Telefonaktiebolaget LM Ericsson (ERIC) 2013 Q2 法說會逐字稿

Welcome to the Ericsson's analyst and media conference call for second 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 operator and hello everyone and welcome to our call today.

With me here today I have Ericsson CEO, Hans Vestberg, CFO, Jan Frykhammar, Head of Global Services, Magnus Mandersson, Head of Network, Johan Wibergh, and Head of Support Solutions, Per Borgklint, that will be making the presentation and taking questions.

After I have reminded you of that we today will be making forward-looking statements.

These statements are based on our current expectations and certain planning assumptions which are subject to risks and uncertainties.

The actual results may differ materially due to factors mentioned in today's press release and discussed in this conference call.

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

With that said, I would like to hand over the call to Hans Vestberg for comments about our performance and plans going forward.

Thank you very much, Helena, and most welcome to our analyst call.

We will be a little bit brief.

We had our press conference this morning and I know some of had not the chance to attend so we will go through the slides as we usually do.

Starting with a key development, I usually go over a little bit what's happening in the quarter.

A couple of things.

First of all, we see clear indications and discussion with our customers all around the world that superior performance on the network and network performance is a key differentiator and extremely important for our customers.

That's of course for us important as our technology is geared for superior performance as well our services when [consult organization], design, et cetera, is coming in there.

But it's clear that networks becomes more and more relevant and important.

On those networks we see also the media traffic continuing which now we estimate that we will have a growth of media traffic in an absolutely 60% annually and very much driven by TV and media.

We also saw in the quarter two large markets being in vendor selections for 4G.

Russia has been there for a while.

Some conclusions we communicated [we know MTS].

So we are now in on the 4G in Russia as well and want to see how that continues and when we'll start deploy but at least we are good wind there with MTS and we are working with the others at the moment.

In China public information, China mobile has started their 4G process just recently.

Hard to predict when it's going to be ended or concluded but right now they have started the process and it's one of the three operators that have started that process.

So that's where we are on that.

A lots of dynamics in industry in the quarter both from our customers merging and doing alliances as well as on our competitive side where we also see a lot of things happening.

It is an industry that's all dynamic for sure.

When it comes to macroeconomics, I usually comment that and we are not seeing any major changes with [deal of a challenge] the situation in parts of Europe, parts of Italy.

We still have a [place to get our rent] and the uncertainty and that is why it's not worsening but it's not improved neither.

We have pretty much the same situation.

We conclude by that the fundamentals for the industry, mobility, broadband, mobile broadband, and the cloud is long term.

Those fundamentals remain very, very interesting and attractive.

Let's look into the second quarter starting with net sales SEK 55.3 billion.

That is currency adjusted sales growth of 7%.

Reported sales flat indicate of course that the headwind of some currency is completely strong especially on the euro, dollar, and the yen so -- but encouraged to see a second quarter in a row growth of 7%.

We had the same in the first quarter.

High activity on projects both in Europe and North America both on services and product.

Sequentially where the growth of 6% quarter-over-quarter so that's also good to see very much driven by global services.

As we look at the profitability, we had some SEK 3.4 billion in operating margin before the one-offs which was two.

That was one with the cable operation that we announced in the quarter that we will exit and partly divest.

That was a 0.6.

Then we had a loss related to a sale of a division within Telcordia ACS of 7.3 so if you take that away, the underlying margin went up 6.1% compared to 3.1% last year.

So we are coming to this as segment heads will discuss as well as Johan will go through the particulars of it.

By that I will hand over to you, Johan Wibergh, to better talk about networks.

Johan.

Thank you, Hans.

First of all then we had organic FX adjusted sales were up 8% year-over-year and the underlying business has really been developing in the right direction.

Having big mobile broadband deployment in North and Latin America that will some will have been impacted by lower business activity in South Korea.

There are some delays there in LT licenses and the continued structure decline GSM in that goes on.

GSM in China which also is structural decline, as well as the [circuit-switched core] where we are between in two different phases, the traditional technology is increasing and investments involved that have more [three-day all year.] We can also clearly see that our investment in the European modernization has paid off and we are seeing ourselves now as being the leader in mobile infrastructure in Europe.

The quarter-over-quarter sales were flat and we had two coverage projects that peaked now in the first half in North America.

On the operating income then we had SEK 1.3 billion, with a 5% operating margin.

A strong [stroller ed ] is said than was a one-time one of event on SEK 0.6 billion related to the cable business.

We are also seeing now a gradual decrease in negative effects on the network modernization Europe.

And we see that our efficiency activities are on track.

At the investor day back in November, I communicated that we were working in three areas to improve our profitability in the network segment.

The first area was commercial excellence which is really about monetizing our footprint and getting a good grip of stabilizing the pricing in the market.

I feel very good about the price development.

I think that's starting to stabilize in the industry.

Second place was operational effectiveness which has really taken advantage or [scale] advantage, increasing efficiency in R&D, and the third item is cost reduction to make sure that we pay at a cost structure to our business.

All operation effectiveness and cost activities are on track.

That is pretty good.

If you would then take the 5% operating margin you would get up to 7% adjusted for one-time events.

You get 8% if you take away restructure.

On top of that you have a very strong currency headwind in the quarter.

Moving on then we see the whole [source store] is talking about an increase in operator focus on network performance is a key differentiator.

This is good for us because we are really competing on getting a premium price for technology leadership.

We have seen during the quarter a big uptake for our air product, impending integrated rate of product spreading to more and more customers and when they will see the benefit that product is giving.

The IP portfolio then, momentum for SSR platform continues, another 15 customers that [choose enough] for SSR product now totaling 66.

All of this is very encouraging.

Out of those 66 contracts, we have 16 customers that have [choose enough] on the [SEK] side.

We continue to invest in strengthening our sales force in the IP as well as broadening the product offering.

On heterogeneous networks small cell, that's the debate within the industry and how you can increase coverage and capacity specifically indoors and we are getting good feedback on our heterogeneous networks [tracked it in] and we are really leading [vando] macro and we are [out and out trialing] small cell products that will come into shipment during the [wasome] and it really shows good performance advantage when you get the combined effect of the cooperation between the macro and the small cell.

With that, I'm done and handing over to Magnus Mandersson.

Thank you very much.

Good afternoon.

Global services showed a very good sales pick up in the quarter compared to last year.

We are up 9%.

In Swedish Krona, it's 3%.

We have seen also strong development, I think, on professional services when it is currency adjusted, I would say almost 5% up.

We are seeing still a good development on new contract in consulting and systems integration.

We have also had a good intake of manage services contract with 19 in the quarter which is a couple more than a year before.

We broke one billion subscribe level on managed services which is also a milestone so very promising there.

Network rollout continue to grow, very high activity in North America and we are also seeing then that the balance in the customer portfolio is a bit better compared to last year -- or last quarter.

We can see that our operating income is now improving quite a lot compared with Q1 where we showed this quarter 6% which is quite stable with previous quarters as we have had.

If we look into operating income then we are showing SEK 1.6 billion in profits where the [wine] off of 0.2.

And again if you look into the professional service operating income, as we said last year when we met on market capital days, we should continues to improve 1% this per quarter.

We are doing that this quarter so we are now 14% including restructuring and you could also see that we have developed quite a lot of positive momentum on the network rollout.

We had in Q1, as you remember, 16%.

We are now down to minus 9%.

Compare a year back, we had 11%.

We are really seeing a good trend.

This is of course demonstrated by gradually decreasing negative impact to European modernization.

Quite happy with that.

I think I hand over here to Per Borgklint.

Thank you.

It gets [worse an issue].

We had a very weak quarter in terms of [sales] and we can see the downward in Middle East impacting our business but also a fairly bit of a slow down in Latin America, and fairly slower in North America.

But in [YEN row], the OSS is taking off and we are seeing that we are also being ranked by Gartner as number one worldwide and we see it continues from demand for OSS and BSS and also for the media part.

We should also remember that Q2 last year was a very strong quarter in terms of media sales and media margins and BSS margins as well.

What we see is that the safe seconds are a [lonely moniums there I] vary much between the different quarters.

Operating margin was minus 12% hit by a SEK 0.2 billion one time effect relating to the divestment of ACS business of Telcordia and we continue to further enhance and invest in our strategy and we announced the Microsoft Mediaroom acquisition fairly recently and we hope to close that in Q3 and get moving forward.

Thank you.

Thank you, Per.

Thank you all.

Okay.

Quick summary of the regions.

Six of the ten regions growing in the quarter.

[A fell of scene] in the first quarter.

A couple of the regions that I pick out, North America of course has been mentioned here by Johan.

Year-over-year growth 18% sequentially coming down then a little bit.

Still very important market, biggest selling telecom market in the world where we have a very, very good position.

Western and Central Europe up 10%, indicates of course what we write about in the report about our gaining in market share and leadership in Europe that we have a very high activity here.

Then of course on the flip side, India continues to have a tough time for us.

I would say there are two things.

One, the cautiousness from operators immersing in that environment in the moment and then also there is a macroeconomic effect in India at the moment.

This is short term looking, a little bit challenging on the other hand.

There is big demand for mobility mobile broadband in the long term.

Right now it looks a bit more challenging.

We are doing good development of services.

We took large amount of services being in the quarter in India that also if you look at their headcount was the majority of the increase of our headcount in the quarter.

Northeast Asia, where talked about them a little bit but at three important countries there, Korea, Japan, and China.

They're all for different reasons declining.

Some are temporary.

Some are more structural.

Korea lost about -- they have very high activity last year.

They are waiting for new licenses.

So it's no loss of market share.

It's just a little bit less of activity in Korea at the moment.

Japan, little bit less activity but more important the cost in development between the German and Swedish Krona is impacting that.

And finally China, here we have one customer on 2G.

G [assembly] investment that is coming down and that structure will not come back.

I think those are the three different.

Of course, in China you have the 4G coming up right now that all the time might offset the 2G decline.

That's where you have some temporary, some more definitely.

[Just mentioned all the rest of you'll to say].

That's down 30%, majority of that down is due to IPX divestment.

We see a good development, a savings development in licensing in [I-force] that we are focusing a lot on.

Good.

Jan, please.

Thank you, Hans.

So let me then start with the sales growth and what Hans already has mentioned then in the segment heads as well.

We decided to summarize the FX impact in terms of topline here on one slide and here you can see the difference between reported topline and FX adjusted topline.

You can see that we have the headwind this year both in Q1 and Q2 as Hans said then if you look at the different the group for first half, sales organic FX adjusted grew 7% and you can see then the network still the services and support solutions numbers there.

Again as Hans mentioned, the currencies that are important here for us is dollar, euro, yen.

We have our main strategy here to handle currency is obviously by means of natural hedges.

We can always work with the more short-term hedging which we do but for the long term we work with natural hedges meaning that we try to match revenue and cost per currency.

We have improved the FX exposure over the last year in US dollars but we still have an unfavorable exposure into yen and that's also reasonable into the numbers.

We have also changed the -- or we have terminated hedge accounting for new hedges.

That has been done from first of January 2013.

The impact of unrealized and realized hedges will be reported and is reported both in the first quarter and second quarter on the other operating income in the P&L.

We also have a bit of a -- it's one of those currency years.

I would say we have quite many depreciation and deviations on currencies all over the world.

We are a company that is operating in 180 countries.

This is what we as management are set to manage and we do that, as I said before, mainly by means of natural hedges.

Then if you take the main P&L comments starting with the gross margin compared to a year ago 32.4% this quarter, 32% the year ago.

Also 32% in the first quarter of the year.

What is good news really in the report is the improvement in hardware and services margins.

That's driven by a couple of things.

The first thing is that we continue to see the declining negative impact from the European network modernization project.

If you look at the isolated margin the project still have a dilute impact on group gross margins but it's an improvement if you compare it year-over-year.

What is good as well is what Hans mentioned on the network modernization projects in Europe.

We start now to see capacity as well as LTE upselling into the installed base, which is good.

The business mix then, we have said now for a few quarters that we think that the business mix will gradually start to shift towards more capacity during the second half of 2013.

The good news is that we have seen that shift happening already in the second quarter and the way we look upon that and the way we measure that is obviously by means of stand alone radios and stand alone digital units being then sold and delivered into base stations on ground as well as capacity related software into the base stations.

We also had an increase services share and compare to a year ago it's 1 percentage point higher so it is 45% compared to the first quarter, it's 4 percentage points higher.

Each percent increase year of services share approximately impacts the growth margin of the company of about 0.3 percentage points.

That's important to remember.

Other P&L comments.

I think a lot has been said on the [one of five things].

I think I'll skip those which is visible in the text.

It's very clear.

I think there should be no major advance around those.

We have a headwind also on the P&L for FX.

On the other hand, if the currency turns in the other direction we would have some positive.

So but again we are working in 180 countries and we will continue to do the best thing for the long-term earnings of the Company.

Restructuring charges, SEK 0.9 billion in the quarter, SEK 300 million higher than a year ago.

The minority here is related to the service delivery transformation.

That initiative is now up and running in this quarter at the speed where we think it will be for the rest of the year.

Then we have not changed bookkeeping with regards to ST-Ericsson this quarter.

We continue to use the same principal as we did in Q1 so we don't take any income from ST-Ericsson.

However we work of course on the -- to make sure that the provision we set aside in Q4 that that is on track and we are on track.

Net exposure is SEK 1.6 billion.

Then just on the next picture here, there's some slight innovation, that the CFO created an operating income bridge where we come from the reported operating income in the second quarter of last year compared to the reported upgrading income this year.

There was obviously some one-time items last year.

In Q2 we had some resolution of a third party issue with regard to divestment of Sony-Ericsson but that was a positive last year.

For comparison reasons, we should really remove that.

Last year was 1.7.

Then you can see that you see the operational improvement here in terms of gross margin improvement as well as operating expense reductions and then also of course the impact of the new way of accounting for ST-Ericsson.

All in all I think this bridge should clarify a lot of questions with regards to operating margin.

Then we go to the balance sheet.

Despite the increase in sales volume we manage to reduce trade receivables with about SEK 2 billion compared to the first quarter.

That together with good inventory management created a positive operating cash flow of SEK 4.3 billion.

I think also what is important or what is important to see here is the trend on the inventory.

We continue to manage inventory down.

This is as you know a lot related to the projects.

So let's see what happens with this now that we'll see business mix shift towards more capacity.

If you take next slide then the gross cash.

This is obviously what we live out of so it is very important.

Here we have a change in gross cash of minus SEK 7.3 billion and a change in net cash of minus SEK 4.8 billion.

The minority of the change here is related to dividend payouts but we have also paid back loans at maturity.

Everything in line with the stress as we communicated last year when we took the new loans that we didn't want to increase our gross [step].

So all in accordance with plan.

If you exclude dividend, this is a positive net cash quarter.

I think with that, Hans, I hand back to you.

Thank you.

I just want to sum up a little bit also what we are doing in TV and media as we have announced two acquisition that we intend to do in the latter part of this year.

Starting with how we believe the TV and media industry now are merging with the telecoms, very much in three different angles.

One on the network.

As I said in the beginning, the majority of everything that is going to the networks are [V] view and that means that there are networks that need to be V view enabled.

They need to be both able to deliver content timely and actually how many timely.

The other thing will come to media transformation is the market screen.

All media and media content will go over different type of solutions, everything from linear broadcasting all the way out to IPTV smartphone, pads, over- the-top services and that of course also another area where it is transforming.

Finally, the whole TV and media is coming close to telecoms means also that our professional services business is coming close to that both from system integration and managed services.

That combination of our networks, our support solutions, and those services creates a very unique capability for us to take a leadership position in TV and media either working directly with TV and media customers or with telecom operators because both of them will emerge closer.

If you look at our assets, we have a good customer base.

[We will end up or the final acquisition we'll trend to] 5% due to IPTV market in the world.

We have already have the first LT broadcasting solution.

We are expanding now to almost 2,000 customers in TV and media so we have a great position and footprint here.

When it comes to confidence, when we have included Red Bee, we will have 1,800 people and [police] working in TV and media which is I would say the most sizeable broadcasting services.

We will be working in multi-screen compression as well, so that's very important.

Finally, when it comes to scale, the scale in networks is important because networks will carry it.

We will be managing some 200 channels for global broadcasting and also of course we'll have a lot of work with our compression, CDM and MDM that we are having support solution.

All that including then the assets of acquisition we are doing, like I say [econolaw] acquisition.

We are now intending to acquire Microsoft Mediaroom and Red Bee Media.

We will strengthen our TV and media.

It will both be able to sell to new customers this portfolio but it also will sell to traditional operators that will broaden our portfolio for TV and media.

Just want to sum up.

Our work and this executive team is very much on executing on our investment that we are done in mobile infrastructure and services to see that very profitable growth and see that we leverage investment well done in OSS, BSS, TV and media, IP, that combination is very important.

We will control what we can control, cost and efficiency.

We will not rest on that.

We will continue to look for improvements on every area we can that we have under our control.

But we will not compromise on our technology and service leadership because that's the base and that will create that we continue to have the leadership in the industry.

As I said in the beginning of the call, we gradually saw the improvements that we have talked about.

We are not satisfied on profitability yet.

We continue to work on that but this is a marathon and Ericsson is standing up in that marathon and will continue to do so.

And with that operator, we have come to the 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 on Ericsson's investor relations and media relations teams will be happy to take additional questions and discuss further details with you after the call.

Mark Sue from RBC Capital Markets is online with a question.

Thank you.

Good morning, gentlemen.

If I take a multi-year view, Ericsson has reinvented itself with more services.

You have now performance leadership and networks and you are also winding down the network modernization.

If I look forward over the next few years, do you feel that those competitors are acting more rationally and that industry profit can improve?

Typically since the biggest player ends up with the most profits, can you -- is your envision to exceed new cumulative operating margins which are now up almost 12%?

Or maybe if you could kind of help us understand what's kind of laying on the rate of margin improvement for Ericsson going forward?

Thank you, gentlemen.

Thank you.

You are right.

We continue to transform the Company to continue to keep our leadership and I said before I will not compromise on technology and service leadership.

That's clear.

Then when we talk about competition it becomes harder and harder to talk about who is the competitor for us because we are in multiple segments.

We are in mobile infrastructure, we are in IP, we are in support solution and services.

There are different main competitors in all of them.

When you try to generalize it, it is a little bit harder nowadays.

But of course the traditional mobile infrastructure has had an overall competition the last ten years.

That's for sure.

We think we are doing the right thing by investing more in research and development and also in the [new front] that we've done and now we are executing on that.

On the question on MSM, I don't have the details on what type of profitability levels they have and what is included or not so I cannot comment on that.

Our ambition is to continue to improve and to have the leading margins in all the segments we are acting in.

I think that's most important.

Maybe Johan can say a little bit about mobile infrastructure and what he thinks about the competition in that area.

Thank you, Hans.

This is really a long term business, quite long technology side.

It's important to be a technology leader, to get the price premium out.

It's a lot of tough demand.

I think in that respect I am extremely happy with our position of strength.

It really comes the way we are on that.

Secondly then on pricing, we are the clearly in mobile infrastructure.

Of course I say the leader.

We have a big responsibility to secure that there is a mature way of handling pricing in the market and we really act in that way.

I do believe we are seeing stabilization of the competitive environment in the market due to the low profitability that exists in this segment.

I am quite optimistic about the future.

Thank you, gentlemen.

Stuart Jeffrey from Nomura is online with a question.

Thanks very much.

I have a question on network grown out revenues.

It's now where your visibility is better than in most other areas and it continues to grow really strongly.

You flagged the North American contracts now to pink.

And so can we now start to assume the network rollout as a whole has peaked and that it unwinds as North American and European rollout starts to ease back?

Or should we assume that maybe the Russian and Chinese builds provide a full offset.

And then second can we just leap to that, is it still safe to assume that much of the losses in network grown out of European modernization contract and that the profitability will improve even if the Russian and Chinese rollout start up?

Thanks.

Okay Stuart, it's Johan here.

I think I'll answer that question.

I think first and foremost that there is, as you know, in those contracts a lag between the bidding of product and services.

You are right of course.

You see that there is still high activity level in the first half and sustainability in rollout numbers both in the first quarter and the second quarter.

Let's come back in the third quarter and see if the trend on capacity change that has happened in the quarter which is predominantly impacting networks if that also impacts network aloud.

I think it's a bit too early to say at this point.

You are absolutely right in assuming that majority of the network allow top line as well as challenges and bottom line is related to the European modernization.

We have stated before that is correct to assume.

We are not going to take the network without earnings light until we are at the profitability level where this business does not dilute the overall Ericsson profitability.

Okay.

Gareth Jenkins from UBS is online with a question.

Thanks.

I think I remember you saying that there was around 150 to 200 basis point margin impact from network modernization.

Can you give us a sense of how much has now alleviated?

How much of that you have recovered in terms of network modernization, how much is still to go?

Secondly, I just wondered if you could give us a sense in a market like Japan where you've moved from coverage to capacity or sort of pulls or delay in revenue there is between those two periods and what the margin that followed the capacity expansion is versus the coverage.

And then finally on China and Russia, I just wondered if you could give us a sense of how much that will be overlay business versus single run business, particularly in Russia actually.

Thank you.

Okay, Gareth.

So I think if you go back to the investor day there in November, we made some pictures on the dynamics of the gross margin and the investor relations team worked hard on getting those boxes correct.

So I think you should go back to those boxes and look at the impact.

I think the most important issue here or the most important statement is really that we start to see that the footprint now is yielding returns.

That is one important statement.

The other statement is that we continue to be on track with the timeline that we have communicated now for I think it's almost two years, which means that during the course of this year the projects will gradually come to an end.

And as they come to an end, we can also engage with customers in discussions around capacity as well as upgrades to LT and so forth.

I think we stop there in terms of estimating exact percentages and so forth and impact in the quarter.

Hans, you also had something.

The question related to China and Russia.

I think that China is premature to answer.

Of course going to 4G is going to be at least, the operator has announced that they are in the process right now.

It will be a fair amount of new technology coming in of course on 4G.

In Russia, it is a little bit different.

Some have all laid, they've already marked the regular base stations in Russia, some of them so it's going to be more fill-ins on that.

Some will roll out new technology.

It's a little bit blended I would say.

China, too early to really say exactly how that will be done.

Where we are just starting the process.

We will know better later on how that will pan out on the TV LTE 4G with China Mobile.

Thank you.

Achal Sultania from Credit Suisse is online with a question.

Thanks.

A couple of questions if I may.

First, on your US business, that part has been quite strong on the last few quarters.

Sales growth has been level at 20% or so.

And then you also talked about two large broadband coverage projects having peaked in the first half.

So going forward, how should we think about the balance between top line growth for US and then the gross margin improvement?

Can you give us some sense of which of these two is going to have a bigger impact on your bottom line as we go to 2014?

And then I've got a follow up on China.

Maybe you were a little bit unfair in that we have had a quite okay growth in North America.

I think we have had fantastic growth in North America, the last five, six quarters.

We are averaging 20% growth there right now, 18% in this quarter.

So I think we -- in the larger telecom market in the world, we have a very good position.

We're working with all the major operators there.

So I think that to point to the credit to the North American team and our technology and service team, I think they have done fantastic jobs.

I just want to make that clear.

Then, of course, there are also in North America, coverage projects and capacity projects coming up and down.

And we have had two projects, one that we already talked about in the first quarter that we believe had peaked.

And we talked about the second, we believe also has peaked right now.

That doesn't mean that they go away and vanish.

It's just that we don't see that they will continue to grow in activity at the moment.

They will come down as they have been deploying quite a lot.

However, the most important for us in North America long-term is the continuation of innovation and technology development focus on the superior performance and network continuing.

That's good news for Ericsson given our size and our market share in that market.

So far, we have seen that, that's continued.

Still you can have more really quarters coming up and down a little bit, but in general, we believe we have a very good position there, and what we are trying to say that maybe you shouldn't expect now that we're going to have this growth of 20% in the quarter, but we're not saying that it will go to something different neither.

But maybe not expecting that high type of growth right now.

But again, long term, good position, underlying demand is correct, innovation, technology forefront, superior performance.

All of that is very important in North America.

And if that stays there with our footprint, long term it's good

Thanks.

Then on China, obviously China has been quite weak over the last few quarters.

How should we think about some sort of stabilization in your China revenues going forward?

Now I think that GSM is structural.

They will not come back in the GSM revenues for us.

It will most probably continue to go down.

Just so we're clear on that.

We are, of course, taking a significant drop already, but we still have some business on GSM.

Remember, we also have 3G WCDMA in China that we are selling.

So that is going fine, so we should not blend that in.

But given that they are in the process right now to go to 4G, that will mean that structured GSM will go down.

When 4G will come in and what type of market share we will have, that's too early to have any views on and when it will happen.

Thanks Hans.

Alexander Peterc from Exane BNP is online with a question.

Thanks for taking my question.

You were saying that this year are the first signs of more capacity of work coming through really in the just reported second quarter.

Are you talking about some of your internal leading indicators on the matter, or are you actually talking about profitability impact within networks?

Because when I look at the networks margins underlying, of course, I struggle to see a very tangible segway there.

So could you just explain what is holding back networks' margin.

Is it scale affect, not enough growth with these stages of FX?

That bit of clarification there would help.

Thanks.

Okay, no.

I mean, I think we look at both.

So we had a very strong radio quarter.

And, obviously, the business mix discussion around coverage and capacity has very much been around radio and related services.

So we had a very strong radio quarter.

Then as we also mentioned clearly in the report is that we have some more challenging areas, and some that has been known for some time.

For instance, the structural decline in GSM, as Hans mentioned, as well as the circuit switch core decline that Johan mentioned before.

So this is a very strong radio quarter, and it's visible in our radio P&L, and it's also visible in the leading indicators as I highlighted to before.

We look at things like number of stand alone radio and digital units being shipped to base stations out there in the installed base, as well as capacity upgrades in terms of software.

Thanks.

Mark McKechnie from Evercore is online with a question.

Great.

Thanks.

My question is you are looking at the US down 3% sequentially, obviously your biggest geography.

You talked a little bit about that, Hans, but I wanted to ask maybe for the team as you move from coverage projects where you are shipping pretty big revenue but different margins.

The capacity, are you finding -- what's your profitability looking like in the US relative to other regions that are still more in the coverage phase?

And if you could kind of walk us through.

You know you talked about continuing spend there but I want to understand how your margins there would be -- your margins and revenues impacted as you shift from coverage to capacity.

Thanks.

There are no major differences between different countries.

It's the type of projects we are doing.

There can, of course, be some local changes but in general, it's more about if it's a capacity or a coverage project.

The coverage project that is in our business model is used when it's the highest competition because we're fighting on the footprint.

You have to enter new technology or a swap off even, and, of course, then we're affecting the footprint.

In the second phase, we sell capacity, we sell additional services on top of the network and that has a similar profile or profit regardless where it is.

So I think we are not getting into that.

We have a certain profitability in a certain market or not.

It's more about the nature of the business we're doing and the business model we have.

That goes for managed services, for managed services in North America, or if it have in Russia, whatever.

It's also that in the beginning on the managed services contract, where the challenge, because then we're doing transformation and transitional employees putting on our own tools, et cetera.

And then we come into the phase where we sort of can leverage our scale.

And that's no different neither from a different country or another.

So it's more the type of business model we're into rather than a particular country, I would say.

Then, of course, there can be some small deviations, locally what we're doing and not doing broader scope, et cetera.

But I shouldn't draw any conclusion of a certain country having better profitability than another.

It's more the scopes and the type of business model we're applying in that moment.

The specific question I've got is would you expect your overall operating profit to actually increase despite what's happening with the revenues in that in any given region but the US especially?

Would you expect your operating profit to grow year-on-year -- I'm sorry, quarter-on-quarter as you move towards capacity builds?

We don't guide on that level on quarter.

But what we have said is that we are focusing on everything we can control meaning the cost efficiency of the Company and seeing was that products are performing well.

And over time, that should increase our profitability.

And we have said we're not happy with the profitability right now.

We're seeing gradual improvement in the first quarter, gradual improvement in the second quarter, and we are continuing to work.

And for us, this is a long-term work in order to see that we can have an audience that sort of are on a level that we really feel good about, and we have a way to go there.

But we also know why we're here.

We have invested more in R&D, we have invested in new areas, we have invested in market share.

And that we all think is very good long-term for Ericsson in order to be even stronger and more competitive in an industry that this is a little bit sensitive right now.

We think that we can stand out even better if we do that right and but coming into quarters, how they will go back and forth, that's difficult.

What we have said before, we have good visibility on the coverage projects.

We can see them, we know the milestone.

They can come up and down with acceptance but fairly good visibility on those, I'll have to say.

And we have had that for quite a while, especially European modernization.

Capacity, of course, can come a little bit in and out, a little bit quicker, but still we see that there are engagement in those discussion with our customers right now and that they see that they need capacity on certain coverage for the ever done.

And that's sort of what we have in front of us, and we will continue as a team to execute on everything we can control to improve the profitability of the Company.

Great.

Thanks, Hans.

Didier Scemama from Bank of America is online with a question.

Good afternoon, and thanks for taking my question.

I would just like to go back to your point that you made already several times in previous quarter that you expect to see a gradual improvement in margin as capacity become more prevalent in the mix in the second half of this year.

I guess my point is I understand why the US is probably going to get better.

I also understand why Europe is probably going to get better because it is probably as bad as it gets now.

At the same time, we are probably going to get into substantially more activity in terms of coverage in emerging markets whether it's Brazil or Russia or China.

I do understand the timing of it is essential here.

I guess what I am trying to get to is, do you think it's possible we see margins recover in the back half of this year?

But perhaps as we move into next year your margins fall back, your gross margins in particular, as coverage project in emerging markets become substantially more important in the mix?

Thank you.

Okay, Didier.

It's Johan here.

So fundamentally, as a company, we have had about a year and a half that that's been quite an extreme situation because we -- in the radio and related services project I mentioned, we have had basically most projects being what we call coverage projects.

As a company, we have always had a mix of coverage and capacity projects.

Now the statement around business mix that we made previous quarters was, obviously, to handle the fact that we were gradually going to move away from this extreme situation that we have had for a year and a half.

The good news is that on the radio side, we have seen that happening already in the second quarter.

So I think that this is a gradual thing that we need to -- and then as leaders, we also need to continue to balance these things.

There will always be coverage projects but we would never comment like we do now unless we believe that this is something that is fundamentally good in the quarter.

Okay.

Thanks for that.

As a quick follow up, I mean, if you look at NSN, I think the assumption was that NSN was perhaps not going to be as competitive as they had been perhaps when the 3G rollouts happened.

And it turns out that now they are restructured and their margins are even higher than yours despite being smaller in size.

Are you concerned that they become more aggressive on price as we sort of hearing that they are extremely aggressive on the 4G options in China?

How do you see, therefore, the competitive landscape going forward between yourself and NSN and people like Samsung also are starting to show up in terms of LTE overlay?

Good question and a lot of facts coming at the same time.

I am not sure that we should comment on NSN.

I mean, as I always say, we respect all competition, and they are doing everything they can do with their asset and what they are planning to do.

We will do what we are doing.

We are addressing far many more markets and far many more product areas than they are doing.

We are trying to build a transformative sort of company here, continue to develop and be strong in many areas.

So I'm not sure that it getting into a comparison one-on-one here would be really relevant.

I don't even have their figures and where they are.

But for us, it's more important to focus on that the areas on execute and on assets we have and we are technology leaders, service leaders, and that's really what we need to leverage in the 180 countries we're into.

And then we want to see how it pans out in the market.

But it's clear that mobile infrastructure has undergone a dramatic change in the last 10 years where basically the only one that stayed around in this mobile infrastructure is Ericsson.

Everything else is combinations or bankruptcies or new competitors.

So we don't expect that this will stop.

We just need to see that we continue to be number one in that ever-changing world.

Thank you.

Operator, at this time we have time for one more question.

Our final question comes from Pierre Ferragu from Bernstein.

Hi.

Thank you for taking my question.

We found this incorrectly in the second half, one of the key drivers of margin improvement will be a lot of this modernization projects in Europe coming to an end.

And so my question is, when -- usually, when you -- when banks going through closing that kind of project, it can happen that a lot of costs get booked to what when as a project because they are not well recognized in the continuing of the project during the lifetime of the project.

So how would you assess the risk of actually negative surprise as it hits your P&L as a one-off as these projects are coming to an end in the next six months?

Jan here.

The way we operate all our project and project accounting is that we update the plan cost estimate on a monthly basis across all projects.

And we track variations between actual and plan costs so I would view those additional finalization cost surprises as a quite smaller risk.

I think we managed really well here.

In fact, if we managed to conclude the projects really well, we may have some positives, but we do this really good.

There is a very detailed review of all of the costs involved in the projects, both actuals as well as planned costs and we adjust the cost levels that we recognized in the P&L all the time.

Thank you.

With that, we have come to the end of this call and I would like to thank you all for joining and I hope that you will be with us for the third quarter report at the end of October.

Thank you.

Thank you ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.