Telefonaktiebolaget LM Ericsson (ERIC) 2014 Q1 法說會逐字稿

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

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

(Operator Instructions)

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

Peter Nyquist will now open up the call.

Thank you, operator.

Hello everyone, and welcome to our call today.

With me here today are Hans Vestberg, Ericsson's President and CEO; Jan Frykhammar, Chief Financial Officer; Johan Wibergh, Head of our Network segment; and Magnus Mandersson, Head of our Global Service segment; and Helena Norrman, Head of Communications.

Via link, from [St.

Cier]; we have also Per Borgklint, Head of our Support Solutions segment.

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 risk and uncertainties.

The actual results may differ materially due to factors mentioned in today's press release 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 you, Hans.

Thank you very much, Peter.

I will start with the key developments in the quarter, focus a little bit on the market development.

Of course, one of the highlights was we're at the Mobile World Congress in the first quarter, but me and the leadership team, we have been both in Africa, Middle East, Asia, North America during the quarter to meet our customers.

We have definitely met all the revenue base of Ericsson in the quarter.

You can boil it down to three things that we discussed more than others.

Number one, clearly in the markets where data revenues are now overtaking the voice revenues, it's very much focused on the network performance, and the network performance is a differentiator.

Of course the data network is very different from the voice network.

Both are optimized in how you differentiate, and it's a great opportunity to differentiate, as well.

Of course we think that's very important, and we believe also that consumers and enterprises using mobility and broadband will be demanding that over time.

We can clearly see that discussion is ongoing.

The other trend that we have discussed a lot of course is the two new acronyms, SDN and NFV, software-defined networking, as well as NFV, which is virtualization on the network.

Both of them are the cloudification of the telecom networks, which are starting to be discussed and planned.

Of course, so far no one has really done it, but we are seeing more and more discussion of it, and seeing the benefits of it.

The benefits would be both lower cost for delivering services, but also time to market our new services by doing software-defined networking as well as virtualization.

Lastly, I think that in general we had discussion with operators from all around the world.

It's clearly that video traffic is increasing on networks, and video delivery efficiency will be very important if it's in the hyper network, or if it's in the radio network or the cable network or wherever it is, this is going to be very important.

Of course, for us, investing in those type of solutions both with product solutions but also in service solutions, we think that is a very important area.

On the Ericsson side, also local activities in the quarter, a couple of highlights.

We are in execution on the 4G contracts in China.

We are proud that we were nominated at the main supplier to the AT&T domain 2.0, which is really exploring SDM and NFV and creating a new type of network, the next-generation network, and of course AT&T, -- a leading operator in the world.

We also communicated that was awarded part of the Vodafone spring project, which is also an important thing to the market that's an incremental investment.

We were awarded several markets, and of course they will start in different paces here.

We also were in the quarter continued managed services.

Management will talk about it later on, but we was awarded several contracts in the quarter and will see good activities in all regions.

OSS and BSS important wins in the quarter.

We see good activities in this area.

It takes longer as its IP project, but definitely we are now part of all major RFPs and RFQs in this domain, and clearly have a chance to win them.

That's given our focus the last 24 months in this area, very important.

Then we had also of course (inaudible) the Ericsson Radio Dot System in the first quarter, which excited the market and ourselves quite a lot, because we are re-defining the indoor market.

The plan is still trials at the end of the second quarter, and then delivers at the end of the year, so we are in full fledge with that.

Let me then talk about the quarter, starting with sales.

Sales SEK47.5 billion, down 7% year over year.

Same trends as we have seen in the previous two quarters that we have lower activity on coverage project in North America and Japan.

These are large markets for us, and impacting overall networks and network roll-out.

That cannot be compensated or offset by the increases we see in markets like China, Middle East, Latin America support solutions, and professional services.

So that's how we need to see it, but it was the same trends, it's no new trend.

It is that we're going from a coverage phase into a more capacity phase.

That also meant our gross margin came up, because we had more capacity business and software business in this quarter.

Jan will come back a little bit more to the difference of it.

That led to an operating income of SEK2.6 billion, improvement in all segments, meaning support solutions, networks and services.

More (inaudible) was reported as a segment last year.

Finally, I would articulate that where there's strong cash flow in the first quarter, SEK9.4 billion in cash flow from operation, partly, of course, driven from the Samsung agreement that we made earlier.

That was partly paid in this quarter, but it was a good work with our capital efficiency.

[If land take] on the regional overview, I think this explains a lot.

We are down 23% in North America, with the same explanation on previous slide, very anticipated lower coverage project activity in North America, not offset by the capacity we have in increased revenue North America.

Northeast Asia then is a little bit mixed.

You see China coming up 4% to 6% from a fairly low value in Q1 last year, but of course you see the full-year activities happening.

On the other hand, Japan still a little bit slower than last year.

Of course, we also have the yen here.

One needs to remember that the first quarter or the first half last year was very strong in Japan and North America due to local coverage projects.

On the up side here at the end of the curve, Middle East, Latin America, Northeast, Europe, and Central Asia, and India all growing.

Other is growing as well.

[Portly's] IPO is growing, and that of course is expected as we now get the more important players in the [crosslighting] activity, but also to be pointing out to where broadcast solutions reported in other, that is also growing and we are expecting that our intended acquisition of Redby hopefully will be closed also in this quarter.

We're going to add even more capabilities into the broadcasting services.

By that, I'll hand it over to Johan to get into some more details on the first-quarter report.

Okay, thank you, Hans.

If we then start with the top line, we had top line of SEK47.5 billion in the quarter.

It was a reduction as anticipated for all of the reasons that Hans had already gone through.

I will save some time and go into the gross margin instead.

We had gross margin of 36.5% in this quarter, can compare with 32% Q1 of last year.

It's an increase both if we include or exclude restructuring charges.

It is driven then in order of magnitude by the capacity business in mobile broadband, which has led to a higher hardware margin in the quarter, but it was also then slightly lower restructuring charges, the increased IPO revenue, and somewhat lower network roll-out sales that contributed positively to this good gross margin.

The operating expense, SEK14.7 billion, SEK14.5 billion last year.

We all remember that we had the restructuring charges for the program in Sweden in Q1 of last year.

What we now see is an operating expense that is established on a higher level, and it has been reflecting the investments in new areas.

It's both the acquisition that we made for media room last year, as well as the integration of the modem business, and then the organic investments, mainly in R&D.

I'll come back to that briefly.

Operating income, then, the combination of these two, SEK2.6 billion compared to SEK2.1 billion a year ago.

It's improvements across all business segments, so that's good.

Operating cash flow of SEK9.4 billion.

It has to do, as Hans said, with the payment of the Samsung initial deal here, but also the lower volumes that we see.

This is very much tied to more capacity in the mix.

We have also during the quarter improved further the debt maturity profile by repaying two loans here.

If we now look at sales growth and look at the FX impact, we had about 2 percentage points of FX impact if we look at top line using the exchange rates a year ago, so about SEK1 billion of negative head wind in Q1 because of FX.

On this picture you can see then the organic FX-adjusted numbers here for networks minus 10, global services minus 3, but then also look at the professional services that this is growing, and support solution is growing both in reported as well as organic FX adjusted.

All in all, this takes us to minus 7% organic FX adjusted for the group.

We also had an impact of currency depreciation or devaluations in the quarter.

This was mainly related to Argentina.

You can see then that there is an impact there of SEK400 million.

If we look at the operating income and the main parameters to explain the bridge between Q1 of last year and Q1 of this year, we have to offset the parameters here.

We have a volume decline impacting the gross margin in absolute SEK, offset then by the improvement in gross margin.

Then we had the restructuring program in Sweden.

As I mentioned before, we had the modems and media room expenses, and then we had the organic expenses mainly in areas such as IP and OSS/BSS.

I want to make it clear here on this picture that the investments in the IP areas and OSS/BSS and so forth are investments that will take place gradually throughout the year.

Having said all of that, we will continue to proactively work on the costs, but I really want you to be looking at the OpEx here, because I felt you were a little bit low in your estimates for OpEx in the first quarter.

If we then look at the change in gross cash for the quarter, operating cash flow we talked about already.

All in all, we had a gross cash change of SEK2.8 billion compared to fourth quarter of last year.

Net cash improved SEK5.8 billion.

Investing, minus SEK2 billion, half related to normal CapEx in the business, and half related to acquisitions in the quarter.

Then you see there on the financing side the impacts of the repayments of some debt.

With that, I would like to hand back to Hans, I guess, or to Johan?

I don't know.

Thank you, Jan.

Let me summarize the quarter then for networks.

First of all, the radio business goes on.

It is quite stable and goes even though taking into consideration it was of course one of the major contributors to the drop in top line, but let's come back to that.

But overall we are quite happy with the competitiveness of the portfolio and the positive LTE business growth.

On the IP business, the SSR continues.

We had 13 new wins during the quarter.

That brings us totally up to 109, two-thirds where the application is mobile, where we feel we are taking customers, new customers on the mobile packet core.

On the thick side it's one-third on the contract on the thick side.

Of course, most of them are new customers too, as on the IP side.

This is fine, and we hope to continue to pick up momentum as we go along.

Also during the quarter we announced a partnership with Sienna, which means we will re-sell Sienna's optical portfolio, and we will also integrate WDM functionality in our routers by using Sienna technology.

We would also develop together SDN transport controller.

We announced it before in Barcelona, and that has generated a significant interest.

(inaudible) and we have been chosen a partner for AT&T for their user-defined network cloud, which I think is -- we're real happy to be a partner to them.

I think it's a strong feedback on our capabilities.

Outside our own top line, we were down 10% FX adjusted.

The main contributor to that were the coverage project as expected, and declined in North America and Japan, coming to an end this project, a fairly big project.

They were not fully offset by growth in China due to LTE roll-out, and growth in the business in Italy, as well as in Latin America.

We had a quite good portion of capacity business during the quarter.

That will positively impacted our gross margin.

Looking at operating income then, we reached SEK2.5 billion, and of course the major contributors to that was a large share of mobile broadband capacity business, some with higher IPR revenues, but also as we continue to work on our commercial excellence and cost efficiencies in the organization.

That led us then to a operating margin of 10%, which is then the third consecutive quarter with a double-digit margin, still a little bit too close to single-digit operating margin for me to be happy, but still happy that we had double-digit now for three quarters in a row.

Let me summarize.

I think overall on the profit side it was a good, okay quarter (technical difficulties) radio business strong.

IP and cloud is where we believe we are a challenge and we see good opportunities.

Business like IMS and UDC did well and keeping a tight grip on the cost side.

With that, over to you, Magnus.

Thank you, Johan.

Hello, everybody.

Let me summarize the quarter on the business highlights.

We see still a very strong demand for professional services.

We did 16 new managed services contracts.

We see that many customers is now asking us for multi-country deals.

We are also seeing it's not only on a regional basis, but also a global basis.

We have good growth in basically all our managed services on a global level.

We are also seeing that consulting and assistance integration, did nine significant contracts, mainly on OSS and BSS, and we're very happy for that.

Sales was down, currency adjusted, to 3%.

We see growth in seven out of the 10 regions.

Of course this doesn't help us to offset the decline we're having in North America and Japan.

But on the other hand we see professional services continue to grow currency-adjusted with 3%.

NRO is then, as we said before and everybody has commented, down 23%, mainly in North America and Japan.

But I will also say that we were running, still running the efficiency programs with NRO in excellence programs and that is paying off in the other regions.

When it comes to operating income then, we increased actually SEK300 million compared to quarter one in 2013, so we did SEK1 billion.

We have reduced the losses in NRO.

That of course because of the lower sales, but the progress at SSN, we're running in all of the other regions is producing good numbers.

I think the network modernization projects in Europe has also continued to trend nicely down, and we are seeing also capacity increases coming in, as we also comped before.

The operating income consequently we delivered 5%, compared to 3% a year back; so again, happy with the improvement.

But we have a stable profitability on professional services, as we have shown over the past eight quarters.

All in all, we have a solid demand on the business, and we have progress that supports a profitable growth.

With that, I'm handing over to Per.

Thank you, Magnus, and good morning, everyone.

I'll take you through some of the business units for solutions highlights for the quarter.

What we can see is we had a strong net sales quarter, with a 30% year-on-year growth, which of course is fueled both by very positive momentum in the area of OSS, so that we finalized media room during Q4, and it is also impacting then achieving our top line this quarter.

We also signed some very important OSS and BSS contracts in the quarter.

To mention one, the CenturyLink service agility contract with CenturyLink and the BSS -- (inaudible).

Over the year, we have had a 4% year-over-year organic FX adjusted sales.

We have finalized the acquisition of Asuki, which gives us a strong portfolio in this space of DRM and adaptive bit rate streaming.

We continue to see a very high level of activity in the quarter in both OSS/BSS, as well as within the media space.

Of course, sales is down quarter over quarter compared to Q4, but that is also of course by a significant part on the Samsung revenues that came into Q4.

The overall result came in at a 0% operating margin versus last year's, where we had a minus 1%.

I think I can hand over back to Hans.

Thank you.

Thank you, Per.

Let me talk about the last segment then, segment modems.

As we already talked about in Barcelona at the Mobile World Congress, our product 7450 is released commercially as of Q4 2013.

We are currently working on integration work with a Tier 1 smartphone manufacturer to get that out in the market.

Our expectation is to get sales in the second half of 2014, probably the more latter part of it.

This of course in the first quarter is more of an R&D business.

We had SEK0.7 billion in operating expenses, mainly R&D in Q1, and we reiterate just what was said in the fourth quarter, that we expect to have operating expenses of SEK2.6 billion in the year.

That leads me to the summary of the report.

I think we start then with the top line.

We were down 7%.

It is the same trend as we have talked about since the second quarter of 2013, that North America and Japan will be having lower activity on the coverage project, and that we see also in the first quarter, as is so in the fourth quarter.

On the other hand, we are in our business model on networks.

We're going from the coverage project phase where we gain market share, and now we're more in the capacity phase, where we both have capacity projects and additional software sales improving our profitability and the gross margin.

As we reiterated at the press conference, as well as in the earnings report, with the current visibility, the key contract award deal will gradually impact sales and business mix, mainly in the second half.

We have a good visibility to the long-term projects and what we have won so far in the last year and the beginning of this year.

That makes us believe that with all the visibility we have on that, that will lead to gradually impact on more sales in the second half.

But there was also certain different type of projects that will have an impact on the business mix.

However we will continue to drive a profitable growth, that we have done now the last two years to see that we secure good profitability as well.

It's good to see that now I think it's the third quarter in a row we are improving our profitability.

I can promise the whole executive team, leadership team, are very focused on continuing that work.

Finally, haven't talked so much about it, but our transformation into IT and new areas such as OSS/BSS, TV/media, modems, and of course IP, all of them are very important for our transformation and have a good business activity.

At the same time, our core businesses, mobile infrastructure and services, all the anchor tenants in our business, and they -- we need to secure that they are performing as they are doing right now.

We continue with our transformation to be relevant, both to create value for our shareholders and our customers, and definitely to see that we are transforming the Company to continued leadership.

Thank you very much.

Okay, thank you.

Operator, we are now open for questions, please.

(Operator Instructions)

We have Tim Long from BMO Capital Markets on line with a question.

Thank you.

Just two quick ones, if I could.

Hans, just love to get your perspective, a little bit slower start to the year.

I get the North America and Japan impacts, but generally speaking we've seen CapEx from service providers going higher.

When you look at the year, do you think the slower start for Ericsson is just a timing issue, or do you think there are some market-share movements impacting you.

Secondly, I just wanted to go back to the business mix.

You talked about the key contracts in the second half.

Are you implying there the business mix is a little more negative because of roll-outs and coverage in those new contracts?

I just wanted to clarify that, thank you.

Thank you.

When it comes to CapEx and market share, what we are communicate is that the market share -- we kept our market share in 2013.

We did improve profitability in basic low-level key segments like services, mobile infrastructure, and telecom equipment, that we can conclude right now.

That was important for us.

The same time as we improve profitability, and I think that's what we're aiming for.

When it comes to CapEx guidance and different operators, it's a little bit hard to make it go in any direct conclusion from our side.

But as I would try to say, we have good business activity, and with the current visibility of the long projects, because some projects are much longer and then we have the short ones that is harder to talk about.

But with the long-term projects, the visibility on those orders, they will impact gradually in the second half with positive sales.

Then of course your question about what type of business mix it will be.

That depends equally much on the other type of business we have at the same time.

But of course, some of them on longer term will have a natural coverage, but that doesn't necessarily mean that it will have a huge dilution effect.

I think that we will continue to work hardware profitability, and improving that.

Then we are going to see what final mix we will have.

We want just to give an indication that activity level is high with visibility on more long-term projects.

Maybe, Johan, if you want to add something?

No, I think that we have had -- I think the model holds.

I think that is one very important conclusion based on this Q1 report, in the sense that we have now had the majority of the mix has been coverage projects for some time, mostly by modernization projects in Europe.

Those are behind us now.

This quarter we had more capacity-related revenue, and with related impact on top line and gross margin.

As we go into the second half, there will be more coverage projects, meaning more hardware.

If we have a bigger service scope it may also mean more network roll-out, but not necessarily the logic that we have had in regards to the modernization projects in Europe.

Okay, thank you.

Thank you.

We're ready for the next question.

Next question we have Edward Snyder from Charter Equity Research.

Thank you very much.

Last quarter, Samsung IP agreement added about SEK2.9 billion in sales.

This period, the press release suggested it was closer to SEK4.2 billion in the current period.

Is that correct, and should we expect similar levels, or will this vary wildly based on sales or minimum payments plus up-side payments?

How do we characterize it, because it's having a really big impact on your gross margin and your cash flow?

I'm just trying to get a feel for how that plays out this year, and what you think long term for IPR?

Thanks.

Remember that investor meeting in 2011.

We outlined a strategy for IPRs where we believe we have a very strong patent portfolio, with over 30,000 patents and leading patents in 2G and 3G and 4G.

Now we have basically signed up all major handset manufacturers, all major infrastructure manufacturers, and we'll have sort of a green cross-license with them.

That's of course what is in base for our recurrent revenue in IPO right now, and that should be in light of our $5 billion in research and development.

I think this has been a strategy for us all the time to gradually increase our IPO revenues that we're investing in and that many are enjoying.

That's an overall statement.

This is of course a focus area for us, and a very important one.

To clarify then, in the fourth quarter of 2013, we added then the agreement with Samsung, which we then called the initial deal or initial payment that was corresponding to SEK4.2 billion.

We also said in the fourth quarter that we were going to get paid then early in 2014 for that, which has obviously impacted the operating cash flow in a positive way this quarter.

I will say that when it comes to the IPO, our business and the long-term growth prospect is absolutely correct what Hans said, of course.

I think also when it comes now to understanding the margin and the margin profiles and so forth of the Company in Q1 and going forward, I also want to clarify again that the way we report -- the way we write the report is that we write the explanations in order of magnitude.

When I say that the most important impact in terms of the positive gross margin development was the capacity that is then through, and then you have the different explanations in order of magnitude there.

So as a run rate level, though --

Ed, thank you.

Next question please?

Next question comes from Mr. Francois Meunier from Morgan Stanley.

Please go ahead, sir.

Yes, it's actually Francois Meunier.

Yes, a question about the non-controlling interest in the P&L, Johan, which is around minus SEK400 million -- that's about 20% to 25% of the net income that just disappeared there.

If you could explain where is this coming from, and maybe tell us as well where or what is the new base for gross margin going forward?

You've printed up SEK6.5 billion.

If you exclude the FX one-off, it was up SEK7.3 billion.

As always, quite difficult to know what the new level of gross margin should be.

Thank you.

Thank you, Francois.

Thank you for the questions.

I think if you start with the quite detailed question, then, on the minority interest, we have still as a Company, we have a few companies with minority interests.

Typically in countries such as China and Korea we have those companies.

In this particular quarter we had some obviously negative impact from some of those companies.

I wouldn't set that as a trend going forward, but just explain it as cost related to some activities in those markets, and let's come back to what the number will be in the second quarter.

I wouldn't throw too much conclusions on those numbers now in Q1.

Then on the great question around the margin and the new baseline for margin, I'll come back to stuff said many times that on the business we have right now and that we have had now for a few years, which is predominantly the mobile broadband infrastructure related services and managed service, the key parameters here are really the amount of capacity versus coverage projects in the mix, and also the share of new managed services contracts in the mix.

On those two parameters, then, we have said clearly that this was a good quarter from a capacity business point of view, with the explanations that we have made on the gross margin there.

On managed services, Magnus has said that there is good demand and we have signed 60 new contracts.

I think what you can conclude from that is that overall it was a good gross margin quarter for the business we have.

Okay, thank you, Francois.

We are open for the next question.

Next question comes from Gareth Jenkins from UBS.

I have a couple, if I could.

Firstly, Jan, you said you felt that OpEx maybe people were a bit high on.

I think if we exclude the OpEx related to the thin modem business, your OpEx grew about 4% year over year, which is consistent with the somewhat growth that you expected for the year, organically.

Could you give us a sense of the OpEx growth that you expect in 2014?

Is it in line with that 4% for the remaining nine months, or should we expect a faster growth rate as some of these investments accelerate?

Then I have a follow on, please.

Okay, what I meant, Gareth -- I'm sorry if I were wrong -- I said I felt that you were a bit low on the OpEx estimates in the quarter compared to at least where we came in.

I think that's also why we decided to show the OpEx elements there in the operating income bridge.

If you look at the bucket there that is called organic OpEx increases, or so forth, what you should read into that is that's a gradual investment increase throughout the year.

Of course, we will continue to work hard to find reductions in operating expense as well, but if you want to be on the safe side to say, you take that organic bucket and increase it somewhat by quarter, and then you end up probably closer to where the OpEx will end.

Great.

Again as a follow-up, I just wanted to explore a bit more detail around these temporary additional project costs in North America in the services business.

Could you give a sense of whether that's literally just a one-quarter impact, whether it rolls away, what it's related to, and whether it affects your target to break even with the network roll-out?

Thank you.

Of course it's always easier to try to -- first and foremost, on the network, if we start with a bigger picture on network roll-out, have to make sure that everyone has the same picture.

Network roll-out is not a high-margin business for us.

It's an important enabler to win big mobile infrastructure contracts.

Having said all of that, we are not satisfied with being just making in the business, and we work hard to make sure that we at least get to a break-even situation.

On the temporary costs related to North America then, which is the main explanation for the network roll-out reduction or loss this quarter, it's very much similar to what we had in Latin America in Q1 of last year, so I would label it as a temporary thing.

Having said that, we will work hard to make sure that it's a one-quarter effect, but we will leave it by that and say we will work hard to make sure it's a one-quarter effect.

Okay, Gareth.

Next question, please?

Kai Korschelt from Deutsche Bank is online with a question.

Yes, hi.

Thanks for taking my question.

The first one was on the US.

As I look at the network sales, I think they were meaningfully better than normal seasonality in the quarter.

I'm just wondering is this a sustainable improvement?

Basically, have we seen the trough or the worst in Q4 last year, or is there still limited visibility on the US this year?

My second question was just a follow-on on OpEx.

Just wondering if the right way to think about it is we should sort of basically take last year's number, deduct the OpEx increase in Q4 from the modem business, and then sort of add the SEK2.6 billion?

Is that kind of the right way to think about it?

Thank you.

If I start with the US market -- again, we are not going to guide exactly what the quarter when things are happening.

There are a couple things.

First, overall US is the most advanced mobile market at the moment with both technology and applications, handsets coming out there.

We see a great innovation and demand from the final consumers and final enterprise customers in that market, and that's very important.

Then our customers of course going through different phases, how they invest, if we talk about networks.

We have had a fantastic journey in North America and the US the last couple of years where it has been high investment levels.

Ericsson has a very good market share in that market.

Now when they come in this moment, now we see more densification, and much more capacity upgrades on the networks, but of course it will always be a next phase of that, as well.

When that comes, et cetera, that's nothing that we are guiding on right now.

We should add to that, as well, that our support solution and our professional services business are working to offset that by start growing as well.

I think we're doing a good job to keeping very important position in the market that is spending the most on CapEx in the world.

It has been down now for three quarters.

When it comes to spending, because of the business cycle, let's see when it comes around.

Kai, can you please repeat the question on OpEx so I don't get the answer wrong?

Yes, sorry.

I was just asking -- I think you guided for the modem business to add SEK2.6 billion on a full-year basis.

I think that in Q4, some of that SEK2.6 billion was already in there.

I'm just wondering if we should think about this year's OpEx number as basically taking last years OpEx, maybe remove SEK800 million, which is a Q4 impact from the modem business, and then add SEK2.6 billion for the full year to get to a roughly a full-year OpEx number for this year?

Or is there an underlying increase in OpEx as well, outside of the modem engineers and the R&D before the ramp?

Thank you.

I think the way to think about it is that we have repeated again in this report that we estimate that the OpEx of the modem business will be approximately SEK2.6 billion for the full year.

It's right to say that we had for the first quarter slightly higher operating expense.

We will obviously work on taking that gradually down here during the course of the year, so that's why we also hold to the SEK2.6-billion number, Kai.

So it was a bit front-end loaded, then I guess, the OpEx.

Okay, Kai.

Thank you for that.

We are open for the next question, operator.

We have Mark Sue from RBC Capital Markets.

Thank you.

Looking at the overall order trends relative to a point a year ago, maybe Hans, just some qualitative comments and your ability to refill the funnel?

Just kind of the views of the pace of activity in Europe for this year, and just kind of how we should think about the reversal in trends and timing for that in North America?

At a high level, the business is very cyclical.

It goes up and down in regions magnified by coverage in capacity.

Are there any considerations to adjust the fixed cost and variable cost so that we don't have these big swings in operating income, and model seem to work in an up cycle, but it actually hurts Ericsson when regions and mix hit a down cycle.

Maybe how you're thinking about that?

Thank you.

Okay, that was a lot of questions in there.

If you start with the volumes and how we see that, and of course, again, how we are working with it is that we are having our core businesses, which is mobile networks and services, they have the growth rates in the market and we are of course planning to exceed those, but they are fairly low.

For network equipment, we have said that it's 3% to 5% per year from 2012 to 2015, and of course that's one.

But then we're investing then in OSS/BSS, TV/media, and all these areas which have a higher growth rate.

Of course, they are too small to make an offset today.

Then when you talk about the network deployment, where it will come from, I think it's -- the only ones that we can talk about, of course, is the ones we have announced.

We have announced spring with Vodafone, which of course are in the large European countries, you can say.

We talked about China, so I think those are the ones coming in there.

Then when it comes to adjusting the cost base and variable, we have worked a lot on that.

We have much more variable cost today than we had before, and we are adjusting very quickly.

If we see that it is a long-term decline in certain markets, then we will do that immediately.

Thank you.

Okay, we are open for the next question please.

Next question from Mark McKechnie from Evercore.

A couple questions.

On this European 4G upgrade, and maybe even more broadly -- but you've got project Spring kicking in, how meaningful do you see the revenue, given that you had a modernization footprint built out there?

Better asked, is this going to be more of a capacity style economics when these European modernized networks upgrade, or is there still more coverage to be done in Europe?

On that note, I'm trying to get a sense for your operating margin in that network business above 10% here.

Do you expect that 10% to go higher throughout the year?

That's it, thanks.

Okay, Mark it's Johan here.

On the modernized footprint in Europe that we have now invested in for a few years, we started to see already last year some capacity revenue related to that footprint, which we communicated.

If I recall, it was I think in the third quarter or second quarter already.

If you now look at the business in Europe during 2014 and 2015, it will be a mix of normal coverage projects, meaning that the customers will put out more macro base stations to continue to build coverage of 3G and 4G services, but it will also be capacity business in those networks, in terms of further software releases, and so forth, coming with LT advanced and all of those things.

It will be a combination.

What I think is important is that it will not be the big modernization on the takings that we have had for several years.

It will be more normal coverage and then mix with what we will call capacity here.

I think if you look some of these projects, such as for instance the Vodafone Spring project, that is an event for 2014, but I would say it's more an event for second half of 2014 than for second quarter 2014.

Then I think if you look at the certain markets in Europe, certain markets in Europe continues to develop well, like in UK, Germany, and so forth.

While there has been a bit of slow-down in countries such as Spain and Italy here in the first quarter, partly driven by normal macro economy, but also some consolidation discussions amongst operators.

But overall, we maintain our view that we have a more positive view on Europe overall.

Got you.

Then on China your APAC business wasn't as strong as I would have expected.

In fact, any geography outside the US was down about 30% quarter on quarter.

Want to get a sense for -- I know that's more of an overlay project for you -- but did we not see as much of an impact from maybe revenue recognition from China, or was that Japan falling off?

Would you expect your APAC region to be impacted more favorably as you move through the second quarter and through the year?

Thanks, Jan.

I can start by answering, and see if Johan has anything more.

But of course Japan was the big drop in sales in northeast Asia.

China grew with 46% in the first quarter for us, but that should also be clear that we had a very weak first quarter 2013 that we're comparing to.

But still, activities on 4G is happening.

The large drop in northeast Asia is coming from Japan.

That's very much related to the large project running there, which has a much lower pace at the moment.

As we discussed late last year, we have new customers coming in Japan, as well, but that will affect us later on this year -- not yet.

I think two more additions, then, if I may.

If you remember in January, we said that one of the uncertainties that we see for the first quarter is really the financial impact in terms of top line in China.

Typically, there is a little bit of a seasonality in China with China's New Year and so forth.

We saw a seasonal impact in China.

We believe that the 4G executions that we have will be more visible in the mix, then, in the second quarter and third quarter.

Then on the final point, perhaps, is your comment on overlay network -- that's not really correct.

We are building a multi-standard network there, but I think the services scope we have in China is not as big as we, for instance, have in Europe or in North America, so we do more basic installation, surveillance type of business.

The operators do more work themselves, there.

Thank you.

Waiting for the next question, operator?

Chris Hogg from Merrill Lynch is online with a question.

Hi there.

Thanks for taking my question.

You've highlighted some good momentum with your SSR products.

I think that's an additional 13 contracts signed to date, so that's 109.

Can you talk about how many of these contracts have actually reached the shipping phase, and when we could expect these contracts to start to contribute towards better profitability in networks?

I think a big portion of them are in execution, but of course, the last that we have announced, they are just awarded, and now we're going to deliver them later on.

I'm not sure that Johan has any more detailed information on that, but the majority of them has been shipped, but the ones we're sort of announcing in this quarter, they are unlikely to have been shipped so far.

They are in the mix, but they are not big in the mix yet.

I also think we have to remember that these are contracts that means that we establish ourselves in the install base, and we get an opportunity to sell more software and hardware into those install bases.

Part of them are in the mix and we will start to see some impact later in the year of these contracts.

Very clear.

Thank you.

Okay, operator, we are now ready for the last question for this session, so please?

Simon Leopold from Raymond James is on line with a question.

Great, thanks for squeezing me in.

I'm happy to be joining the call here.

A couple of things I just wanted to see if we could chat on.

One is in light of kind of the CapEx trends in the near term, AT&T up-sided the quarter in terms of spending.

Could you help folks understand the alignment, or matter of fact, lack of alignment of your business to strict CapEx trends?

Longer term, what I was hoping we could get a little bit more color on is your feelings about China contributing to your business, and your feelings about Europe in terms of 4G adoption and ramps beyond project Spring from Vodafone -- how you feel about that shaping up over let's say the next 18-24 months?

Thank you.

Okay, thank you very much.

We'll start with the CapEx alignment, the normal alignment.

I think that when we see announcement with either increase of CapEx or decrease of CapEx, that doesn't tell us too much.

We need to be much closer to our customer in all of the details of what they're investing in.

Many times CapEx could in a coverage phase include constructions, et cetera, that we are not addressing, as we are addressing mainly the electronics and the installation of that.

It could also be sort of a CapEx investment in areas like building system, et cetera, important.

Then other customers are doing more on the OpEx side, which is equally important for us.

You're right.

It's hard for us to draw a conclusion when we see a number coming out in the market.

We need to be much closer to the customer to understand what type of content -- is it in your CapEx and how are you planning to spend OpEx?

Because that is really what we're addressing with our full portfolio of Ericsson.

Then Europe, about 4G in Europe.

I think as we have said now for at least the last four to six quarters, the activity level in Europe of deploying technology has been high, at least for Ericsson.

As you have seen also before as well been growing our networks distance in certain quarters in Europe when it comes to deploying new technologies.

I think that Europe has geared up for having networks prepared.

Now it's of course to get phones out and getting the usage of the network.

I think that I'm a little bit more on the positive side when you look on technology deployment in Europe, where many are speaking we don't see those investments.

We see those investments and the European modernization that we had done or now ending; or of course a big contribution to bringing in 4G.

Then on China, I'm not sure I understood the question about a meaningful China will be, if that was the question.

I think as Johan said, we have announced that two of the three operators in China has decided 4G.

We are part of those two.

Remember on 3G, Ericsson only supplied one customer, because the two others have technology that we didn't have.

I think that it's large volumes in China; but then as I've said so many times before, is that compared to our overall market share in the world of mobile infrastructure, we would have lower in China, but we will be the largest non-Chinese vendor in China.

I think also Johan (inaudible - low audio)

If I'm on a model a bit -- if you look at the services share we have in Europe and in North America, it's close to 50%.

If you look at the services share we have in the region northeast Asia it's 17%,18%, perhaps 20%.

It's a more basic product near services scope we have in northeast Asia.

Roll-outs of 4G in China will impact the networks business, and also the network roll-out business in services to start with.

Then later on that will be normal customer support revenue and so forth.

But that's kind of the sizing of the opportunity.

Thank you.

Okay, thank you.

By that, maybe some closing remarks from you, Hans?

No, I think that very helpful questions on where you're seeing (inaudible) reports to be explained.

I think it comes back to a lot about North American market -- that of course we're working diligently, where we feel we have a really good position.

We will continue with our push for profitable growth, and then of course to see that we're growing in the areas that we're investing right now, OSS/BSS, TV/media, IP modems -- that's going to be important for us.

I think we know pretty much how we need to focus going forward, and then that's what we're executing on going forward.

Thank you.