Telefonaktiebolaget LM Ericsson (ERIC) 2015 Q4 法說會逐字稿

Hello, and welcome to Ericsson's analyst and media conference call for the fourth-quarter report.

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

Peter Nyquist, please now begin your call.

Thank you, operator.

Hello, everyone.

Welcome to this Q4 call.

With me today I have our CEO, Hans Vestberg; our CFO, Jan Frykhammar; our Head of Global Services, Magnus Mandersson; and our Head of Marketing and Communications, Helena Norrman.

During the call today, we will be making forward-looking statements.

These statements are based on our current expectation and certain planning assumptions, which are subject to risks and uncertainties.

The actual results may differ materially due to factors mentioned in today's press release, as well as 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 those words, I would like to hand it over to you, Hans, please.

Thank you, Peter.

Let me just make a brief overview of the market development in 2015 and trying to highlight the couple of things that I think have been very important with 2015.

I think, first of all, the strong focus on 5G and Internet of Things -- 2015 was really the year of that.

We saw more and more operators, [industry for us], focusing on 5G, and of course, which drives also the whole Internet of Things.

Secondly, we saw a big drive in the year of 2015 from transition from 3G to 4G.

We almost hit 1 billion subscriptions on 4G, but still quite a lot of 3G subscribers only going to be turning to 4G.

But clearly, [emerging markets started that journey in 2015.

We also have to say that acceleration ICT transformation] of customers that are in mature 4G markets.

Information means virtualization, IT transformation to be able to orchestrate the future of the networks, which also is a clear market development new in 2015.

Finally, we also saw a year with very many currency movements and big currency movements, both on the positive side and negative side.

We also saw the weaker macroeconomics in parts of the world impacting customer investments.

I think that, and I will come back to some of it later on.

If you will take a stab on Ericsson and see the key developments, and without no particular priority, of course, we think we have done a great job with our IPR strategy that we disclosed for the first time in 2011.

We signed some really important IPR agreements in 2015 -- Apple, of course, being one of them.

And then we announced in 2016 also that (inaudible) [Huawei].

That means that we basically have signed up all major handset manufacturers and infrastructure manufacturers in the industry, and have a way of monetizing our patents, which is, of course, a [great job] of our IPR unit.

We also saw new in 2015, after a weak second half of 2014, and partly of 2015, on the investments in North America, a stabilization or investment in North America.

And the reason in this key development, it's a large and important market for Ericsson, but also on the telecoms were a very important market.

We talked about the target areas, both -- we started 2014.

We can conclude that 2015 also had the good growth that we've been expecting, where the market for these target areas is growing around 10%.

We are growing about 20% for 2015 as well.

That's important, given how we are invested in this area.

We announced a strategic partnership with Cisco in order to orchestrate the future networks, 4G and 5G, which we did in November.

We also have been executing a lot on the cost and efficiency program, which we saw activities on in the first half, and we saw the impact in the third quarter some, and then more in fourth quarter.

We also, as we will come to later on, had very good operating cash flow in the fourth quarter -- all-time high for Ericsson -- SEK22 billion in the fourth quarter, which also made us making the cash conversion target for the third consecutive year, with 85% cash conversion.

I will come back to the dividend proposal later on, but it is SEK3.70.

If then you (inaudible) on the full-year figures first, just to get the feeling for it.

So, of course, the full-year sales figure has been fueled by the currency development in a tailwind for Ericsson, which given many markets an extra boost.

On the other hand, you can see on the negative side, Latin America and north Europe and central Asia, here where countries have been going in the other way because of currency.

Russia with Russian ruble, of course, with the depreciation, the purchase power has gone down.

The same goes for Brazil.

So, even though you have a tailwind, you get some headwinds in the markets where you sell in dollar.

On the other hand, you can see India had a very good year, with growth of 74%, but not only India -- SubSahara, Middle East, and southeast Asia -- four emerging markets that are having a good growth if you look at the whole year.

And then North America growing 7%, very much fueled by currency -- that sort of currency growth.

If you look at the full-year result then, 5% negative growth, 8% growth in Swedish kronas.

Margin-wise, if we exclude restructuring, 11% operating margin in the year where we did one of the largest restructurings that we have done for many, many years, given the program we have if we include that 8% operating margin -- improvements in all segments.

Clearly, the gradual improvement that Jan and I are looking for all the time -- finding a gradual improvement on profitability -- we are seeing that in 2015.

So, if you then go to the quarter, you will get some similarities in the quarter with the full year -- a little bit less of currency impact in the fourth quarter compared to the full year -- still, some drive from currency.

Here you see that Region Other is growing very well.

Here, we have IPR business and broadcasting services, which are the main contributors here.

Both of them have been growing very well in fourth quarter.

Of course, in the IPR, we -- as we announced in December when we made an agreement with Apple, is one portion of a one-time payment there, which is included and that we guided for as well.

You remember that, the full-year IPR.

So, that's part inside there.

North America had a good fourth quarter with 31% growth.

Here we need to put in context the full year and how they're investing, but we clearly see stabilization in North America.

India continues strong.

Southeast Asia and Oceana is growing a little bit, but here we have China actually coming back from a little bit weaker third quarter.

On the flip side, you see north Europe, central Asia, where Russia, that has come down equally as we saw on the full year, and then, of course, you can also see that Latin America is down.

But you can also see that western Europe is down 13% in the quarter, year over year.

One can say if you are a little bit nice that they had a very good quarter, the fourth quarter last year, 2014.

All in all, this is a growth of 8%, and basically flattish in constant currency.

So, that seems that if you look backwards, we've narrowed the non-organic growth there.

If then looking to the profitability in the quarter, SEK11.7 billion, excluding restructuring -- 15% operating margin.

Higher IPR revenues is, of course, important in the fourth quarter, but also the lower operating expenses.

Then, of course, if you even take away all the IPR, we have an improved income in all segments.

So, there's a gradual improvement in all of them.

We also want to highlight that NRO, which is -- you will see later on is contributing quite a lot to the bottom line with improvements, continued its path towards sustainable profitability in the quarter, which we think is important.

Jan?

Yes.

Hello, everyone.

Let me then talk a little bit about some other aspects of the P&L and balance sheet.

We start with the IPR and licensing business.

Hans has mentioned a lot already, but I think if you look historically then on the performance of this business, we have tripled revenue from the licensing program during the last five years.

So, that's a very good monetization of the research and development that we invest in.

We have obviously signed a contract with Apple -- initial payment, ongoing royalties -- so, we can conclude that we have now cross-license agreements, as Hans said, with all major handset and infrastructure suppliers.

And if you remember the presentation at the Capital Market Day in November last year, we talked about the IPR and licensing strategy being, first and foremost, of course, to secure that we have a good penetration of agreements in the telecom space, and then expand the portfolio to other industries as Internet of Things and 4G and 5G and so forth starts to become used by other industries.

So, we feel that we are now focusing, of course, on making sure we sustain all the contracts we have, but also expand the Business into these new industries.

The majority of these contracts are in US dollars, so I think it's important also to remember that when you do modeling and so forth.

If we look at the cost and efficiency program, we have updated the numbers here with actual numbers where it's possible; so, 2015 is actuals.

Otherwise, the run rate that we estimate in terms of run-rate savings is the same as we presented in November last year.

So, SEK6 billion run rate in 2016, and going then up to the full effect of SEK9 billion in 2017.

So, no changes to the Capital Market Day presentation there on this picture.

If you look at the program as such, and you measure the activities, as Hans was already referred to, we are on track there.

We have executed well on activities, both targeting the cost of saves improvements, then both in supply chain and in service delivery.

In service delivery, as one example, we reached now the 50% mark, which is an acceleration of the strategy.

Remember that in 2014, we had 42% service delivery ratio from our four global service centers.

Now we reached 50% this year.

On supply chain, we continue with optimization of factories, as well as distribution, surface transport, and so forth.

On the OpEx side, of course, very visible in the numbers, especially with regards to research and development expenses.

We have also efficiencies in selling expenses and G&A.

However, they have a little bit of a headwind if you look at it from this point of view, in terms of currency.

Nevertheless, this is a net saving initiative, which means that we are targeting to save SEK9 billion net, if you look at the P&L in 2014 than compared with 2017.

So, we are confident that we will reach that, and we will continue to make sure that we have enough activities in order to reach the SEK9 billion net saving.

The restructuring charge for 2016 is in line with what we presented as well in November of last year.

The range we put forward now is between SEK3 billion and SEK4 billion for 2016.

If you look at the fourth-quarter performance then, gross margin of close to 37%, compared to close to 38% gross margin in Q4 of 2014.

The underlying business then developed in, I would say, in accordance with a more normal Q4, meaning that we have a little bit of a margin pressure in Q4.

The most important difference, I would say, between Q4 of 2014 and Q4 of 2015 is really that we had more software sales in Q4 of 2014.

And that has been replaced completely by the same amount, you can say, of more hardware sales, but then it's obvious that the margin profile then -- we have higher margins on software.

Then also, we had a one-time inventory writedown of SEK400 million.

We set aside provisions for this on an ongoing basis, but this was more some customer-developed gear.

So, we wanted to highlight that that was a one-time writedown.

Then sequentially, you have the same explanations basically -- higher IPR revenue, and then some more hardware than software in the mix.

Those are the main explanations.

Operating income, SEK11.7 billion, ex restructuring -- so, strong performance.

It comes thanks to leverage, meaning higher saves and lower operating expenses.

It's improvements in all segments.

And if you look at the fourth quarter, but also the full year, there's a significant improvement in the Network Rollout business.

Net-net, we had a positive impact on FX also in this quarter.

If you look at the bridge, then, operating income, isolated quarters, Q4/Q4, these are basically the things I have mentioned, but also the most important in variations that we want to highlight.

Then if you look at the full-year performance on operating income, it's improvements across all segments, and that's good, and also a positive impact of the -- thanks to the exit of the modems business.

Then if you look at the balance sheet then, the cash flow profile of 2015, you can say that we had a super strong Q4 in terms of operating cash flow, and we know that our cash flow profile is quite volatile if you look at the different isolated quarters.

That was why we want you really to measure us on full-year basis here.

Nevertheless, it was a strong quarter, and also, to certain degree, a catch-up quarter in terms of collections, as well as inventory reductions and so forth.

Nevertheless, good performance in the quarter, leading to a decent performance on operating cash flow full year of close to SEK21 billion.

If you look at the investing side, there are only three buckets in investing cash flow there.

On the CapEx side, it's the normal investments we make in our own test beds.

It's the investments we are making to improve test efficiency going forward, which is our global ICT centers.

And the third element is capitalized R&D.

If you now look at acquisitions, that's more normal level of bolt-on acquisitions that we have been executing at [bond] during 2015.

Financing is the dividend.

So, net, this means that we had a gross cash that reduced by SEK6 billion year over year, and with a net cash then of SEK9 billion.

Cash conversion, about 85%.

Hans?

Thank you very much, Jan.

Let me briefly then go into the segments.

We have heard Jan talking about the [MME] as well.

But starting with Networks, Networks, then, in the fourth quarter, had flat sales after a year of declining.

When comes to organic FX adjusted, this quarter was flat.

Partly, of course, in the fourth quarter, IPR revenues, and Jan talked about additional hardware in North America, but also India, Nigeria, Mexico good development.

On the other hand, I mentioned Russia and Brazil that are investing a little bit less, as well as parts of the Middle East.

We see good momentum in our Voice over LTE on the core networks, which (inaudible) are driving that at the moment as well in the whole portfolio networks, not -- it's more than only radio.

Sequentially, I talked about China -- came back in the fourth quarter.

We were down in the third quarter, more driven by Ericsson than our customers.

Income -- very good income improvement -- up to 19% operating margin.

One parameter is IPR.

The other is cost of leverage that Jan talked about.

We are getting lower R&D driven by the cost and efficiency program that is yielding a better bottom line.

We also have some writeoffs in the Networks business of SEK0.4 billion in the quarter.

Full year down a little bit different.

Sales increase was 5%, which, of course, is organic FX adjusted sales of negative 8%.

Totally, SEK15.8 billion in operating income, excluding restructuring, and of course, we've seen improvement from last year.

That's Networks.

Magnus, what about the segment, Services?

Thank you, Hans.

Let's talk a little bit about that.

So, Q4, we saw a small drop on organic FX sales of 4%, driven by less demand in Latin America and Sub Sahara, and as well as continues low, lower demand for Network Rollout.

However, we are seeing still a good growth in Professional Services, driven both with Consulting and Systems Integration, but also Managed Services.

Worthwhile to mentioning here, 26 new Managed Service contract was signed in the quarter, and 21 in Consulting and Systems Integration.

We increased [RSAs] 17% quarter on quarter, mainly on Professional Services and Network Rollout.

Leading up to actually the highest profits we have seen, excluding restructuring, for Services in the quarter with SEK2.7 billion, very much driven by the improved result in Network Rollout.

2015, then, on a full year, we broke the magic SEK100 billion -- SEK108 billion now, up 11%.

Good growth in Professional Services in all regions throughout the whole portfolio, all our different business lines.

We did over 100 contracts in Managed Services.

We did 65 big contracts with Consulting Systems Integration.

As Jan also said, we were able to push up the delivery efficiency number to over 50%, which also resulting in the bottom-line improvement.

We also see Network Rollout coming down then in Japan, North America and Latin America, and this is, of course, a big infrastructure countries for Ericsson.

Our operating income, then, totally for the year is up SEK3 billion, or 200 basis points.

I think that's worthwhile for you to put in your model.

And then, of course, we have a restructuring on Network Rollout -- sorry, in Network Rollout, its operating income is then improved with coming up to SEK400 million minus from almost SEK2.2 billion a year back.

So with that, I'm handing it over to --

Me.

You, Hans.

Yes.

Segment Support Solutions had a quarter that was extraordinary you can say.

22% growth, of course, and higher IPR revenues here as well, but not only that.

The strong TV and Media sales in North America that we have been waiting for came in the fourth quarter, which is very important for the investments were done in TV and Media.

We had, of course, a sequentially growth then of 70%, which is very, very large.

Profitability-wise, SEK1.9 billion in profit in the fourth quarter, driven again by the higher IPRs, but also the leverage that we have in Support Solution when we get higher sales values, as we are working a lot with software here and recurrent software.

Full year, then, were flat sales year for Support Solutions, and the reported sales was up 19%.

Bottom line, SEK2 billion over the course of the year, compared to last year, which was flattish.

So, we have a leverage model, and of course, with a -- what I talked about, the market development of transformations of our customers with the portfolio we have here.

Of course, we expect that we continue to be able to move this inter-market, together, of course, with the Professional Services, which is given even more drive for -- when it comes to revenue in this area of transformation.

Talk about transformation, two parts of it -- we are on a very active action plan to transform.

And remember, 2014, the numbers was big when it comes to transforming of our employees; the same for 2015.

17,000 people left the Company, the majority non-voluntary.

15,000 added, and the 15,000 added was in three buckets -- acquisitions, M&A, and then, of course, we are ramping up in the Global Service Centers that Magnus is handling in India, Mexico and Romania, in order to increase our delivery efficiency by having even more delivered from these centers.

So, on the other hand, we have already heard us talking about a target areas, growth about 20%, amounting out to SEK45 billion in sales.

And it is not only one of the target areas, it's basically all of the -- it is all of the areas that are growing right now -- IP networks, OSS, BSS, cloud, TV and Media, Industry and Society.

All of them are growing and in more -- many regions as well.

So, it's a much more broad growth we see there right now.

Very important for the investments we have done.

Then, if I finalize the focus areas -- and I guess I jumped the dividend slide, but I can only go back to the dividend slide and say that the Board met yesterday.

They looked back on the cash generation of 2015, and they, of course, looked forward on both the market expected economical development, but also the business plans for the year to come.

Based on that, the Board decided to propose to the AGM a dividend of SEK3.70, which is a growth of 9%.

And they will suggest that then to the AGM that will be later on this year.

That also shows that we have worked hard with the dividend over the last six, seven years, where we basically, in 2000, start with SEK2 in dividend, and now it's SEK3.70, a compounded average of 11% per year.

That's what we have done.

Let's see if the AGM is approving it, but that is what we are suggesting.

Ending up with the conclusion, then, and the focus 2016, maybe not that surprising for many of you working with us.

The core business -- there are some challenging when it comes to infrastructure and (that type) services, given the market development, but there are also opportunities to capture new businesses, especially on the 4G when it comes to the transition with 3G.

Also important is to keep the technology leadership when it goes into 5G right now.

And here we have a lot of proof points, and we are very early out working several markets all around the world with both customers or other interesting groups to really define the 5G in a good way.

Target areas, yes, now we are in the third part of the 10-year plan.

Where we missed it, we are getting them to grow, and now it's more about improve our earnings with it as well.

It should be accretive to bottom line, and that's the focus for this team right now.

Ultimately, Jan has already discussed it, the cost and efficiency -- we are confident that we can achieve the net annual saving of SEK9 billion in 2017, and we are executing on that.

We'll also have a high preparedness if it would be necessary to take additional actions in order to keep us competitive.

The management team is prepared for that.

Right now, we're main focus is to execute on the SEK9 billion, but we also have a high preparedness for if it's needed to take additional activities.

Thank you, Peter.

Thank you.

So, operator, you can open the Q&A, please.

Thank you.

(Operator Instructions)

Our first question comes from the line of Pierre Ferragu from Bernstein.

Please go ahead with your question.

Are you there, Pierre?

Hello.

Can you hear me, guys?

We can hear you, Pierre.

Okay, great.

Thank you.

So I have a question actually on your last comments, Hans, about your dividends.

It's very impressive to see the projectory of the dividend over the last six, seven years, and you are up almost another 10% this year.

But when we look at your free cash flowage, you are basically putting all the cash you have left from what you've generated this year once you've taken out CapEx, acquisitions, et cetera, so your coverage is not very strong.

So I understand it reflects -- I saw, as you say, your outlook and your positions, the positions of your balance sheet, but it would be good to better understand how you think of it because from there.

What I see, maybe you are telling us going forward you are going to give back 100% of your free cash flow into the dividend?

Or maybe you are thinking we are going to get to a more reasonable ratio, like a maybe 50%, and in that case, it means you expect your free cash flow to double.

Or maybe you are just telling us that once your cash [buy] on your balance sheet is going to be very low, you are just going slash the dividend.

So of course, depending on what you have in mind, that crosses three scenarios.

It has a huge impact on how we should think about Ericsson going forward.

So if you can give us a bit perspective of how you think about it, that would be really great.

Thank you, Pierre.

So yes, you have seen a development of our dividend, and of course, we still have a strong balance sheet.

It is important to remind you of that.

Jan went through it.

We have SEK66 billion on the gross cash and almost SEK19 billion in net cash.

So we still have kept that level all the time through the years, and that, we think, preparedness is enough if we need something.

Then we are going to see, again, it is a judgment of the Board every year, what they believe should be appropriate dividend, and so far, it has been this growth.

I cannot really speculate in next year what portion of the net income that will be dividended out, but we actually, Jan and I, we will work hard to generate free cash flow so we can have a good dividend; but ultimately, it's going be the Board that decides it.

Now, can I make two comments in addition to Hans there?

One is, of course, that if we start with the CapEx numbers, you know and we know that what we are working with in terms of the Global IT Centers, as one example, is, of course, to change the way we do testing of our own software.

In order to structure, you also take down CapEx over time, as well as the R&D costs related to testing.

That's one key improvement that we are working with in order to have also an even better free cash flow over time.

The other element is, of course, that when you think about the -- if you look, the last let's say 7, 8, 9 years or so on the working capital performance, of course, we tied up a lot of capital during the European monetization project, and during 2015, we have tied up a lot of capital, mainly in regards to mainline China for the deployments and so forth.

What we are working with is, of course, to try to get into more recurring revenue, and a business makes that -- has more recurring revenue both for services as well as software.

So just to support what Hans said, it's important to think about those things as well.

Thank you.

Okay.

Thanks.

Next question, please.

Thank you.

Our next question comes from the line of Edward Snyder from Charter Equity.

Please go ahead.

Your line is now open.

Hello, Ed.

Thank you very much.

You mentioned (inaudible) Hans, 5G, especially with regards to Japan and Korea look like they're saturated, and the US is there too where you've got pretty much all your coverage here.

I know there's a lot discussion about that, but it's a real scatter-shot technology.

Are you seeing anything develop, whether it's clean slate or Cat 0 or LA or LSA or NB-LTE or any of the very in different standards that people are talking about or approaches because you've got everything from IoT all the way to higher bandwidth millimeter wave.

I am just trying to get a feel for at least the initial deployments.

Are we getting a theme on how they're approaching 5G?

And then if you can, maybe on the timing where it starts to become at least material to your revenue.

And then in terms of growth in other regions here, that was very strong this quarter, and it has been sustained for India for a while.

How do you see that in the first half of year?

Do you expect this to continue, or is it mostly catch [up payments] or -- there's big mix shifts in the last two years over who's growing and who's not.

I'm just trying to get an idea of how consistent you expect that to be in 2016.

Thanks, Ed.

Starting with technology then.

I think that first of all, there's emerging markets that are transitioning from 3G to 4G that we will see coverage in those countries.

On the more mature 4G market, we are going to see what you are talking about, the next evolution of 4G, advanced or something like that.

Everything from narrowband IoT, of course, the different variation on unlicensed 4G LAA and LTU that we are seeing coming into our technology, and all in all, what it's doing is a capacity enhancement on the 4G networks.

And I think that's what we're trying to say as well.

Yes, there are some market that has done a very decent 4G coverage.

They are now going into capacity mood, and of course, that capacity mood also means that they are going to use more frequencies and more IoT possibilities, and that drives transformations where, of course, both virtualization is happening on the application layer together with BSS, OSS where both are strengthened, BSS or OSS, and virtualization and services will become very important.

But correct that we're going to see these markets be a little bit different in this moment, how they are going to pan out.

On India, yes we have seen, I would say it's four quarters, if I don't remind myself wrong, very good growth.

We started almost 100% in the beginning of year.

You need remember that they came from a very low level of uncertains on investments in India.

The carriers did not invest because they were uncertain.

Since then, of course, a lot of spectrum has been bought, and they see a great benefit of mobile broadband going out.

So it's a little bit too early for me to judge if it will keep up that level, but it's a large market, and there's still coverage to be done on 4G in India.

But again, the carriers will define a pace on that.

We are well prepared.

However, it was in the India market, remember, that more than half are businesses and services, which is an important piece of a running networks, manage services, which is very important here.

So we both have the recurrent rev in there, and then we have the network business.

It is a very global type of market for us.

Thanks.

And then you mentioned that the US is pretty much full coverage now on 4G, as are Japan and Korea.

China has come back here.

Any estimate of how far you think China has to go before they choose similar coverage rate?

And then, Jan, IPR, was most of that the one-time payment that you got from Apple?

Is that mostly showing up in Networks, or where on your segment model?

Thanks.

It is always a risk when I do a blanket general statement that we are fully covered in US.

I understand that might be different with different carriers and so on, but some of them have done a very big job to get coverage in the US.

On China, we can only say that they have big plans, and they have been on a very high pace for quite a long time.

The plans are still to make a very huge coverage in China.

They will [pass] some 350 million to 400 million 4G subscriptions in the year 2015, which is an enormous rollout.

But as far as we see, we see both handsets coming up out.

The juice is going up on 4G, and of course a coverage still there.

So let's see if they keep up the pace they have done for the last six quarters.

We can only see what they are reporting, and they are committed to the national broadband because this is way beyond only doing it for consumers.

It's also way for bringing in new infrastructure into China to digitalize China.

Okay.

On the IPR side, and we haven't changed the allocation keys between segment Network and Support Solutions.

It's the same keys that we have used now for, I don't know, six, seven years or so.

In terms of the isolated Q4 revenue, I'm not going to comment that in detail.

But if you look at the full-year portfolio, of course, it's a big portfolio.

We had, of course, we are happy with the success of the Apple settlement.

I think a way to look at the licensing business in 2016, a good way to look at it is to look at the 2014 numbers since most of the businesses in US dollar terms, and convert that into a relevant US dollar exchange rate.

I think that's probably a good baseline for modeling.

There would always be contracts coming in and out and so forth in this portfolio.

Thank you.

Thank you, Ed.

We are open for the next question.

Thank you.

The next question comes from Alex Duval from Goldman Sachs.

Good afternoon, everyone.

Many thanks for the question.

Actually, I had a couple.

First of all, just to understand on Network revenues, it looked like you had high-single-digit declines if you exclude the year-on-year benefit from patents.

Just wondered if you'd give a bit more color on a couple more regions, specifically Europe, given that Vodafone's [spring] is ending, and also on the US, given that coverage of 4G is very advanced.

And then next, just in terms of the gross margins, they were obviously a little below consensus expectations.

I wondered to what degree are you seeing any pricing pressure from players like (inaudible) and [TE].

And also, as you look to emerging markets and roll out to 4G there, there has been some discussion in the past about potential pricing pressure as equipment vendors aim to capture new installed base.

Are you seeing any of that at the moment?

Thanks.

Wow.

That's a lot of questions.

Do you want to start?

Yes, I think I will try at least.

Okay.

So if we look at the quarterly revenue profile and so forth, I think that what's described in terms of Networks and business performance in the report are the relevant underlying factors.

I think that we had a recovery in the business, or the underlying business.

In the quarter, however, net-net for the full year in constant currencies, it's been a challenging year for Networks.

No doubt about that.

But there was a somewhat of a recovery also from an underlying point of view.

Then when we look at the gross margin, well, it is related to things I said.

We had a good Q4 of 2014 in terms of software sales.

That was fully offset in terms of sales of hardware.

Hardware has a different volume profile than software.

In terms of the competitive landscape and so forth, there is no change compared to what we have reported in the third quarter and the second quarter and so forth, that the main underlying factors here have do with whether it is big foot prints that are available and so forth, so no changes to that.

Thanks.

I don't know if we answered all the questions.

There were so many.

Are you happy with those answers, Alex, or --?

Was there something more you wanted?

I will leave it at that.

Many thanks.

Okay.

Thank you.

Our next question comes from line of Achal Sultania from Credit Suisse.

Your line is now open.

Hi, Peter.

Hi.

Thanks.

So for a couple of questions, first on the IPR, it's now given -- are you saying, Hans, that you already got all of the major vendors -- agreements with all the major vendors in place?

Should we now expect that your IPR revenue should broadly grow in line with the handset market in revenue terms more or less?

The ones that we have IPR agreements on the handset, of course, will be more in line with that, that's true.

But we also have (inaudible) with infrastructure vendors, and we also have with nonmobile infrastructure cross licenses.

But on the handset, there are, of course, some smaller vendors that are local, handset manufacturers we don't have agreement with we are working with, for example, have a legal situation with Xiaomi, but other than that, we have the majority of them.

So I think your statement is right there for many reasons.

Okay.

So just -- I think that Jan just mentioned that we should take 2014 as a base for IPR revenues.

I am trying to estimate a forecast for 2016, but obviously, there's a big difference between 2014 and 2015, and partly, it is because of FX and partly because of Apple.

So I'm just trying to understand, like shouldn't 2014, taking as a base would be much lower for 2016, wouldn't it?

Or am I missing something?

Well, I was trying to give you a different way of modeling 2016.

Of course, there is always contracts in and out.

I was just wanting you to understand that we think that 2014, if you (inaudible) suggest that, and then also have an assumption around the market overall development, then probably that's a good modeling scenario for 2016.

I was trying to give you some help.

Right.

Okay.

One question on the Network side.

So obviously, like in the US, we've have seen some recovery in the second half last year.

Do you expect things to -- how should we think about CapEx trends going toward?

Do you expect things to stabilize here, or you think that there may be a couple more quarters where we see continued improvement?

Like, I'm just trying to get a sense of what to expect near term in the US.

I think that our -- what we are trying to express in the report is very much the following, right?

We have said, if you look at the -- first, if we start with a full year 2015 compared to 2014 on Networks, and you look at the business in US-dollar terms, it's approximately 20% down.

Then if you look at the isolated quarters during in 2015, since the second quarter, we have been stable basically.

So when we talk about stable developments, Hans and I, we talk about the reference from the second quarter and a stable scenario.

Then we had some catch-up capacity business, and this time related to hardware.

So I think the scenario we are looking at for 2016, it's a continuation of this stable environment with some pockets of opportunities for growth then driven by the underlying fundamentals, which would be then the quality and capacity enhancement.

That's the way we view the scenario for now.

All right.

Are we seeing, like, any new rollouts relating to the spectrum that was auctioned last year, or not as yet?

My view is, when I say stable with some pockets for opportunities for growth, that's an all-inclusive statement.

Thank you.

We usually say that people that buy spectrum wants to build on it because it is pretty expensive.

But also, when you look at North America, I think it's very important to remember that the Networks business is one, but what the North American Management Team has done, they have also developed a very strong Service business, a very strong Support Solution business, which has been growing quite nicely.

So one needs to look at that.

We are basing North America on basically all fronts of the Company on the largest telecoms market in world, so when you look and assess North America, you need think about it as broader than only Networks.

Networks, you are correct, as Jan said, has been covered very good on 4G.

Now we see the capacity coming and a pocket of growth as, Jan speaks about, and all the technologies that Ed talked about.

That's how you should view it.

Thank you.

Thank you.

We will take the next question.

Thank you.

The next question comes from the line of Gareth Jenkins from UBS.

Your line is now open.

Thanks.

A couple if I could.

Maybe one for Jan to start with.

But I just wondered if you could remind us on the SEK9 billion cost saving target, whether that is a cash cost savings, i.e., including capitalized R&D, or whether it's a P&L cost saving target?

I just notice that you've had about SEK1.8 billion benefit through the P&L from capitalized R&D this year.

And then I've got a second question maybe after that one.

The program is about real efficiency in the Company.

So it's a P&L target.

So when we talk about in the report that the most part of the run rate savings in Q4 comes from the cost reduction and efficiency program, that's correct, and part of it has also to do with capitalized R&D.

So the way I look at it, it's real savings and efficiencies, right?

Then capitalized R&D, that number will depend upon how much of major development efforts we have.

They tend to go in cycles.

We have been now, during this year, on a cycle of a lot of major development programs, such as the new Ericsson Radio System, such as the next-generation OSS systems and so forth.

So they tend to be more cyclical.

When we talk about the SEK9 billion, we talk about things that we can impact with efficiencies in the Company.

Okay.

And then the second question was just on -- sorry to come back on this one, but on mix going forwards, I think if we ex IPR, your margins for hardware and software combined in Networks are mid single digits currently.

How do we model mix going forwards?

Do you think you can drive more software in the mix through this year and next?

Or do you think you can actually do anything to bring the margins of the hardware platforms up?

I think that we have several of these initiatives, and as you remember the Capital Market Day, we both have initiatives on platforms.

We're coming down to new platforms and fewer platforms which are more cost competitive.

The second is that our [products] having a much higher degree of software, so we are, of course, driving as a Company that pricing transformation.

It takes time, as was said before.

But of course, our aspirations, as you know, we have outlined for 2020, is that 75% of our revenues should be software and services.

We are on that path.

Then, of course, the markets and the forces out there as well, but clearly, our way of working and our way of pricing should be go more to software.

And I also want to say there, Gareth, that in terms of the cost reduction and efficiency program, of course, I've mentioned a few things that we are driving in terms of cost of saves reductions and that we also will put even more effort on those items for 2016 and 2017, of course.

Then if you read in the Network segment, we've also mentioned the status of the Ericsson Radio System.

That's an important platform for us also in terms of not only because of the benefit it is to customers, but also for the cost elements.

So we are driving a lot of different activities to impact what we can impact ourselves, and then of course, as Hans said, there's also software element here, right?

But our philosophy continues to be that we drive the things we can really impact ourselves for.

Thanks, guys.

The next question, please.

Our next question comes from Richard Kramer from Arete.

Thanks very much.

Just to add to try to keep it at a broad level, as you say, Hans, what makes Ericsson a growth business?

Because we have just seen another year where you talk about the targeted areas.

In Magnus' business, he talks about 30% more contracts signed, but sales are down.

What should we be looking for in 2016 and beyond?

Is it simply the decline of the legacy business?

Is it a change in customer behavior?

What is going make Ericsson a growth business again, coming off of a year where you had so many initiatives but the sales line was down?

And then a followup for Jan.

I think we need to have a little bit more balanced view on it, and of course, in constant currency, we were slightly down in the year, but in Swedish kronas, of course, it was enormous growth, and of course, exchange rate is helping us.

On the other hand, as I said in beginning, the exchange rate movement is also making a headwind in certain markets, so I think you need to balance that out.

At the same time, the target areas are now coming to critical level, very much fueled by Professional Services, of course, and they are now SEK45 billion and 18% of Ericsson.

So for every 10%, 15%, you can grow that.

That's starting to give you a basis point.

So I think that we have our long-term program to really continue to push for this, and I think that I am happy that we are pushing all this.

Is we wouldn't do that, then we will be having an even tougher time on the top line.

So I think we are doing everything in the structure that we can push for and can control.

Then there are market forces that sometimes is beyond our control, but I promise you, this Executive Team will push everything we can control all from top-line, software, transformation, target areas, and cost down.

And that we will continue to do.

And for Jan, the biggest portion of the cash -- or an equal portion of the cash that you saw in fourth quarter really came from squeezing what was the industry's highest working capital to sales ratio.

Is that something that you think you can continue?

Because typically when we've seen declines in inventory, they've been precursors of declines in overall network sales.

But should we be expecting that you squeeze further and bring down DSOs, payables and inventories down further in 2016, or will we see the same cycle we've seen in the past, which is successive squeezes of working capital and expansions of it?

I think the major -- first and foremost, we continue to work with the things we can control in terms of working capital, which means in end of the day, structural efficiency in terms of cycle time.

The majority of the working capital is really tied up in projects.

Of course, once you reach the billing milestone, it is a matter of cash collection, right?

But the majority of working capital is sitting in the projects.

That's why a lot of the initiatives is focusing on that.

Then this year -- and I agree with you that working capital performance has not been good in 2015 up until the fourth quarter.

It's sitting very much in business mix.

If you look at the working capital in the European modernization projects around 2011 or so, and this year, it's very much business mix.

If I look the flow efficiency things we are driving, we have gained good traction there.

But again, our aim is to improve what we can improve in terms of structural efficiency, and of course, also commercial terms, but this 2015 was really around business mix predominantly.

So there is potential to improve working capital going forward, not only because of doing projects in a better way, but also thanks to more recurring business model (inaudible).

Thank you.

Thank you, Richard.

Next question.

Our next question comes the line of Sebastian Sztabowicz from Kepler Cheuvreux.

Hello, everyone.

Could you please provide some colors on the profitability of targeted areas today?

Where are you standing right now?

And do you have any specific target or margin ambition for this business for the midterm?

And also, [everything] has grown more than 20% year on year last year.

What were the organic growth [of it] last year please?

The last question (inaudible)?

Organic growth in targeted areas.

Okay.

The organic growth targeted areas is above 10%.

So we are -- remember, we talked about the market growing more than 10% for targeted areas.

We are well above 10% also in targeted areas when it comes to constant currency.

So that's very important.

And then you asked about the profitability going forward of our targeted areas.

We are not disclosing that way.

But as I said, we have been in a phase where invested the couple of years, which, of course, were taking down the operating income.

Now we are getting more to a natural situation, meaning that we are not adding anything.

The plan is right now, the next three years here, is to see that this is adding to our profitability in absolute money bottom line.

That's the plan we have.

And this is, of course, sizable business right now with SEK45 billion.

Now we should see the benefits of the investments [well] down in this area.

I want to think that -- I want to refer you back to the model that I described at the Capital Market Day with the capital improvement bridge there consisting of three different buckets, right?

One being efficiency, one being monetization of footprint, and the third being growth in targeted areas.

And of course, if you look at those three buckets, the efficiency, we have -- we are tracking well towards the SEK9 billion, which is the main [KPI] on the efficiency bucket.

The monetized footprint phase, of course, one portion of that has to do with capacity and relate to both hardware and software sales and also Professional Services, and also IPR.

And I think on the IPR side, we are tracking well.

The last item is, of course, targeted areas.

And if you look at that bridge, we have the ambition to have, I think, a good return on that business in the midterm.

Okay.

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

So please.

Thank you.

Our last question comes from the line of Kai Korschelt from the Merrill lynch.

Please go ahead.

Your line is now open.

Yes, gents.

Thanks for taking my question.

I just had a couple.

The first one was just on OpEx.

I remember a couple of years ago, you did provide, I think, OpEx guidance.

And it looks like you are making pretty good progress.

I am just wondering, could you give us any color in terms of the run rate which is coming down quite a lot?

But from what I can tell, we should be tracking well below SEK60 billion this year, so I am just wondering if you had any thoughts on that.

And then the second question was on the gross margin side.

I think clearly was boosted by the IP income and I think some of it is probably runoff and somewhat is recurring.

So I'm just wondering, clearly, I think may investors are trying to understand, what the underlying gross margin would have been if we removed the nonrecurring part.

So any comments would be appreciated.

Thank you.

Okay, Kai.

On the OpEx then, the best way to look OpEx is, of course, again, from the net savings perspective.

Coming back to the SEK9 billion, we have said that approximately SEK4.5 billion is related to OpEx in that number during 2017, compared to 2014.

We have also commented on the capitalized R&D elements.

We also have, [I would say, some intangibles in there, which is also disclosed, right?

For the SEK4.5 billion, it's again addressing real efficiencies, real cost savings, right?

So the other two items will depend a bit on -- how much (inaudible) will obviously depend on the level of M&A that we are making, and the capitalized R&D, it can be cyclical depending on projects.

So I think with that, you can model the OpEx yourself.

I think the second question was --

Gross margin.

The underlying gross margin.

More the gross margin Q4 if we strip out the nonrecurring part of IP.

Actually, there's probably -- of the recurring part of incremental IP income.

No, but I will, of course, openly disclose that.

I think that -- so what I've been trying to say, Kai, is that if you look at the performance in Q4 2013 and the performance in Q4 2014 and the performance in Q4 2015, we have had very strong gross margins in all of those four quarters.

That's typically not the Q4 profile, as we all know.

We typically have 100, 150 basis points or so lower gross margin in Q4 because of project completions.

In Q4 2013, it was Samsung; in Q4 2014, we had a loss of software; and in Q4 2015, we have a situation that we have talked about here with the strong IPR.

So I think underlying gross margin is okay, but it's impacted by the mix between hardware and software.

Going forward we will work hard on the things that I've discussed in this call to improve underlying gross margin.

We have that ambition, normal seasonality if you want to call it that.

So it is more of a seasonal decline or slowdown which we didn't see in the last year or two.

Is that what you are saying?

Well, we had, obviously, Q4 -- we are happy to sign another significant licensing agreement in Q4 2016 if you can come up with one.

Otherwise, it's going be more normal seasonal (inaudible).

As Jan said, we usually have a lot of completions in fourth quarter, and that has been the historical past for us.

It's nothing unusual.

Now we need start continue to work on getting overall gross margin up.

Then we all need to remember when we have these debates about gross margins, services has a lower gross margin.

That doesn't mean they have lower bottom line.

So also that Services is growing might deteriorate the gross margin, but it should not deteriorate total overall profitability.

We need to look at a segment each here, how they work.

But hopefully, you got the color of the gross margin in the fourth quarter here, and it's very similar to a normal fourth quarter.

Just to be clear, we have had, I think, Hans and I, we have had together (inaudible) for Q4 where we've had a good bottom line because of top line, but the gross margin that's been down to I think 30 percentage points.

So what I'm saying that there is a little bit seasonality business mix in this quarter.

So doesn't exclude the fact that we work hard on the things we can control going forward.

Okay.

Thank you.

Thanks, Kai.

Before Hans will conclude his call, I would like to -- I think there is a slide as well on -- invite you all to the Mobile World Congress, which will kick off with the press conference on Monday, 22nd of February.

And we will have lots of activities for the investor analyst community throughout the coming days.

So please, you can sign up on our website for the event.

So, please Hans, you can conclude the call.

Thank you very much.

We have the focus of 2016 and how we'll now go forward in this market.

We will definitely do a lot of things on the things we can control, and that goes everything from our core business as well as the target areas, and of course, programs.

And of course, we are happy to see you in Mobile World Congress where we are going to talk about our new offerings and how we're going to continue to keep our world leadership hold in technology and services.

Thank you very much.