Telefonaktiebolaget LM Ericsson (ERIC) 2015 Q2 法說會逐字稿

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

To view visual aids for this call, please log onto 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.

Please begin.

Thank you, Maria, and welcome to today's call.

Today, as always, I have our CEO, Hans Vestberg, with me, and our CFO, Jan Frykhammar, and our Head of Communication and Marketing, Helena Norrman, with us today to answer question -- make the presentation.

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.

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

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

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

Thank you, Peter.

Let me start with some of the key developments in the quarter.

I think that what we're seeing right now that the industry is really start focusing up on 5G.

And it's not only the industry.

We see also, of course, other industries having a great interest, and see how 5G will be developed and standardized.

Everything from car manufacturers to logistic companies, pharmaceutical companies, et cetera, all have a keen interest to understand 5G.

And we probably have announced more collaboration this quarter than we have done for quite a while.

We have both announced KT Korea Telecom, SoftBank, Turkcell that we work close to.

But of course, we work with many others, as well.

But we see these now formalizing as a very exciting area for the future, and especially how the industrial internet will work, or the mobile broadband for industry.

So that's good.

I think that -- not only think, I feel that we are in a good position here.

We are really early on here.

We have been working with 5G for quite a while, so that seems really good for the next generation.

Consolidation continues, especially in this quarter, has been more on the customer side, adjacent consolidation but also industry consolidation happening, and a lot of talks.

Again, very much logical, given where we are in the industry and the transformation we see in this industry, and how it can evolve.

Currency we have talked a lot about.

You can say that we continue to see currency movements in the second quarter here.

We didn't see the major currencies for us, Swedish Krona to dollar shift so much.

But there are other currencies in markets where there have been financial crises or et cetera, which means that currency are moving.

And as you know, we are in 180 countries.

Of course, we feel that is a fairly important development in the quarter, as well.

Finally, we presented and publicized (inaudible) report in July -- or in June a couple of highlights.

The data growth is continuing 55% up.

We are now predicting 3.7 billion LTE subscriptions by 2020.

We are at 600 million.

So of course, it is almost 3 billion more in the next four years.

And we see also a doubling on the smart phone subscriptions.

We are at 2.6 billion right now, so north of 5 billion smart phone subscriptions in 2020.

Of course, important fact, just to reiterate the speed that we want to see the next five years in our industry, also that 4G is going, I would say, quicker than we thought.

Looking at ourself, we are after three quarters of decline in North America, stabilized the North American business, we had sequential growth of 19%.

They're still operating on a lower level for the external.

Things that were discussed before, but we clearly saw a stabilization on the revenue levels for mobile infrastructure.

The other areas are services, support solutions, they have all the time been in good sort of growth and additions, but it has been the mobile infrastructure, mainly.

What else?

We saw also that, regarding the patent litigation with the large handset manufacturer, we took further steps in the second quarter, a couple of litigations in Europe was opened in the quarter.

We are not there with any agreement with them.

We are of course trying to get to the agreement outside court, but right now, we are not there.

And that means that the court process will define the value of our patent in this cross-license discussion.

Key development was, of course, the recovery of Networks [margins] in the second quarter compared to the first.

We will come back to that.

Then, of course, clear signs of our Company transformation, good growth in the target areas.

Again, we highlight OSS/BSS here, but actually all the [toy] there is going well.

OSS/BSS, of course, being the largest, of course adding the most to the absolute growth of the Company.

Activity level on the global efficiency program, very high.

We saw already in the first quarter, some activities.

Much more in the second quarter, some 4,000 people left the Company.

That is excluding the Swedish reduction.

That headcount will leave in the second half of this year, when it comes to reporting.

So yes, high activity, and that just also in the restructuring charge that was extraordinarily high in the second quarter, of SEK2.7 billion.

Looking quickly at the P&L, then, what happened -- growth of 11%.

Negative growth in constant currency of 6%, very much like this first quarter.

Similar just also in next nation, North America, even though very sequential growth, they are of a lower level, compared to first -- compared to last year.

Of course, first half, year 2014, was very strong for North America, when it comes to investments.

Other than that, Japan is also weaker when it comes to investment at the moment, and goes in cycles.

But right now, Japan is a large market for us, investing there.

And we see the same trends for the growth markets.

It's India, it's China, it's -- or mainland China, it's Southeast Asia, the Middle East, all of them are growing well.

Operating income, SEK6.3 billion, excluding restructuring, some 10.4% operating margin, compared to 4.2% a year ago.

And if it were compared to the first quarter, of course, excluding restructuring, a big improvement.

And even including restructuring, also an improvement on bottom line.

If you then look at the region [sales] quickly are highlighting year-over-year, we see the same countries, basically, or regions, Middle East, India, Southeast Asia, and sub-Sahara having growth over 40%, all of them, India up 85%.

And now you see North America being negative 4%.

And of course, in constant currency, that is far bigger.

But there, we see the stabilization, as we said.

And that you can see when we look at the sequential growth, where North America has the biggest in absolute numbers, sequential growth, with 19% in sequential growth.

But also Middle East, Northeast Asia, had good growth, and Southeast Asia had good sequential growth.

And then finally, you can see that, compared to the first quarter then, India is declining somewhat sequentially, down 14%, still from a level of growth rate 85% to 100% we were seeing, but a little bit lower volume in the second quarter, compared to the first.

By that, I hand over to Jan.

Thank you, Hans, hello everyone.

So then, if we just go through this -- some of the highlights of the P&L, to start with.

Gross margin of 33.2% in the quarter, obviously heavily impacted by restructuring charges.

If we adjust for those restructuring charges, we had also declined compared to a year ago, of approximately 1.5%.

And compared to Q1, 1.2 percentage points.

And if we stay there for a second, we can say that, compared to a year ago, we have obviously lower IPR revenue.

That is explaining both sequential decline, as well as year-over-year decline.

But also, then, the business mix shift more so a comment for year over year, but also impacting sequentially.

And the business mix -- by that I mean the lower capacity business in North America, and more 4G coverage deployments in mainland China.

And then year over year, you also have a slightly higher services share.

All in all, you can say that second quarter had higher hardware shares of the business, and that impacted the gross margin.

If we stay a second on the operating expense, because we have two bridges on the operating income, so I don't need to comment that here.

But I think operating expense, then, of SEK17.7 billion in the quarter.

If we remove the SEK1.6 billion that we have, then, in restructuring charges, it's SEK16.1 billion, compared to a year ago of SEK15.6 billion.

That's up approximately 4%.

In constant currency, it is slightly down.

So I think that's a good sign, that we start to see underlying OpEx run rates coming down now.

And also, of course, if you look at the sequential performance here, as Hans mentioned, the impact of the reductions in Sweden will start to impact here during the second half of the year.

If we look at the operating income year over year, so compared to Q2 2014, you have that on this picture.

And you can see then that, compared to a year ago, we have the -- most of the improvement is related to FX and the movements, the strengthening of the US dollar, mainly, towards the Swedish Krona.

And then we have some headwind items, then, around the IPRs, as I've mentioned, the business mix with North America and China, as I've also mentioned.

And then some positives on efficiencies, and this one-time capital gain that we had, related to a sale of real estate.

So all in all, year over year, very much thanks to currency and the continued work on efficiencies.

If we then compare with the first quarter, then we obviously have a bit of an impact on the hedge, as well as the re-valuation of the hedge contract.

But I think underlying what is fundamental here is that we start to see a better leverage in the Company now, with getting benefit from the higher volumes, and then starting to see OpEx coming down, run rate-wise.

So I think important leverage there, in the sequential improvement.

Then if you take the [sales] growth and FX impact, as I've already mentioned, a lot of these things, I think that what is important to say here is that US dollar continues to be a very important currency for us.

We have been between 40% and 45%.

I think we were at 44% of top line in Q1, now we are in 45% of top line being US dollar.

So by far the most important currency for us.

And you see also that the delta between reported and constant currency has started to decline with a few percentage points in the second quarter.

And of course, the bigger impact, in terms of the US dollar being -- strengthening towards the Swedish Krona happened here in the second half of 2014.

So if business volume stays, then the delta will go down in the second half here.

If you then look at the cash, after a very weak Q1, in terms of operating cash flow, the organization really focused on improving the working capital, and we managed to deliver a cash flow of SEK3.1 billion.

In itself, probably not a super-high number.

But still, considering where we started from, with the big working capital buildups in the first quarter, I am still satisfied with the performance here in the second quarter.

On the investing cash flow, you see here that it is slightly higher than what we typically have.

It is driven by the normal things, which is investments in the normal test-related equipment that we need.

Over time, that will be substituted by the benefits of the ICT centers.

This year, we have double investments until the ICT centers are up and running.

So that's why you see a little higher here.

And then on the financing side, that's really the impact of the dividend payouts.

So with that -- and this then leads to a net cash of SEK3.5 billion plus.

And as you know, our net cash definition, in the net cash definition, we also exclude or include the post-employment benefits that we have, so I think that's worthwhile noting, as well.

Hans?

Thank you, Jan.

We will briefly then do the segments, starting with networks.

Similar trend at the first quarter growth of 8%, currency adjusted down [9%], the same market as I mentioned before.

However, sequentially, up 16% compared to the first quarter, with the same market I talked about before.

Operating margin up [to SEK4.3] billion, excluding restructuring.

So it's a year-over-year improvement.

And of course sequentially, a quite dramatic improvement from 3% operating margin, excluding the restructuring to [14%].

This is very much driven by higher sales.

Somewhat, of course, currency effect sequentially.

And of course, the continued efficiency work.

And then, of course, counteracting this with a somewhat higher operating expenses and less of IPR, still managing the 14%.

So of course, it was a step forward.

Services, as I said, in the first quarter, good, solid performance, 21% growth in Professional Services.

Overall services flat, sort of, in constant currency.

[In a row] still in decline, hanging much together with mobile infrastructure.

Also on the Professional Services, system integration managed services, very good growth.

Result wise, SEK2.3 billion, bottom line, excluding restructuring, compared to SEK1.6 billion a year ago.

So clearly, improvement as well and stable operating margins, including restructuring.

So we see a good demand for Professional Services right now.

So that is, as the industry is transforming, our skills and our competence in services becomes very important.

Support Solutions, down 9%, down 13%, reported sales up 9%.

Here we see two different things.

OSS/BSS so far is now starting to really get traction, very good to see.

And that is of course fueling the Professional Services growth.

TV and media software is still down very much, down to a few customers in a very few regions that are not being able to invest yet.

We believe that we are right positioned.

We have a great portfolio, and it's more about the market taking off, and the ability for some customers to actually invest right now.

Excluding restructuring, a flat bottom line, meaning zero, which means that we have a very leveraged model there.

If we just get more sales into support solutions, it will flow down.

There is not a gross margin problem here.

And they have worked a lot with the cost base, as well, so good to see.

Summing up a little bit then, talking about North America, the business has stabilized, but it's on a lower level than last year.

Continued 4G deployment in mainland China; continued strong demand for Professional Services in all regions.

We have also lower IPR revenues.

Despite that, we had improvement in all segments in profitability this quarter.

We have, as Jan said, a higher pace this year in our cost and efficiency program, so we have increased the restructuring charge to SEK4 billion to SEK5 billion.

Doesn't change the overall plan.

We're all still planning for the SEK9 billion in effective cost savings by 2017.

Just that we seem to have more activities very early on here.

So we feel more confident that we have activities enough to deliver on that promise to the market, and to ourselves.

Concluding, we have a high pace in the Company transformation.

Both when it comes to type of products, businesses, but also the efficiency program at the moment, at the same time managing the Company.

That is, of course, very important.

This is key for us to continue to maintain our leadership and maintain our profitable growth that we are aspiring for.

Thank you very much.

Thank you, Hans.

Operator, we are now open for the Q&A session, so please.

Thank you very much, sir.

(Operator Instructions)

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

Achal Sultania from Credit Suisse.

Hi Peter, thanks for taking my question.

First, Jan, on OpEx, I think if I remember correctly, you talked about second half of this year being significantly below first -- second half of last year.

Can you give us some color?

Are we still looking at that pattern for the second half?

Or do the currency fluctuations change that slightly?

I think the -- do you want me to answer first?

Or ask your --

I can answer it.

Look, the ambition that we have is still to try to be, even including restructuring charges, basically on the same level as last year, including restructuring charges.

And we also know, as you rightfully said, that the second half run rate, and also the first quarter run rate, were high in terms of OpEx.

We are still aiming towards that, which means that we are trying to make second-half run rates come down significantly.

Let's see if we managed to reach flat, in terms of OpEx, despite the FX headwind that we have.

But it is still -- it's absolutely ambition.

So second half, especially Q4, should be coming down significantly, and we have activities to support that.

Obviously, the modem was the first one we started with, and now we have the global dimension, and then later in the second half, the impact of the Swedish programs.

We continue to work on that, and let's see, it's still half a year to go.

Thank you.

And maybe a second one for Hans.

Hans, just generally thinking longer-term, I think you have seen two markets, Japan and Korea, where LTE was actually rolled out initially.

We're seeing CapEx patterns have been quite weak, although I understand that the capacity project is increasing the mix, so that helps your gross margins.

But generally longer-term for top line, how should we think about the CapEx patterns in US and China, as we go into 2016?

I'm not sure if I'm -- we should start guiding for 2016 already, but you can say, also, you're right that Korea and Japan was very early on 4G, but it is also very -- two markets that are competing on quality.

That means that they are actually investing up front quite a lot in quality and capacity, which is of course enormously important for their markets, because the competition is there.

So that means that there will be moments where they can be a little bit lighter on their investment, because they are really focused on getting good quality in the network.

So that's how we see it.

And then when it comes to China, it's a little bit easier to see its long-term projects, and its sort of coverage.

So then you can predict that will continue for a while, as they are now rolling out 4G.

Harder, then, to make any statements about North America.

What we're [thinking] about the trend right now is that we're seeing stabilization.

And remember, now, although sometimes it sounds like there's no investment in North America, these guys are investing a lot.

It's just that they invested even more first half last year.

And still we see good investment.

There are some blocking factors for high investment, such as consolidation, new spectrum coming out, and of course the disbursement they have done for those spectrum.

But the underlying factors in North America, it's still a 4G, in a new [west], it's the most advanced market in the world where you have all the internet companies, all their gadgets and Internet of Things using the network.

So that dimension is intact.

And the third element, our market share is also intact.

So that, in combination, I still believe that stabilization is important, but not talking about what will happen after this.

Let's see how the markets develop, now we are seeing a stabilization in this quarter.

Thanks a lot.

Thanks, Achal.

Next question.

Sandeep Deshpande from JPMorgan.

Hi, Sandeep.

Hi, thanks for letting me on.

Can -- my question is regarding what you've heard most recently about US spending into next year.

They have bought -- some of your customers have bought spectrum earlier this year.

When is your timeline when you think that they will equip that spectrum?

And is there a risk that CapEx increases from that spectrum increase will not be able to compensate for any declines in Chinese CapEx?

Sandeep, it is Jan here.

I think you're asking questions that we typically don't answer, because I think that the customers we have in the US and China will be the ones that answer those questions of how they -- when they intend to deploy the AWS spectrum and so forth.

And that is their call to comment.

I think what you can say is, of course, that our -- obviously, for any carrier, what they are trying to achieve is that new spectrums and new radios should carry traffic as soon as possible, from the point when the spectrum is available.

So that means that you probably should think about our business coming up, let's say, three to four to five months prior to the spectrum being made available, if you understand my point.

But I think it's for the customers to comment on when they exactly want -- intend to deploy.

I think on mainland China, and CapEx for 2016, I think that is far too early to say.

And that market, we would like, absolutely, the customers to comment that.

But I think what we see this year is very much the same pattern as we said after the first quarter.

Meaning that we have now been deploying 4G for, let's say, three or four quarters on this level.

And I think we will see, for the remainder of 2015, the same type of pattern, and the same type of business mix, meaning that this hardware deployment that is the dominant mix.

And then after that, we should hope for -- to see some more -- so the connection fees and so forth coming from subscriber uptake.

So it's -- the theme is more hardware-centric this year, and then let's see, once we approach 2016, what the mix will be for next year.

Thank you, Sandeep.

Next question.

Tim Long from BMO Capital Markets.

Hello, Tim.

Hello, thanks.

Just back to the China, give us a sense as to how far along you think -- how much room left we have for these 4G builds.

And then when you think about some of the other emerging markets, do you think, when China is in more of the stage like North America is, at that point, do you think we'll be looking at India or some other markets filling in to be important build-out markets, to keep that piece of the business going?

Thank you.

On the general comment, as I said in the beginning, there are 600 million LTE subscriptions in the world.

So it's a very -- it's a little bit more than 10% of all the subscriptions in the world on 4G.

So we still are in the beginning on 4G, so we need to remind ourselves of that.

Then of course, when it comes to China, they -- it's by far the fastest growing LTE subscription market at the moment, given the large rollout they're doing.

Remember, China is big, and of course they are now doing the coverage.

We are going to see the pickup on demand on 4G later on, and then we can sort of decide what will happen in the next step.

But still, they're on the [coverage phase].

India is sort of starting on 4G right now, but their LTE subscription in Indian is very, very low.

So yes, we're going to see more market then.

Right now, the majority of all markets in the world actually have gotten a 4G license, but they're still a market that hasn't even started at 4G.

And if you look in the mobility report, you're going to see that still, 2020, 3G mobile subscriptions will be more than 4G.

So 3G still is a very important technology rolling out in the world.

4G is of course where we see more investment at the moment.

And totality, of course, it's a quite dramatic mobile broadband subscription growth, going forward.

And of course, then the Asian markets is in the play, because that's where the majority of the population is living.

Thank you.

Mark Sue from RBC Capital Markets.

Hi, Mark.

Good morning -- good afternoon.

If I look at it at a high level, at a constant currency, the business is declining, and Ericsson's stock has been basically slashed for about 10 years.

And in the broad view, the service providers want to do less hardware, more software.

You're moving in that direction.

So the question is, can we accelerate that?

Are there considerations to do something more transformative, so that operating income just doesn't come from restructuring at first?

Maybe if you can update us on how you might be able to do things differently, over the next 10 years?

Thank you.

We not going to debate if we haven't grown in 10 years or not.

I would say that we have.

I mean, remember, also that currencies has gone the other way for us, until last year, where we actually had adjusted the currency growth in the Company.

But of course, in Swedish Krona, we didn't have it.

And if we go back 10 years, of course, then we were SEK150 billion internal, and now we're at [least closer] to SEK127 billion.

So -- but we shouldn't debate that one.

We should debate how we get into software.

We are trying to accelerate as much as possible, and the important thing is that the journey we started early 2010 to 2011, that we configured all our hardware so we can sell software as a service, or as a product.

Because before that, it was entrenched in our hardware.

Secondly, we need to have our customers, of course, adopting that model, software-centric model how we sell product.

In the support solution, we are already there.

We sell software.

I mean, if we sell a (inaudible), it is a pure ICT type of software.

I would say the same goal for many other products in TV and media, even they are even sold as (inaudible).

On the network side, of course, it's a transition where you now change contracts with our customers, to go to a much more software-intensive model.

Here, we are working with all our customers, all around the world.

One of our strategic execution program is all about making this happen.

And as you remember, last year, we launched publicly the model we're going to have for software for networks.

So yes, we are doing everything we can.

We will see the customer with us, and preferably that the competition also believe that the software models are important, as the majority of all R&D is software.

So yes, we're going to do as much as we can, as fast as we can.

But of course, it's a market out there that needs to adopt these new models, as well.

From a pricing point of view, is it more separation of software that you are doing?

And looking at adding a little bit of (inaudible) with OSS/BSS?

Or is there a way that you can avoid the deflation, so that you can actually see not only software revenues, but growth in software revenues?

I think Mark -- Jan here.

I think what Hans refers to is obviously the change of the business model, in the network side, towards more of a software model that reflects, also, how we make investments in R&D.

If you look at all our targeted areas, they have been chosen because they either are more software-centric and professional services-centric.

So I think the way to track our ability to grow software beyond networks is really by tracking targeted areas' performance.

And we will come back, when we meet at the capital market day in November, to give a little bit more detail and tailor it the performance of the targeted areas.

We know that we have -- we are commenting in the terms of good growth and so forth, so far.

But we will come back in November and do a similar kind of more detailed analysis on market and progress as we did last year.

So let's wait until November with that.

(multiple speakers) We're looking forward to it.

Good luck.

Great, thanks.

Pierre Ferragu from Sanford Bernstein.

Just a quick one on your cost reduction program.

So you've (inaudible) like a very significant -- had contradiction in Sweden, in the last couple of months.

And we're going to see the impact of that towards the end of this year.

I was wondering how much of your total ambition, at least qualitatively, is this reduction?

Is that most of the cost savings?

Or do you have still like major restructuring happening, on the back of that?

And if that is the case, if you could give us a sense of where this is happening?

Which kind of functions?

Which region, at a high level, it would be very helpful.

Thank you.

Okay, Pierre, it is Jan, thank you for the question.

I think the -- if you just go back to when we announced the cost reduction and efficiency program at the capital market day, we went through the buckets that the program contains, and it is very much about structural efficiencies.

One should know that, because we want these cost savings to stick, we want them to be sustainable.

So -- and what we are obviously driving is more long-term, it is the -- what we call the global ICT centers.

Those savings are not in the picture yet.

They are in investment mode, as you can see in investing cash flow.

But what those will enable, in a few years' time, is a new way of doing testing of our own software, that will then lead both to lower CapEx overall for test equipment, but also an improved test process and so forth.

So that is a typical example of a structural saving.

It takes a bit of time to implement it, but we think it's a very good one to do, also very much linked to a cloud-based way of working, and continues the integration of software and so forth.

So it's a very important project and initiative.

Secondly, we have started, as you know, with the modem business.

That is obvious that one is in the mix.

We have the reduction related to Sweden, which is a mix of R&D-related efficiencies and some closure of factories.

In the global dimension, so far it's mainly in the services areas.

And if you look forward, then, we will obviously continue to deliver efficiencies in the global scale.

And our rule is that -- our policy is that we will inform employees that are affected first in the countries that they are employed.

But I think Hans and my opinion, and what we want you to model with, is the SEK9 billion net saving.

Of course, we also need to make investments during these couple of years, especially in new sales people in the targeted areas, and the new services people in the targeted areas, and so forth.

So we will continue to do that.

But net, it is the SEK9 billion that we are gunning for, and that is the comparison with 2014 P&L.

And then what we will do, of course, if we see that there are bigger restructuring activities that will cost more money, then we will inform you about those.

So that is the principle we have.

Until we have done that, it is the guidance that we have provided, or the guidance that we want you to follow.

Yes, thank you very much.

Thank you, Pierre.

Next question, please.

Kai Korschelt from Merrill Lynch.

Hello, Kai.

Yes, hi gents, thanks for take my question.

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

The first one was on the M&A side.

I think you've had the management huddle a few weeks ago.

And I think you have essentially told us that (inaudible) on the agenda.

I'm just wondering, on the routing side, is there now -- what is the battle plan to gain more market share?

Is it more investment?

Is it maybe lower prices, new products?

I'm just wondering, on that part of the equipment side, where you have invested already a lot of money over the years, is there a new plan, I guess?

The second question is on the IPR side.

I think there was -- a couple of days ago, there was a [you court] decision, which may make it a bit more difficult to basically take out injunctions against some of the handset makers.

Just wondering, do you think that impacts that weakens your position, in the apple or future IPR case?

And then my other question is on the 5G side.

Do you think you are in a good position to at least defend a good market share, in terms of standard essential patents, given that we are still only in the standard setting phase here?

Thank you.

I start backwards.

I start with 5G.

And I think we're in a good position.

We're early out, we're part of standardization.

I think we have done a lot of innovation already.

We can basically replicate many of the discrete sort of requirements on 5G already, right now.

We just need to put it in a little bit smaller phone.

Right now, it's a little bit big.

But from a network point of view, we're (inaudible) for with the latency throughputs, [handing] over numerous devices, and all of that.

I think the team has done a great job, and now we're working.

So I feel we're really good in that.

When it comes to IPRs, there are, of course, a lot of things happening in the market.

We don't feel, at this moment, that we have any weakening situation, because of some different things that are happening.

We still believe, in the industry, that this is enormously important.

Anyone that [won't end] their industry are allowed to do it, and we used a friend in order to get everybody in.

At the moment, we basically have agreements with everybody in the industry doing a handset or infrastructure, except Apple, in this case.

And we could not agree the value of the cross-license.

Now, we'll let the court system define that, and we think we have a really good position.

We have a lot of patents in this area, and we're just going to see that, if we cannot sort this outside the court, which is our preference, we're going to do it, of course, in the court.

And that process in ongoing.

Then on the first question, which was very broad, you can answer fairly simple.

The strategy has not changed.

We are executing on the strategy that we outlined for a couple of years ago, with the different horizons.

We have a clear M&A strategy, where we focus mainly in the core areas, on organic growth, meaning our own money.

And that in the target areas, we have acquired companies.

But that's also coming to a moment where we feel, for example, in OSS/BSS, we almost have a complete portfolio right now.

We have added Telcordia, ConceptWave and things like that.

But now, we can build it together, as the different modules.

And that is the whole idea, because customers want to have the modularization and the flexibility of it, to help standalone products that you bring in, that it's nothing that the customers are looking for right now.

So that's it, the same strategy, no change of that strategy at the moment.

We're following the market around us, of course, to see if the situation has changed, or something like that.

But that's normal management responsibility.

But no change to our strategy.

(multiple speakers) Thank you, Kai.

Next question, please.

Alexander Peterc from Exane BNP Paribas.

Yes, hi, thanks for taking my question.

You stated in the press release that you have accelerated your transformation, given the consolidation trends in the industry, both among your clients and your competitors.

Could you be a bit more specific, with respect to what you have accelerated?

And does it really show in OpEx, or CapEx, or any other area?

And also, while we're talking about industry consolidation, if you could comment a bit on the pricing situation, and the pressure in the industry?

Is there any change there?

Or is it basically unchanged versus a year ago, let's say.

Thank you.

When it comes to the acceleration, we're doing the acceleration because of our strategy.

Of course, things are happening outside, but it's not because of anything else.

And the acceleration we see, and that we're trying to report in the quarter, of course, the good growth, continued good growth in the targeted areas, that definitely supported our strategic execution.

The second is, of course, the activity level of the cost and efficiency program, is considerably higher in the second quarter, compared to the first quarter.

And basically, the 4,000 people have left us in the second quarter, and that does not include the people in Sweden, because that is coming in the second half, from a reporting point of view.

So of course, it's a high activity on those transformational activities.

One, to really grow into new areas.

And two, to see that we take care of the possibility right now to reduce our cost base, to even get the better leverage going forward.

Then you asked about the pricing.

Depends, of course, if you talk about OSS/BSS and managed services, and those areas, I would say the competitive environment is the same, pricing is the same.

It's much more about scope rather than maybe traditional RFPs.

If you talk about mobile infrastructure, there's no change.

It's basically, if they're coming up, new footprint, or sort of transformative network build-outs.

Of course, it's more pressure on price, because everybody knows who is going to win it, is going to sit for a long time.

But it's no different for a competitor the last four years or five years.

It's the same type of competitive environment, in those type of deals.

The only thing you can see in the mobile infrastructure, you see fewer competitors, if you take it over time here, and not in one quarter, for god's sake.

But if you take it over five years, of course, you see fewer players competing for mobile infrastructure deals, all around the world.

Especially -- we don't meet all competitors in all regions.

There are very few that we meet in all regions, I have to say.

Thank you.

Next question, please.

Johannes Schaller from Deutsche Bank.

Hi gentlemen, thanks for taking my question.

I was wondering, given that we are halfway through the year, if you could maybe give us a little bit of a quantitative update on your growth in the targeted areas?

Right now, I think you mentioned OSS/BSS is going very well.

Also, you touched briefly on routing.

But should we assume that you are well on track to deliver the more than 10% growth in the targeted areas for this year, as well?

And then I think Jan also talked about some additional costs and investments, of course, in the targeted areas.

If you could maybe give us a bit of a framework around that, how we should really think about OpEx growth here, versus some of the savings that you're planning with your SEK9 billion program?

Thank you.

I can start with the growth.

Yes, you're right, our ambition is to grow more than 10%.

And we will, as Jan said, come back a little bit more detail in the capital market day.

That's our ambition.

If we say good growth, it's a good indication that we, at least so far, feel that we're in that range.

Not saying any more right now.

Good, Hans.

Now, Johannes, I think, on the OpEx [plate].

I mean, the reason that I want all of us to use the SEK9 billion number, and the baseline being 2014 P&L, is of course that there will be also needs for investments.

And we still think that the split, or the breakdown, of where the savings will appear is still holding.

So when we met there in, I think, November last year, we said, of the SEK9 billion, approximately half is cost of sales related, and approximately half is operating expense related.

And most of the operating expense related savings will be R&D.

There will, of course, be savings on G&A.

But on selling expenses, we are mainly using the same amount of money, but releasing efficiencies and investing in new areas.

That's kind of the breakdown that we are -- we still think holds, the breakdown that we gave in November of last year.

That is very sensible, thank you.

Next question, please.

Gareth Jenkins from UBS.

Hi, Gareth.

Thanks for taking my question.

Just a couple, if I could.

One touched on earlier, one -- you mentioned, Hans, around the software business model.

I wonder if you could talk about visibility and whether you're seeing any improvement in visibility around that software model?

And if so, can you maybe share with us some metrics around annuity revenues, going forward?

So how much of revenue have you got covered by existing contracts?

And then just secondly, on support solutions.

It's obviously very difficult to model, given the variability, quarter to quarter, in profitability.

I just wanted, again, on visibility, how you can -- whether you can help us with our forecasting, going forward, for that business?

Thank you.

Okay, Gareth, it is Jan here.

So if you -- we come back to our common favorite topic, which is the software business model there, Gareth.

So since I am Chairman of that initiative internally, I should be the one that answers.

I think for -- so last year -- and we took the time to develop the tools, methods and the processes to be able to execute the change, which will be obviously, in part, a recurring model, and in part a hybrid model.

This year and next year, and also -- this year and next year, it is very much about negotiation, or introduction of the new models.

And I think that again, by November, we should be able to give some more flavor or color on what's -- how much percentage is recurring revenue and so forth, so on a higher level.

I think you can say, as to simplify things, support solutions is the area that has -- is the most advanced, in terms of recurring software business models.

And I think they are approaching on their software business, they are approaching now 35% or so of the business being recurring.

So we will not reach 100% recurring software business models.

But I think the important thing is what you hear me saying, is that now we have all customers in the funnel, and then now we are in execution mode.

So it's my view, based on the half year analysis and assessment that I've done, or the project I think we are progressing in accordance with the plan, for a long-term good benefit.

Next question, please.

Edward Snyder from Charter Equity Research.

Thank you very much.

Hans, it seems, clearly, North America is a reasonable proxy for the path the 4G markets will follow.

I know you've spoken quite a bit about adjacent markets, and you mentioned that 5G, in a lot of your -- or many of your customers here in the US, and North America in general, are looking to deploy into other areas.

Can you give us some idea of what the timeframe for that new market to become a material contributor to your finances?

Is it several years after 5G?

And generally, a few of the applications would be helpful, too.

And then, Hans mentioned that most everybody who is in infrastructure in handsets has already got a license with Ericsson.

And of course, you're still in discussions with Apple.

I know you don't want to give any specifics.

But in general, even if you get a settlement with Apple, will it materially change your IPR revenue?

It's not going to increase by 2 times.

But in general, can we expect a significant change, if that were to finish?

Or will you be at these run rate levels for the foreseeable future?

Thanks.

On the first one, when it comes to adjacent markets, that is of course a little bit different from market to market, as I said.

I mean, North America, we already see some of our customers having a [side] of business, from machine to machine, et cetera.

And of course, that's partly -- we are benefiting from how we build the networks.

But when it comes to requirement from new use cases, like low latency for autonomies, cars, or low battery for sensors that cannot change the battery for 10 years, or you come to enormous throughput, because of data loads, et cetera.

All those use cases that we're now doing, that has not happened yet.

Today, we still use the traditional 2G, 3G and 4G, and some sensors, to handle the industries -- adjacent industries.

But just imagine when health care will come in with remote patients, or remote monitoring, and remote healthcare.

Their demand on the network will be very different from today.

That is probably a couple of years out, before we're going to see any sizable revenues for our customers, and hence creating demands on the network.

But that's very much where 4G/5G is going.

And that's, of course, the excitement we see.

I mean, I usually say that so far, the so-called networks aside, has impacted people.

Now, it's, we're going to have the impact on industries, and finally on the whole society.

And that's what we're approaching.

When it comes to IPRs, now there is no specifics here I can answer on.

But again, we have basically agreements with all larger infrastructure vendors, and handset manufacturers in the world, except Apple in this moment.

Of course they are a sizable and important piece of it, but it will not be any dramatic changes, when we sign that.

It's all of them, or part of a recurrent revenue that will build up, and this is part of how the industry is working.

And remember, we also work with cross-licenses, because we need licenses from others, as well, when we do our infrastructure.

So it depends on who we are doing deals with, and what type of patent portfolio they have.

On your income statement, or on your operating income bridging function, you show this negative effect from the mix shift from North America to China.

I know you spoke in the past at length about, it doesn't matter what geography you are in, because the pricing is about the same.

So then, given what you said about adjacent markets in North America, it sounds like just the increase in revenue and networks in North America is just generally more capacity business than coverage, where China is more coverage.

And that's going to -- and that's the way it will continue, and the way we should think about it for a while?

I think the design principle for the networks right now, going from 4G to 5G, is two.

One is that it is a continuation of 4G to 5G, meaning that you can reuse a lot of the hardware, especially if you buy our stuff.

Our baseband can handle several technologies, several frequencies, and licensed and unlicensed spectrum.

That means that, of course, you can reuse a lot, and of course, there's going to be more capacity in software.

Second design principle is, of course, what I've said, we want one network that handles 2G, 3G, 4G, 5G.

That uses all the spectrum, and you can do carrier aggregation, including this unlicensed spectrum.

And that, of course, requires a lot of software to handle that.

So you're right that, over time, we're trying to do this as smooth as possible for our customer, migrating from 3G to 4G, to 4G to 5G, by reusing as much as possible of their hardware, and then having software on top of that.

That's how the model works, and the design principle that the team in radio and group function technology has implemented.

(multiple speakers) The path of build-out would be different in North America, when we get to 5G?

Would you be less coverage, since your radios are already installed?

And therefore the margin profile, if you move to 5G, may be a little bit different than what we are used to?

I think it depends a little bit which market you're into right now.

There are, of course, markets that don't have the basebands of the future.

But of course, many have deployed it.

And they can be able to use to migrate.

So it depends a little bit on your legacy installation here, when it comes to that.

So then, you need to go from market to market.

And I think we have to -- it is Jan here.

I think we -- if you look at the capital market day presentation, we have this different business model.

This is the picture that I typically always show at the capital market day, where we talk about coverage and capacity.

And I think it's a little bit too early to say whether the logic is going to be coverage and capacity, in the same way as we have introduced it, when we introduce multi-standard radio, also for 5G.

I think, as Hans said, it's evolution that is the main strategy.

Of course, there will be a need for different types of base stations, and so forth.

So I think it's a little bit too early to talk about whether the logic will be coverage and capacity.

But I think in time for 5G, we will absolutely make sure we have a relevant business model discussion, and so forth.

Great, thank you very much.

We are getting close to 3 PM, so we are open for the last question, please, operator.

Thank you very much.

Paul Silverstein from Cowen and Company.

Hi, Paul.

Hi, thank you for taking my question.

I heard your comments earlier about pricing.

But if I may, any thoughts about -- gross margins obviously have been a long-term issue for you in the industry.

Any thoughts about where you can get gross margin to, in terms of maximum gross margin efficiency?

And how you're going to get there?

As well as your strategy, at a high level, in terms of trading off revenue for margin?

Okay.

Paul, it is Jan here.

I think the -- I'm sorry to say, but the gross margin, over time, it will be less and less relevant to look at gross margin as the value driver for Ericsson, as our services business continues to increase, as portion of the total Company.

So over time, it will be more important to look at the bottom line, and our ability to grow bottom line, in regards to that.

But nevertheless, the whole strategy around evolution on 5G, as Hans discussed, the whole strategy around targeted areas is, of course, to get more and more software, and more and more integration type of projects into the mix.

So -- and that is what we then summarize when we talk about the strategy of Excel in the core business, which is very much around software-centric networks, as well as efficiencies, and then build success in targeted areas.

So I think that is the strategy we have, and we have -- we are continuing to executing on -- to deliver an improved earnings level for the Company.

Thank you.

Happy with that?

Thank you.

Hans, you want to conclude the call?

I think concluding, then, that we are now past the half year here, so we are continuing to work hard with transformation.

As Jan said, Excel in the core business is extremely important to see, that we keep our leadership.

And then see that the target areas are succeeding.

And we think that we have traction on that, and we're accelerating that, and management will continue to focus on that.

And see that we control what we -- or act on what we can control.

Of course, there are things outside our control, but we will definitely act on everything we can move in that direction, to transform the Company.

Thank you.

Ladies and gentlemen, that does conclude our conference for today.

Thank you very much for your participation.

You may now disconnect your lines.