Telefonaktiebolaget LM Ericsson (ERIC) 2014 Q4 法說會逐字稿

Welcome to Ericsson analyst and media conference call for the third quarter report.

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

(Operator Instructions)

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

Peter Nyquist will now open the call.

Thank you, operator, and hello, everyone, and welcome to this call, the Q4 and the year-end results call.

With me here today, we have Hans Vestberg, President and CEO of Ericsson; Jan Frykhammar, our CFO; Magnus Mandersson, Head of Global Services; Helena Norman, Head of Marketing and Communication.

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 materially due to factors mentioned in today's press release and discussed in this conference call.

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

Before handing over to Hans, I would like to mention, as you probably can see on this slide, that in the comments we have adjusted for the SEK4.2 billion in initial payments from Samsung.

For the full year, we have made an adjustment, of 2013, we have made an adjustment of SEK2.1 billion.

And for Q4, 2013, we have made an adjustment of SEK3.7 billion.

As you see in the adjustments, the impact will hit segments networks and support solutions.

Commentary made on gross margin and operating income considered these adjustments.

And our table displays the reported numbers.

With that said, I would like to hand over to you, Hans.

Thank you, Peter.

Let me just go over some of the key market developments for 2014 and I will do it pretty quickly, because some of you have probably already followed the press conference in the morning and read the material.

We can conclude 2014 continue with high demand in mobile data from consumers.

We will all see that operators have moved into focus much more on network performance, which means capacity enhancement and [instafication].

At the same time, we now see the next step of the technology revolution in our industry, which is very much about virtualization and cloud.

And that, coupled with the opportunities, are pretty big in the market and choice has been taken.

We see operators taking their choices.

Some consolidate, some went to other industries.

And we saw that too, in 2014 and we believe that will continue as we are in an inflection point of this industry.

We also talked about two very important markets for Ericsson.

North America, which leads the market with strong fundamentals.

We have seen investments even by quality and capacity enhancements during the year.

However, slower pace in the second half, I will come back to that.

China is probably doing the most rapid technology transformation that we've ever seen, with 4G passing some 100 million 4G subscribers in one year.

In total, we are now 7.1 billion mobile subscriptions in the world, growing 6%.

More important, a growth of 32% on mobile broadband subscriptions to 2.9 billion mobile broadband subscriptions.

That's a little bit on the market.

Given a look at Ericsson, 2014, excel in the core business.

We have, clearly both with business mix and efficiency gains, improved our core business.

We have also launched a couple of new products, where of course there is a regular system is important with first commercials during the year.

Professional services, as we believed in the first half, they would come back in the second half, and you can see why.

Very many managers with contracts that we signed up in the first half is now coming into the base, as well as the demand on system integration is, of course, high with all the softwares, from OSS/BSS, TV and media, that has to be integrated.

That's good to see.

At our [toys era] said we talked a lot about the capital markets.

We said that that market is growing 10% and that's partly why we've chosen them.

We can conclude that we grew more than 10% in 2014 in these target areas.

And that's good to see we have momentum in all five of these target areas.

Capital Markets Day, also we revealed our practical focus on reducing cost and we have the plan of reducing our cost base with SEK9 billion in 2017.

We are seeing the first activities here, especially with modems, which is ahead of the plan.

Definitely doing very well on agreeing on them, of life on the 7450.

That means that we know when we can ramp down these and when we can move resources to radio, because we're doing some part of that.

And when then we can reduce and discontinue other activities.

And that we have already seen happening in the fourth quarter.

Concluding also this was the year where we clearly see that our modernization work in Europe paid off.

We have strengthened our position and Europe, that has gone from coverage sort of project region to much more capacity.

Given a look at ourselves, full year, SEK228 billion and then for comparable units that's down 2%.

Of course, the softer mobile broadband business in North America was an important factor in the second half.

On the other hand, we had many other regions that were compensating through the year.

We saw also in the year, clearly an improved margin in the core business.

We produced some 7% full-year operating margin.

That should be compared to last year 8%.

But remember, last year we also had the business from, the settlement with Samsung, that Peter talked about, how we have tried to adjust in order to make it much more easier to compare the years, so we can see that.

Third consecutive year on cash conversion over 70%, which is the long-term target for the Company.

We're happy with that.

Good work to all our organization to reduce our capital structure, which meant also that, basically, with all the activities we have done we maintained our balance sheet and our growth cash position and Jan will come back to that.

Fourth quarter, down 2%, very much similar to the full year in North America, sort of a softer in mobile broadband.

Middle East, Europe, Asia stronger.

Of course, 8 out of 10 regions growing in the fourth quarter, which is also strength of the Company, where the largest region is not growing.

We had currency tailwind, which is helping us on top line, of course.

But also there are some other challenges coming on the hedging effects, which we will come back to later.

We think that our gross margin improved to 36.6%, which is of course good.

That led us an operating income of SEK6.3 billion, so 9.3% operating margin, which is clearly an improvement as well.

Here, of course, we see a good business mix, efficient in target, efficient improvements.

And on the negative side, we are on the peak on our OpEx.

As well said, we are addressing that in 2015.

We needed that to get the competitive portfolio, but now it's time to take that down and management is extremely focused on doing that.

We also had an impact on the currency, of course, that went negative.

Now you can just look at the region safes for full year, and clearly see that North America was not growing, negative 8%.

On the other hand, you saw everything from Middle East, India, Western Europe, Central Europe, growing for us in the year, sort of balancing out.

Then if you do the same bridge on the fourth quarter, we can clearly see that North America came down.

And that's, of course, in Swedish krona, so we had some tailwind.

Many other regions of course, eight of them, growing very well.

Highlighting the Middle East, that has been consistently strong for us.

But Western Europe, India very strong.

Southeast Asia came back very good in the fourth quarter.

Here you can also other that went down 35%.

In other, as we have explained many times, we have our broadcast services, some other small businesses, but we also have the IPR.

Here, you see the impact of that.

We had the Samsung payment at the fourth-quarter 2013.

That was a quick summary of where we are and I hand it over to Jan.

Okay, thank you, Hans.

I will briefly comment on the fourth quarter in terms of gross margin and operating income.

What I want to start with, if you look at the gross margin trend there in the chart, you can see that we could operate the Company now on a much better level of gross margins.

Typically in the fourth quarter, we have a high share of project completions, that is visible in network cloud sales in the quarter.

We had that this year, as well.

But we also had a much better overall business in terms of software, and also, if I compare with Q3, a better IPR revenue.

Also in the mix is that we continue with a high pace in rolling out the [cabridge project stem], mainly, of course, related to mainland China.

So overall, a good gross margin development in the quarter, and also partly supported by the FX development.

If we look at operating expenses, SEK17.8 billion in the quarter.

Typically we have a seasonal uptake of operating expenses between the third quarter and fourth quarter.

I'm sure many companies have that.

We have continued to invest in the target areas, predominantly in R&D.

That's visible in the run rates.

But as Hans said as well, when we go now into 2015, 2016, we will work with efficiencies and cost reductions in order to make sure, then, that operating expenses comes down here, gradually.

Then if you look at the hedge impact, I'll come back to that with a separate picture, so we don't need to comment that now.

Operating cash flow of SEK8.6 billion or so was a good recovery compared to the third quarter.

If you take the next slide, please.

Here, we then look at the sales growth adjusted for comparable units and FX.

You can see here that we have an organic FX-adjusted group sales in the quarter minus 2% and that was minus 7%.

Global services grew both in reported numbers as well as in organic FX-adjusted numbers, 10% and 5%.

Support solutions, minus 5% organic FX-adjusted.

We have the same major FX exposures to big currency in terms of top line is US dollars and that has been the case for many years.

If you then take, next, look at operating income.

So we do adjustments that Hans had gone through to create comparability with initial payments from Samsung there in Q4 of 2013.

We start really the comparison with an operating income of SEK5.4 billion as of Q4 of 2013.

That has been improved then to SEK6.3 billion, driven by two main things.

One is gross margin improvements, you can see that in this slide.

And also the fact that we have a net positive impact now from currency, including volatility reductions.

So, this means we are exposed to FX by means of translation and transaction exposure, but also when we include the negative impacts of hedge contracts, there is a positive contribution in the quarter.

And that's, I think, important to know.

Expenses up, then, so that offsets partly the improvement.

If you then look at the currency hedge impact, you can see here that we had negative SEK1 billion in the fourth quarter.

Most of this now is realized in the quarter.

That has, of course, to do with the profile of the year that we have the biggest dollar inflows in the fourth quarter every year.

So, most of this is realized.

Now, we have the hedging policy that we have, so we average have approximately five to six months hedge horizon.

We continue to disclose our closing rates when we go into 2015 on the quarterly basis on our homepage, which I hope improves the visibility of this impact for yourselves when you do the analysis.

And the rules of thumb here, in terms of impact on the income of currency movements still holds.

If we then look at the cash position, we start the year with a gross cash balance of SEK77.1 billion.

When we ended the year, we had a gross cash of SEK72.2 billion.

Operating cash flow, of course, positive for the full year, close to SEK19 billion.

We have spent approximately SEK5.3 billion in CapEx.

Acquisitions around SEK6 billion.

We have paid back some loans and we don't have any now maturing debt until 2017, and that's also disclosed in the report.

Then, we paid dividend.

Net-net we end at SEK72.2 billion, or a gross cash reduction of close to SEK5 billion.

Net cash then reduced for the year of slightly more than SEK10 billion.

This is mainly driven by the valuations of post-employment benefits.

And that's due to the very low interest rates that we now see in many markets.

For us, it's mainly Sweden, UK and US that impacts the post-employment benefits.

Okay, with that, Hans, back to you.

Thank you, Jan.

Let me talk by segment networks and go through a little bit what happened there.

Full-year, down 7%.

And we saw a year where we started a little bit weak and then had the second and third quarter a little bit stronger and then the last quarter coming down again.

Overall then, 7% down for comparative units.

The main reason is, of course, the mobile broadband business in North America in the second half here.

However, 7 of the 10 regions are growing mobile broadband, which is very good.

Sequentially, that hasn't hit on us.

We all had a sequential growth of 7%, but other regions that were coming up were Japan, Taiwan, and Mainland China strong.

We still, of course, would have declined then quarter on quarter to 27% on that.

North America we actually made SEK4.3 billion, with better software sales and efficiency enhancement where the negative impact from the hedges.

Not only that, of course, here is the area where we have high investment levels, so the OpEx is higher.

Still, we made SEK4.3 billion with all those.

We see the sixth consecutive quarter here of about 10% operating margin.

As you can see in the lower part of this graph, full year 3%, down.

Of course, Middle East played a role here, as well as mobile broadband in the second half in North America.

But clearly, significantly improved operating income with some headwinds from currency, as well as higher investment levels.

But that's what I've spoken about right now.

Magnus Mandersson.

Very good, thank you, Hans.

Hello, everybody.

Global services, we had a good 30% up in the quarter.

We are growing 9 out of 10 regions.

We continue to be a very strong in professional services, seeing demand increasing both on managed services, where you had 18% growth on.

Professional services was 12% in the quarter.

We saw managed services with 17 contracts.

So, very strong quarter for GS.

Network roll-out sales was flat.

And if we do the organic FX adjusted, say it's increased 20% quarter on quarter.

We're seeing very high activity on [annarow] and, as we said, on professional services.

Operating income is basically flat, the same level as last year.

Had, though, some negative impact from hedges.

That's explained by Jan before.

And of course, we had a high share of new managed service contracts coming in, as well.

Remember, we had the first half was intense on managed services.

They are now in full transition and transformation and that takes a little bit out of the bottom line.

On the full year, professional services, slow in first half, came back very strong in second.

Network roll-out declined almost with SEK6 billion, so we have had big portfolio shift here in global services.

We see continuous strong demand for our professional services.

So, all in all, flat income, as we said.

With that, I hand back again to you, Hans.

Popular guy today.

Yes.

Support solution segment.

Support solutions, down 5% in the quarter.

When it comes to saves for adjusted, meaning comparable units, we are transiting.

But you've also seen when we hit the SEK4 billion mark in sales here, we clearly have a good model because that suddenly turns into an 11% operating margin and a way higher EBITDA level over support solutions.

So, that's very important.

We have a good portfolio and we have good development across the portfolio.

We are constantly working in this area and we can see that we have a good grip on the costs here and we have good gross margins.

It's more about getting the volumes in on support solutions.

Modems, not dwelling too much on that.

We are ahead on the plan.

This is, as we have communicated, discontinued business.

We are ending our commitment on the 7450.

We have agreement on that, very important.

That means that we can do this rapidly.

Then, two last lines before the summary.

The Board met yesterday and discussed the dividend.

And as usual, we use our policy for dividend, which reflects on the earnings and the balance sheet of the current year, of 2014 in this case.

And then looking into the coming years, when it comes to the business plan, then expected economic development.

Doing that, the Board then suggest to the AGM, a dividend of SEK3.40, which is a growth of 13% from last year.

And the recording date of that is the 16th of April, 2015.

And as Jan said, we basically remain on our gross cash, even though we made repayments of loan, a dividend last year of SEK3 and also CapEx and acquisitions.

That's why the Board, when they looked at that, then looked at a future, then decided to grow the dividend with 13%, and sort of suggested that for the AGM.

Good.

Then I end up with two measurements that we use to show when we talk about the transformation.

First we have talked about the target areas.

We defined them as IP networks, cloud, OSS/BSS, TV-media and industries aside, which include three verticals.

We grew in that business with more than 10% last year.

As we said at Capital Markets Day, the combination of the market here is growing 10%, but we grew clearly above the 10%.

We see the good momentum in the Company.

We are managing the resources and capital allocation between the core areas and target areas in order to make this happen.

The other [pair of media] for transformation, of course, that we allocate our people, where they are and what type of confidence that they have.

That has meant that last year we increased with 4,000 employees.

But on the other hand, it was 15,000 people that left the Company last year and we hired 19,000 people.

Partly on other locations but also managed services and acquisition is included in 19,000 people that entered Ericsson for the first time during 2014 and being part of the transformation that we're doing.

To sum it up, I think we showed in the year of 2014, better strength in this game, both in the different business segments, as well as scale of different regions has panned out to us to manage the differences between regions and products.

We see the improving profitability, very much focus for the management, as I said now for two years, that we have not been satisfied with the profitability.

Now, we see that coming back.

Two major markets, Mainland China, the majority of the business is related to the LTE coverage rollout that is happening right now in China at the high pace.

When we then talk about North America, we say that with the current visibility, we anticipate that North America mobile broadband business to remain slow in the short term and that's with the current visibility.

As announced at the Capital Markets Day, we are now working with our cost plan proactively in order to reduce our costs.

Which we believe we have a good opportunity, given the changes and the transformation we have done in the Company.

By that, I hand back to Mr. Nyquist.

Thank you.

So, operator, we are now ready for questions.

(Operator Instructions)

Mark Sue, RBC Capital Markets.

I was wondering, just on your comments on the duration of the downturn in North America.

The carriers' incentives in the US seems to always reduce their CapEx.

They can only do that to a point until the churn increases.

Your comment that it's actually going to be short term may be proof points that things will return quite quickly to North America.

And your confidence that you've actually maintained your market share in North America, please?

Of course, we have a hard time, as they say, exactly.

Our customers need to communicate to the market what they are planning to do.

That's why we say with the current visibility, we believe this will prevail in the short term, that's what we're saying.

That's the visibility we have at the moment.

As you also mentioned, we feel that we have a good solid position in North American markets, both in mobile infrastructure, but also in services.

And now, also, in the BSS and OSS area and TV and media.

We are a much broader Company today in North America compared to five years ago, so we have more legs to stand on.

We'll talk more about mobile infrastructure in this case, when we talk about this short term that it will prevail.

Okay.

Understood.

Hans, you saw a decent bump in software.

I guess some of that is OSS/BSS.

Are customers taking a broader solution set from Ericsson?

Are there synergies in the acquisitions that you've made more so?

Are the deal sizes getting larger for you?

Maybe just qualitative comments as we work to improve your revenue growth and also work to improve your overall margins.

Thank you.

It's an excellent question, because you are right.

Of course, in the target areas, we are both acquiring companies and doing organic growth.

What we're doing right now, is what we're doing in every businesses we are doing.

We are putting this a system so it hangs together.

Of course, being able to give our customers a much more stronger solution is that where our OSS/BSSs are connected with a system integration in a totally different way.

And it can be connected to our mobile infrastructure.

Of course, this takes some time to do, but it should evolve that we have a good solutions for customers, that we can provide something more.

You are right, in the beginning you sell them in smaller portions and then you have the chance to sell something more.

That's our ambition, of course, to be part of transforming, especially the OSS/BSS when it comes to the next generation, data mining from OSS/BSS point of view.

Thank you; good luck.

Edward Snyder, Charter Equity Research.

Do see North America as the leading indicator of the trends you can expect in the mobile broadband, going from coverage to capacity then the cash generation?

What does that say for similar timing?

What's your view of the same kind of trends occurring in Asia?

Is that several years out?

Then I have a follow-up.

Thank you.

I think that, in general, you are right.

One needs to think about -- and, of course, this is a little bit different, but it's 7.1 billion mobile subscriptions in the world and it's 400 million 4G.

So, of course, it's quite a lot outside US, Japan, Korea and China.

When it comes to 4G, that means a half.

But even though the networks always are ahead of subscribers.

Because the networks need to be there before you can be a subscriber on 4G.

Of course, there are -- the coverage pace that Jan has told so many times before, that we have the coverage phase and then after comes the capacity phase.

We have talked about that in Europe.

In the Europe case where the toughest part of the coverage probably 2010, 2011, and into 2012 and then 2013 and 2014 we have another structure of it.

It is moving a little bit different from region to region, depending on how they deployed from the beginning.

Do you expect investments that you're making in media to generate sufficient growth to offset some of the slower performance in hardware?

Or will there be an extended time where top-line performance lags as those investments have to grow, given the relative size of the different groups?

Our ambition, of course, is in many of the acquisitions we've done in OSS/BSS and TV and media, they have been adding part of the portfolio, so we can be the holistic system.

Then some of the acquisitions in services, like the Red Bee and Technicolor, they are adding to the top line much more.

Service acquisitions are adding to the top line much quicker.

In the support solutions, what we acquired there is more components that we need for a full system.

To deliver this, of course, that takes a little bit longer time before it adds to our growth.

What we tried to prove today is that the total of various is now generating about the 10% from the market.

And, of course, we will continue to focus to see that we are growing that more than 10%.

Great, thank you.

Achal Sultania, Credit Suisse.

Hans, just a question on your European performance of your European business.

Obviously, we've seen [three] full quarters in a row where revenues have actually grown in Europe.

Can you just give us some color, as to is it mainly driven by just one key customer which has been spending on LT and upgrades?

Or is it more broad-based?

And what kind of signals you're seeing from other operators in this stage about increasing spend as we go into LT networks?

Okay, I can take that question.

It's Jan here.

So, if you look at Europe and look back to the whole of 2014, of course, what has been important for us is that we have seen good development on capacity, whether it's add-ons on LTE or densification improvements.

And then with network modernization footprints that we invested in for a few years.

And I think that's good.

Then, of course, we also had the roll-off on spring project announcements that has, of course, supported growth, as well, in Europe, especially when it comes to the second half of the year.

Then we have also been successful in signing many important managed services contracts in Europe in the beginning of the year that is now part of the revenue mix.

And then finally, of course, towards the end of the year we have also been a little bit supported by the development of the euro versus the Swedish krona, but that's more towards the end of the year.

So, overall, I think Europe is developing well.

But there is, of course, always attention to continue to improve both quality in the networks and so forth.

But I think those are -- the things I mentioned are the main drivers for the business in Europe.

Great, and then just a follow-up.

Jan, on the OpEx side, if I remember at the Analyst Day you talked about SEK9 billion of restructuring of which SEK4.5 billion was going to be in OpEx.

I presume like at that time, the idea was to retain all of this OpEx savings in your numbers.

With this FX movement, like, are you still looking at SEK4.5 billion of OpEx reduction in Swedish krona terms?

Or that number is going to be slightly lower, given the volatility in FX?

So, what we said at the Capital Market Day still holds.

What we said was that we are going to reduce the cost base with SEK9 billion.

Of course, currency is what it is.

We should know that currency is not the main driver for OpEx.

It was a little bit of OpEx impact in the fourth quarter because we have quite a lot of development in US dollar, as predominantly related to our IP investments.

But I think when we come back to the capital markets message, it's SEK9 billion.

Half, we think, is related to cost of sales and half is related to operating expenses.

You can rest assured that we are going to do our utmost to make sure that we deliver on the OpEx savings as soon as possible.

You also see in the report that we have guided for a restructuring charge this year of approximately SEK3 billion to SEK4 billion.

And that is then including what we see and the visibility we have for this program and the impact for restructuring charges for 2015.

Great, thanks a lot.

Gareth Jenkins, UBS.

A couple of quick ones, if I could.

I wondered if you could talk about the Chinese market?

It looks like China is flattish year over year after a very strong prior two-quarters growth.

I guess, should we end up in a situation with CapEx ourselves at 35%, with a similar situation that we've seen in Korea, Japan and North America, where maybe we take a bit of a pause for breath.

And then I have a follow-up on a different question, please.

When it comes to China, if you look at the full year, it was a little bit slower the first half of the year, but the second half year, of course, we saw some growth in China when it comes to their business.

I don't do any guidance for next year, for 2015 when it comes, but they are all on the big technology transformation that we have seen on 4G.

I guess, you better look at what they are guiding for, the Chinese operators, and asking us, because we usually don't want to speak on their behalf.

Thanks.

Gareth, let me ask you a clarification question.

When you talk about Mainland China, which number are you looking at, so I know?

I think we only have the 7% of sales for both years.

I know there's a lot of rounding error in that.

But, I don't --

All right, okay.

So, let's come back to if you look at the region Northeast Asia, they're obviously the main driver of the business in region Northeast Asia.

In terms of networks, for 2014, has been Mainland China.

Then towards the end of the year we have had, also, business coming from the new customer that we managed to acquire in Japan, which is good.

But the main drivers of the business in Northeast Asia this year, if I look at the full year, is absolutely Mainland China.

And also a little bit Taiwan, but it's not as big as Mainland China, obviously.

So, that's the big picture.

Right.

And just to follow up on a really quick one, is on capitalized R&D looks to have gone up fairly substantially in the quarter.

Just wondered whether, on a going-forward basis, if it would remain elevated levels or whether there's a change in accounting policy there?

Thank you.

No changes whatsoever in any accounting policy.

What we do here, in terms of capitalized R&D, is that we look at the different projects that we have, and since we follow the accounting rules, we capitalize and then we depreciate then over the course of the lifetime of these projects.

It's not the material item.

So it's nothing to think about, in particular, anymore then.

If you look at the full-year numbers, we have had the last three years, a little bit slowing trend in terms of capitalization.

That had to do with smaller, shorter projects.

It didn't really make sense to capitalize anything.

Now, when we look forward, we have some capitalized R&D in this quarter, but it's nothing that you should model in going forward.

Thanks.

Sandeep Deshpande, JPMorgan.

Thanks for letting me on.

My question is regarding your IPR revenues and then I have a follow-up question.

Clearly you're seeing, even if you exclude that one-off, you're seeing improvement in IPR revenues in the year.

Is this mainly because of foreign exchange or are there renegotiated contracts within your IPR business revenues in 2014?

No, I think we had separately from the outline in 2011 at the Capital Markets Day, that we felt we have a strong portfolio.

The market is growing with handsets.

This has been away for us to grow, and you are right.

Of course, our portfolio has been growing and our revenue has been growing as well.

But it's nothing with currency in here, just that we are working hard with that.

I think we have a very good position, as well as we are following the FRAND rules that are in the market.

And we have, basically, agreements with anyone in the industry, a cross-license agreement, which is very important in these discussions.

So, it's nothing unusual there.

As Jan said at the press conference today, when they got the question about distribution over the year, is that we have probably some seasonality in the fourth quarter, but nothing special one can apply for in the fourth quarter.

We have a fairly equal distribution.

It can go up and down a little bit in quarters, depending on how our cross-licensees are performing when it comes to their cell phone handsets or if it's infrastructure.

Then, if I ask a quick question on support services -- I mean support solutions.

In support solutions, is a very rocky quarter to quarter, your margins change?

Hans, you've talked about OSS/BSS as being a big portion of those sales going forward.

Do you see margin progression in that business, as well as potentially in the network roll-out being better in 2015?

What I would say about support solution is that there is not a [growth] margin problem in support solution.

We need more volume there.

But remember what I said at the Capital Markets Day, for us, OSS/BSS, for example, is consisting of businesses which is with Magnus in services as well as in networks.

That is the whole offering we have in OSS/BSS.

That is a very sizeable business and that's how it hangs together.

Of course, when we single out it in the support solutions, we need a certain amount of volume.

And that you see in the fourth quarter and then we make money.

I think that's a very, very important for us.

What we said about network roll-out was that we see a very good job there.

One that supports that we're concluding some of the more challenging projects.

The other is that Magnus and his team are implementing a lot of efficiency improvement in network roll-out, everything from [2s,] et cetera.

That's why Jan and I said that we see the light in the tunnel.

We're not saying when we're going to have that profitable business, but clearly, our aim is to get that to be neutral the bottom line, at least not having a negative impact.

That has been a huge focus.

The team in services are working on it daily and we see the progression.

That's why Jan and I say we see a good progression here.

Thank you.

Alexander Peterc, Exane BNP.

I'd like to comment a little bit on the seasonality in gross margins.

We usually have a weaker Q4 and a stronger Q1, and that's mainly pertaining to software delivered in the quarter.

So against the backdrop of this strong gross margin we have in Q4, should we still see positive seasonal impact sequentially into the current period?

Then the second question, actually just a quick follow-up on restructuring.

Can you tell us more about which business areas will be affected by the SEK3 billion to SEK4 billion to do that towards this year?

Thank you.

I'll take the first one on gross margin.

The second one, I didn't hear what was --

The restructuring in which segments --

Okay, in 2015, all right.

So, in terms of -- we'll start with the restructuring, then.

When you look at that, I think, when it comes to implementation of the service delivery strategy, that is going to continue to be something we do, of course, in 2015 as well.

So that's going to be related to cost of sales.

And as such, that's segment services then.

Other activities, we will, obviously, communicate as we announce things.

And we have a principle in our Company that we always communicate these things to the employees that are concerned, first.

When that happens, then we can also guide a little bit more on the segments.

I think when it comes to an assumption on operating expenses more to have it, perhaps, spread across all segments, as an assumption.

Then, on gross margins, yes, thank you for recognizing the good gross margin for Q4.

I think it was a good performance for the reasons that I mentioned.

So we had a recovery in the network rollout business in the quarter.

You can see that.

We had project completions.

We also had coverage projects that were quite hardware-heavy into Mainland China, and so forth, in the quarter.

Despite that, we did have a good gross margin development in the fourth quarter, driven by software then, and also other efficiencies.

So if I look at the first quarter, we don't obviously guide for the first quarter.

But I think it's important that you listen to what we say there around the mobile broadband business in North America.

I think it's important that you also look at and understand that we say that we have a good pace on 4G deployments in China.

At the same time, the first quarter sometimes have a good input in terms of software and so forth.

Then we have FX that yesterday when I looked at the US dollar versus Swedish krona, I think it was at [8.25] or something like that.

So, let see.

There are a few moving parts.

But we have been trying in the CEO comments to highlight the most important things that we want you to consider.

And that's really North America and also the fact that we have a quite big share of 4G deployments in Mainland China.

Okay?

Thank you.

[Alban Koci, Areach Research].

Thanks for taking my question.

Maybe a question for you, Jan.

I was looking at the operating income reconciliation and that's SEK3.7 billion adjustment for IPR.

This is the SEK4.2billion you reported last year.

Is the delta simply the back-dated part of the payment that you received then?

Or what's the big driver for that delta?

I think what we have done here, is that last year in Q4 we obviously booked the whole, what we call, initial payment from Samsung.

It was SEK4.2 billion.

There was an element, obviously, of the past in that initial payment.

The reason we used 2.1 is that that's the same adjustment that we have used that we communicated at the General Assembly when it comes to adjusting also our share program for Management.

I think that's, then, relevant to use the same adjustment here.

The reason that we adjust with SEK3.7 billion in Q4 is, of course, that we have divided it equally by quarters.

It's nothing else than that.

Okay, thanks.

Hans, perhaps just a clarification, as well.

When you talk about short term, do you mean -- what was the timeframe, is it up to a year?

Or is it shorter than that?

No, we have not quantified short term as exact months or quarters here.

But, with the current visibility, again, we believe it will remain short term.

But, of course, there are many parts to it.

Maybe Jan wants to comment.

Important, then, is that we highlight this, the drivers beyond, what we call, then, as slowness short term.

One is, of course, that our customers are in the finalization, I think, in terms of the big spectrum auctions that is ongoing in the US.

And I think what is important is, of course, to track the progress there and also the progress in terms of their build-out plans for the acquired spectrum.

So, I think by doing that tracking, I think your guess is as good as our guess.

What we then will do, of course, is that we will come back after Q1 and report on any progress into this visibility.

But let's look at the drivers and follow those drivers and then I'm sure your guess will be as good as ours.

Okay, thanks very much.

Thank you.

Tim Long, BMO Capital Markets.

Just two quick ones, if I could.

Back to the IPR line.

Given the litigations, or the negotiations with Apple, could you give us a little bit of color on how we should think about that line into 2015?

Obviously, there's going to be a revenue and margin hit.

So if you could try to maybe give us some scale, or if we should just think about it as Apple's percent of industry revenues as a good proxy, that would be helpful.

And then on the gross margins for the full year in 2014, just curious when you look year to year, how much of that do you think was the end of the network modernization deals?

It was obviously a big jump year-to-year.

I'm just trying to get how much was just the network modernization and how much was just normal business efficiency improvements.

Thank you.

Many questions in one.

On the network modernization projects in Europe, if you look at our commentary for the last, I guess, two years, we started to see the business mix shifting and the projects coming to an end here, in mid-2013.

Since then, if you look at the gross margins, of course, we have had an improvement, thanks to that impact.

In addition, of course, we have also seen good capacity business on that footprint.

But it doesn't explain the whole improvement, one should know that.

The whole improvement is explained by overall work on efficiency.

That goes both to commercial questions, as well as cost of sales reductions, in combination with a better business mix in general for 2014, then 2013.

The third element, and that's more towards the end of, or second half of 2014, then we started to see some positive impact driven by the development of the currency as well.

On the question around IPR revenue then, so we have a portfolio of very important customers.

We obviously will not disclose anything in regards to a particular customer.

We felt last year, when we did this big agreement with Samsung, that we had to communicate something, because it was such a material numbers.

But of course, both the Samsung and Apple are very important players in this market.

When it comes to the total patent revenue for 2015 and 2016, I think you just have to come back to the fundamentals.

We are working with a portfolio that is very strong.

We follow the fundamentals, which means you should look at the smartphone growth and the penetration of 4G phones and so forth, as very important indicators.

At then at same time, understand of course, that if we have a discussion with one of the bigger customers, that might have an impact.

At least it's an uncertainty on the revenue line.

I will not disclose more than that, for now, at least.

Thank you.

Kai Korschelt, Merrill Lynch.

Good afternoon, gentlemen.

Thanks for taking my question.

I had two.

The first one was just a follow-up on the capitalized R&D.

I think, Jan, you said it's not that material, but it looks like it's about SEK800 million, so it's quite a big number.

And it also looks like, at the same time, the modem OpEx has come down materially.

I just wanted to clarify, because I think we all expected the modem OpEx to get larger in structure and not transfer to the balance sheet that this is unrelated.

And that the modem OpEx decline is really due to cost-saving.

That was my first question.

The second question was for Hans.

I think in Davos last week, I believe you said that M&A does impact negatively.

As more of these deals are announced, I think there was one recently in Europe, maybe some of the other places.

How long do think that that impacts CapEx spend in these regions, and when, from your experience, shall we expect, then, CapEx to pick up again once the integration and merger dynamics have happened?

Because we expect an improvement in CapEx once that M&A has happened.

Thank you.

I will start, then.

The progress in terms of the decision to discontinue the modem development is going well.

The progress is slightly ahead of the plan.

The people that we said were going to transfer to the later development have been transferred.

So operating expense, obviously, have been shifted over there.

Secondly, consultants have left the Company and quite a lot of employees as well.

Obviously, we have then used the provisions that we have for the modems for that.

So, it's an operating expense that is a positive development that is structural, if I may use those terms.

On the capitalized R&D, I don't have any more comments than what I've already answered before.

Then, Hans?

So, it was a general comment on how Ericsson has impact on consolidation between operators.

My experience and Magnus's experience as well, which he is working as well, is usually short term, depending on how big the M&A is, or the consolidation is.

Of course, operator looks into what assets to have are a little bit less hungry for investments.

They wait a little bit, so you have a short-term impact.

Medium-term, you usually see more opportunities as they need to combine the networks.

So we have service opportunities to combine the networks.

Long-term, near-term, a positive, a stronger operator that buys more of our full portfolio that want to address a bigger market as a consolidated company.

Those are the three stages.

That's a general statement that, of course, could be a little bit different with different consolidation.

But it does work pretty good for us when we look into consolidations where we have impact with.

Okay, thank you.

Operator, we are now ready for the last question for this session, please.

Stuart Jeffrey, Nomura.

Sorry to end with a sequential FX question.

Because of the way you do your accounting treatment for FX, it looks like it's going to be an 18% tailwind into Q1 on the dollar-krona rate.

Assuming that's going to be half of your revenues, it could be argued that maybe you should see an 8% to 9% sequential benefit in revenues.

Is that something that we should factor in?

Or am I exaggerating some of the trends and there's some offsets that I should be aware of?

Thanks.

You are exaggerating some of the trends, Stuart.

Typically when I look at the revenue mix for dollars, typically it is between 38% and 42%.

So it's not half of the revenue, that's correct.

So it's slightly less than half; it's rather towards 40.

So that's important.

It is correct to assume that we reset the clock in terms of how we do averaging.

So we will then start with a more favorable dollar versus Swedish krona rate, if the rate persists.

That's also why we have started to disclose the closing rates at our investor relations homepage in each quarter.

So, I think there will be positives, hopefully coming from the US dollars-Swedish krona development.

But there are also some more challenges, which we have talked about.

And that is, of course, related to the mobile broadband business in North America.

So some short-term challenges in terms of the actual volumes and, hopefully, some tailwinds in terms of currency.

That's how we see it.

Great, thanks.

Before handing over to Hans for his closing remark, I will just welcome you all to the Mobile Congress in March 2nd to 5th this year in Barcelona.

Now just a quick closing remark.

As we have said on the early call, we are in transformation.

We're trying to manage this Company on an ongoing concern, generating both cash flow and operating income as we are transforming and strengthening the [toad] area, and fully defining our core area.

So that's what you're going to see from us in 2015 as well.

We will continue the work with that through our great leadership team that is very experienced.

And we will see that we'll take you good care of that.

And I hope to see you in Barcelona, where we most hopefully will have a lot of good news when it comes to product and solutions that we'll always launch when we come to Barcelona.

Thank you.