Telefonaktiebolaget LM Ericsson (ERIC) 2015 Q1 法說會逐字稿

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

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

(Operator Instructions)

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

Peter Nyquist will now open the call.

Thank you, operator.

Hello, everyone, and welcome to this call today.

With me today, I have Hans Vestberg, our President and CEO; Jan Frykhammar, our CFO; and Helena Norrman, Head of Communication and Marketing.

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 uncertainty.

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.

With these words, I would like to hand over the call to you, Hans.

Thank you very much, Peter.

Let me start with a couple of key developments in the market, and as I usually do, talk a little bit what's happening in the market.

I think a couple of things are very important.

One is that what everyone have been talking about, the [network cycle], the mobile, the broadband, Internet of Things.

It's just coming down in all our conversations in our industry but also with other industries.

We are in the inflection point.

And that's, of course, a very important knowledge that we need to have, in order to see how the network is going to be [capable] for the future.

So, that's one thing that we have been debating much more with our customers recently -- how they go to a digitalized operator and start getting into revenues from other industries.

And then, LTE -- we see that much broader right now.

That is the predominant deployment technology right now within the field.

Not all markets have LTE, but I have to say the majority are now starting to deploy it.

Prices on handsets coming down, which means that we have a different business model because the usage of 4G technology is, of course, much higher than 3G and (inaudible) data consumption.

On that note, of course, China continues with a very high pace of coverage of 4G.

And notably, it has almost reached 100 million subscribers last year in less than one year, when it comes to 4G.

Consolidation is another theme in the quarter, and after the quarter, I guess, on all minds.

Not only that our customers are consolidating -- and I've spoken about it before; I don't think it's strange.

Everybody is seeking for how to be the best, and how to address this changed world with the data consumption and digitalization.

But now, it also goes for our industry, where we have read, all of us, that there's a planned merger with two of the larger equipment manufacturers in our industry.

That, of course, also indicates that they are changing strategy to gain both scale and leadership.

I think, again, that is also a reflection of an industry where that's gone from 15 vendors in mobile infrastructure; that now is almost coming down to three in 10 years.

It's just a dramatic change in industry.

From our point of view, we continue to execute our strategy.

I think we took these decisions already 2010.

We have our core businesses.

We believe they are super important for us, but we're also developing new, adjacent businesses that are supporting us and our customers when they are moving into these areas.

Lastly, I guess, one thing that is also important from a market point of view this quarter is the currency movements.

And as you very much know, our only large exposure is between the Swedish krona and the US dollar.

And the movement we have seen in the last 12 months, but even in the shorter time frame, is one of the larger movements in currency.

And of course, that makes some of the line items a little bit hard to analyze.

Overall, we understand, but that is, of course, very strong changes.

Overall, a weak Swedish krona versus strong US dollar is good for Ericsson.

And over time, we will get all the benefits from it.

Right now, we get some negatives from it; overall it's positive, of course, but we get some negatives from it as well, given that we have some hedges.

But overall, positive.

If you look at our sales -- same trend as in the end of the third quarter and in the fourth quarter in North America: less spending on the mobile broadband in North America from the customers, from the reasons that we have talked about so many times before.

External reasons -- everything from mergers, spectrum auctions, which makes it a little bit slower.

And I have all understanding for that at the moment.

I don't think that the market, as such, has changed.

We see even more competition coming up, and new, innovative models coming up in order to meet the growing demand of mobile broadband and new Internet services.

Our own transformation -- going as planned.

We talked about target areas last year.

So, we bundle them through here, so I hope you remember what it consists of.

Grew good last year -- over 10% with that.

That continues into this quarter to grow well, as well, even if we exclude the currency impact.

That is good.

The cost and efficiency program -- according to plan.

You saw a lot of activities in the first quarter.

We did some in the fourth quarter with modems, et cetera.

We are continuing -- we are expecting to ramp up activities even more here in the short term, as we have announced.

For example, the notification in Sweden, which we are aiming to be concluding in the second quarter.

The portfolio that we launched in Barcelona has good tractions -- everything from the new radio, Ericsson Radio System, to the 6000 Router, to the applications that we launched of optimizations of different type of ports on the network, even including, of course, the launch of the data center hardware together with Intel.

We also have to mention in the quarter, of course, which is an important event that we ended up in litigation with a large handset manufacturing company in the beginning of the year.

That has not been resolved.

We have seven ongoing litigation in the US market at the moment.

We believe we have a very good position.

We are the main contributors to all standard or to -- or main contributor of standard-essential patents for 2G, 3G, and 4G.

We don't believe you can do a phone without having our patents.

We are, of course, defending the ways we are working in this industry, where everyone is having cross-licenses.

We have agreements with basically everyone in the industry.

So, unfortunately, we cannot get to a commercial agreement or a cross-license with Apple, even though we believe we are doing a fair and reasonable cross-license.

That's why we are in this process right now.

Nothing more to say -- we're in the process of different court procedures, and we will report if something new happens.

Finally, we did one acquisition in the quarter, and that was an acquisition in China.

That is to broaden our portfolio in China, that historically has been very much about our core business -- meaning mobile infrastructure and services.

Here, we take the first step in to be a supplier, also, on the OSS/BSS in China, acquiring a company that is having expertise in system integration for billing systems.

If I then go into the numbers of the quarter, growth of 13%; long time since we were at 13% of growth.

However, that was a tailwind coming from currency.

We were down organic FX adjusted with 6%, fairly similar to the fourth quarter, meaning same patterns and same markets.

Professional Services was very strong in the quarter; you'll see that when we come to it.

There are some regions as well; I will come back to that.

I already mentioned that the same trend on the slower mobile broadband business in North America continuing this quarter, and the currency, of course, has been helping us.

Looking at the operating income -- down 19% from SEK2.6 billion last year to SEK2.1 billion.

The main decrease is in Networks.

We'll come back and explain that, but it is the same parameters we talked about before.

We have also higher restructuring charges in the quarter.

So -- however, Global Services has an improved profitability.

If you look at the regions -- and here, you see a little bit how it has panned out.

I mean, a fantastic or phenomenal growth in India -- 108%.

I've never seen that before.

But also, the whole Asia is growing from us, even in constant currency.

You'll see that southeast Asia, northeast Asia is growing.

Add that to Africa is now growing as well, on a fairly high-paced 19%.

Europe, to a certain extent, is growing as well.

The regions that are not growing, especially in constant currency, is North America and Latin America.

And North America, with the currency swing, you can then understand that we are having lower activity level there in dollar.

And then, of course, that's -- the majority is in the Network segment, as well.

So, that is the swing we see in this mix.

But that's the same mix we had in the fourth quarter, so it's no different from that point of view.

I will hand over to Jan to talk you about the details of the P&L.

Okay.

Thank you, Hans.

So, I'll go quite fast here.

So, if we take the gross margin, 35.4% compared to 36.5% a year ago, we have established ourselves on a higher level, compared to the performance in 2013.

The main reason for the reduction compared to the year ago of close to 1 percentage point, or a little bit more than 1 percentage point, is what is highlighted here on this slide.

It's the lower business volume on mobile broadband, driven by lower capacity business in North America, and that's been offset by continued fast pace of 4G deployments in mainland China.

And that is the most important factor.

When it comes to business mix, and the share of coverage and capacity and so forth in the Networks business, in the rest of the world there are no changes.

So, this is the most important dynamic, if I may say so, in the quarter.

Gross margin, then, in terms of Q4 performance -- well it's what's highlighted there.

We had slightly higher software sales and IPR revenue in Q4.

Operating expense -- SEK15.6 billion.

We know; we have been aware all the time that we have a higher operating expense run rate in the Company.

We took a conscious decision on investments in the portfolio there in the beginning of 2014.

We knew that we were coming into this year with a higher run rate.

But we also announced at the Capital Market Day in November a cost reduction and efficiency program that is not impacting the portfolio areas that we are investing in, but rather is about releasing efficiency in the Company.

And it will take into later part of this year before we start to see run rate savings here.

I also want to say, then, that we have -- our intent is to book the restructuring charges related to the Swedish program here in the second quarter -- the major part of the Swedish program in the second quarter.

If you look at the restructuring charges in the first quarter, they were around SEK600 million.

The majority of those are related to execution of this cost reduction and efficiency program in service delivery in various parts of the world.

That activity will also continue, of course, in the second quarter, but I want to highlight that the bigger restructuring charge related to Sweden, we will take in the second quarter.

Operating income, then, reduced year over year to SEK2.1 billion.

And if you take the next picture, you'll see the bridge here of operating income items.

So, as expected, we have a positive support by the currency development; also, as Hans said, net of the hedges.

So, that is good.

I also want to say, then, that there is, in terms of the forward hedge contracts, now you see that there is a realized impact of SEK1.1 billion, and unrealized of SEK0.3 billion.

And this has, of course, to do with seasonality of payments.

So, typically, the way this works is that we build up the hedge portfolio for Q3/Q4, and then you have the payments coming in Q1 and Q2.

And that means that you have realized impacts.

The reason that the item here is negative in the quarter is mainly due to the fact that you have -- we started the quarter with $7.79 versus SEK.

And we end the quarter with $8.64.

So, that's the impact.

If the dollar now stays at, for instance, $8.64 for the second quarter, there is no impact here in terms of P&L effect.

Now I have said that.

We go to the gross margin.

Here, there is the restructuring element, mainly in services, compared to a year ago.

And that has impacted the gross margins a little bit.

Also, the increased services share.

Underlying business in service is improving across.

But of course, when there is a higher share in the sales mix of services, you get a little impact on the Company gross margin.

And that's what you see here.

Then, you have the business mix shift in Networks between the North America and mainland China, which is the negative there, and offset by FX and other efficiencies.

So that is the bridge for gross margin.

If you take the sales growth and the FX impact, here you see the big delta then, Q1 over Q1.

And it is actually more than SEK8 billion impact on top line.

And what I want to say here is that now we have changed the method for translating local subsidiaries' balance sheets and income statements into Swedish krona, so we are not using averaging anymore.

We use something called M rates, which is easy to understand.

It is -- the closing rate for the month becomes the rate used for the following month.

So, in this, for instance, if you look at the closing rate, $8.64 in March, that will be the rate used for translation in April.

And all of these monthly rates used is disclosed at the IR webpage.

So, I think this will, over time, create an even better transparency and easier to understand the impacts on currency on our P&L.

Then, if you take the gross cash, then changing gross cash and net cash, obviously disappointing operating cash flow in the quarter of close to SEK6 billion negative, driven by working capital buildups.

This is something that has to do with the change of mix.

We will, obviously -- we want you to measure us on full year.

We have said that before.

And we have the cash conversion target of 70%.

And this is, then, related to the fact that we have now, in the Networks business, more of project terms, here, which means that you get higher capital tied up.

But anyway, we are working with the working capital, and continue to focus on this.

And we are not happy with the operating cash flow being negative, of course, in the quarter.

Then, on the investing side, I want to highlight the CapEx, there, of minus SEK2.4 billion.

That's higher than normal CapEx.

The reason for that is that we now have the -- start to see the ICT Center buildup in the CapEx numbers, and that is an investment over four years of, all in all, SEK7 billion.

So, there will be some more CapEx throughout this year related to the ICT Centers, but we have a big portion of this year's CapEx here in Q1.

So, this leads, then, to a net cash.

The gross cash reduction of minus SEK6.1 billion, driven by operating cash flow mainly.

And then, the net cash is down SEK12 billion.

And that is, then, related to the lowering of interest rates globally, which has led to that.

The post-employment benefits have, then, been revalued.

But it's also related to some of the debt we have in US dollars.

Excluding these post-employment benefits, the net cash position is still close to SEK40 billion.

With that, I hand back to Hans.

Thank you, Jan.

Let me look into the segments, then, starting with Networks.

Growth 8%.

However, with the -- in constant currency down 9%, a little bit bigger than in the fourth quarter, but the same patterns as we heard before.

There are the Asian markets growing well, and we see a decline in constant currency in North America in mobile infrastructure or mobile broadband, for the reasons we have discussed before.

So, that sums it up.

And, of course, we need to remember how big North America is.

And of course, even though we have many regions that are growing in mobile infra, mobile broadband, and Network segments, that is not offsetting the largest CapEx market in the world -- North America.

On the results side, a clear reduction compared to a year ago, very much because of that we had first-half year of 2014 was much more capacity business in North America.

Remember, now, first-half 2014 was strong in North America, when it comes to mobile broadband business and Networks.

Second-half, we start seeing the slower pace of it.

So that is one.

And then, of course, we have a mix shift to having more coverage projects, especially in China, that, of course, have a different profile or margins.

Capacity and coverage is different.

It has nothing to do with the countries; it is more the type of projects right now.

So, we clearly understand that.

It's the type of projects -- exactly as we had the European modernization seven years behind.

That was much more hardware, as well, because you are in a coverage phase, and then it comes capacity.

So, it's nothing to do with the countries; it's more about the profile or the type of projects we have.

We also have, as we heard before, an increased R&D.

Conscious decision -- we increased R&D in Networks for IP.

And we have gotten out a lot of new products, as well as we moved certain R&D from the Modems divestiture into radio.

That's, of course, impacting us right now, but that is part of the efficiency work that we now are executing, here, in the first and second quarter during the year to reduce our cost base, as we have come to a moment where we can rationalize, and we should.

We also have in Networks, then, the majority of the hedge loss, or the impact from the hedge contract, with the minus SEK1.1 billion.

As I said at the press conference earlier, our ambition is clear -- to have Networks well, or having Networks on double digits.

We have had that for six quarters.

We are now coming down.

Some of the things that we have as reasons here will go away.

I mean, the currency, depending on where it goes, of course, the costs we're taking, the mix shift we have talked about that's shorter -- we believe that, with the current visibility, that will continue.

But all other things that we can control, we are taking right now, so we don't see these as a new trend or something.

Our plan is to have Networks on double digits, as we have had before.

Global Services comes a little bit in the shadow, here, on the Networks discussions.

But Global Services had a very good quarter.

Let us state that.

Probably one of the best quarters -- first quarters -- that they have reported.

9% operating margin, excluding restructuring, including network rollouts.

That's what they have, a growth of 17%.

And Professional Services up 20%.

And remember, also, right now, the Professional Services is growing a lot with managed services in there.

So, I think that they are managing these transitions very well.

NRO margin is -- the loss is narrowing down quite considerably from minus 16% last year, down to 3% (sic - see press release, page 27, "-7%").

So, that's also exactly as we have said before.

They had sort of the tail (inaudible) of the projects.

Now they have been working on that, and we see that's improving.

A lot of the growth also comes from the Support Solutions portfolio, the BSS and OSS that we are deploying.

The system integration is, then, a necessity, in order to do it, as we build this.

And of course, that is reflected in the numbers for Global Services.

Finally, Support Solutions -- growing with a tailwind, down without it.

However, very good deployment and development in OSS/BSS, when it comes to activities.

And the perception of us being the leader is clearly there in the market, right now.

We're invited to basically all of them.

They take some time.

We are, of course, moving some legacy business, and now getting new one.

We can also see that it is a small operating profit, here, of 3% in the quarter, which, of course, is an improvement from year over year.

And that is showing that we are taking in the cost, and now we're moving into new areas.

If, then, you take the summary -- before we go into questions -- 8 out of 10 regions growing.

Of course, some of them with currency, but some of them also growing excluding currency.

With the current visibility, we anticipate the fast pace of 4G deployments in China to continue.

And North America mobile broadband business to remain slow in the short term, with the same reasons we have explained before.

Summary, weak profitability Networks -- nothing that we are happy for, but we know the reasons for that, and they're known reasons.

We are taking all the things that we can control, and we do it forcefully.

Global Services -- doing well.

On the transformation, as Jan said, we have good traction on our cost and efficiency program.

That's according to plan.

And when it comes to growth area for the target areas, last year we reported that they were growing more than 10%.

We can also conclude, after the first quarter, we had good growth in these areas, excluding the currency, as well.

So, that is seeing that we're getting the traction.

We made a dividend payout of SEK11.2 billion to our shareholders in the month of April -- just a week or two ago.

Jan talked about our cash flow.

Reasons for that is, of course, the mix shift and the buildup of working capital.

Not happy with that, but we measure cash flow in full year.

And we have a cash conversion target above 70%.

The last five years, we have hit that four times.

We are determined to hit that this year as well, but let's look at the full year on cash flow.

Thank you very much.

Thank you, Hans.

And, operator, we are now ready for questions, please.

(Operator Instructions) Alexander Peterc, Exane BNP.

Thanks for take my question.

I'd just like you to elaborate a little bit on the argument of the one-stop-shop that your major competition is developing.

How do you feel about your portfolio here, especially with regards to IP routing and optics, where your share remains extremely low.

Do you think that Ericsson's market position could be at risk in the future if your IP routing strategy, in particular, fails to deliver tangible market share gains, or is this irrelevant where it competes with the more integrated players -- Huawei, and Nokia, and Al-Lu -- for mobile footprint?

Thank you.

Good question.

I think what we did last year -- we increased R&D in the IP area.

We came out with a couple of products that are totally connected to our radio access.

That's very important because we believe that is an advantage that we have between our strong market share in the next generation mobile networks to get there with IP that is now connected.

Remember also, we use the same platforms, crossover, in order to leverage our scale -- fewer hardware platforms where we can move our different applications in between.

So we gain that.

So I think that what we are seeing so far, as we reported last year, we report right now, we have good traction on our IP portfolio and a lot of new products coming up.

As long as we have that, and it hangs together with our overall offerings, we are going on the organic way of working, here.

And I said the increase or ramp up of R&D last year, we are now taking down because we're getting the products out.

So I think we are taking those measurements, and we believe that getting the sort of products to hang together is very important for the industry, and that's how we want to compete.

We think we are on the right path, there.

So that's where we are, and we are not, due to the recent announcement, change our strategy.

But my job, Jan's job, the executive team's job of Ericsson is constantly to evaluate our strategy and see if we are executing and progressing at the same way -- in the right way -- and seeing what is happening around us.

Right now, we are not come to conclusion that we are changing any strategy.

Thank you.

Mark Sue, RBC Capital Markets.

Thank you.

Understanding there's no strategy change because of the pending industry structure dynamics, Hans, maybe if you could talk about the tactical things to drive increase footprint, particularly as your large competitor goes through a difficult integration process.

What are the things that you can do for now in the near-term for Ericsson to drive disproportionate profits longer-term, expand your footprint, and maybe some tactical things that you can share with us?

I thank you for the question.

I will disappoint you.

I will not give you any details on that.

Any company like ours are constantly working with our tactical strategy as what we should do or not do.

But if it is a tactical strategy, in the marketplace I wouldn't reveal it, even though I trust you.

But there are so many others that, of course, are very interested in what we are doing.

But rest assured that we're looking into everything we're supposed to do as leaders in the industry and protecting that.

But I will not reveal any details what we are doing.

If I could ask a separate question then, Hans.

North America, which is your highest-margin region, are we starting to see indications of improving capacity additions?

Should we see a seasonal uplift later this year?

It seems you did qualify your comments that the slowdown is just short-term.

So we're just trying to see how we should think about the balance of the year.

You'll still disagree that it's a high-margin market.

Again, it's about what type of projects we're doing, and it's regardless of if it is in that country or another country (inaudible).

We have to be clear on that.

We are in a capacity mode in North America because we had a lot of hardware for 4G deployment early in the 2010, 2011, and 2012.

So that is why.

Our comment to qualify that more exactly -- that's hard to do because with the current visibility and external forces that are into the market for our customers, as long as that is there, of course, we believe they will not come back to the spending again.

But that is the short-term, we know, because we have only current visibility on the short-term.

Remember, also, that software and capacity upgrades is very quick it can be deployed.

It is not like a long project that we are doing when we deploy hardware -- we'll have good visibility.

Software can come very fast, increasing capacity on 4G, the carrier aggregation, things like that -- we can, in days, deploy new softwares in the network.

So that is why I say that the visibility right now is short-term.

Let us come back and report later on.

I have said it before, I believe it is still very valid -- the underlying demand in the market for mobile broadband, new services, new type of application coming into the North American market, is still happening, and it is the most advanced 4G market in the world.

And we have a good position.

And I want to add to that.

So with what Hans said, short-term, when it comes to capacity, it's short-term.

It could be a quarter; it could be two quarters, right?

But we don't have visibility more than in that type of time horizon.

And that's also why, when it comes to the comments around specifically North America, we understand that we need to come back to you on a quarterly basis and report.

And then, on the other hand, when we talk about the mobile broadband coverage deployment, as you know as well, there it is more -- it's bigger rollout projects.

And we have, then, better visibility.

And that's also why we can say that we have a continued high pace of mobile broadband deployment in mainland China.

We have had that for Q3 and Q4, and we had it in Q1.

And we think that will be continuing short-term, and that is, obviously, something that we assume will be the case for the rest of this year with a little longer time horizon that we have on visibility.

So that is the dynamics of these comments.

And we understand that we need to come back on a quarter basis and report progress here, in terms of North America.

Okay, gentlemen.

Kai Korschelt, Merrill Lynch.

Thanks for taking my question.

I had one and a brief follow-up, if that is okay.

The first one was just on your target of low-single-digit growth.

I understand it is a mid-, long-term target.

Last quarter, I think organically, you did minus SEK2 billion; you now did minus SEK6 billion against a very easy comparable.

So I'm just wondering, either by region or product, where should we expect that growth should come from, certainly over the rest of the year, particularly that 4G rollout seemed to be down in some of the larger markets.

So again, just wanted to see if you could give us a bit more color here.

And then, the second one was specifically on Europe.

It looks like Western Europe Networks revenues were down 9% year on year.

So I'm just wondering, does that mean that the Vodafone CapEx peak is behind us?

Is it carrier consolidation?

Just wondering why we are starting to see a decline in Europe again.

Thank you.

If we come back, then, to the growth, I think -- I can go back to the first quarter here -- we have growth in several markets, even excluding the currencies.

So we're clear on that.

Maybe I wasn't clear enough.

It's just that North America is such a sizable market for us and a sizable market in the whole telecom industry.

It's nothing unusual for us.

It's just that the biggest CapEx spending in the world is in North America.

So when that comes down, and we have a good market share there, that, of course, impacts even though I grow 100% in India, which is far beyond any currency, or 25% or 24% in Northeast Asia, or 23% in Southeast Asia.

So definitely, we have growth in many places.

Then Professional Services growing, as well.

And of course, when you look at a targeted area, the area that we now have selected, because they have a higher growth rate, high degree of software, high degree of recurrent services, as well as being adjacent to our core businesses, those are also growing very well, excluding currency.

So it's just that the magnitude of North America is so important for us and, I think, for the whole industry, when it comes to that.

So that's, of course, taking it away.

So we will just hammer on, on what we can control and see that we're coming back to growth as well as seeing that we take control over our cost structure and our transformation.

And that, we're doing on a daily basis.

And that should yield us continuous improvement on both the top-line and the bottom-line as we have said before.

And for your question on Europe, then, the regions that you obviously referred to is what we call Mediterranean, Northern Europe, and Central Asia, and Western and Central Europe.

I mean, the Euro has, obviously, not strengthened 20% towards the Swedish krona, as you know.

That is one comment.

The second comment is that the main drivers, for us, at least, in Europe continues to be the project you referred to.

But also, managed services being very important.

Then I think one quarter -- this is not an exact science.

You have some spillover effects in Mediterranean from one big modernization project there in Q1 of 2014.

So I think the most important things on Europe is that the growth drivers for Ericsson is the same that we have talked about for a few quarters.

It's very much managed services, it is this big, important project with one customer, there.

And the other mixes are basically the same.

Then, we also know that there is consolidation going on in parts of Europe and so forth.

So nothing new, really, on Europe for us.

What is worthwhile to mention is that in northern Europe, Central Asia, that's obviously also where we have the business we do in Russia.

And it's been strong, now, for two years.

We have -- we saw little bit slower activity in Russia this quarter.

Of course, part of that has to do with the ruble versus dollar development -- really nothing more than that to say.

I think the important thing is that we haven't seen any other big triggering events in Europe than the ones that I have mentioned.

Okay, thank you.

Ehud Gelblum.

Think you very much.

Appreciate it.

On the geography slide, Hans, you had strength in India.

And I want to go back to the comment that you now made twice -- that geography doesn't have anything to do with margin, but it has more to do with the types of projects you're doing in each region.

As we look at the geography breakout that you have, especially with the India as strong as it is and North America now kind of weak, can you just run us through where we sit in 4G rollouts across a lot of these geographies?

And as you see the rest of this year into next year, how that evolves.

And so when do we get to a steady-state where most people are past the 4G coverage area, and that we're in a pure capacity mode?

And does that mean that we get to that state, it really doesn't matter which geographies will be up and down, at that point -- once we are in 4G capacity mode everywhere?

Does that happen next year, and where does that settle us out on the margin line?

That's a very broad question, of course, but let's remember, now, we ended 2014 with 400 million subscribers on 4G out of 7.1 billion.

So we are in the beginning of 4G.

Of course, the network is ahead of the consumers, because the network needs to be there first.

So of course, even though we feel the deployment is there, from a coverage point of view there is still a lot to be done on 4G.

No doubt about it.

If you do a rundown, you can say that Northeast Asia there are three markets doing massive deployment of 4G: Korea, Japan, and China.

The others are starting.

Some are a little bit ahead.

India is in the beginning.

Their frequencies just came out, so it's very alone.

Europe is, in all markets, sort of happening.

Eastern Europe is in between.

I'd say many markets, actually, haven't even started 4G.

Africa, I would say, predominantly 3G.

That's still 3G and driven by handsets very much.

And then if you take the Mediterranean, there you have differences between the Frances of the world and Italys of the world and the Northern Africas, where it is less of a 4G.

And then, Latin America -- big countries, yet they are in early phase on 4G, driven about how to get the handset prices down.

North America -- I guess we all know that's probably the most advanced 4G market.

So it is still much to be done on 4G: densification and coverage, carrier aggregation, technology aggregation between 3G and 4G to get to seamless mobile broadband experience.

So that is still there, but we see they're predominantly moving more to 4G investments.

Remember now, of the 7 billion mobile subscriptions, 4.5 billion of them are still on 2G.

They are going to be moved to 3G or 4G phones.

And probably, the data usage will go up 10 times when they go from a feature phone to a smart phone.

So there's still plenty of that.

However, as we said at the Capital Market Day, when we talk about network investments, we estimate that, in dollars, to be a couple of percentage growth per year.

So in a sense, are we looking at more a similar network modernization stage that the rest of the world is going in, that Europe went into a few years ago?

And that will last for a few years and depress gross margin, regardless of what happens in North America?

(multiple speakers) any larger.

Of course there are modernizations happening all the time and that's part of our business model.

It was just a concentration of modernization where we had it in Europe.

But of course, there are markets still that are heading for multi-service -- multi-standard radio.

But there is much more -- it is much more done.

It is not like you are coming a cluster of modernization right now.

But you see certain regions doing it, but not at the same concentration we saw in 2011, 2010.

And I also want to add there, we want to be very clear that what is impacting Q1 and profitability in Networks and also the operating cash flow is this lower capacity business in North America being offset, then, by the higher pace of 4G deployments in mainland China.

Outside of those two markets, the mix continues as is.

So -- just to be clear on that point again.

Thanks, Ehud.

Are you happy with that?

Yes.

Thank you.

I appreciate it.

Very clear.

Operator, next question, please.

Richard Kramer, Arete Research.

Just a couple ones.

First of all, if we exclude the IP income in Networks, it seems as if the business is loss-making, and I'm just trying to square that with the notion that we've had several years of European network modernization.

And remembering the famous curves, these contracts were supposed to be moving into the period of profitability.

And should we be expecting that still in the second half of the year?

And allied to that, Jan, if we think about SEK16 billion of net cash now and a dividend payout that has just happened, how do you balance pursuing new business and the need -- if you feel a need -- to rebuild the net cash balance?

Thanks.

Okay, Richard.

I repeat myself, then.

What has impacted the profitability in Networks this quarter are the things that I have mentioned around lower -- that the North American markets continue to stay on a slow volume -- same trend as in Q4.

And then the mobile broadband deployments in China continue in the same high pace as we had in Q3 and Q4.

Nothing else in that regards, and we are not going to draw conclusions that this is going to be lengthy modernization trends because it is not.

Then if you remove the currency impact in Networks, obviously, the operating margin excluding restructuring is 7.5% or something like that.

You also see that the hedge impact is -- most of it -- is realized.

And I repeat myself again, then.

If the currency stays at $8.64, you don't have a currency impact, in terms of hedge losses in the second quarter.

That's how it works.

And then, if you think about the net cash position then, we do define net cash in our [account] and including the unfunded pieces of post-employment benefits.

And when interest rates go down, obviously, the value of the liability increases, which impacts the net cash, and in this quarter about SEK3.5 billion.

And then also, the US dollar debt that we have, the US bond, obviously, because of the strengthening dollar, also increases.

So if you exclude the post-employment benefits piece, the net cash position is SEK40 billion, and we will work, as we always do, hard on making sure that the operating cash flow is strong for the full-year.

So I don't see any need to, right now, to rebuild net cash position and so forth.

We think we have a good capital structure in the Company, and again, want you to measure us on operating cash flow for the year, as Hans said.

And you didn't call out the lower royalty income this quarter as a reason for lower profitability in networks.

Wouldn't that have also been a contributing factor?

No.

I mean, the IPR revenues is in Swedish krona.

It's obviously flat, and that's thanks to most of the IPR revenues in US dollars.

So if you were to do everything in constant currency, then you can remove the hedge gain and the hedge losses and so forth.

It becomes quite theoretical.

Okay, thanks.

Achal Sultania, Credit Suisse.

Hi.

Thanks for taking my question.

Just on the OpEx side, can you remind us how much of your OpEx is in dollar or dollar-denominated currencies?

And just to follow-up on that, Jan, you mentioned at the Analyst Day that basically, you're driving this SEK9 billion cost-cutting plan over the next 3 years.

And the simple way to look at this is that we should just add that SEK9 billion to the EBIT number in 2014.

And basically all that savings should flow through the EBIT line.

So given the move in FX and the headwind that you have on the OpEx side because of the strong dollar, is that still the conclusion, that SEK9 billion is going to be the net savings number?

Or some of that goes way because of the FX headwind?

Thanks.

That savings number -- and it is based on baseline 2014 as we described before.

And Hans and I, we are working on a net number.

We are not working on a gross number.

So if there will be currency headwinds, we will obviously make sure we identify more savings because we are committed to making sure that it's the SEK9 billion net savings number to start today with.

Then, if you think about the translation impact then -- so if you look at the sales expenses, of course, the sales expenses that is sitting out in some of the regions, yes.

They have some impact on FX.

And approximately, if you think about the R&D, I would say that approximately 25%, 30% of R&D or so is reimbursed to Sweden from US dollars.

So it has a little bit of an impact as well.

But I think what is important, here, is that we have -- the cost reduction and efficiency program are for the reasons that Hans mentioned.

And what we drive and strive towards is, of course, to have a run rate, second half of this year, that is significantly down compared to the run rate second half of 2014.

Then the challenge will remain, of course, if we can get the absolute number, including restructuring charges, to be flat year-over-year, right?

But we work on that.

We are -- we like that challenge.

But for sure, the net savings number of SEK9 billion is absolutely still there, and we are not changing that.

Thanks.

Thanks, Achal.

Next question, please, operator.

Gareth Jenkins, UBS.

Quick question on China, if I could.

I just wondered whether you've seen an acceleration in recent months, given the FDD-LTE licensing was actually fairly late quarter.

And if so, does that mean we get a fuller impact of some of the trends that you have seen in Q1?

So maybe a bit more margin pressure, but an unwind of the working capital and maybe a slightly stronger top-line from China?

Thank you.

Well, I think we -- so what we saw here in Q -- I mean, if I look at the numbers for mainland China, Networks only, the volumes in terms of SEK is on the same level Q3, Q4, as they are in Q1.

And we think that this pace will continue throughout the year, then, that we have said, right?

So no major change there.

I think, in terms of mix for Northeast Asia, then of course, if I compare with a year ago in Q1 2014, we had also a bigger share of the business coming from Japan and Korea.

So the main driver for the Networks business in Northeast Asia right now is the mobile broadband deployments in mainland China.

So let's see what happens, here, in the second half of the year.

But I think, in terms of mainland China, we have known that the pace will remain here for mobile broadband for the rest of this year.

And Jan, just to follow up on that, the inventory build was quite high.

Was that predominantly for these buildouts or this coverage in China?

And so, therefore, it will unwind as we go into Q2 and Q3?

What is happening here is that you have -- I mean, the big difference, as we all know, in terms of capital tied up -- I mean, if we set aside currency, for a second, obviously, that has an impact.

I mean, in the cash flow statement, if you look there, there is a slight lowering impact on operating cash flow in the cash flow statement than what you see on the balance sheet.

And that is, of course, the currency impact.

But nevertheless, the important factor, here, is that when you do build the coverage projects, you have project terms, which means that you get, for instance, cluster acceptance for hardware, software, and services as one deliverable.

You reach preliminary acceptance, you invoice part of the invoice.

You reach final acceptance, you invoice the residual.

While in the capacity business, you have split contracts.

So you have hardware, software, and services at different deliverables.

That is the big impact on the balance sheet.

So that is the reason -- nothing else.

Thank you.

Okay, great.

Thanks, Gareth.

Next question, please.

Andrew Gardiner, Barclays.

Good afternoon.

Thank you.

I just wanted to come back to the question of M&A in this space.

I can understand your stance of sticking with organic investment.

This is generally the way to better returns after all, over time.

But Ericsson does have a history of doing it differently in the past.

We are nine years after the closing of Marconi, eight years after Redback, the acquisitions which did give you the platforms to provide a more integrated offering to the telcos.

And so I can appreciate you've elevated R&D recently to drive your IP routing platform forward in an organic fashion, but it's taken the better part of a decade to even get to this point.

We're still fairly low market share.

Can you just give us any insight as to how you are going to be judging success in these markets over the next year or so?

What type of market share do you think is sufficient to support the cost base?

And perhaps what kind of time frame we should be thinking of to see these results.

Thank you.

Any business we have there of course we [ask] them, first of all from the end-to-end capabilities we have.

And secondly we have our market assumptions, our product assumptions, and our financial assumptions.

And as long as they are intact, we will continue.

We are not in to reveal any of those toll-gates to the market, but as we do with any business -- and you have now followed us, hopefully, for a couple of years -- you know we have our toll-gates.

We took on [additional] handsets; we took it on chip sets.

So we take them when we feel that the market assumptions have changed.

In this case, we haven't seen that.

We have good progress in IP.

We have good product portfolio.

We are coming out with new products, taking down the cost so we're going to be more efficient and more competitive, even.

So -- and it hangs together with an overall sort of mobile broadband offering, rather than being a standalone for us.

And I think that's how we use our scale, by using the same hardware platforms.

So we will continue the (inaudible) constantly, we are evaluating.

And that, we do with any type of business we have, in order both to have a competitive portfolio that is demanded in the market, but also as we are able to do good business out of it.

And I think, one final thing I would like to add there, Hans, is at the Capital Market Day, we went through, in quite detail, the profit improvement bridge.

And obviously, the growth in targeted areas is important in that equation.

And there, obviously, we have the ambition.

It remains in exactly the same way as we had on the Capital Market Day, that we think that these markets that we address are growing faster than the traditional markets and that we have an ambition to outperform market.

And that's also why we continue to comment on the progress of targeted areas in Hans' CEO comment.

And together with the efficiencies we're making, that should also, over time of course, improve the bottom-line profile of the Company.

No changes there.

Thank you, Andrew.

We are now ready for the last question, please -- first-quarter call.

So, please.

Sandeep Deshpande, JPMorgan.

Yes.

Hi.

If I may ask two questions, my first question is regarding the mobile broadband market itself.

Hans, we have seen this softness in the US, now, for two consecutive years.

This is the third year that we are probably going to see some softness in the US.

How do you see this?

Is this that the US has essentially finished its 4G rollout, and now the next wave is going to only come, really, in 5G?

Or we are going to see some buildouts, there, in terms of capacity in an interim period?

And secondly, my question is on IPR.

It is not entirely clear to me whether you are accruing for the customer or you're not accruing for the customer and how that is being accounted for in the gross margin of the Company.

Thank you.

Thank you.

First of all, I probably need to disagree with you.

I think we have had very good growth the last couple of years in mobile broadband in North America.

It has, actually, accelerated for us as the investment changed to 4G.

And remember now, the first half of 2014, it was very good growth in mobile broadband.

But of course, memory slips us all.

But that was -- when we're sitting here one year ago, we had very good growth in mobile broadband in North America.

So it's just that right now, it's a little bit different situation.

And I still think that mobile broadband is an enormously important technology in the market and 4G, as such.

I think that yes, you can see growth in mobile broadband in North America, even before five years.

But as we have said before, we have given our statements what we believe and with the current visibility.

On the IPR, yes.

You know, we are reporting IPR once a year.

We don't [grade] the specific contracts -- what we are doing and not doing.

We stated in this quarter that the IPRs were flat, which means that they're flat in Swedish krona.

That means that the underlying business was declining in the quarter.

But we are working constantly here.

We have our strategy, here, to deal with.

And then we come back and report where we are with the different activities.

But in constant currency, we were down in IPR in the first quarter.

Thank you.

Great.

Thank you, Sandeep.

With that, I would like to hand it over to you again, Hans, to conclude this call.

Not sure how much is to conclude.

I think we have all circulated around the same questions.

And I think we pretty much had the same pattern as we have in previous quarters.

Good progress in certain areas, some challenging -- challenges in North America, which is a large important market.

We are taking the things that we can address -- our target areas, our cost structure.

We will continue with that, and we will see that we execute fast and with good quality in it.

So I think that we are on a journey, here, and the 10-year plan that we laid out in 2010 -- we're definitely on to that, as said.

And I just want to reiterate, we are, of course, not happy with the low operating margin in Networks, but we know the reasons.

And they are known.

Our job is to continue to see that that is a double-digit business.

That ambition is clear, there, to continue to be on double-digit in Networks.

As the head of segment Networks, I will definitely see that I'm working with that on a daily basis, going forward there.