Telefonaktiebolaget LM Ericsson (ERIC) 2013 Q4 法說會逐字稿

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

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

(Operator Instructions)

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

Our Head of Investor Relations, Peter Nyquist will now open the call.

Thank you, operator, and hello, everyone, and welcome to our call today.

With me here today, I have Hans Vestberg, President and CEO, Ericsson; I have Jan Frykhammar, Chief Financial Officer; Johan Wibergh, Head of our Network Segment; Magnus Mandersson, Head of our Global Service Segment; and on (inaudible) I also have Per Borgklint, Head of Support Solutions; as well as our Head of Communication, Helena Norman.

During the call today, we will be making forward-looking statements.

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

The actual result may differ material 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 on our annual report.

With that said, I would like to kick off this conference call by handing over the word to you, Hans.

Thank you, Peter.

Let me start to talk a lit about the key developments in the market in 2013.

This was the year of the mobile broadband.

Mobile broadband subscriptions, they grew to 2.1 billion in the world, which is a growth of 40%.

This puts, of course, the focus on both the improved consumer or user experience, as well as seeking performance and quality in the networks, because this is becoming so important and relevant that the networks are [changing] for all these data services that we now are seeing coming into the networks.

We will also see which -- it's fairly logical.

We are [holding] an inflection point in the whole industry, going from voice and picture, [social] networks or data-centric networks.

The technology that we are all are working with are going into other industries and society as a whole.

And of course, that is putting also strain on our business models, both the vendors and operators, and that we have seen in 2013 and will most probably continue into 2014.

We can only look at Ericsson.

We are taking all decisions like leaving handsets, et cetera, in order to be strong in the second phase in this techno-revolution.

But one thing is certain, that mobility, broadband and the cloud will only grow in importance going forward for people and in this recent society.

I think we saw that developing in 2013.

If then looking to ourself, a lot happened during 2013, and trying to summarize some of it is always difficult, but we picked out a couple of things.

Of course, we continued to focus on our service and technology leadership.

I think our technology leadership, especially in the mobile infrastructure, continued develop well.

Good quality on the product, [lots of] first in the world.

But also we redefine the whole small cell market with the [doct] that we came out with in the later part of 2013, which I think is great to develop.

The service side continued to be a corner pillar for our Company and our future, and has continued to grow well.

And now adding a very strong North America, as well, in the service portfolio.

We of course, been there for a long time, but it's growing there, which is an important market for us.

So I think that is the core businesses.

At the same time, we're in the midst of transformation to really establish leadership in new areas, IP, OSS, BSS, TV and media.

All of them are important, as well as cloud.

I think we're doing capital resource allocations to succeed in those area.

We will enforce it even more in 2014.

I think we're in good positions.

We have acquired companies.

We have our own organic development, both in product and services here.

I think this is important areas for long-term for Ericsson to establish ourself in more areas beyond our core areas, which we of course, are going to (inaudible) and keep as leadership areas.

We also did a large transaction with ST-Ericsson that went out to the end of 2012.

During the year 2013, we have this old JV.

We are moving the modem business into Ericsson.

This is a large transaction, and the second joint venture that we now are taking out of operation with [Dukes] Sony Ericsson the year before.

So, this, of course has been a journey, a very strong and important strategic decision we have taken, which of course has been very much on how we want to focus the Company to exceed in the future.

Another thing that happened last year is of course our agreement with Samsung.

To be seen in a broader context of FRAND and how we work in this industry, which I think is unique.

Basically, we share the technology and the standard technologies in the industry according to the FRAND rules, meaning that we can use the same technology all around the world.

And that is why we have 6.7 billion mobile subscriptions in the world and the growth of mobile broadband today.

And we have already more than 100 contracts with all the main players on handset and infrastructure.

And of course Samsung was the company that we had not agreed with, and we were in litigation.

Now, we have agreed with them, and I think it's important for the industry to show that the number one on handsets and volumes and the number one on infrastructure has in cross licensing in patents in order to see that this way of working continues; this will prosper the whole industry, but also the whole society when it comes to connectivity.

You can see we have outlined the strategy for our IPO, our portfolio, two years ago.

We are executing on that, but remember, it is part of the investment we're doing, innovation R&D.

We wouldn't this, [it wouldn't even spend our $5 billion] a year in research and development, innovating both on [assessed standard retention] patents, but also implementation patents.

That is very important to remember in all this, and that is why we also report them inside the segment, because this is part of the segment's business model, given that we are investing more than others when it comes to research and development, and have more patents than the majority of all others, being the number one on [2D, 3D, and 4D patents.]

I think this is, for us, an [embedded] business and very important.

You can see the development of IPR revenue.

So it's gone up, of course, 2013, then, a little bit impacted, of course, on Samsung.

That should have been spread out on several years. ¶

We have approved [NC note-taking] on the revenues in the years where we have been in litigation, but we are taking all the courses.

And of course, the research and development has continued as well.

But you should see it on a trend (inaudible) years that we are continuing to grow the IPR business.

[If you take] Ericsson in 2013, I can be brief on this one.

I guess many of you have looked into it.

Growth of 5%, adjusted for currency.

Of course, we had the headwind of currency in the year and even in the fourth quarter.

We have also some structural declines like in GSM in China, CDMA circuit-switched core.

On the other hand, we saw new markets coming up during the year, like Russia strengthening.

Middle East being strong, et cetera.

So we are balancing the year with different markets coming up, and I think that has been important.

Profitability, of course, going up quite dramatically, if I don't miscalculate, over 70% better operating income from SEK10.5 billion to SEK17.8 billion.

I remember last year 2012 we both had the negative impact of ST-Ericsson and the positive capital gain from Sony Ericsson, which is almost equally big.

So it is an improvement of our business.

We're also happy to report that cash conversion reached above our targets, which is 70% -- 79%, as we also explained when we announced Samsung agreement.

The payment will be done --or expected to be done in the first half of 2014.

So that is, of course, impacting our cash conversion.

If we would take that away, we have 100% cash conversion in the year of 2013.

Q4, SEK67 billion in sales, growth of 4% currency adjusted, fairly (inaudible) very much as management were expecting, the currency impact.

Now we see growth in mobile broadband China and Russia.

Of course we [haven't] added revenue here from Samsung, but also we stated in second and third quarter, we have some larger roll-out projects in North America that has a lower pace that has impact on networks [business] in the second half of 2013, as well as one project in Japan.

And that we're predicted and forecasted from our side, so it was more a confirmation on what we believe.

On the profitability side, the gross margin came up quite dramatically, 37%.

Of course, Samsung revenue recognition supported that one, even without that, even though I don't want to exclude if because it's part of our ongoing business.

But if you do that, our gross margin went up to almost 33%.

Very much in line, that's what Jan and I communicated Q4 last year, that we would have a tougher first half, and then we will have a gradual shift on our mix, as well as (inaudible) European modernization the second half.

That leads us to a quite dramatic change in net income between the years in Q4, a net income of SEK6.4 billion from a loss of SEK6.3 billion.

Of course, we had the ST-Ericsson provision and write off in Q4 last year.

By that, I'll hand over to Mr. Wibergh to talk about the networks segment.

Thank you, Hans.

Q4 for me a quarter according to plans, with the exception of Samsung, that came on top of it.

But if I look on the rest of the business, I think we are executing and delivering on the plan I presented at the investor day, both back in 2012 and in 2013.

Notables in the quarter was the strong mobile broadband sales in China, Russia, and but they did not offset the decline we had in North America and in Japan, as we have communicated before.

The continued structure decline on GSM and China, CDMA in the US and on circuit-switched core continues.

On the positive side in the quarter, we had [18] new SSR contracts, including 6 for fixed networks.

[If you would then] add together, since we launched SSR two years ago, we have done 96 contracts totally on SSR, and with those, 26 on the fixed side.

So for me, then, this has become a very successful switch from our previous portfolio to this new generation.

And we are still up in the early days of breaking in with our IP portfolio on the fixed side; 26 customers is a good start, but much, much more to do there.

On quarter over quarter, we had a 30% growth including Samsung.

On the full year then, for the organic FX, adjusted sales 5% up.

And notable regions there were Latin America, Europe, and the Middle East, while we had a decline, I said earlier, in North America and Northeast Asia.

On the portfolio side, I would like to highlight that we had some really strong developments during the end of the year in the new core area, in things like IMS and UDC that are key platforms to be used as you migrate the next-generation mobile broadband technologies to voice and subscription handling.

Also our range of business is extremely strong.

We feel extremely competitive.

During the year, we broke in and got seven new customers.

The I want to highlight here in importance is KDDI in Japan, which is extremely important for us, both from a business-volume perspective as well as competitiveness.

It feels really good.

On the operating income side, SEK5.9 billion in the quarter, supported [a lot then] by the SEK2.9 billion from Samsung.

If you look then on the margin side, that means then that we had 17%, including the Samsung IPR revenue.

Excluding that 9%, if you then take away the one-time effects and restructuring we were at around 11%.

So we're hovering around a double-digit margin.

That's the target, still too close to single-digit margin.

We will continue to work.

And the -- I'm really, really happy with the traction we have had on the cost efficiencies, overall operational effectiveness, and efficiency in the organization.

It's really paying off on giving cost reductions, less quality costs, et cetera, really good.

On the full year then, we got 10% that's reported operating margin.

And with that, I hand over to Mr. Magnus Mandersson.

Thank you and hello, everybody.

Let me first comment shortly on the quarter here.

If we adjust for the currency, we are up 1 percentage.

We did SEK27.2 billion in the quarter, and continue to have a quite heavy negative FX there.

We are flattish, small decline in the currency on professional services.

Our network rollout was declining with 8% in the quarter.

Remember we had a very strong first half.

Consequently then on earnings, we have a little bit stronger second half.

We did 13% quarter-on-quarter sales increase.

If we look into the full year, then, which is nice to see.

I think we continue to grow our business with 5% adjusted, and we did also growth in professional services, [not] adjusted minus 1%, but adjusted 3% or 4%.

And we have good growth in managed services.

If we look into the significance of the professional services, we had record high managed services contracts signed in 2013, 84 contracts, 52 compared to last year, and in the quarter, we had 25 compared to 15 a year back.

These contracts is a little bit smaller in size, because we are now getting more and more traction on the managed service IP and this contract by nature is smaller.

North American continued to be our biggest market, and has shown us good growth in the quarter, as well as the full year.

We are also continuing to broaden our portfolio, getting more and more into managed service side, the IP transformations on [CSI] et cetera, and that has continued to be a very strong services market for us.

Notable also is that we continued to have that very solid profitable level on professional services.

We ended the quarter with 14%, and you can also see that the quarter ended with 8%.

This is 2 percentage units better than Q4 2012.

So I'm very happy with the profit improvement we have had over the year.

All our programs that we are running in services is gaining momentum, and then resulting in this solid result.

Per, I'll hand over to you in San Jose.

Thank you, Magnus, and good morning.

So, if you look at the figures of support solution for Q4, as you can see, we came in with a very strong growth on the net sales to SEK5.1 billion, including the Samsung agreement of SEK1.3 billion.

Excluded that, we ended on [a figure of] SEK3.8 billion in the quarter.

These figures are both including [media room], but also the fact that we, during the year, have made divestments and closed down some of the products line, and we are continuing our transformation of the overall business and towards next-gen and investing more and more in modification of our solutions.

Furthermore, if you look at the operating income, we had a fantastic quarter, with an operating income, excluding Samsung, of 16%, which is very strong operating income, which is of course, also characterized by fluctuations we have in our margins coming out of the sales of software that is not even distributed over the year.

But also as a consequence of our streamlining of our cost, and focuses on getting very [fair] value proposition into the market.

We can see that we have a very strong demand for OSS and BSS solutions, and it shows a very strong state of development.

We've had a bit of headwind in there and compression during the year.

Which we, however, see a bit of stabilization.

We also are seeing a fantastic momentum in media and media solutions, like our media delivery network and [it's fueled] and demanded by both the multi-screen as well as the any content anywhere development that we see in the market.

And as a final comment, we are having a 2.1 billion subscribers that is managed by our rating and charging BSS systems globally at the end of the quarter.

With that, I think I'll hand it over and back to Peter Nyquist, who is -- to Hans Vestberg, who is going to take you on further into the report.

Thank you.

Okay.

Last segment, we report modems for the first time.

That's a separate segment that we now have that included in Ericsson.

There was two things here: one, the product 7450 is now commercially released, and we're happy with that.

We have been during this transformation, bringing the employees down and [this whole new venture] We'll have great focus in seeing that these product is coming out, and we think it's a good and great product that can address the high end of the smartphone market.

So that's very good.

Nothing else to report on modems.

We guided already in the beginning of the year [over] a cost of roughly SEK500 million in the fourth quarter, and that is what exactly became.

Then we also say that operating expenses from modems in 2014 is estimated approximately SEK2.6 billion.

Quick regional overview: North America we talked about, strong first half year, a little bit more cautious or pressure on the top line in the second half, still a very important market.

Europe growing well.

Middle East, constantly well-developed during the year.

Northeast Asia, there we talked about Japan and China and the structural changes and the currency being down all year, even it came back a little bit.

India rebounded, both in networks and of course, services in fourth quarter, after a long time of decline.

Latin America grew, and in (inaudible) there, they will have the IPO.

So that is a quick summary of the world, but again, 5 regions growing out of 10 in the fourth quarter, and year -- the full-year 2013, 6 regions grow out of 10.

By that, I'll hand over to Mr. Frykhammar, our CEO.

Thank you, Hans.

Hello, everyone.

Let me then do this quite fast, because I now you have read all the materials.

So we take sales growth and the FX impact first.

I think the only thing I want to highlight in this picture is obviously that you see the full-year numbers here by segment, summarized the table 5%, 5% , 0%, networks, global services, support solutions.

And you can also see the quite big amount that we have had as a headwind on the top line for the full-year number; it's a little bit more than SEK10 billion, so it's a significant number there if you look at it.

Then, of course, if you take the P&L, a lot has been said around the margin already.

A strong margin in the quarter, of course fueled by the Samsung revenue, but also as Hans said, excluding the Samsung revenue close to 33%.

It is the factors that we have been talking about for the whole year that is now also positively impacting the margin.

There is [used effect] of the network modernization projects in Europe, and I think it's important that what we write in the report and the (inaudible) comments is that we want to really put this explanation now behind us.

We feel that we have, in the fourth quarter -- we don't see that the modernization projects has any material, negative impact on margins.

So in our language, and that means that we are not going to continue to explain variations in margins by means of the network modernization projects in Europe.

So probably end a three-year story there.

The improved business mix is also important to highlight.

That is also a gradual thing that we have had throughout the year.

Typically, as we all know, our fourth-quarter margin is typically the -- it's a little bit lower than the rest of the quarters, and that is due to a lot of project completions in the fourth quarter.

We had some impact of that, as well, in the quarter, but more than offset them by the items that we talked about before here, the IPR revenues, but also the strong sales in support solutions.

On the negative side, we saw some impacts on the hardware margin driven by the 4G deployments in China.

So, if we take the gross margin bridge for a full year, we have to try to give you the main explanation items if we compared the 31.6% full-year 2012 with the 33.6% full-year 2013, you can see there that there is, of course, a negative FX impact.

There are impacts of slightly higher restructuring, the mix effect of services, but also the structure decline there in the circuit-switched core.

But also the positive impact of improved business mix and the European modernization project.

So all in all, I think it's -- the items are there that we and yourselves have been using when you look at the Company's performance throughout the year.

If we then go to the next with P&L comments, operating expense SEK16.1 billion compared to SEK16.4 billion a year ago.

There are some one-time items, and there are also some impacts of acquisitions in those numbers.

The one-time is the acquisition or settlement-related charge there related to Airvana.

And then the modems have added cost with SEK500 million in the quarter, as well as some impact of the Mediaroom acquisition.

If you think about the operating expense, excluding restructuring charges and those items, it is down 6% year over year, and R&D is down 9%.

If we then look at the number here for 2014, so R&D expenses, excluding expenses related to the things I have mentioned, modems, Mediaroom, and restructuring, are then expected to increase somewhat.

And this is mainly then driven by the increase at first that we make into the IP area.

And then Hans mentioned the-- our forecasted operating expense on the modem business.

And with those two components, we hope you will be able to model operating expense in a good way.

Operating income bridge compared to Q4, there is a volume element there, both related to networks and a little bit to services.

There is the increased Mediaroom and modems expenses to post to the impact of gross margin expenses and so forth.

So you can follow the bridge yourself.

If we then look at balance sheet, two main things related to the balance sheet.

First, good collection in the quarter, which was obviously real nice to report as (inaudible).

And secondly, good work on the working capital in general by the organization during 2013.

The improvements in capital, especially inventories, is partly related to business mix, but also partially related to efficiency and improvements in the flows.

If we then take the cash, so changing gross cash and net cash, operating cash flow SEK14.6 billion in the quarter, investing minus SEK1.9 billion financing plus SEK3.5 billion, and if you read in the report, you can see that we have dispersed a new loan in the quarter, but another old loan has then been repaid already in January.

So it's more a timing issue between the years here.

So all in all, this leads us to a gross cash of SEK77.1 billion and a net cash of close to SEK38 billion for the year, which is SEK700 million or so less than last year, but a very strong balance sheet.

Then we take the last slide, which is the proposed dividend.

So the proposed dividend that the Board have decided to propose for our AGM is a dividend of SEK3.00, compared to SEK2.75.

Last year in total, approximately SEK9.9 billion.

April 16 will be the record day for payment.

And the way the Board then looks at deciding the dividend in our Company is that they look at the 2013 performance, both in terms of earnings and balance sheet, and then they look at coming year's business you plan and expected economic development.

So, that has lead them to propose the SEK3.00 dividend.

That then will be decided later this year by the AGM.

With that, I hand back to Hans.

Thank you, Jan.

And I will not dwell on the last piece here.

You know our focus, that [distracted] execution on the areas where we are strong, but also establish our leadership into new areas, and that we are doing, resourcing capital allocation for.

At the same time, we are doing cost and efficiency [gains] and we'll continue with that.

We are on a transformation on a large [Company] to stay relevant in the second phase of the technological revolution.

We are taking one step in 2013 and kept our balance sheets strong, as well as increasing our profitability.

So by that, I hand back for Q&A.

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

Detailed information is provided in the report and Ericsson's investor relations and media relations team will be happy to take additional questions and discuss further details with you after the call.

And now we have the first question from the line of Mark Sue from RBC Capital Markets.

Please go ahead, the line is open.

Thank you.

Good afternoon, gentlemen.

If perhaps I could get a sense of how we see the cycle of spending in North America and how we can overlay what we should see in terms of the beginning of the cycle as it relates to upgrades in Europe with projects [bringing] other carriers, and what that might do in terms of your spending assumptions for the year, that would be great.

I can start see if I get some of my colleagues that would comment as well.

When it comes to North America, we can only conclude the trend that we saw in the second half.

That was that we saw a little bit lower pace on the big roll-out.

But remember the pace was enormous for a while on some large projects.

That came down.

We are a little bit more in a capacity phase right now in North America, a little bit less of large roll-outs, and that trend we saw in 2013.

And usually these trends, it's not changing quickly.

But I don't want to guide, but clearly, these trends are taking some time to change.

So we will remember first-half year very strong on it, the second half, we have seen more of capacity you can [take].

Then on Europe, there is nothing to comment on there on this type of spring project.

In fact, that will be communicated, of course, when they are decided.

And so far, there's no official communication on how they will do.

We have the same information as the market, what they have communicated.

What we feel good about is our position in Europe.

Both on services and technology, we have strengthened our position the last [48 months], in the last two years given the investment [were down].

I think the most important for us, both in North America as well as in Europe, to see the consumer uptake, the users of the network, the new type of devices.

That's going to be important to follow when it comes to -- for our business.

Should we assume that if we combined it, North America and also the [pace] or the start of Europe, that we might actually see a lull of activity for Ericsson this year?

And does that necessitate some tuning of expenses lower, or will the other regions balance that out?

We always work to balance our Company, and the strength of Ericsson we are in 180 countries.

If you look -- take one year ago, which market was growing, and you take now, that is changing, especially on the technology side as you have cycles of technology.

I think that's a strength.

If we needed to, we will always tune for sure, and we will constantly work on cost and efficiency.

That should be an integral part.

That is the only way to stay relevant and efficient.

Maybe Jan wants to comment something.

No, I think in general, in general terms, of course what Hans said around the big coverage projects that that's been around, honestly speaking for 2.5, 3 years.

Different customers, the first initial period, then the customers that we now have in the mix for those coverage projects.

I think what is important here is obviously what Hans said, that there is more of capacity, meaning more of quality-driven type of investments, which means that we need to obviously look for the continued race for quality and also how traffic impacts investments.

Of course, if you look at the beginning of the year, it might be tough for comparisons, because we have had now for a couple of quarters very strong top line in North America.

It's just to look at the network's number was doing in Q4.

Then I think when you think about North America for us and how we invest, we have the release of the Ericsson Dot system coming later in the year, which is a business opportunity.

We have, obviously, a lot of the media opportunities related to next-generation TD and so forth.

So, it is very much a focus for us to try to win new businesses in new areas in North America, but reality is that we are in the place where we are having less of coverage projects, more of capacity, but also new business opportunities.

That is what I would like to lead out with.

Got it.

Thank you and good luck, gentlemen.

Thank you.

And the next question then is from the line of Stuart Jeffrey from Nomura.

Please go ahead, your line is open.

Hello, thank you very much.

I had a question on networks.

For Q4 and the full year, you didn't quite get to your 10% margin target.

You have guided for an increase in R&D.

I don't really see -- you haven't mentioned any savings in SG&A.

So I'm assuming to get to that operating margin target, much of it has to come from gross margin expansion.

And I was hoping you might be able to talk through the levers there.

I think Johan mentioned in core, there might be some improvement coming through, and your mentioned circuits which cause a negative drag.

Perhaps you could talk about some of the mix dynamic that might be improving gross margins in the course of this year.

Thank you.

Hello, Stuart.

Thank you for the question.

So what I communicated back in November 2012 was that my target was to get to 10% operating income in the quarter, and then when we achieved that in Q3 last year, I felt happy.

And then I said, then we needed to be -- to get that to a more consistent view, and in our business, we are typically been going up and down.

There are some seasonality in the business.

I did not state when, and that would continuously be on at least 10% margin of every quarter, because I know there are certain seasonality.

I think that I think that is what you should expect.

And then when it (inaudible) to get there, because we are continuing with our focus on cost efficiency and that both related to gross margin, as well on our cost efficiency on the OpEx side, as well as on how we work on commercial excellence and pricing.

Three different leverages to work upon, and we are, as I communicated back then November of last year, we will get that on a continuous basis, but don't expect we would do that in every quarter immediately.

And then the next question is from the line of Alexander Peterc from Exane BNP Paribas.

Please go ahead, the line is now open.

Yes, hello.

And thank you for taking my question.

I would just like to understand exactly where we are going to go -- where is going to go the increased R& D expenditure in IP specifically.

Do you need to do more work on the [SSR] platform, or is there any other investments you're looking at there?

Thank you.

I can start (inaudible), fill in, but I think we are working very [diligent] in resource and capital allocation to see that we use our resources in the best way.

That [cost] everything from R&D to services to our selling expenses, seeing that we are consistent.

I think that what we are doing right now, we are reducing in several areas.

At the same time, we're increasing in some areas.

IP then is one area that we are increasing in order to be even better in the competitive landscape.

And maybe -- won't go into exactly what we're doing, but [network] IP is going to get a proportion than is higher than it has before in the totality.

To add on there then, and as I said I am encouraged to see the amount of contracts we are getting, but it's important to remember that there both is a time lag from orders until you see revenue taking on these new customers when we step into new areas.

Affecting also, I think we're just in early days.

We are also are very encouraged by some big customers who are coming to us and saying, please Ericsson, [be a disrupter].

We that SDN will completely change how the IP networks are built.

We really welcome you, a new strong player in this market place.

So please come in, disrupt, change with SDN, et cetera.

So we are increasing investments to live up to those expectations from customers.

It goes across different pieces of portfolio, and for competitive reasons, I don't want to be specific on exactly what we are doing.

I think it's very encouraging to hear that feedback from customers.

I still believe if you look on this business today, it generates quite small money, total P&L, but I think there's a huge upside in the future.

I think that we need to work up on them for the coming couple of years here.

Thank you very much.

Our next question is from [Ahud Gelblum].

Please go ahead.

Your line is open.

Hello.

Thank you very much.

So, questions, there's a lot of questions on how the decline in North America, as it moves from coverage to capacity impacts you in 2014.

And that is integrated into the gross margin progression, especially since it sounds as though China comes on stronger in the second half of the year.

Can you just give us a sense of on -- as we look at these different pieces, should we be looking at North America continuing to go down through next year, and having an off-balance or balancing off an offsetting impact on the gross margin, as the European modernization is now completely finished?

So should we be looking at the gross margin that we looked at in Q4 as being somewhat of the correct run rate as we look into next year?

And then as you get into the second half of the year, when China becomes larger, does that put additional pressure in the second half of the year on the gross margin?

Or how should we be looking at those three different pieces?

And I had another question on modems.

At what point -- how many years will you let it go before you take a look at it and say, maybe it's not a profitable business, maybe it's tougher to turn around than you'd thought, and look for other strategic options?

What is the time frame that you give it and what are the thresholds that you are looking at to decide at what point to take action?

Thank you.

I will come back to North America again, and saying that first of all, the trend that we saw in the second half, of course, that's a trend that we see a little bit less of coverage projects, which impacted networks.

Of course, that trend will not go away quickly, so that you need to have there.

Remember also, the first half-year last year was very strong on networks.

On the other hand, as Johan has said, services and TV and media solution OSS, BSS, all growing in North America.

Not offsetting the decline on networks, but that's the way we're working.

And again, most important for us to understand is the overall demand for mobile broadband innovation, new handsets in the North-American market.

In China, we saw at the end of fourth quarter an impact on the 4G side, that will go into the first half as well when it comes to 4G roll-outs in China.

Then the pace it's at, that's defined by our customers, so it's hard to speculate.

But definitely, we're already started in 4G in the fourth quarter.

So I guess that will be there as a trend as well in the beginning of 2014.

On the other hand, as you rightfully mentioned, we also have a [business] change in other markets.

All that weighs together when we look into 2014 and how we work with it.

But we will diligently work with profitable growth as we have done before, but those are the big parameters.

When it comes to modems, I think we've already said that it should be viewed over a couple of years from the integration of it.

We just integrated it.

We just launched our product, so we believe that this is a great first step, so we are committed to see that that is going to be a success, and we believe that we have a great product.

So it's not in the near- or short-term we will have any strategic changes to that.

Helpful.

As a follow-up, can you give us a sense as to what Q4 would have looked like if the Samsung or LTEs had been appropriately -- if the Samsung agreement had been done at the time a year or two ago, so that instead of seeing a whole chunk in the fourth quarter, or taking it out entirely, we would have seen the right amount in the fourth quarter?

The fourth quarter as we can see there on, Alex, both in including and excluding the impact of Samsung.

And that, I think, is a very good disclosure for you.

I think also on the modernization projects for Europe, I want to say then the statement that we are making in the CEO comments there, in the upper right-hand column, is what we want you to use.

And that is that the major impact, in terms of negative margin is now behind us.

Then if you go into the network segment and the services segment, there is some more detail with that regard, because there is still a bit of a lagging factor of network rollout.

But overall, we would like, as we said before, that we put this investment improvement in Europe from a financial-impact point of view behind us now and we look forward to more of a normal [logic] in Europe, which means capacity and coverage that we have had in many other markets throughout the years.

Right.

What I was asking on the Samsung is we have both with the large SEK4.2 billion chunk, which represents multiple quarters, or we can take it out entirely, which represents nothing.

But appropriately, this should have been a Q4 contribution of that SEK4.2 billion, and I'm wondering what that quarterly contribution would have been, so that we could use that as a quarterly guide going forward.

I don't know if you can give color on that.

I understand the question and it's well put as well, because you're absolutely right.

We have had this legal disputes, and during that time, we are not taking any revenues and that goes for several years.

And of course, a portion of that came into Q4.

So it should, of course, [distribute] it differently.

We cannot really give you any guidance exactly how much is [roped] in this case.

We are in agreement with Samsung about what we can disclose and not disclose.

We are going forward with a multi-year agreement right now, and royalties and licenses, and we are going to report that per quarter going forward, part of our IPR licensing revenue.

Okay, I appreciate that color.

Thank you very much.

And the next question is from the line of Tim Long from BMO Capital Markets.

Please go ahead, your line is open.

Thank you.

I wanted to follow up on China.

I think you said in the release, not necessarily on the roll-out part, but you talked about the initial sales diluting gross margins a little bit.

Could you talk about that?

Are you seeing that at both of the operators that you are working with?

And what do you think the time frame is for your business in China to take the normal course of a little bit dilutive in the beginning and bringing it up back to normal equipment gross margins?

Thank you.

So Jan here.

I think a couple of things to consider when we model China going forward.

I think we have the statement in the report is quite clear there on the operators that have chosen vendor and the one that had started then to deploy 4G.

They are in the mix in the fourth quarter, and that is also an impact on the hardware margin.

Then if you look into 2014, these contracts are, as we have said before, they are quite hardware heavy, initially.

The services scope though is not as big, as we have had scope-wise in, for instance, North America and European modernization projects.

So it's more -- if I may say that, more normal network route or integration-type of services.

It's more of a hardware element initially, and then as traffic starts to grow, we start to see software.

And I think we will, as Hans said before, deployment is ongoing as we speak.

And then we'll see about the exact seasonality and the distribution about these contracts.

I am sure we will come back in Q1 and report back on this one.

But they are -- for you to remember, it's not this big services group.

They are quite hardware happy in the beginning.

Okay.

Thank you.

I'll leave it at that one question.

Thank you.

And the next question is from Sandeep Deshpande from JPMorgan.

Please go ahead, the line is open.

Yes, hello.

I have a couple of questions.

Firstly, Jan, you talk about in the release that the negative impact from the modernization projects is mostly over with the fourth-quarter number.

So, I guess the gross margin in the fourth quarter is some baseline gross margin.

But you still have a negative SEK0.5 billion on the network roll-out.

How does that -- is that not to do with the network modernization and is that not going to roll off going forward from here?

Secondly, I have a question on the SSR routers.

You've got a large number of new projects there.

Would you say that during the course of 2014, that business will actually contribute to the bottom line, and thus, that will help the overall profitability of the network's business?

Thank you, Sandeep.

If I repeat what I have said the network modernization, on group level, we see that the majority of these projects, from a margin point of view, is behind us, and that's according to the plan.

That is according to what we have been communicating to all of you since late 2010.

Then as I also said, if you look in the detailed segment comments, there is one comment around networks, and another comment around services.

And there is still some spillovers in terms of network rollout and that piece also.

This (inaudible) in the operating income for network rollout.

So if you think about it from a Company viewpoint, it is -- it's not -- we see this as a non-issue from a gross margin point of view.

Then Hans, SSR.

Yes, on the SSR, I think you want to explain it, we had good traction and a lot of new customers coming on.

But it's time from the orders to getting to [save], so I think we need to be a little cautious about -- we are cautiously optimistic that this is a good in-road.

But from making that to a large piece that significantly impact Ericsson overall results, we have some way to go.

But definitely that is our plan.

Maybe 2014 is not the year.

But the in-roads and the market share we're gaining are enormously important in 2014.

So, Hans, maybe to understand that SSR route a bit, of those 96 contracts that you have, how many are already shipping?

We don't have the exact data on how many are starting to shipping, but of course, the ones that have started and that were reported after third quarter, many of those were shipping.

The ones that were now added in fourth quarter, they are probably up to be shifted.

I think that's where we are, but I don't have the exact number at the moment.

When we met at the investor day, we talked about the obviously, what we call the structure and decline in circuit-switched core, and the importance of winning new core.

And then we said new core is obviously [old] packet core and other core opportunities related, for instance, to IMF, (inaudible) mention before you [to see and so forth].

And we also stating the [report].

And if you look in the investor day packages, this is in order to improve margin over time.

To win saves in these areas is one important element over time.

And we also write in the report that business in these new areas is not yet enough to offset the structural decline on the circuit-switched core.

We used that language for you to try better understand the dynamics here.

Thank you very much.

We are ready for the last question in the session please, operator.

The last question for today is from the line of Francois Meunier from Morgan Stanley.

Please go ahead, your line is open.

Thank you very much for taking my question.

I would like to see if there is anything you could say about the Samsung litigation actually, because there are lots of question -- maybe there are lot of things you can't say.

But is there some form of [linearity] during the year?

Is it a quarterly payment?

Is it semi-annual payment?

Is it a annual payment?

Is it unit based?

Is it a fixed amount?

Is it a percentage of [sale]?

Was there any damage in the payments, in the one-off payments you received this quarter?

Anything you could tell us, we will take it.

Thank you.

You pre-empted basically everything that can happen in the litigation, so I'm not sure.

I think that we have pretty much said what we can say in this type.

We have signed -- it's a multi-year agreement going forward with a royalty and licenses.

We [at Ericsson is] net receiver, of course.

I think that is what we can say at this stage, and of course, very important is the performance also of the overall market.

But I'm not sure if Johan has any more comments to your question.

But we have disclosed what we are able to disclose in this agreement.

I think so.

Let's stay firm on what the agreement we have with Samsung here and not speculate too much.

Sorry for that.

Okay, so you can't say anything basically.

I think that the concluding remarks from me is very much similar to what I said in the beginning.

2013 was a year of continuous transformation of Ericsson, resource and capital allocation in new areas to succeed in not only the strong areas and core areas of Ericsson, but actually establish ourself in new areas.

I think given the market situation, looking backwards, we remain solid on our financial position, and after one year, we have improved our margins.

We always are striving to do better, but I think it's also a stable year and really defining our leadership and showing that we are going into new areas.

I think that is my summary of the year.

And now we put that behind us, and we now are full speed ahead in 2014.

Thank you.

Thank you ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect your lines.