Telefonaktiebolaget LM Ericsson (ERIC) 2016 Q2 法說會逐字稿

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

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

(Operator Instructions)

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

Peter Nyquist will now open the call.

Thank you, and good afternoon everyone.

And welcome to this call today.

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

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 subjects to risk and uncertainties.

The actual result may differ materially due to factors mentioned in today 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.

Thank you, Peter.

Second quarter was a tough quarter.

We saw the same negative industry trends that we saw at the end of 2015 and also in first quarter where markets with the macroeconomical challenges, currency devaluation, those countries continued to have challenges and we saw that to be intensified in the second quarter.

You can look at and see that the networks business where we in the first quarter basically was flat in constant currency and sales, and this quarter were down 11%.

The same markets that we talked about before, it shows that after seven quarters of weak markets our customers are reducing the mobile broadband investments in these countries.

At the same time, in the quarter we saw that services had a weak first quarter, and we discussed a lot about it, had a recovery.

They improved in many -- both in top line, but also in profitability.

I will come back to that.

When we now look out in second half of this year we believe these current sales trends and the business mix that we're now seeing are in the first quarter, we expect that to prevail in the second quarter of 2016.

We don't think that this second part of 2016, and we don't think that will revert when countries like Russia, Brazil, et cetera, Middle East, which have had a tough time, we don't think that very quickly in short term will recover.

That means also that our (inaudible) becomes even more important.

We are on the program of the SEK9 billion that we announced at the end of 2014, half of it going to OpEx and half of it to cost of sales.

That program is tracking well.

But we're also now initiating extensive and significant new cost reductions given the scenario, both in order to (inaudible) for lower volumes, but more important to see that we can continue to improve on our profitability.

I will come back to that.

Sales in the quarter, down 7% in constant currency, SEK54 billion.

And operating income of SEK3.8 billion excluding SEK1 billion in restructuring, which means that the operating income including restructuring was SEK2.8 billion.

So declining sequentially, which we'll come back to, but also of course decline year over year, mainly driven much lower sales volume.

If we look into the sales first, you can see that we now have 10 [of] 11 regions coming down.

Very clear that we have Southeast Asia continuing to the path of 3G to 4G and growing 8% and then the regions that we already saw, which are regions like Middle East, part Europe, Latin America continues then to have a challenge to grow the business right now.

And it's mainly mobile broadband, meaning the infrastructure and the services that touch that, that [has] come down.

We can cut a little bit different.

We can look at these countries that I talk about that are a little bit more challenged from both macroeconomics, oil prices coming down, devaluation in many of the countries.

Remember the mobile infrastructure equipment we sell in all currencies, of course their purchasing power coming down after a while, even though they might spend equally much in rubles, they cannot spend equally much in dollar because that would be a doubling in ruble.

So of course this is now impacting -- actually, the biggest impact to have in the quarter which account the decline year over year.

The second is currency, SEK2.3 billion in currency.

Of course, we have now headwind instead of a tailwind.

EU countries slowing down.

There's some uncertainties, but also that last year we had some operators, and one in particular, that was doing large investment in capacity and rollout that is now -- that customer has stopped doing that, and they are more in capacity mode.

North America, infrastructure is stable, as we've now in several quarters.

However, the service business has been a little bit on decline here.

The main reason is that (inaudible) we had in 2015 due to very good quarter.

We now see also on top of that that CDMA is now end of life, which means that related services is coming down very quickly, which of course has been still part of the North American market.

China continued stable pace on 4G deployment, 2G and 3G declining somewhat, 4G definitely continue., And then Southeast Asia as we talked about, is positive there.

So that's a little bit look at the different areas.

Basically no new markets that are declining.

We are seeing that this intensifying reduction of mobile broadband investment in these countries after five, six quarters that of course had these challenges.

They didn't come right now.

For our customers, this is now meaning that they're reducing their investment spending.

[Even] I look into the segments, networks down 11% in currency adjusted compared to basically flat in the first quarter.

That of course is impacting the profitability year over year, coming down quite a lot, mainly driven with the lower sales.

But also that we have a higher proportional coverage at the moment, meaning more hardware.

We also had some revaluation of the hedge, which is forward-looking of course.

That was negative.

What is positive is of course the cost reduction that we start to initiate end of 2014 is helping us, or mitigating some of those declines.

Global services from a weak first quarter, quite significant improvement, basically from SEK0.6 billion in profit to SEK1.5 billion in profit.

Similar profitability levels as Q2 last year.

We see sales down 7%, and in currency adjusted 3% down.

So clearly less impact here right now, even though the network rollout are more connected to our products.

On the margin side we are now double digit on professional services again, 10% due to restructuring and net of rollout [almost] here minus 2%.

So here we're of course done a lot of right-sizing, as we discussed already in the first quarter.

We started in the first quarter.

Now we have done it in the second quarter.

In total some 4,000 employees left us in the second quarter, The majority from service delivery.

Support solutions down 7%, clearly down from the first quarter, both here in support solutions and in networks.

We also have an impact on lower (inaudible) sequentially.

Here we basically see that we have the lower OSS and BSS sales that come in (inaudible) when we take new deals and we come in on software.

On the other hand we see the service side still growing due to OSS and BSS deals because the system integration is something you need to constantly do.

We have good traction in the portfolio.

We signed a very important deal in the quarter with a transformational 12 markets with Vimplecom, amounted to more than $1 billion.

Which is of course a split between system integration and software.

We see good traction in the portfolio, but actually no real improvement on top line on software on the support solutions which is impacting the bottom line here, both with lower (inaudible) but also that were lower software sales here.

That leads me also to talk about additional cost reduction we're doing.

The SEK9 billion, as I just want to come back to again, the SEK9 billion was SEK4.5 billion and SEK4.5 billion.

SEK4.5 billion in cost of sales and SEK4.5 billion on OpEx.

What we now are doing, we're basically doubling the reduction in OpEx for the same time frame and -- or the second half of 2017 run rates to reduce the double in OpEx.

And the main reason is that of course we see a low volume, but also that again we are putting new Company structure that was designed to take out cost.

We now see that we can do that.

[We have an obligation] in the portfolio.

We're doing end to end much better for supplies, sourcing service delivery.

All that is very important.

We also are continue to reduce our IP investment in IP routers on the agreement, strategic partnership agreement we did with Cisco.

That's also contributing.

That's part of what we're doing in order to reduce the whole OpEx with SEK10 billion.

Jan will come back to that.

We also are intensifying of course the reduction in cost of sales.

Very, very important because we have both the reduction in volumes sales.

So we need to (inaudible) down in the second quarter when it comes to network rollout and the services, where that has to be intensified with the market condition prevailing, as we're saying.

That's all a very important.

That that's a big piece of it.

Here of course it's variable on the top line but we need to bring out fixed cost in cost of sales as well.

This is what we now are adding to the program with the same time frame as we had before, and Jan will come back to it.

So Jan, please.

Yes.

Hello, everyone.

Thank you, Hans.

So if we then start with the operating income.

Some comments on the operating income.

I think before I do that, I just want to say that we have worked with trying to explain the most important parameters of the performance in the quarter.

So I think we have done that in a pretty good way, enabling better accuracy on the consensus line for Q2.

Still some more work to be done there.

I think what we are trying to do here today is to be a bit more precise on planning assumptions.

We know that's, I mean, in terms of perception it's important to be on, or even perhaps slightly better than consensus.

So this is an important thing for us and we have spent a lot of time on this during the quarter.

Many of you are aware of that.

If we then look at operating income, you can say compared to year ago we managed to offset the sales volume decline with reductions in operating expenses.

That's the short story of those two items.

We had an impact on the income because of lower gross margin.

As you can see on this picture, that had to do with more hardware and more coverage projects.

Hans mentioned the Southeast Asia ones and so forth, and that was something that started already towards the end of 2015.

But in this comparison we had a lower -- or a high share of hardware in the mix.

Also we had slightly higher services share compared to one year ago.

So you can say sales volume decline and OpEx offsetting each other.

What impacted the underlying income was the gross margin decline.

The hedge impact there, that's more future-oriented, as you know.

And here the impact is done mainly to look at the closing rate mainly for US dollars compared to the starting of the quarter.

And in this particular case it's obviously one year ago.

If we take gross margins sequentially, that was also important for us in the quarter.

You see we had the IPR revenue, which we have decided now in this quarter to disclose.

So we disclosed Q1 of SEK3.8 billion and Q2 performance of SEK2.2 billion.

That's a big impact obviously on gross margin when we compare Q1 performance.

And then we had an increase in share of services in the business of 1 percentage point.

We are still basically on this rule of thumb that if you increase services share with 1 percentage point it gives 0.3 percentage points impact on group gross margin in both directions.

I think that's a rule of thumb that still holds.

Then we had the underlying improvement in the services business.

And that was both related to professional services as well as network (inaudible) in the quarter.

Coming to cost savings.

Hans mentioned a lot on this already.

What I wanted to show with this slide is of course that if you take the operating expense, it's down compared to a year ago with SEK2.1 billion, excluding restructuring charges.

In order of magnitude the three things there that this -- that they are there all the three things.

Savings related to the cost and efficiency program, reduced amortization of intangible assets, as well as increased capitalization of development expenses.

They're all there.

They are in the order of magnitude.

You can say that approximately two-third of the reduction is related to the cost and efficiency program, which is important.

Restructuring charges for the year, we remain with guidance we gave in April for this year.

We will come back with guidance for 2017 as soon as we can guide for that, depending on the discussions that we now will initiate with trade unions and so forth.

But at the latest we will do that at the capital market day, but hopefully a bit earlier.

The cost of sales reductions, Hans have mentioned.

The only thing that I want to add to that is of course that we are trying with the new organization to become more effective in end-to-end cost efficiency.

For instance, with mobile broadband.

That's important, so competitiveness that goes also with the implementation of the new Ericsson radio system.

It's not only the TCO on the hardware.

It's also how we work with the services attached to that product.

And it's obviously an important theme that we have in the Company now for second half of this year and going into next year.

If you look at the picture there, you see the OpEx in a full-year perspective.

I've taken, for instance, the June numbers and the last four quarters.

So it gives a feeling for the annual run rate of operating expense.

You see that the other item there that consists of the nets of amortization of intangibles assets as well as capitalized R&D.

Now in the June numbers for this year, it's [very limited].

But we will now start to depreciate on the capitalized R&D.

As I've said many times, the products are now coming gradually into general availability.

And once that's been accomplished, we will depreciate during 36 months, or three years.

So we should expect that other item, as you can see in the slide there, is becoming also cost item.

So the underlying expense level is really around SEK50 billion, which then is a doubling, as Hans mentioned.

If we then take a look at the cash flow, of course this quarter was impacted by the dividend payments.

We had an operating cash flow of SEK700 million negative.

The impact is -- if I exclude some extra tax payments as well as some buffer stock on mobile broadbrand since the radio volumes came down in the quarter, we ended up with a slightly higher buffer stock than what we typically have.

That's only a timing issue and that will be consumed during second half of the year.

But those are important things to remember.

And here I want, as always, you to (inaudible) our performance on full-year basis.

And then finally, it's good to know that the CapEx for ICT centers have now peaked.

Looking at currency exposure, still the US dollar is the most important currency.

And that's the case also in this quarter.

You see there the development of the P&L rates, and those are all together with closing rates disclosed on a monthly basis at the IR web page.

That's important.

If we look at the planning assumptions then, and this is just a summary of statements that we have made in the quarter report.

So I think the most important one here is obviously that the current sales trends and business mix that we have been having for Q2 will prevail for second half of 2016.

We have talked about the OpEx run rates.

And that's then going to be reduced to SEK53 billion, excluding restructuring charges, and that is from July 1, 2017.

It could be a gradual decline there during the course of the period.

The restructuring we have already mentioned.

The IPR licensing revenue in the quarter was SEK2.2 billion.

And that's representing the current IPR licensing portfolio.

And then you have the FX rates, and I've already mentioned that.

And all of this is of course based on current assessments and visibility.

And if there will be major changes here, of course we will inform you about those things.

With that, Hans, I hand back to you.

Than you, Jan.

We talk a lot about the quarter and what actions we're now taking to improve the profitability.

And also that I mentioned the Company for the lower volumes, which is extremely important, as we said before and stated before, we are not satisfied with the profitability of the Company.

That also go to for being competitive in the market we need to have a lower cost base.

And that is we're now taking next step on.

We can also look a little bit broader on the continued strategic execution and talk about a couple of things we have mentioned before.

Number one, of course leverage the installed base in our core business, enormously important for us.

That's both a technology and service leadership.

We'll now put a structure in place, network structure that is going much more end-to-end.

Here we believe we can both take out cost, be more efficient, and definitely deliver even better to our customers on their requirements.

That's part of the new corporate structure that we put in place on the July 1.

And of course we're going to have combined functions here between the networks products and network services.

When they work together all the way out and we have also moved responsibilities for service deliveries and supply further back in the chain in order to take quicker action.

That's of course part of what we talk about, increased cost reductions.

But it's also a way to work much more like our customers are changing right now, having this (inaudible) as a way to working with much more responsibility.

That also goes for the next area, what we call the target areas before, which is basically now restructuring the companies, the IT and cloud of course, which consists of virtualization of cloud as well as OSS, BSS.

That together with the system integration of course is combining a couple of the most important target areas.

Here we need to continue to have the growth of course.

At the same time this should not going forward be accretive to bottom line.

Start [adding] because we have been in investment for a while.

They will also set the structure that's going to be able to work on that end-to-end much more efficient.

In the quarter the so-called target areas grew 5% in constant currency, and they stand for roughly 20% of our turnover.

So even though they're not up all the 10% that we believe the market could be, we believe of course there's a contraction also there.

But we are still growing it and it's an important area.

We also have of course increased investment in 5G because that's coming earlier.

And I can tell you [where there's] really good traction, all the virtualization, 5G and [utilization] service that we have, and a lot of customers of course very interested in that and we do [need to run] that.

At the same time, of course we're opening up the channel for (inaudible) society and for media where we're going to be more sort of sensitive to which markets, and we're going to -- we're not going to do that across the board as we're doing on networks and IoT cloud because that's we're addressing all markets in the 180 in the society and media.

They will be much more focused on the markets where they believe they have the greatest chance in the beginning right now rather than exploring the whole world.

This is all part of being more efficient as well.

And then on the IoT cloud there are all (inaudible) there like in the OSS that we work with.

We also mentioned in the report that the IP investments will go down even further, given that we have our strategic partnership with Cisco.

So all that is also part of how we put up the Company structure.

Ultimately as Jan said, very important we remain strong cash flow, both in order to have strong shareholder return, but also being able to do the long-term investments.

Here we are continue with working capital to continue to reduce that.

And also going to the mix of more software and service over time, as well as Jan said we're peaked on our global centers, CapEx investments.

So this is important all of them in order to [report] strong cash flow generation.

And Jan said, [next one on] a full-year with constant cash conversion, we have been above 70% which is a target for the last six or seven years.

We are always aiming for that.

That is no difference for this year.

All in all, summarizing.

Tough second quarter, the negative industry trends intensified in the second quarter compared to the first quarter, but basically the same impacting mainly mobile broadband investment in certain markets.

That's what we have.

We had good progress in services, which we already announced in the first quarter.

We had to take out costs very quickly, and that we did, and especially on the network rollout.

On the system integration, we explained that will gradually take time to improve.

And that's very much driven that we are a lot of new digitalization projects in the startup phase, which is drawing much more resources and costs in the beginning in order to get into the milestones, and later on to the upsell.

That is seeing that we have more proportional deals in the beginning and that where some of them we have announced and we're working with of course very, very important deals because this is sort of our enablers for getting into this areas which we're now invested in.

That's all good.

It will take some gradual time that system integration will recover there, even though we saw a recovery in the quarter on professional service.

And in light of these market developments, as Jan and I stated, we are now increasing quite considerably our cost efforts.

On OpEx we're pretty clear that this is doubling.

We of course need to do a lot of cost of sales as well, both on the fixed cost of sales but also on the variable, as the volumes come down in certain markets.

Already in the first quarter we -- or in the second quarter we had already started with that.

That journey will just continue and increase the next four quarters to get to the run rates and the profitability we want to have going forward.

Thank you very much.

I think it was one more comment there, Hans.

We have Sunday evening European time, we had an article in a Swedish newspaper called Svenska Dagladed that was commenting in a wrong way some of -- claiming that Ericsson had made the incorrect accounting on certain items.

And that was something that really made both Hans and myself very upset.

We have then consequently on the IR web page of the Company now posted the comment on that article.

I know that some of you that's not read Swedish media, but that was something that was very important for Hans and me to clearly make a statement.

That article had very many faults in it and it was incorrect.

And that is now posted on the Company's IR web page, just as a final remark from me.

Thank you.

Thank you Jan and Hans.

Operator, we are you now ready for the Q&A.

So you can open that session, please.

Thank you very much.

(Operator Instructions)

So we have our first question from Alex Duval from Goldman Sachs.

Please go ahead.

Hi, everyone, Alex Duval from Goldman here.

Thank you very much for the question.

Just to clarify, firstly, you talked about a worsening conditions in the second quarter sequentially.

But just wanted to understand, of that lower base you're now at, is it fair to assume normal seasonality into the third and fourth quarter of the year, or should we be thinking about something sub-seasonal, just to clarify that?

And secondly, if I look on gross margins, these would have been significantly impacted sequentially by the SEK1.6 billion lower revenues you called out on the slides.

So given that gross margins were rough in line with expectations today, the underlying gross margin was perhaps better than people thought.

Clearly you have taken significant actions on the services piece.

But just to understand gross margin fully, could you talk about what kind of price competition you're seeing right now in the markets?

Many thanks.

Okay.

So when it comes to the trends being -- worsening, as we clearly talk about in the second quarter here.

I mean, we were also when we went into the second quarter, we were telling you that we had the -- you can say the emerging market bucket of countries there that Hans mentioned that had typically a quite strong seasonality between Q1 and Q2, that was not going to show that seasonality.

And I think that was captured well by all of you.

I think the situation on those markets are still -- that we have a challenging situation.

There will be still some seasonality of course between different quarters.

But I think for the modeling purposes we say that the industry trends that we have right now in this quarter will prevail.

And we are in this -- we have a situation this year where it is more uncertain on top line.

But I think that we will of course have some seasonality, and typically it's not that big of a difference between Q2 and Q3.

But I think if you look at the markets, it's those emerging markets.

But it's also slow business volume in Europe.

And then finally I think it's also important to remember what we said around the IPR revenue there.

On the price competition that you brought up, and of course it's a tight market.

But you can also see that's a little bit less of investment.

Now, we're specifically talk about mobile broadband because that's usually where the question you're posting when it comes to price competition.

There are fewer deals out in the market at the moment because as many regions right now are on the lower intensity of deals there's of course less deals to talk about.

But the ones that are out there are of course new deals or swap-out, that are fewer.

They are still competitive, as they've been all the time before.

So that's no difference.

Of course, it's a little bit less of the deals coming up.

You get a little bit more inflecting on the ones that you know about than maybe being able to draw a line between if it's more competitive or not.

But clearly it's competitive on the new ones.

And that's also part of why we continue our journey on cost efficiency here.

And of course on the radio side, we're much looking forward to our Ericsson radio system that we will launch at the latter part of this year and start in substituting, which is great reception in the market and very important one.

Alex, you happy with that?

Many thanks.

Thanks.

Next question, please.

Thank you very much.

Next question is from Sandeep Deshpande from JPMorgan.

Please go ahead.

Hello, Sandeep.

Hi, thanks.

My question is regarding your working capital.

The revenue of the Company has come down again in the quarter, but your working capital has increased.

You've explained some factors, Jan.

Maybe you can explain how you expect the working capital, or rather the cash, to go through the rest of the year?

And in a period where your revenues are under pressure, why your working capital is continuing to be under pressure?

Of course.

I mean, first and foremost, there are a couple of aspects to this, of course.

Last year, as some of you remember, we had a quite significant buildup of working capital mainly driven by mainland China for the deployments.

And that started, if you remember, already in the end of 2014 and went through 2015.

And then we managed to get the contract signatures and the cash collection in Q2, more as a catch-up.

Now, this year we are back to more of the normal -- I would say normal business profile in China, which means that we are building, and we then count on more of the collections to take place than in the fourth quarter.

So that's one reason.

Then of course the discussion I had around the buffer stock.

I mean, what we do is of course that we have -- I mean, a couple of years ago we had -- three, four years ago, we had some -- you remember we had the tsunami situations.

And since we didn't have back then a big buffer stock on finished goods, we decided to have, at least on the key components, enough of buffer stock.

And that -- we put that as more of a relative number to the total volumes that before cost to ship.

Now that came down a bit in the quarter, which made the buffer stock go up.

That's about SEK1 billion.

That will be consumed during second half as we then reduce the production capacity.

That's one aspect.

Other than that, the working capital buildup is -- even though of course top line defines, we should release working capital over time, but the most important factor for us still in terms of working capital when we are dealing with mobile broadband is the mix.

And that continues to be the mix.

When we have countries such as Indonesia, Bangladesh, mainland China and so forth in the mix, we have project terms in those markets which means that we invoice based on preliminary acceptance and clusters rather than on split contract terms.

To define the working capital going forward, it's more important on the business mix.

Having said all of this, I also made a clear statement, Sandeep, that of course in a negative revenue scenario, that should mean a lighter balance sheet.

And I agree to that.

It's just that it takes some timing -- takes some time.

Okay?

Thank you.

Thank you, Sandeep.

Next question, please.

Thank you very much.

Next questions is from Achal Sultania from Credit Suisse.

Please go ahead.

Hello.

Hi, Peter.

Thanks for taking my question.

One question on the OpEx guidance.

So obviously now the guidance is for SEK53 billion base by end of -- by second half of 2017.

I think when you had the old guidance obviously you were expecting some kind of growth in all your key markets.

But given what we are seeing now, is it fair to assume that once we get to SEK53 billion of OpEx is it enough to get to 10% plus EBIT margins across all your three businesses by 2018?

And does that 10% margin imply that you expect sales to start to grow in 2018, or at least stabilize in 2018?

I think that the cuts that we're doing right now is aiming what you are saying.

We have a little bit of different expectation on the different units.

But again it's clearly to improve our profitability.

And that ambition is definitely into that SEK53 billion.

And with the current visibility we have on volumes, we think that's clearly enough.

As Jan said, if something changes we will do more.

But right now, this is really what we're saying.

We're not planning, at least in the short term, for an increase in volumes, as we're clear on that.

But we believe it's going to be a decrease, keeping the same fundamentals in mobile broadband.

We are betting that the structure we're put in place, the organizational structure and the cost structure we are doing, that should improve our profitability and also manage the down-sizing in certain markets where we have lower volumes.

So yes, you're right.

We're aiming for protecting a higher profitability.

That's part of what we're doing.

Okay.

Thanks a lot, Hans.

Next question, please.

Thank you very much.

The next question is from Simon Leopold from Raymond James.

Please go ahead.

Hi, Simon.

Great, thank you.

Thank you for taking my question.

I wanted to get a little bit of clarification on how to think about the new cost reduction, because I'm considering the way many analysts build models as well as seasonality and the fact you've guided for the second half of 2017 where we normally would expect seasonality leading to higher expenses.

So I'm just worried that we might make some erroneous assumptions in terms of how we build in the new reduction.

Would you expect that 2017 would lack past seasonal patterns in your operating expenses because of the reduction effort?

And also do you expect a greater proportion of reduction in SG&A versus R&D, given what you talked about in terms of depreciation on the capitalized investment?

Thank you.

Okay.

So my points would be that SEK53 billion is an all-inclusive number, excluding restructuring, to start with, right.

And what we were trying to highlight in that picture there, Simon, is the underlying element.

And of course what we are working on is real cost savings, meaning underlying expenses, to be clear.

The way I want you to think about the guidance then on SEK53 billion is that run rate is going to be achieved July 1, 2017.

So that the first time that you will be able to see -- to inspect that number in reality is obviously end of June in 2018.

But that's what I want you to guide on.

We will report on a quarterly basis going forward, we will report in the same kind of setup as I have in that PowerPoint slide there: to all the time look historically four quarters, and then report progress on the SEK53 billion.

And of course when it comes to the real cost savings, they come a bit in waves because of where we do the reductions.

You know that some countries it's fast, some countries takes more time.

But let's take this quarter by quarter now.

And it is clearly our ambition here to do the right things, the structural savings, and do them fast and with urgency.

And then having this run rate being delivered from July 1, 2017.

I hope that helps.

It does.

Thank you.

Thank you, Simon.

Thank you very much.

Next question.

Next question is from Gareth Jenkins from UBS.

Please go ahead.

Hi, Gareth.

Thanks for taking the question.

Just a quick question on potential areas of pruning the portfolio.

I understand what you're saying, Hans, in terms of the new areas of growth providing accretion to the bottom line going forward.

But I'm just wondering, particularly around support solutions, whether you need to be in a business which can move from a profit to a loss quarter to quarter with what appears from the external community as quite a degree of variability?

I think that first of all there are pruning to be done, and I mentioned that.

There are overlaps in our OSS portfolio, for example, that we now we will take care of in the new structure.

There are probably other areas we're looking into as well.

Yes, there are pruning and we'll continue to do that.

The support solutions of course is also driving a lot of system integration.

As a combination of it, we're growing on the OSS, BSS.

That's important to state that.

So of course now we're not driving enough software revenues.

And that of course is something we need to get in a recurring models with our customers as we're now going into new digitization.

It takes some time to make that movement.

But obviously there are pruning to be done.

But we still believe that OSS, BSS and the new portfolio is extremely important for the market.

You might remember we showed how a typical deal will look like when it talks about a transformation where basically 50% is pure services, and then maybe a quarter is our own software and then a third-party software.

That's a typical large digitization transformation deal.

So it's a quarter coming from support solutions and 75% from somewhere else.

So I need to weigh that team when we look at holistically.

In the new structure, that's going to be one unit basically.

Then we can show that in a much clearer way.

Right now in our current structure that we'll keep up to the end of the year, we are keeping services separate and software separate.

Over time this is a solution.

This is how customer buys it.

They don't buy it separately.

They buy -- and that's a strength that Ericsson has, as well.

We should see that the one is supporting the other.

That doesn't take away that we are pruning things that are not performing, we will take out.

But initially if there were assess overlaps we're working with, it's a reduction on IP and a couple of other areas.

Thanks.

Can I follow-up on that one?

Yes, you can.

Just quickly then.

I just wonder whether you feel support solutions in its current form pre-reorganization can reach a sustainable margin one quarter to the next?

Say above 10%, or whatever the number is, but a nice sustainable quarter-after-quarter margin.

Yes, I believe that.

And it's a volume issue because the gross margins are fine.

It's pure software.

So it's more a volume game here.

We need to get the higher degree of recurrence of our business in there.

That's why we're changing the models.

That's what we need to have in there.

So, yes.

Thanks.

Thanks, Gareth.

Next question please, operator?

Thank you very much.

Yes, next question is from Andrew Gardiner from Barclays.

Please go ahead.

Good afternoon.

Thanks for taking my question.

I was just interested in a bit more detail on what you said about the reduction on the IP side of things.

Just can you perhaps give us an update as to how things have developed with Cisco since the November announcement last year?

And what -- to what extent is this -- your reduction enabled by what you're doing with them, what have you had to negotiate with them, what will you be relying on them for in the future?

And have you got to a stage where there's some joint product development.

Just make sure that Ericsson, as it goes to market, isn't missing out on anything.

Thank you.

Thank you, thank you.

You're right.

I will give you an update.

First of all, I think after the first quarter we talked in Barcelona over a couple of these that we are trying to get with Cisco.

Now we're over 30.

So the pace of new deals is coming in.

Even though they're fairly small at the moment, we are at least seeing it.

The reason for that is that we are now defined all the solutions that we have together, that we can go together with 180 countries.

This is now good traction, good funnel.

Still it's a lot to be done here, but we have at least started and increased to more than 30 deals compared to the couple that we had when we met in Barcelona.

So that's very important.

That was the main focus in the beginning, obviously to see that we can create more sales for both companies.

$1 billion in 2018.

That's still the target.

We're starting off here, still a lot to be done.

On the cost side we already had of course plans to -- we had peaked on our IP investments at the end of 2014, coming into 2015, still growing.

So that was part, if you look at the charts of Jan.

We were on an upward going trend in IP in beginning of 2015, and then it all basically in US dollars, as well.

So it didn't help as much on the OpEx.

Now we have started to decide which products want to keep and not keep.

And of course some of them, we will rely on Cisco, especially on layer 3 and layer 4.

And then we are reducing our R&D in IP and routers.

We talked initially on synergies of SEK1 billion.

Of course, we see potential doing even more.

And a part of the reduction right now, the doubling of the OpEx reduction.

I will not go into more details on the portfolio.

We can do it at a separate time when we come back to the partnership.

But clearly this is part of the strategic choices we've done when it comes to our IP strategy.

Thank you, Hans.

Thank you, Andrew.

With that, next question please, operator.

Next question is from Richard Kramer from Arete Research.

Please go ahead.

Hi.

Thank you very much.

Guys, I'm having a bit of a hard time accepting the explanation about the surprising market developments and challenges in network growth.

It reminds a bit of when your predecessor, Hans, Carl-Henric Svanberg, was surprised by the weaker sales in third quarter 2007.

So what's happened with the sort of CEO level contact with customers and from your sales force that meant at the start of the year you didn't have visibility to anticipate this weaker sales effort?

And maybe make earlier, deeper cost reduction efforts rather than restructuring program that now seems like it was only a halfway measure.

And second question -- I have a second question for Jan.

Maybe you want to take that one first.

I think that I'm not sure that we're articulating surprise here.

We've seen an intensification of the decline that we talked about already at the end of the year.

And we already started in the beginning of the year of the program.

But of course we have seen also clearly that we don't see that coming back.

That is part of it.

And that's why we increased our cost efforts.

We see to look back and come up with brilliant answers.

We are taking it in right now.

And we have done it quite significantly in the first part of the year we have reduced some 8,000 employees.

And of course that will now accelerate, given what we're planning to do.

We will do that.

We are close to our customers and working with them all the time to listen to what they're doing or not.

But of course their realities can also change.

The second one on the same vein.

If you look back since you stepped in in 2010, the share price is actually lower than it is today, and there hasn't been a incremental equity value created.

Are you confident that this latest restructuring plan is going to create sustainable equity value?

Or are we -- should we be anticipating that there will be a 2020 plan once we get into 2017?

Is that just the nature of the industry that we're in, and an inevitable consequence of the price competition and the technology development?

We acknowledge that we're not happy with the share price development.

That's clear.

We're not happy with that, Jan, and I am not [profitabilty] neither.

We're working hard.

And the plan that we're putting in place, we clearly believe that's going to create shareholder value and we should be able to increase our profitability, but also size the Company for, at least in the short to medium term, lower volumes in mobile broadband.

Okay.

Thanks.

Thank you, Richard.

Next question, please.

Next question is from Johannes Scheller from Deutsche Bank.

Please go ahead.

Thanks, gentlemen, for taking my question.

When you were talking about the IP R&D cuts and the Cisco partnership, you were referring again to the SEK1 billion of cost saving you mentioned there.

But there must be much more you can take out on the routing side in terms of R&D.

Could you first give us a bit of a feeling how much of the SEK4.5 billion incremental is coming from IP that would be helpful?

And then secondly, how are you looking at the Cisco partnership here?

How long do you have to retain some of your products like the SSI towers?

When can you actually discontinue those, given the customer agreements you have in place.

And isn't there much more cost savings potential maybe a bit further out here?

And then I have a housekeeping follow-up.

Thank you.

Johannes, it's Jan here.

I think we have given you the detail that we want to give on the IP and the Cisco partnership for now.

I think a good way to understand the reductions that we have achieved so far is to look at the R&D reductions year over year.

Remember now that from an OpEx point view at least had an FX headwind last year.

We have reduced R&D mainly in the cloud and IP area.

And of course going forward we will continue to optimize the portfolio and create synergies.

Then that results then in a possibility to increase the OpEx plan.

However, the OpEx plan will not only be about R&D reductions going forward, but equally much around G&A reductions, as well as sales effectiveness.

We need to make sure we have a very competitive R&D machine.

That's clear.

So that is the way I would like to answer that.

And I will not give you more detail than that for now, Johannes.

Okay.

I won't ask another question.

But just as a housekeeping item, maybe you could give us a bit more color on this special tax outflow you had in the quarter, just where exactly that was coming from?

And if there's anything in there that is recurring or if that is purely a one-off for this quarter, that would be helpful bit of guidance on cash tax.

No, I think that when you look at the tax, first and foremost Ericsson is operating in 180 countries.

And if you look at typically we have a tax rate in the income statement that has been a little bit on the going-up trend, so to say.

That has to do with the fact that we have been very successful in the services business, which means that your tax, obviously, services based on the local profits in each country.

You can say, I think just to be simplistic, I think that it's a good way to assume that the tax rates we have in the income statement is also going to be the cash tax rate over time.

Now in this particular quarter we had some more one-time payments related to some transfer-free price settlements or agreements that was [month/year] and it was in two particular countries.

I will not comment more than that for that topic, Johannes.

Understood.

Thanks, Jan.

Thank you very much.

Next question is from --

Operator, this is the last question we'll take.

So yes, please.

So the next and last question is from the line of [Met] from IJC Partners.

Please go ahead.

You had noted some updates on the relationship with Cisco.

We haven't heard very much on the global alliance with Amazon Web Services since its announcement in February.

There seems to have been not much of an update, despite AWS growing by leaps and bounds.

Okay.

I'll take that one.

When it comes to the whole HDS8000 deployment that we -- which is the joint work with Intel based on their rack scale, as I said when we launched that in Barcelona we had a lot of partners that will use that type of services, and of course AWS is one of them.

The product is coming out here now.

We have some products already out.

And it's coming more in the second half.

I think we can come back to that on the capital markets day a little bit more how that's continues.

We feel good about the portfolio.

We feel good about the HDS8000, which is not one product, it's a portfolio of different products that can be both virtualized and non-virtualized.

That discussion has ongoing and many interested parties, but it's just about to start.

So let us come back to update you on that when [Ander Kleimlaud]and Jean-Philippe will talk about IT and cloud at the capital markets day in November.

Because then we can both get business (cut off) thinking, but also portfolio thinking that what we have in that portfolio.

Okay, thank you.

Okay, Douglas.

You're happy with that.

And then Hans, some closing remarks here.

We're ending the conference call.

Thank you, Peter.

I think again, we are in a market that is changing.

Ericsson is changing, as well, in order to both create stronger portfolio, diversify the portfolio in new areas, which we think is so important for Ericsson going forward, also creating new types of customers.

We're putting up a structure that supports that, that is also designed not only for the customer needs but definitely designed for cost reductions.

And that we will utilize right now to be more competitive, safeguard our profitability improvement that we so dearly need.

But also thinking about the new type of mix we'll have in order to improve and continue to have a strong cash flow.

I think that's what we are extremely focused on.

We have a new management team coming in, very energized.

And that we now are working hard with in order to execute on this.

They are only three weeks into it.

I think that this is really going to pay off.

Thank you.

Ladies and gentlemen, this concludes our conference call.

Thank you all for attending.

You may now disconnect.