Telefonaktiebolaget LM Ericsson (ERIC) 2015 Q3 法說會逐字稿

Welcome to the Ericsson's conference call for the third-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, you will now open the call.

Thank you, operator.

Hello, everyone, and welcome to the call today.

With me here today I have our CEO, Hans Vestberg, and our CFO, Jan Frykhammar.

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

Thank you, Peter.

Let me go through a little bit of the key developments in the market -- what we have been discussing with our customers.

And I will briefly mention in the second quarter that 5G is taking off and thought to be discussed, and we see implementation on test beds; very much focused on Korea in the second quarter; now we also have the US; we have China in the discussion; Brazil; many markets that we now are implementing test beds with and starting to look how 5G will impact.

And it's, of course, very different design on 5G than 4G, 3G and 2G.

It's much more of an industrial Internet with different type of solutions that can be applied for different industries, rather than only having a consumer view on the mobile technology.

And that's goes very much in hand with the Internet of Things discussion that is rolling all over as well at the same time.

Another thing that is common theme by all operator, of course, the increasing media traffic in the networks, how to handle it in the best way, how to deliver it in the best way, comes very well in hand with our investment and (inaudible) from compression to caching to indeed the right management, all of that depending for the (inaudible) prime and content or not.

This is both a mobile network and IPTV networks, I would say.

We see, and this is not news, but of course, that some of the markets where there has been a devaluation on the currency or weakening of the currency.

They get a little bit harder to spend the CapEx in dollar, and we want to be surgical here.

It's very important.

We don't want to put the blanket on the whole world and say it's a macro problem.

There's certain markets that have had this, and have an impact on us.

And I would say, Brazil and Russia, for example, I think two large markets for us -- has a lesser purchasing power due to the weakening ruble and reais, and there are some markets in Middle East as well.

We don't think separate the renewal markets when it comes to infrastructure.

Remember, we talk about the infrastructure and nothing else.

We also will talk a little bit ourselves.

We had a little bit slower 4G in China.

Remember now, been a very high pace for three quarters in China on the 4G, ramping up for more than a year ago.

We saw a little bit slowdown this quarter.

We believe, with our Northeast Asian management that their underlying demand on 4G still there, they're still, even thought it's a lot of subscribers on 4G, there are many, many more to go.

We see also digitalization trend in China or Internet of Things and connectivity going into industries happening as well.

Clearly, on the long term we think that this an enormously important infrastructure remain on China.

That we haven't seen any changing.

We, Ericsson, we had a little bit slower pace in the third quarter.

We can report, as we did in the second quarter, stable business on networks in North America.

We had two, three quarters when it came down from a very, very high level.

Now it has stabilized, as we saw in the second quarter.

There are other businesses that are growing -- services, OSS/BSS, et cetera, which of course, is very positive.

On the result of the quarter, we had 10% operating margin, excluding restructure on the whole Ericsson, and that is a clear improvement from a year over year; it's 46% up.

We had 7% operating margin last year in the third quarter, going to SEK6.1 billion from SEK4.1 billion.

So it's a clear -- SEK4.2 billion -- so it's a big, big increase.

Services is main contributor, but all segments are contributing, but services mainly.

Now, this quarter, 46% of our sales was Global Services.

Professional Services stable on the operating margin, and then Network Rollout then that we have talked about in that question for a long time, was breakeven in the quarter, which is good.

We can conclude that the transformation of the Company is going well.

The target areas that we will talk more about at capital markets day are continuing for the fourth consecutive quarter to be about 10% in growth.

We are strengthened to position a couple of very important announcements in the quarter -- Envivio acquisition, but also AT&T's commitment to the media room and the media platform that we have, [after them] the acquisition of DirecTV.

Very important for us, which we have been waiting for.

Also we see Jan report in the second quarter we saw some signs of the profitability program that where were the costs out.

In this quarter, we saw clear impacts of it.

Even though we are in the beginning of the program, we can clearly see the impacts of it.

We are very much committed to the SEK9 billion out in 2017, and we are clear on track for that.

If we then look at the third quarter, in summary, yes, up 3%, down 9% in constant currency.

Remember also that even all the tailwind we get from currency converted to the Swedish kronas, you get the headwind also when it comes to emerging markets like Brazil and Russia when it comes to the purchasing power.

Of course, it's a lot here where we count the networks; it's, of course, networks that has a harder time with their growth right now.

You can see that North America, Japan, Russia and Brazil have lower levels compared to last year.

However, India very strong.

Southeast Asia, strong.

Sub-Sahara, strong when it comes to growth in this quarter.

Fairly normal seasonality, 2%, nothing much to talk about.

The main difference here between second quarter and third quarter when it comes to top line is China, and that's the slowdown I talked about.

And then, I have already talked about the SEK6.1 billion in bottom-line compared to SEK4.2 billion last year, the 46% improvement.

And a gradual improvement that management is working with constantly to really take in things we can do.

We can look into regions; I've already talked about the majority here.

So you can see on the right-hand side is India, Southeast Asia are growing well, and sub-Sahara.

Then you can see on the other end, Northeast Europe, Central Asia, which is including Russia, is coming down, as well as Northeast Asia where you have Japan and China.

If you do it sequentially, a little bit different perhaps.

India came back a little bit from a little bit lower growth, that pace in the second quarter, even though it was high.

Latin America as well.

And then you see Northeast Asia coming down a little bit due to the things we talked about in China, slowdown compared to second quarter.

And then we talked a little bit about Middle East as well.

It's a little bit different path than when we do sequentially compared to year over year.

I will hand over to Jan to talk about the financials more in detail.

Okay, thank you, Hans.

Let me then start to talk a little bit about the gross margin, close to 34% in the quarter; about 35% a year ago.

The main reason for this drop compared to a year ago is higher share of services.

It is approximately 3 percentage points higher share of services in the quarter.

The rule of thumb that we have talked about for some time now, approximately, is still valid; approximately every percentage point increased in services share has approximately 0.3 percentage points impact on gross margin.

I think that holds up also this quarter.

Also, higher restructuring charges is one explanation.

Similar explanations when it comes to the increase in gross margin compared to the second quarter.

If you look at the operating income, then Hans has mentioned a lot of this already.

I think underlying, of course, this year is the year where we have a positive impact, net FX positive impact on operating income.

That's there.

Of course, these revaluation of the hedge contract stock, I mean, that goes up and down every quarter, and that has to do with the future and, obviously, the exchange rates that we close the books with.

Lower cost is a fact.

Breakeven in Network Rollout is good.

It's one quarter we would like to make this a trend, of course, but I think if you look at the improvements over the course of many quarters, we have seen an improvement quarter over quarter over a couple of quarters now.

We now want to make sure that we create the sustainable break-even situation in Network Rollout.

Then, if we then talk about operating expense, SEK14.9 billion in the quarter.

If we then exclude the restructuring charges, it's SEK14.3 billion, compared to SEK15.2 billion a year ago.

Let me spend a few minutes on the different elements here of the operating expense.

If I make an estimate on the FX headwind then on the operating expense, it's about SEK1 billion, if I compare a year ago.

Around half of it is related to translation exposures, meaning then the monthly translation of the local subsidiaries, that's mainly done in the SG&A item.

And then the rest is transaction exposure.

That's then reimbursement of R&D expenses in our local companies back to the operating entity in Sweden.

That's mainly impacting R&D for a comparison reason.

Also I got some questions this morning around capitalized R&D expenses.

Here I want to refer to the page 34 in the quarterly report where you see all of these different relevant items, both depreciations, capitalizations and so forth.

If you look at that table there, you see that we have had, since the fourth quarter of last year, an increasing trend in terms of capitalization of R&D.

And this has to do with the fact that we are in the face of now developing systems for releases during 2016, 2017.

For instance, the Ericsson radio system.

For instance, the TV, software, the MediaFirst and also somewhat impacted by [two zymethis] development for our globalized IT centers.

This is nothing unusual.

It goes a bit in cycles, depending on where we are.

Everything is disclosed, but it has been questions in the morning around this, therefore, it's better to take this up front.

Net-net, it is the reduction in cost base, if we make everything -- if you make adjustments for all of these things.

Not all of it is related to the cost reduction program.

Some of it is also related to normal adjustments that has to do with business volumes.

But that we have to do all the time.

We will continue to see improvements in the cost base here when we go into Q4 and next year.

So that's what I want to say on the operating expense.

If we then take the operating income, I wanted to show then how it looks per segment, excluding restructuring charges.

Here you can see that the main improvements compared to a year ago is in the Global Services segment.

It is split equally between Professional Services.

That's mainly then volume-driven, but also efficiency-related, and then you have the improvements in Network Rollout.

And also a big item is, of course, the exit of the modem business.

If we then take the next picture which has to do with the sales growth and FX, this quarter you see that the delta between reported and organic FX adjusted has come down a bit.

And that's natural because of the fact that the major strengthening of US dollar to Swedish krona have been during the course of last year.

It will -- if we assume that we have a similar currency mix in Q4, this will come down a little bit more.

In this quarter, Q3, we had approximately 45% of top line being US dollars, and we have been in this range between 40% and 45%, basically, for many, many quarters.

So the US dollar is the most important currency from a top-line point of view.

Then if we look at currency movements, and a lot has been said already on that topic by Hans here.

But if you look at the US dollar versus Swedish krona development, you see that it has been stabilizing on levels between, let's say, [SEK8.10] and [SEK8.40] during the course of the year.

It varies still between different months and quarters.

We disclose these FX rates on the homepage of investor relations every month.

Then on the right-hand side of this graph, you see the US dollar development versus a basket of six different currencies, just to make the point out of this comment that Hans made around the purchasing power, if I may say so, on some of the emerging markets.

You can see then that there has been a strengthening of the US dollar against these currencies since end of last year of around 28% in average.

You have then the -- and the networks business is in US dollars because a lot of the -- all components and so forth is in US dollars.

It's a US dollar-based business.

Global Services then is mainly local currency, so that is really where there's a company today, has around 105 different currencies we do business in.

That's been mainly impacting the services business.

We take then the cash bridge.

Operating cash flow in the quarter, SEK1.6 billion plus.

Remember now that we have made SEK1.1 billion in cash out related to the restructuring programs in that.

You also see that the main challenge this year continues to be working capital.

It has to do with the mix of a lot of coverage in mainland China, but also some emerging markets and the related project terms that we have in those businesses.

When you think about the operating cash flow and the profile over the year, typically Q4 is the strongest quarter for us in operating cash flow.

I think we would obviously try to repeat that also this year.

We have the target of more than 70% cash conversion.

Given where we are year to date, it looks a bit challenging, but we never give up, Hans and I.

With that, I hand back to you, Hans.

Thank you, Jan.

Let me then go into the different segments, starting with networks.

We spoken quite a lot about the things that are happening in networks, and [up] 4% in reporting currency and then down 15% in constant currency.

That's a little bit more than we had in previous quarter, mainly again in China.

So it's nothing new.

It's more the somewhat slowdown we have seen from a high level in China.

There are also regions growing well here.

Sequentially, down 6%.

Basically, nothing extraordinary either, and here, of course, is China, an important piece of it.

Operating margin, 12% excluding restructuring.

We now have double-digit margin in networks eight of the nine latest quarters.

Q1, we all remember, we were not there, and we said it's not the trend.

And it was not a trend, now we have comfortably proven that we have a very ambitious plan to stay [around] 10%.

We understand that we cannot have it always clear, but we definitely work for it then.

Eight out of nine is proving that we have a good track record there.

Of course, expenses, as Jan has talked about, important.

Two important things that Ericsson Radio Systems starting to be shipped in this quarter that we launched in Barcelona.

We will also get our first contracts on the HDS 8000, which is a Hyper scale cloud server that we are building.

That is also very encouraging, which was launched also in Barcelona and resides in our business unit cloud and IP.

You can see there that on the operating income, margin, we are gradually improved from the beginning of the year, 2%, 8%, 10%.

And that of course, also includes restructuring charges.

If you exclude it, it would be more even, as in the second quarter we had quite a lot of restructuring charges.

Global Services -- we talked about it, both me and Jan, 11% up.

Even grow, flattish on the whole.

Of course, Network Rollout declining and that means that Professional Services is growing.

In total, 15% now in this quarter, both with system integration and managed services.

We had double-digit growth in 8 out of 10 regions in this quarter on services, which you can see in (inaudible) as well.

Of course, then ending up with a SEK1 billion improvement bottom line, year over year, from SEK1.7 billion to SEK2.7 billion, 10% operating margin, which is, I think quite astonishing achievement by the team.

Network Rollout to breakeven.

Of course, improved earnings in absolute number in Professional Services, which has been stable between [12%] and [15%] the last, I am not sure how many years.

I think that tells that we have a lot of good recurring business that we are working with here.

Support Solutions then, move to that.

Support Solutions also stabilizing, even though the reported sales up 8% and down 8%.

Here it's in more TV and media that is coming down.

OSS/ BSS, very good momentum, as Jan said.

We are coming down a little bit on TV and media here, and it has been one customer that has been more important than others.

As you saw in the quarter, we signed the agreement then with AT&T, which is very important for this business.

Our margin is coming up as well here.

Compared to second quarter, clearly coming up.

On an EBITDA level, of course, that's where we acquired quite a lot of companies.

7% EBITDA level here, which is also an improvement from previous quarter.

We also made the bid for Envivio in the quarter, which is a global leader in software-based video encoding.

Then we would be the leader on the hardware-based video encoding, through the Tandberg acquisition that we have had for many years now, and the software.

We really believe that we are now building a state of the art TV and media business where we can actually supply any type of customer, if it's mobile operator, fixed operator or if it would be a satellite or cable company and the broadcasting as well, which I think is very interesting.

I will sum it up with a couple of things we have said before.

Slowdown in the third quarter in mainland China -- not strange at all.

After seven quarter of high deployment you can see a slowdown.

We do not connect this to any macro economic discussions in China.

It's more related to our customers that are -- had a little bit slower rollout this quarter.

North America, stabilized on the mobile broadband.

We see on the mobile broadband business or network business, a little bit weaker business in the emerging market that has been impacted by currency devaluation.

We name the countries in order to not talk that everyone is in there.

Services, of course, good quarter.

8 out of 10 regions growing, strong demand for Professional Services, Network Rollout breakeven.

Concluding then, fast pace in the Company transformation.

Global cost and efficiency program all on track.

I hope you can see that, we were to announce in Q4 last year.

That has contributed to a lower cost level, as Jan went through in all the details.

It's important to remember all the details he talked about, that is also currency going against us in all of this, to the net-net it is a good first steps in the program, [whereas SEK9 billion in fixed cost] by 2017.

We also talked about the target areas.

Target areas are performing well.

They are growing about 10%.

We report that in every quarter.

Right now it seems the capital markets, they last year in November.

We will come to the capital markets day and have more in-depth in each and every area, how they are doing and what the nature of the businesses are.

To take in the next step.

We are encouraged with the growth we have seen, and for the rally around this areas, which are very important for the market and for transformation.

Thank you very much.

Thank you, Hans.

Operator, we are open for questions from the audience.

So, please.

Thank you.

(Operator Instructions)

Our first question comes from Alexander Duval, from Goldman Sachs.

Yes, good afternoon.

Alex, here from Goldman Sachs.

A couple of quick questions.

Firstly on the US networks, in particular, looks like those were double-digit, down organically giving the FX benefit you get.

When I look at Verizon's wireless CapEx, that was actually up and AT&T was roughly stable.

Obviously the correlation is never perfect between the two, but I wondered if you could give a bit of update on that?

Second of all on the China slowdown in the third quarter, obviously activity levels have been high for a while.

You have expressed some confidence in longer term 4G demand.

I wondered if you could update on what underpins that view?

Thirdly on gross margin, looks like the number was somewhat light versus where consensus was modeling.

That to a significant degree seems to be caused by higher mix of services.

But could you give a bit of an update on pricing in the market and competitive intensity as well?

Many thanks.

I'm trying to capture all of your questions here.

Starting with North America market and the CapEx.

You are right, it's hard to do a correlation within the CapEx of the US carriers.

First of all it is a lag in-between when they are spending and we have revenues.

Second is, of course, the nature of all this inside the CapEx because it could be areas that we are not into, or it could be areas that can even decline CapEx and we are getting more business.

So that's very important.

Also if you look at some of the carries in the US, they're using CapEx not only for the US anymore.

They are sort of moving CapEx into Latin America, for example.

And of course, we got benefit from that in Latin America, so that's what we reported somewhere else, even though you see that they are stable on CapEx.

All they can deploy to TV and media, for example.

We are working with it very closely to see how our customers are developing there and how they are spending the CapEx.

But your insight there about the levels, those are correct, but it's not correlated 100% to how it seems to behave and business for us.

When it comes to China, yes, no, I said very recently been in China myself with some of my executive team members to meet the customers to talk to them, see what is happening.

I cannot, at least at this moment, not say that we don't see an underlying demand, growth in 40 subscribers is unparallel in this market as well as we've seen as any other market in the world.

We see the discussion of the legalization of using the technology for connecting cars for Internet and all of those things, and all of that that we see in other markets.

That's where I base it, medium to long-term I think that the rollout of Q4 will continue.

It's a big country, many subscribers.

The growth volumes, Jan will come back to that, I can only say all-time high on services.

46% of the Company.

That intrinsically means that we get a little bit lower gross margin, but it doesn't mean that you get a lower bottom line.

We just wanted -- and of course the modeling becomes hard for the market when you are a little bit wrong on that on gross margins but, ultimately, bottom line you can see that we are producing equal bottom line on these units right now.

That's where different gross margins.

On the competition on pricing, nothing new to report.

Network side, always when it's new deals, always a little bit more tougher pricing environment.

There is no difference on that.

If you fight for new market share always a little bit tougher, but it's nothing like, wow, now we have new world here.

It's tough, it's competition as always.

It's less in the competition if fewer companies, especially mobile infrastructure.

Then you can go to billing system.

Here we meet totally different competition.

We would meet Oracle and Accentures of the world.

If you would go into pure services, it can equally be HP and IBM.

Clearly when we talk about competition, it's a very broad term for Ericsson nowadays, how we have selected our areas.

Jan, do you want to add something?

No, I don't want to add anything.

I think the gross margin has bridged here, Alex, it has to do with services.

We shouldn't see anything else into mix than that.

Many thanks indeed.

Happy with that?

Next question, please.

Next question comes from Pierre Ferragu with Bernstein.

Good morning, how are you?

Quick question actually on (inaudible) you made significant progress in you (inaudible) this quarter and I have two questions.

First one is, could you give us a sense of what's behind you and what stands in front of you in the next 6 to 12 months in terms of cost reduction?

So we have your target of SEK9 billion for the full year of 2017, if you could just recap what are the drivers that you haven't pulled yet, and that will be on your to do list in coming months?

So if you could give us a quick reminder of how much of that cost cutting is getting to your OpEx and how much is more coming in to your gross margin.

Of course, on the gross margin side, it's difficult for us to read what you have achieved so far.

If you could tell us what you have achieved so far there, that would be great?

And my second question is your recession (inaudible).

The amount, of course, you're capitalizing has increased over the last two, three quarters by SEK600 million, SEK700 million, so it's a fairly significant number.

I was wondering if you could give us some visibility on what is happening in your R&D, why is this number increasing, and how we should think about it as a run rate number going forward?

As we try to prioritize on cost cutting it's important for us to make a very clear difference between expenses that are getting capitalized and expenses that are to be taken out of your cash expense every quarter.

Thanks.

Okay, Pierre, it's Jan here.

So, let's start with the overall cost reduction program then.

The ambition is to improve the cost base by SEK9 billion in 2017, and the baseline is 2014.

In terms of the activities and so forth, it's still very relevant to model with a half-half between cost of sales and the operating expense.

That's still very relevant.

Also, remember, that we started 2015 on an upward going trend here in terms of R&D expenses, in particular.

But when we measure this, we baseline from the operating expense and fixed cost of saves level as they look in 2014.

In terms of the things we're doing, obviously, we will continue to execute activities.

You see that if you look at the headcount numbers.

The gross number is down 5,000 people in the quarter, not all of that is related to the cost reduction program.

Some of it is also normal right-sizing that you have to do and normally efficiencies every year.

I think, in terms of what you will see happening here in 2016 first half and so forth, is of course that we start to see more materially impact from the program that was announced in Sweden.

We are continuing then with things that is addressing the service delivery.

That continues as a continued to do list for next year.

We will also continue to work with the IT infrastructure and IT related costs and so forth.

There is a to-do list, I agree.

But when it comes to people, you also know, Pierre, that we also prefer to communicate all of these things to the relevant organizations first.

I think we have gotten -- we are in execution and we start to see impact on the cost space.

I think that's important.

When it comes to the cost of sales, I agree with you, that it's tough to see that because it is mixed and so forth.

I will try to make a shot of that we meet at the capital market day to give you some progress.

On the capitalization of R&D then, it goes a bit.

If you go to look at this page 34 in the report and you look back a few years, you would see that when we did the development around the RBS 6000, for instance, we were in a capitalization phase as well.

Then once you get into more of this twice a year, software releases, those are short projects, those we do not capitalize.

When it comes to modeling this Pierre, some of the products that I mentioned there, they would be in the market end of this year and during 2016.

So if there is no new big project then you will start to see this trend going in the opposite direction during next year.

Then of course, you will start to have some developments related to 5G and so forth.

It goes a bit in cycles, but right now you will see that the products that I referred too, they will be in the market here at the end of this year, and next year and then you will start to see this going in the other direction, so to say.

It's a little bit in it goes in cycles.

I hope that was good enough answer on your question.

Thank you.

Thank you, Pierre.

Next question.

Next question, Tim Long, BMO.

Hello, Tim?

Hello, thank you.

Just back to the services business.

Thinking about the gross margins here, longer-term.

It's been, overall margins have been pretty consistent for managed and professional services.

Is there -- are we kind of -- really no chance to improve gross margin that would only be pricing?

Is there anything that can be done to help improve the gross margins and maybe mitigate the mix shift that we see?

And, secondly, on the network rollout side, good performance in the quarter.

How was that -- a little bit more detail on how that was done?

Is this just being a little bit more strict on pricing?

Or was there good cost outs to help us get an idea of how sustainable that might be to have that run at breakeven?

Good questions.

We talked earlier, the gross margin as you said, it will be a combination of hardware, software and services, which all of them have different type of nature.

Given the push we have for software, of course there is also a chance that the gross margin can go up.

We are in the pricing transformation right now with our customers, over a three-year term in order to actually price our products more like a software.

The reason is very simple.

We have so little hardware and it is going down dramatically.

We launched that one year ago, our software model.

That we did publicly as well, so everybody knows.

But we can't do it immediately.

It comes up, new tenders or new renovational contracts, and we are negotiating each and all of them.

The area which is the furthest ahead is support solution that has done that for a while.

The toughest has been in networks because you also need to move and change the technology in order to be able too charge like a software.

You need key locks and keys and optionality packages, et cetera.

And that, the guys have done a tremendous job with last three years to put together, and now we can do it.

That will of course increase software over time.

We have an ambition to increase our software and services in totality.

That is what we are structurally doing in order to get there.

Then the mix will always be there.

Services intrinsically have a lower gross margin, but they can definitely still get out bottom-line that is very competitive.

Add a few things.

So on the Professional Services margin, how do you get more leverage?

The work that the team does is of course to work diligently with tools, methods and automation.

And we invest a significant amount onto development for services each and every year.

We continue to do that in order to create both automation and one to manage delivery models.

That's one important leverage.

On the network rollout piece, that's more of a business that has a higher element of variable or consultants or sub-contractors in delivery.

Still there is a lot of tools development to reuse solutions and so forth.

This particular case has been very much focused on knowledge sharing tools and also much closer work between the radio product areas, together with services around the ease of installability and so forth.

We need to do those kind of things because we know that we can't go and ask for price increases to customers.

We need to take care of their projects that we have taken on in a good way.

Those are the things we can work with.

And then on network rollout, it's not pricing.

I think the guys have worked a lot through the projects in network rollout, ways of work, in the tools, methods and processes.

So I think that is a very tedious and good work that is been done across the globe.

Just imagine how many network rollout projects we have in180 countries.

It is an enormous lot of work.

It has taken some time and we saw one quarter right now, Jan has said it several times, we're now looking for sustainable.

Because we think that this will not be a high-margin business, but it should not be a drain to the bottom-line.

Headquarters where we have certain projects coming in and out.

To be clear, this is hard work with our course base and the ways of working and Jan mentioned tools, method, processes, consistent work across the globe.

We have global teams that working with all our local organizations.

I think organization in this and they have been able to turn this around.

Okay, thank you.

Thank you, Tim.

Next question.

Next question comes from Edward Snyder, Charter Equity.

Please go ahead.

Hi.

Hans, you talked about again of 5G rollouts starting in China, specifically more of an industrial beds like IOT.

Wondering, is the profile of this upgrade going to be quite a bit different than we have seen from 2G to 3G, and 3G to 4G.

In those we saw a big change in the backbone of the infrastructure, the modulation scheme, et cetera.

Are 5Gs going to be LTE like 4G was?

Does this change, not just the ESPs, but the margin profile what you're looking at?

Or even the timeframe that it takes to roll this out, given that we're probably going to be dealing with LTE for some time now given the radio capacity issues.

And then, Hans, if we are looking at the profile or demand in 4G, now in China starting to slow down.

I know that has something to do with the economy, but if you compare that to what happened in North America, we had several years of very strong buildout and then that's followed by a lower level, then a stability.

It looks like maybe China is falling in the same path.

It's just the template we can expect do you think from most 4G rollouts as they get into India, several years of growth and then a big drop-off and then more stable?

Trying to get an idea of what you think the profile will be once we see maturation of 4G in some of the emerging markets?

Starting with the China comment with 5G.

When I talked about digitalization in China it's based on 4G.

So we're clear on that.

So that's also related to 4G and IoT.

Still, I said in the beginning that many markets are now looking into 5G and China will be one of them.

When I talk about the 21st century's infrastructure would be mobility, broadband and cloud, that is 4G based in China.

5G will come later on.

Just to clarify that.

If we then talk about the (inaudible) we could see.

Yes, I think that Jan has talked about this every time.

We have (inaudible) on coverage first, and then depending a little bit how capacity it was in that coverage, you get to face a little bit slower and then you constant capacity.

That's how we work in all technologies.

However, we do not say this is the case in China right now.

We say it's one quarter of slowdown and it might not be -- the underlying and the coverage is still there, let's say.

You need more coverage in China.

The coverage space is not over in China.

That is what I'm saying.

(inaudible) as you describe, that's how it works between technology.

Your next question is how do you correlate 2G, 3G and 4G?

It's a little bit early to say.

We have on standardizing working on standardizing 5G.

To as much extent, we would like, of course we would like to see that we can reuse as much as possible of the install base when it comes to base plans, et cetera, when you move to 5G.

However, the ranger unit have to be changed because it's going to be different frequencies.

But we will only know that when we have decided what frequency it is going to be, and how it will define.

But of course, one way to see is that this could be upgradable from where we are, but it's too early to say.

We are now discreetly running 5G test where you can -- we can show 5 gigabits per second right now in our 5G test plans here, which is enormous.

It can also give a latency that's 10 to 20 times lower than 4G.

There's many new characteristics on the network and that's why I'm talking about many industries will be very interested.

We are trying to see that this is going to be as much reuse of the previous infrastructure because that's important for our customers and they don't need to reinstall or reinvest again.

It depends a little bit how the standardization going to be done.

We will pull for that.

A follow-up then.

If that turns out to be the case where you do reuse, and that seems to be the scenario that's playing out, give you are not going see a big change of modulation.

Does that radically change the ASP revenue versus margin profile of wider deployment of 5G?

If you go to IoT in the US, and eventually in China whenever it shows up, and you're looking at industrial applications, do you expect your financial statements would show a significant change?

At least in networks as this started to penetrate some of the more advanced markets?

We're very early out now speculating on the margin profile.

Remember, commercially, volumes is 20, 20.

But of course, if it goes that way it will be more software-centric, sort of next generation mobile networks rather than hardware.

We probably -- still you're going to need more sites because we need to densify again a lot in order to have it.

You would also have much more of an orchestration layer over this because now you cannot have discrete product in the network.

They need to hang together if you are going to enable this, because it's not enough that the radio access is 5G, you need also the radio and the transmission, IEP radio and something to control that.

There's going to be more and broader definition on 5G then we have seen on radio access.

Great.

Finally, if I could, C-RAN I know there's some test deployments now too.

Is that something we can expect in the next year or so, or is that further out like 5G?

C-Ran is such a wide sort of question.

There are a different ways of doing in C-RAN.

You can do base band halters as I call them.

You can virtualize parts of it.

Parts of it we are already doing today.

Of the things we're looking if they're going to be more efficiency for our customers and if the use cases are there.

You can say, yes, we're doing C-RAN today because we can actually pull together the base bands in one place.

But then it depends on how much IP you are having between the radios and the base bands.

You can do a lot of what C-RAN -- so it's a more definition, what is C-RAN?

As a world leader in mobile technology, we will be exploring all new ways of actually delivering radio waves in a more efficient way.

Is that is part of doing different things we will do it.

We are very early on in the research on these areas and some things we can already do.

Great, thank you very much.

That's go to the next question, please.

Next question comes from Achal Sultania, Credit Suisse.

Hello, Achal.

First on the Western European market, we have seen some moderate growth in the last few quarters and now this is a first quarter of year on year decline.

I think you mentioned a couple of projects getting completed, like a few products getting completed in the region.

Can you give some more color around it.

Is it just one customer?

Is it more than one customer?

And where we are in terms of project completion and how should we think about 2016 in Europe?

I think that the way why we write that in the report is, obviously, that one of the important projects that we have been carrying out for one very important customer is gradually coming to an end and is peaking.

That is why the comment is there and then I think we don't talk more about it, I think you know what it is.

Yes.

I think in the terms of growth story for Europe, in general, I think that the -- on the overall level it's a lot of work still to be done in Europe in terms of 4G.

Both coverage and capacity.

That's an opportunity to grow.

Obviously, we have had in some markets lower investment levels for some time, driven by a lot of the conservation discussions that is ongoing.

It was also driven partly by slowness from a macro point of view in some countries and so forth.

I think points for growth is going to be around 4G and continuing 4G deployment, as well as perhaps, hopefully, some resolutions on some of the consolidation opportunities and so forth.

That's really what I see.

I wrote it there because I think it's important for you to understand that in the case of Western and Central Europe you have those projects with one particular customer.

That's clear.

And maybe one follow-up on China.

If we try to understand, clearly, you've seen a big rollout 4G in the last three, four quarters.

Can you talk about where we are in terms of mix, because my understanding was that the mix in China should improve as we get more and more 4G subscriber uptake on these networks.

Can you talk about where we are in that process?

Are we just starting to see that?

Are we still a few quarters away from that?

I think, from my point of view and in the past, Hans talked about this view on 4G in more mid long-term in mainland China.

I think, for us, we are still predominantly, it is coverage.

Capacity, which we all would like to see has still not materialized and become a relevant part of the business mix.

So it's mainly coverage still.

Hans, do you want to talk about 2016, 2017?

No, I think that we still have the coverage going out.

The last time China reported 4G subscriptions, it was 200 million.

That was in midyear.

I am pretty certain there are many more right now but it's still a long way until they have full coverage and the subscribers on 4G.

That is why I'm saying we still have the coverage space to go.

Then, of course, we go to a normal profile.

It's not now for sure, it will take some more rollouts before we get there.

Then of course if we then start to get into industrial Internet of 4G, then you need to densify and a lot of other things as well.

We're going to see, then we have a shift for the leadership of the three Chinese operate at the same time in this quarter as well.

China Unicom, China Mobile and China Telecom has all changed.

That's also something that needs to be taken into consideration here.

Thanks a lot, guys.

Thanks.

Thanks, Achal.

Next question.

Next question comes from Francois Meunier from Morgan Stanley.

Hello, Francois.

Thank you for taking my question.

You are talking a lot about the TV broadcasting and you seem pretty excited about your contract with AT&T and DirecTV.

The first question is, could this big R&D investment you are putting in the cash flow something which could be reused for that net six type clients?

That's the first question.

The second question is also about your new areas of growth, IP routing.

You have not made a comment yet on IP routing and I was wondering if you could give us an update on how it is going, especially with new you introduced this year?

Thank you.

On the first question it's pretty simple, is, yes.

We have already worked with all the top providers like Seymour and HBO et cetera that we're delivering this type of service for.

So, yes, we could work with that.

We have different type of TV platform.

We have one broad TV platform that can actually handle it, which is MediaFirst, which can basically handle all type of accesses.

Everything from IPTV to over-the-top linear TV to satellite TV at the same time.

Very much smaller sort of over-the-top service with TV that we acquired from Azuki, that we can deliver to stand-alone all the top solutions only.

Yes, we are addressing both of those markets at the same time.

And then for the second question about IP routers, yes.

As I've reported a little bit briefly then, and I understand your question.

We say we have good growth in all target areas.

IP is in the target area when it comes to the areas that we have then put focus on.

When it comes to our IP portfolio we have good growth there as well.

A little more detail on how it looks like when we meet on capital market, as for all the different areas, but we see a continued good focus.

As I said, also the ACS 8000, we have our first customers on that, and that way will of course start deploying in the beginning of next year.

Yes, it is going according to our plan that we staked out with ambition to be serviced in our areas of the IP routing, and that is moving along.

But we will be giving you more updates when we meet on the capital market day, as well as on OSS, BSS, TV and media, in industry verticals and the cloud that we will have as well.

Thank you, Hans.

Thank you, Francois

Our next question comes from Gareth Jenkins, UBS.

Hi, guys.

A couple if I could.

Firstly, I just wondered whether you had seen any change in market behavior following the announcement of consolidation earlier this year, whether more aggressive pricing behavior or less aggressive pricing behavior, or just no real change?

Secondly as a follow up on China, just the working capital movement, again seems to be quite heavy through the first nine months of this year.

I wondered whether you feel that that unwind next year?

Whether the payment terms may be extended in China in particular and that you will make good on some of the investments that you've had to make up front?

Thank you.

Market behaviors?

Okay I'm looking at Jan for answering the second question.

The first question, yes.

Market behavior, I assume you're talking about infrastructure because we always end up talking about networks when it comes to market behavior.

Then you need to remember that 46% of our turnover is in pure services.

OSS, BSS, TV and media, with very different competitor as well with other behaviours.

But I just assume you're talking about the consolidated market there.

No, nothing new has happened.

It is competitive when we have new infrastructure to use where, building a new footprint that you can have for 10 years if you perform well or maybe 5 at least.

Of course we see the same pattern there, but there is nothing incremental or any major changes.

As I always say, you will always remember the lowest couple of deals that you have them.

Those can impact on your view what's happening.

We try to take it over longer period and see how the price and the market is developing.

Nothing significant is changing in the market so far.

On working capital, then Gareth, we are in project terms, right, which means that you obviously, typically you get, you reach the billing milestone before that.

It's obviously in inventory, working capital, inventory and then you reach the billing milestone.

That you reach based on preliminary final acceptance.

That's really what is creating the challenge when you are into project terms versus with contracts.

It's nothing else than that.

We will do our utmost to make sure we obviously reach the billing milestone, bill the revenue here.

We have said that we think that there will be project completions in network and so forth in Q4, and that's obviously linked to the fact that you reach the billing milestones and then you can collect.

I think that's what we are doing.

It's nothing else than the mix of mainland China, but also some other emerging markets.

We will work hard to make sure we improve.

I promise you.

Okay, thanks, guys.

We are now open for the last question for the conference call.

Please?

Our final question comes from Simon Leopold, Raymond James.

Hello, Simon.

Question.

I wanted to see if we could drill down a little bit on North America since that is your largest region?

I wanted to look at it from both a shorter and longer term.

From a shorter-term perspective, AT&T CapEx, it looks like it's going to be very back-end loaded to the fourth quarter and I did hear your earlier comments about the challenge of aligning specific quarters.

But just want to see what you were thinking in terms of the shorter-term trend?

More significance, when we look at this year and we think about 2016, I'm wondering about the relatively easy comparison, given weakness in North America, yet I think the prospect of improvement in 2016 -- and I'm thinking about drivers such as the AWS-3 auction that was held earlier this year when the carriers need to spend to utilize that spectrum.

Shorter and longer term North America comments, please?

I think I have said this many times.

Wireless CapEx is a lagging indicator to vendor revenue.

Have to be clear on that.

Because they, obviously, once we have invoiced and billed and so forth, the operators do the actual capitalization.

It's not a leading indicator to vendor revenue, it's a lagging indicator to vendor revenue.

Hans?

Thank you very much, Jan.

It was an important comment.

For us you have to understand how we work.

I, personally, are in contact with chairman and CEO, so talk to them.

Our key account manager as well to understand the structure of (inaudible).

That's what we need to understand.

As Jan said, is lagging indicator what they want to say and what they want to spend and it's not really hanging together with our (inaudible).

We need to know what is inside there.

I think that's important.

Yes, it's a lot of new spectrum auctions coming up.

In the US next year, I used to say if somebody buys spectrum, they want to build on it.

It depends on when it's going to be auctioned and when it's going to be available.

We know that there are some coming out in the first half of next year.

Then of course we want to see who is going to acquire them and when it's going to be cleaned up.

Clearly, new spectrum creates more need for deployment.

However, many of the customers right now worldwide that have multi standard radio, so then it comes down to carrier aggregation.

Using our baseband, adding new radio features in the towers, but using them carrier aggregation in order to have the best possible performance over the network, combining them, the 600 and 700 or 800, 900 in order to have it.

That's from a technology point of view and network point of view.

I wouldn't say it's simple, but it's fairly easy to do.

It takes some time in this vertical.

But what is really important is of course that the handsets can handle the same carrier aggregation in order to get throughput and their uses of uplink and downlinks on different frequencies.

I think that's what we are working with the whole ecosystem to see, and that of course can drive a lot of investment.

That is also one of the main pillars, how we can handle the increasing dataflow, that we can combine frequencies in the future.

Now there is, of course, new technology and the third one is definitely more spectrum.

Thank you, Hans.

Thank you, Simon.

Are you happy with that?

Yes, thank you for the help.

Before letting Hans conclude, I would like to invite all of you to the capital market here on November 10.

Listen to Hans and Jan today, it is going to be very interesting.

A lot of talk about all of the areas, et cetera.

So all of you are welcome to Stockholm on November 10, with a dinner before on November 9. Please, Hans?

No, my summary will be fairly simple.

Again, I think we are in the midst of a transformation.

I hope that you will understand, investors and analysts see the work we are trying to achieve.

I think we have good traction in many areas where we are working with, both in the costs but also in the target areas.

We see also that we have an improved core business, which was also target that this management put up.

I think, I would say that this quarter is very stable sort of, next step in our process and we will be a very happy to meet at the capital markets day where we go deep down in the drivers for the different target areas.

Why we have selected them, how we see them growing, how we are performing in the market and how we can be world leader in those as well.

I think that is the summary, Peter.

Thank you very much.

Thank you.

This now concludes our conference call.

Thank you for attending.

You may now disconnect your lines.