majority of the data will be video.

Of course, that drives the demand for superior performance on the data networks, the mobile networks, everything from the radio access to the packet core to the routers, and combining that.

But it also puts some requirements on new OSS/BSS, and we are engaged in more discussions in that area than before, and I think that our portfolio there is proving to be very relevant.

A couple of other things that were important, especially in Barcelona, a lot of talk about SDN, software defined networks, but also cloud discussions and machine-to-machine, as operators are embarking for other industries.

I think we have good solutions in all three.

We are evolving well in them.

We presented in Barcelona a continuation of our cloud strategy, which we think is really good.

Based on our current technology, we had already planned this for a couple of years ago, with our component-based architecture.

I think this is for us important, but we are all there and we are evolving this with our customers.

By that I can conclude, after this quarter, as I've said so many times before that the fundamentals for long-term positive development in this industry remains.

Let's then dig down in the financial figures.

Quickly, on sales.

2% growth.

This was a quarter was quite a lot of headwind, especially from US dollars and the Japanese yen.

That means that we actually had organic FX adjusted growth of 7%.

So that's the second quarter in a row that we now have growth.

I will come back to the regions, and we will hear from the segments where they are, but we can say, quite of lot of markets having growth, at this stage.

High activity when it comes to projects, very much in Europe and in North America, but also in other places.

But there is accentuated -- you are going to hear Magnus Mandersson talking about Network roll outs that are having record high volumes, as we are now rolling out a lot of technology all around the world.

I will come back on Northeast Asia.

On the profitability, here, of course, there are some things that we are adjusting when we try to explain that we had a gradual improvement in profitability.

Again, remember Q1 last year, SEK7.7 billion in a capital gain from our sale of shares to Sony.

Sony -- from our 50% in Sony Ericsson -- that we believe is one of the way -- we take that away compared to where we are today.

We have, of course, had a gradual improvement on our profitability year-on-year.

Then we will have in this quarter also another one-off that we, in the press release, as we promised, and that was the SEK1.4 billion in restructuring in Sweden.

But all in all, if we exclude that, we had 6.7% operating margin of the JVs in this quarter, which is clearly a gradual improvement, or maybe more than so in the quarter.

I will then leave it over to Johan Wibergh to talk about Networks.

Thank you, Hans.

So then if we turn to Networks.

Overall, you can say that we are really tracking on our plan, as we communicated at the Investor Day in November.

So, that is pretty good.

The organic FX adjusted numbers were up 7% year-over-year, and that's driven by mobile broadband in many places, particularly we have highlighted in the US and Indonesia, as expected.

And we had a continued decline of CDMA, down 42% year-over-year, which then meant that we only had SEK1.3 billion sales of that in Q1.

If you look on operating income, we are, as I said, tracking our plan when it comes to cost reductions, and we have done significant restructuring during Q1, and also then in Sweden at the end of March, which means then that we are on track on the cost savings.

And we achieved then an operating income of SEK1.6 billion, which is the same as we had in Q1 2012, but then this quarter it includes the restructuring cost of SEK1.3 billion.

And that's supported, then, by both the business mix we have and underlying operating expenses, and we see that effect of the European modernization projects are coming down.

If we then move to the next slide, I'm very happy about the momentum that we are seeing with our SSR routing platform.

I've been talking about that now for a few quarters.

I'm very happy to report that we have 12 new customers that have chosen us now in Q1, 51 totally.

And it's many of the leading operators in the world.

It's extremely good, and it's used both in fixed and mobile applications.

And, it's still a limited amount of manual that's coming into our P&L.

I think this is a good potential for us going forward, and we are releasing a big new software release in Q2 that makes us even more competitive on the fixed side for IP EDGE and what's called B and G applications.

So I think that's a good opportunity for the future.

LT is strong.

LT rollouts are happening in many places.

It's driving uptake of HSPA.

In all, the mobile broadband is really driven by app coverage.

If you remember, those of you that attended the Investor Day back in November, we talked about app coverage, the need to really build out more capacity to have coverage for applications.

And for instance, that's what we are also seeing in North America.

And there's a lot of uptake on volumes and to then provide good coverage for video applications, or a lot of build out.

We should also highlight then that we have taken on -- this is not only driving investments in radio, but also, for instance, we have now secured our 100th Evolved Packet Core contract.

Evolved Packet Core is when you have [one core depend] that is 2G, 3G and 4G.

Also very encouraging is that we see a high adoption rate for software releases and optional software features.

This is due to the high pace of innovation development in our industry, and there's so much new functionality that are coming out in the software releases, which means then that customers have a big interest in taking more software releases.

So, that's also very encouraging.

On our portfolio then, I feel really good about our strong portfolio.

We focus very much on superior performance.

And every year we do a perception measurement with our customers about how they perceive us on technology leadership.

And we ended last year with having a record high perception and gap widening to competitors on perception on technology leadership.

So that feels very good.

We will continue to focus on operational performance, driving improved profitability, what we can do on the core side, what we can do on our own pricing and our margins, and continue to execute on the plan as communicated back in November.

And with that, thank you for that and over to Mr. Magnus Mandersson.

Thank you very much, Johan.

I will first focus on the positive things that happened in the Service business.

We had a quarter where we actually grow quite a lot, adjusted for currency, 9%.

And we had, basically, 3% growth on Professional Services, very steady profitability on 13% operating income.

We took 21 new contracts in Managed Services.

This should be compared with 9 contracts a year back.

We are doing very, very well in both India, as well as Sub-Sahara on these.

We are also breaking in with Managed in Russia for the first time, and building up capabilities there, which will continue to build on our global success.

You can say, then, that we have had a very high activity on Network Rollout, up 19% in sale.

And we can say the activities that's taken place is, of course, in North America.

You can see the sales we have in the Networks and consequently, how much we are doing there.

An enormous need of mobile broadband amongst all customers, and of course, a lot of different activities that has driven a bit on our profitability.

You can also say that in the European modernization has been as high activity in all the countries where we are present in.

We have even increased the rollout production.

So, that has hammered our result, and we came in on 16% in losses there.

I think this is a record high quarter when it comes to losses, and I wouldn't see that this will continue in that pace.

However, we have a couple of quarters still left in our modernization in Europe, but I think we can see the process [methods] and tools that we are applying is biting in, and I think we will have this business under control going forward.

We should also remember that we had a very good quarter with consulting and systems integration.

Here the portfolio around BSS/OSS is also taking off.

We took eight new contracts in this segment, both on systems integration as well as transformational business, as well as operations around managed IT stack.

So I would say that, all in all, it was a lot of activities and we see the future as still good and stable on professional services, and we have a little bit left to do on Network Rollout.

Per?

Thanks, Magnus.

Hello, everyone.

So, Support Solutions.

We were declining our revenue by some 3% year-over-year.

Over the year, we have continued to focus on portfolio towards our strategic direction, which means OSS, BSS, Media and M-Commerce, which has hampered our growth.

And also, as you probably have seen divested IPX during 2012, which means that we are dropping quite significantly revenue year-over-year.

Over quarter one last year, we had a very, very strong Media sales, driven both by the Olympic Games, but also some IP TV deals that came through.

During the quarter now, we have also signed the intention to acquire Microsoft's Mediaroom business, and we are intending to close that during the coming quarters.

And that will strengthen our capabilities in this area significantly.

Operating margin ended at 1%, including then a one-off restructuring charge of SEK0.1 billion, which means that we had an underlying positive operating margin, and we'll see continued strengthening in the operating income over the year.

Our intention is to continue to focus and strengthen our portfolio towards the areas of strategic choice we made.

And we see a very good momentum in BSS, as well as Media, as well as OSS and M-Commerce in the market, right now.

Thank you, Per.

Down to the region update.

I will highlight a couple.

We had 8 out of 10 regions growing.

If you FX adjust it, you can cluster them a little bit.

North America, of course, continuing, as I said in the beginning, and was mentioned by the Heads of Business Units, as well, that continued very well.

We had a growth of 23%.

We have high activity in the region.

We have several projects, of course, ongoing.

And one of the larger coverage projects that is ongoing has probably peaked in this quarter.

But the most important process to follow how the consumer demand and the change of [tare] rates is happening in the market, because that will finally drive the investment.

And for us, of course, North America is a very important region, where we have a very good position.

Then, you can say that Southeast Asia and India grew well, 22% in Southeast Asia, Indonesia, important country.

India, as well, grew.

And what else we can say is that we look getting into Europe.

We were growing in Europe, as well.

And that was the second quarter in a row that we're growing in Europe.

Very much of that, we are having high activity in the European modernization, but we are also doing a lot of Service business there and we also are working with nontraditional customers, like energy companies that we signed a deal with just recently, with Aeon, for example.

So, that's those regions.

And then we have the regional Northeast Asia.

That is down 34%.

Three important countries here, different reasons why they are declining in sales.

Japan, the main reason for the decline in sales year-over-year is the currency.

If you then take South Korea, here it's more that we had a strong quarter first quarter last year, more projects than we have today.

We have not lost any market share or something like that.

It's a little bit lower pace in South Korea, at the moment.

And then China, basically same comment that we've had for several quarters.

We have a structural decline in 2G with one of the customers that is impacting our sales, and we are in a technical trial situation for [the nought] decided for either licenses and when it will happen.

So that's what's impacting.

Latin America is more a time delay, as the LT has not been deployed yet.

Very much because of the spectrum needs to be cleaned, and that has not happened.

So that's why we have had a little bit slower activity in Latin America.

On the Other segment, which we usually comment, a very normal and favorable development on IPRs in the quarter.

Good, I hand it over to Jan Frykhammar

Okay.

Thank you, Hans.

So some highlights.

I will keep it brief, because I know you want to get into Q&A.

So then, just some more highlights on the P&L, to begin with.

We had a gross margin in the quarter of 32%.

That's down somewhat compared to a year ago.

We had 33.3% a year ago.

The main reasons being the lower Network Rollout margin that we already have commented several times upon.

We also had somewhat higher restructuring charges compared to a year ago, and then we also had the positive impact of the trend around the European modernization project offsetting somewhat.

Then, we also repeat these two very important statements that we made in January around the business mix.

We think that the underlying business mix will gradually shift towards more capacity projects during the second half of 2013.

And then also, we basically say that the network modernization trend that we have been commenting upon now for, I think, two years, we are on track with earlier communication there, as well.

But the statement is on this slide, just to make sure that we understand the same thing.

If you then go to the next slide, restructuring charges, SEK1.8 billion, the majority of that is related to the ongoing reductions in Sweden, but also we have the global transition transformation programming global services that is also continuing, although somewhat lower pace this quarter than what we typically have.

But all in all, SEK1.8 billion in restructuring charges in the quarter.

Operating expense then, if we adjust for the restructuring charges, but also for comparable units, is down 6%, and we think we are on track for the programs that we discussed at the Investor Day in November.

We had some negative impact from currency on the P&L, as well.

And then overall, we had an operating income then, including joint ventures, of SEK2.1 billion.

The underlying operating margin has been commented by Hans already.

It's an improvement, but you have to compare apples-to-apples, here.

We also make a statement here around hedge accounting.

We will then terminate hedge accounting for forecasted transactions, and that will be a gradual impact during the year.

The effects will then change from -- you have all the time seen these impacts, but you've seen it under other comprehensive income.

From now on, you will see the impact on other operating income, but it will be a gradual change during the year.

We will also host a phone meeting on May 2, to brief you more about these changes.

And then, we had a financial net of minus SEK400 million.

The majority, here, is the normal items, but we also have an impact of the devaluation in Venezuela.

On ST-Ericsson, big activity, obviously, in the quarter, regarding ST-Ericsson.

We made the announcement on March 18.

We hosted a briefing for all of you on that.

Here on this slide we just repeat the same messages.

We are on track with this.

We have basically the business now divided into three different buckets, one being the business that is going to be transferred to Ericsson, meaning the multi-mode, thin modem business.

We have the business that will be transferred to ST, and then we have the business that is being restructured.

So we are on track.

The net liability that we have is SEK2.8 billion.

So we have used some of the restructuring provision that we highlighted for all of you a month ago.

But it's overall good progress in the breakup of the JV.

If we take the balance sheet then, a typical increase of DSO days in the first quarter, perhaps slightly more, a few days more, nothing dramatic.

It's due to high business and project activity.

We also had an inventory increase of about SEK1 billion.

That's also related to business and project activity.

The decline of pay was more related to the big volumes in Q4.

So overall, I think, on the balance sheet KPIs is nothing dramatic here to report, really.

If we take the change in gross cash, minus SEK4.6 billion in the quarter, mainly driven by operating cash flow, them being negative, or minus, SEK3 billion, slightly on the weak side.

It has to do with the working capital build up here in the quarter.

Again, we would like you to assess us and judge us on full-year performance of operating cash flow, and have also the very important, more than 70% cash conversion total for full year.

There is also an accounting change impacting net cash, and that's highlighted in the report.

It has to do with special payroll taxes for defined benefit plans in Sweden that has been reclassified and therefore, impacts net cash.

So with that, I hand over to Hans.

Thank you, Jan.

I will say that we are continued focus, of course, on the [strategic] execution we are doing and moving toward profitable growth.

We will also, of course, continue with our cost and efficiency work, and as Jan mentioned, our capital focus.

But we also are very focused on keeping our technology leadership and service leadership, because that's enabled for us to really continue to be number one in this industry and continue to execute on that.

So, by that, Helena?

Thank you, all.

With that, Operator, it's time to open up for questions.

Ladies and gentlemen, at this time we will begin the question-and-answer session.

(Operator Instructions)

As always, please limit yourselves to one question at a time and please keep your questions at a broad level.

Detailed information is provided in the report, and Ericsson's Investor Relations and Media Relations teams will be happy to take additional questions and discuss further details with you after the call.

Tim Long, BMO Capital Markets.

Thank you very much.

Just if I could, on the Services business.

It looked like the percentage of network rollout did come down a little bit from the last few quarters, but we did see the operating margin come in a bit lower.

Anything else there?

It seemed like normal seasonal revenue decline.

Anything else in the profitability?

And just remind us, when -- the timing on when those network rollouts go down or margins start to go back up for the network rollout piece?

Thank you.

Okay, Tim.

It's Jan here.

I'll take that question.

So when we look at the impact of the network modernization projects in Europe, the impact in the P&L is shown both under the Network segment, as well as Network Rollout.

In this quarter, obviously, we had a positive impact on Networks and some more challenging negative impact on Network Rollout.

That's the fundamental reason.

It has nothing to do with quality and product execution, it's more the commercials that we have discussed before.

We are on track there with regards to a time plan that we have given before.

So it will be a gradual reduction here, due to the network modernization projects.

In addition to that, we also had some idling resources awaiting LTE rollouts, predominantly in Latin America, that impacted the quarter.

That's obviously a timing thing.

When deployment starts again in Q2, this will go away, or we will have to look at resizing of the organization.

So underlying, the most important thing is the network modernization project, and then we have some more short-term issues related to LTE deployment in Latin America.

Thank you very much.

Andrew Gardiner, Barclays.

Thanks very much.

I was just wondering about the various comments you've made about seeing very high levels of activity.

I think we can see that in the numbers quite clearly in North America.

But you've also highlighted Europe, given the network modernization.

But just adding together some of the countries or the way you segment the countries in Europe now, northern Europe, western and central Europe, and Mediterranean, I'm only getting about 6% year-on-year revenue growth, which given that high-level of activity, doesn't seem like the strongest of growth.

I'm just wondering how you see things longer term, as we come through network modernization, and the networks are there and built and we're just adding capacity.

Is this as good as it gets in Europe, at the moment?

Or what else is there that could continue to drive some growth here?

Everything is relative, of course.

And I think that we actually have had two quarters of growth in Europe.

If you look in our slide 31 in our report, you can see that EU is growing with some 3% in this quarter, if you class it as the EU countries.

And then of course, on top of that, we have an impact on the currency.

So I would say that given where everybody talks about Europe and a lot of macroeconomic challenges, I think our sales team in Europe has done a great job.

They are in the midst of a modernization.

They are coming in with a service portfolio that is probably today more than 50% in the region.

And they are also doing business with maybe not so traditional customers for us, energy companies, et cetera.

I think it shows innovation and a lot of drive.

As I said also on the press conference, if you ask me about macroeconomics, I'm basically saying that we have not seen any change.

We are not seeing any deterioration.

It's basically the same as we saw in the third quarter and the fourth quarter, coming into this quarter.

So we can all have different expectations, but I think that we are seeing two consecutive quarters and I think that the team in Europe for Ericsson has done a great job, where we see some of our competitors are declining quite dramatically.

Yes, I would agree with that.

I suppose my question is more looking further forward.

If there's such a very high level of activity at the moment, as you quoted in saying in a number of areas, can that -- is that sustainable?

Remember now, the European modernization is in high volume but on a lower value.

One needs to remember that's why we also have invested in Europe.

And as I said from the beginning, that will cost us, because that's when the biggest competitive situation is taking place because we are redefining all the market share.

So the activity is high, but the values are low.

And of course, over time, if we perform well and seeing that our quality is up in the networks, which is our trademark, and as Johan has talked about, we have a great opportunity to see that we can increase that capacity over time.

We can sell services like optimization, tuning, et cetera, as well as helping them with efficiency, like managed services and going into IT.

So basically, use the whole portfolio on that installed base.

And I think that Johan's previous comments talked quite a lot about that on Investor Day, how our business model is done.

And I don't think that that has changed since then, nor the last five years.

My direct answer is, of course, if we do it well and the sentiment in Europe is there or improved, of course, we should be able to actually capture that growth in Europe going forward.

But right now, we are focused on executing on this modernization.

And as I said, they will gradually decline during the year of 2013.

Okay.

Thanks very much.

Simon Schafer, Goldman Sachs.

Thanks so much.

I just want to follow up on the Latin America issue in rollout services.

Just wondering whether you could maybe quantify how much of that impact was -- just so I get a sense as to if that's really clearing up into the next quarter, how the run rate is looking in that segment.

That would be helpful.

Two comments.

One, this is not something that is our normal or something like that.

The Service organization are constantly working.

In managed organization worldwide, is over 60,000 employees in Services.

So of course, sometimes you're idling, et cetera.

So we are adjusting our resource base all the time.

That's something that's normal.

Why we disclosed this was that it was a significant amount.

If not, we would never have brought it up.

But this is the daily work we have, and we will adjust it accordingly.

If we don't see business coming in, we adjust it.

And that's a subset of suppliers that we have engaged, that they're supplying to us, and our own employees, and that we work with all the time.

So we are not quantifying the number.

But again, we wouldn't have brought it up if we did think it was important.

On the other hand, this is normal business in Services, to work with this type of inefficiency that we sometimes find in the Service business.

Got it.

Thank you.

And my follow-up question would just be on the cash flow.

I understand that Q1, number one, is very seasonal, and obviously, you had a strong unit quarter in Q4.

But as we look out into the remainder of the year, when should we look for you to recuperate some of that incremental cash outflow in the first quarter to make your cash conversion go for the full year?

Do we have to wait for a very back-end loaded fourth quarter to see that happen, or is there anything else to it?

Thank you.

Thank you for that question.

No, I think that we, obviously, typically -- I mean, our ambition is, of course, to have a more evenly distributed operating cash flow through the year.

That's clear.

But I think that for sure, when you think about the fact that we had a strong Q4, Q1 suffers a bit from that.

I still think that we have a good opportunity to reach our full-year ambitions.

We would obviously work hard on recovering this as soon as possible, rest assured.

Thanks, Jan.

Kai Korschelt, Deutsche Bank.

Thank you for the question.

I just had one on the expectation of improving mix.

I seem to remember that your expectation centers mostly on the carrier spending behavior in Europe.

But I was also wondering with regards to the US, obviously, some of the LTE coverage rollouts are probably nearing an end for some of the larger carriers, and the networks are filling up quite quickly.

So I'm just wondering, then, when or if you would expect that positive mix shift in the US also to stop benefiting you, because my understanding is currently it's still pretty much all in coverage space.

Thank you.

Thank you.

I think that we have not said anything about the different carriers spendings going forward there.

What we have said is that we have had a phase right now of a lot of coverage projects deploying a lot of technology all around the world.

And with the current visibility from our customers that we are working closely with, and with the current visibility on macroeconomics, we believe that we will see a gradual shift in the second quarter that we will have a little bit less of coverage projects and a little bit more on capacity.

So that is more how we see the market, being close to the market, rather than saying it's a CapEx shift for any regions.

That we have not indicated.

The thing that we have talked about when it comes to infrastructure and CapEx is what we did at the Investor Day, when we talked about our outlook for network equipment, for services in OSS, DSS, for the timeframe of '12 to '15.

And there we talked about CAGRs in the different areas.

It's more that we have always different phases of coverage and capacity.

And that's why with the current visibility, we believe it's going to be a gradual shift in the second half.

Okay.

And then maybe a follow-up.

On TD-LTE in China, obviously, you're currently suffering from the 2G declines there, probably not benefiting from the LTE deployments yet.

Any sense for when that may start to benefit your revenue line?

Thank you.

No.

I don't have that.

There is technical evaluation right now.

We have no knowledge that we can communicate to the market when the license will come out, nor when the spectrum will be released on that.

So we are working closely with the customers, the customer, in China on technology trials on TD-LTE at the moment.

But when that will be converted to commercial contracts and volumes, that we cannot predict at this moment.

Thank you.

Matthew Hoffman, Cowen.

Good morning.

Thanks.

Another question on the gross margins.

You've seen a couple of quarters now where the gross margins have headed up, but can we yet connect the dots with SSR with the gross margin trends?

And can you maybe give us some color on the overall mobile core mix on the Network side?

Thanks.

I can start, and Johan will pitch in.

I think that Johan said that so far, even though we had a great success on the SSR where we cannot translate that to any significant business volumes in the sense of the Network segment, which is very big.

But maybe you can get a little bit more color to the Packet Core and all of that, Johan.

Sure.

Thank you.

So we have two pieces of -- types of equipment in core.

You have circuit switch core and you have packet core for data then.

Circuit switch core has been declining since, I think, probably 2008 was one of the best years, when there were Olympics in Beijing, and since then, that has been declining significantly.

And that has had a significant impact on our profitability and top line.

And that was expected.

There's only so many voice calls you can make at one point in time in the world.

And we will see then, and we are starting to see then, a shift to the next generation of circuit switch core, that's called VoLTE and will be used for doing voice over LTE networks.

And that way will start having somewhat of a positive impact in 2014, with probably 2015 being a more important year for that.

Then as you said, at the same time then, we have packet core, which has been a strong area for Ericsson.

We have around 40% worldwide market share on that.

And in that area, we have introduced SSR.

And SSR itself has had a very limited impact on our P&L so far.

We have been extremely successful in getting contracts, but there is a significant time from contract signature until you have the products into the network and you get the corresponding capacity growth.

So far, it's a very limited impact.

We should see gradually somewhat of an impact, but of course, packet core amount is still small compared to the overall range of business.

But, it will start to help in the coming quarters.

All right.

Good.

I'd like to follow-up on the TD-LTE question you took a minute ago.

You answered, Hans, about the overall market opportunity for TD-LTE and some uncertainty there.

But can you step up to a higher level and just discuss your competitiveness on TD-LTE?

Do expect that if the opportunity does show up, that it's a place where you can win?

Thanks.

So, let me take that question also, then let Johan in.

So first of all, we feel extremely competitive on the whole LTE space.

It doesn't really matter if it's FDD or TDD.

And it's important to understand that a significant portion of our products are the same, whether it's FDD or TDD.

It's technically constructed is that you have a big piece of the software and hardware is the same, and there's just a piece on the radio that is different.

So technically, we feel extremely competitive.

And we are the only vendor in the world that has a converged FDD and TDD network launched in commercial operation.

For me, it's not really a technical question.

Our technical trials in China going extremely good.

For me, everything is just a matter about a commercial attractiveness on the deals and how you make good money out of this, good business out of this.

And nothing else, really.

And we have yet to see then the big deployments to come up in TD-LTE.

We have built our products.

And what we say then is if you have a base station where you have support many frequencies, and these frequencies can then be either FDD or TDD.

They will support load-balancing.

They will support carrier aggregation.

And you will see that in many countries then coming up, that operators will combine different spectrum to provide the really good and competitive solution.

So we have taken this into consideration when we constructed the products, and we feel really, really good about this.

To me, I'm not really concerned about whether we get the small or big market share in China.

That doesn't really at all affect our competitiveness of what we do on TD-LTE.

For me, it's only a business decision about what can we get and what type of deals we can get out of China.

Thank you.

Sandeep Deshpande, JPMorgan.

Thanks for letting me on to ask a question.

My question is regarding overall -- you talked about TD-LTE and that you think that you're competitive in TD-LTE.

Can you talk to how you see your share evolving in China?

Because clearly, China GSM has been fairly weak.

Do you see having a significant share within TD-LTE in China, or is that still being negotiated with the customers?

And I have one small follow-up.

On the China, I think first of all, on the first statement, yes we see, of course, that our share in China came down in 2012, because of that spending in 2G came down and the TD-SCDMA business were not involved.

So structurally, that meant that we came down in China on market share.

On TD-LTE, there's not been defined any market share, as yet, on the larger volumes.

And as Johan said, we will be there where they are doing the trials.

We think we are very competitive portfolio, and we will be there to see that we can maintain our market share.

But let's see how it turns out, both with commercials and the technical evaluation.

And it's too early to talk about any of them right now.

Okay.

Thanks.

Jan, maybe one question for you.

Year-on-year when you look at your Network margin, if you exclude the restructuring in Q1, your margin has improved.

Could you comment on where the delta is?

Is this mainly the roll-off of some level of European modernization?

Or is it mix?

Or is it something else which has caused that approximately 350 basis point move in the Network margin?

Okay.

Sandeep, part of it has to do with the execution of the modernization project in Europe.

Part of it has to do with an overall improved margin on the radio, and that has to do both with the commercial management, the price management, as well as focus on the cost side, which Johan mentioned.

So it's a little bit of everything.

It's still so that the Network business, as Johan said as well, is very radio-centric right now.

And the new core, if I may say so, is still an opportunity ahead of us.

Thank you.

Francois Meunier, Morgan Stanley.

Yes.

Thanks for taking my question.

It's about Professional Services.

Actually, there's been quite a bit of a slowdown in year-on-year growth, especially this quarter.

But it sounds like you've got a good pipeline of deals coming through.

So when do you expect growth to pick up there, and do you expect to benefit from Alcatel and NSN withdrawing a bit from this market?

I will talk, and see if Magnus wants to chip in.

I think that first of all, our plan at Investor Day that we believe that Services will have a growth per year, between the years '12 to '15, between 5% to 7%.

And of course, our goal is always to be better than the markets.

But let's see what the market becomes.

But that was what we had.

This quarter, we are growing a little bit less in Professional Services.

But growing too much from one quarter to another, I think, is not relevant.

And as Magnus explained, as well, we had a very good activity level on Managed Services in the quarter.

If you looked at the earnings of what -- we took 21 deals, and last year we had 9 deals in the first quarter.

So of course, that is fueling, of course, some of our understanding how the Professional Services markets will go forward.

Again, we have good positioning and find that it's going to be defined by our customers by services in these times.

But I think we have a competitive portfolio that is very relevant right now.

Okay.

Thank you, Hans.

Actually, I've got a follow-on question about the competitive landscape and how do you see it evolving at the moment.

And particular, we've seen software companies like Oracle buying Acme Packet.

Do you see those guys becoming more aggressive in your field?

I think it's a very good question.

If I look over a little bit of a time frame here, maybe five years or something like that, it's clear that the traditional equipment vendors, they are sort of narrowing down their portfolios.

So we meet them very much, of course, in the traditional areas, like networks.

There we meet them.

On the other hand, Magnus' area and Per's area, when it comes to services, here we meet -- how do you say -- they're different type of competitors.

We would meet the Accentures of the world, the HPs and IBMs of the world, we'll meet in this field.

And as you rightfully said, then when you come into the OSS, DSS, media in there, here we meet traditional software companies type, Oracle and et cetera.

Of course, as we are evolving as a company, we are meeting different type of competition.

That's why it's so important for us to execute on our strategy, because we don't believe that anyone has the same assets as we have, so they address the same piece as we have.

If you go back ten years ago, you can basically say that Ericsson, together with the five competitors, that we would have exactly the same portfolio.

That is not happening any more.

So that's why I'm talking so much about what we need to execute and what assets we have, because there's different competitors right now in different areas.

Okay.

Thank you, Hans.

Very helpful.

James Faucette, Pacific Crest.

Thank you very much.

I wanted to ask about underlying traffic growth.

Clearly, as you look to transition from network coverage to capacity, traffic growth will be an important driver for your business.

We've seen some statistics from the CTIA in the US indicating that cellular traffic growth is slowing, or is growing at a slower rate here in the US.

And similarly, Cisco, a few months ago, put out some forecast that showed that they had reduced their growth forecast a little bit.

So just wondering what you are seeing in terms of traffic growth from your perspective and how we should think about the longevity of continued capacity additions.

Thank you.

When it comes to traffic growth, we published our Ericsson Mobility Report October last year.

We kept, basically, our outlook for data growth with some 12 times up to 2018.

I think that this Cisco is coming very close to that.

They were very far away from that before.

So that's an interesting remark.

And secondly, we don't comment on quarters, how it goes.

But again, we are following, because it's an important indicator.

And of course, when you come up on higher absolute values, the percentage will go down how much you are growing.

That's for sure.

But again, what we look at, the penetration of smartphones, the penetration of new data tariffs, how operators are well doing changes from voice tariffs to data tariffs, how successful they are on that.

That is driving, finally, how it will be the investment in smart mobile broadband networks, as well as OSS, DSS and the request for services that are attached to it.

We have time for one more question, please.

Richard Kramer, Arete Research.

Thanks.

Hello, guys.

I'd just like to go back to a couple things, phrases you mentioned in the call.

First, maybe for Magnus.

Hans used the word normal daily work in describing network rollout and the capacity there.

But we've now had nine quarters in a row of losses in network rollout.

And I guess the question is, is there something that needs to change in the way you are managing that business?

Or has this become a cost of winning contracts and taking them on and taking the transformations on?

And then, a question for Jan.

Johan mentioned gradual impact of the SSR and higher adoption of software, and Hans just mentioned some of the shifts of modernization that should be gradual.

But Jan, are you still expecting gross margins to fall over the course of the year?

Or will some of this adoption of software and the SSR and lower modernization allow gross margins to rise over the course of the year?

Thanks.

Let me try to answer you question.

So in 2009, we introduced RBS 6000 multi-standard radio, where you basically put everything in one box; consequently, you have a full modernization on electronics, you have full modernization on powers, you have full modernization on antennas, you have full modernization on everything that's on site, on cables, et cetera.

We have over the past nine quarters, as you pointed out, changed out old 2G and 3G equipment, done a lot of [cables], reinforced foundations to steel in towers, put new equipment in place.

And then of course, not enjoyed yet fully the capacity model, where we put in channel elements into the radios.

That will happen.

I look very, very promising on this, as we are visiting the sites and we are getting good reports, what we are doing on the European modernization.

So, I think structurally, it will last for a while more.

But will it be better?

Absolutely.

So Richard, on the gross margin then, there are three main factors impacting the gross margin, the first one being the share of the Services business as a total picture.

The second thing is the business mix, whether it's coverage or capacity or more normal mix.

And then, it's the European modernization.

If I can then just come back to the fact that in the first quarter, we still have a lot of coverage projects, and it's very radio and [network outstanding], as you can see in the numbers.

Then, let's see how the gross margin evolves throughout the year.

A very important indicator is, of course, to look at the business mix and the gradual shift towards more capacity projects.

But also, please don't forget the share of Services in that mix.

So, it's for your own assessment, Richard.

Thanks, guys.

Okay.

With that, we have come to the end of this conference call.

So I want to say thank you all for joining and talk to you next time.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.