Telefonaktiebolaget LM Ericsson (ERIC) 2016 Q3 法說會逐字稿

Welcome to the Ericsson's analyst and media conference call for the third-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 one hour after today's conference. Peter Nyquist will now open the call.

Thank you, operator. Hello, everyone, and welcome to our call today. With me here today I have Jan Frykhammar, President and CEO; Magnus Mandersson, Executive Vice President; and Carl Mellander, Chief Financial Officer.

During the call today we will make forward-looking statements. These statements are based on the current expectations of certain planning assumptions which are subject to risks and uncertainties. The actual result may differ materially due to factors mentioned in today's press release and discussed in this conference call. We encourage you to read about these risks and uncertainties in our earnings report as well as in our Annual Report. With that said, I would like to hand over to you, Jan. Please.

Thank you, Peter, and good afternoon to all of you on the call. Or good morning, even, perhaps. Let me try to summarize the third-quarter 2016. Of course, it ended up becoming a very challenging quarter. We saw the negative [district] trends that we highlighted in the first and second quarter accelerate during the quarter, which in turn created a situation where we had to preannounce our earnings because the impact of these trends demand that we had a performance that was lower than our own expectation.

It really came mainly from the mobile broadband business within networks, but also impacting the network roll-out business in services. If you see on this picture here, you see that the networks sales declined 20% year over year, and that compares to 11% in the second quarter year over year. So that was really where the acceleration impacted.

We also had a gross margin that was low in the quarter. It was impacted by the lower capacity sales, both in the countries that are impacted by macro economy but also lower capacity sales in parts of Europe, more than what we anticipated.

To mitigate this of course, I think, as a Company, as a Leadership Team, it is obviously very important to say that we started the program to reduce cost, become more efficient, already at the end of 2014 we have seen in the quarter good progress on these cost reductions. But there is more to be done, and we remain on the objective that we discussed in the second quarter which is SEK53 billion operating expense by second half of 2017.

We also indicate that we think that the current challenging market situation linked to mobile broadband and in turn linked to these emerging countries, you can say with weak macro that trend will prevail in Q4. But also that the current business mix that we have with coverage and capacity will remain short term. And we have a seasonal growth typically between Q3 and Q4. We think that will be somewhat weaker this year, and I think Carl can come back to that.

So the numbers that you have that in the tables. I don't think I need repeat all the numbers because I am sure that most of you have read them already. If you go to the regional sales split and year over year Q3 you see, of course, a lot of reds here.

In terms of relative numbers, you see a big decline year over year in Middle East. You see a big decline in Latin America. You see a big decline in India. You see a big decline in Europe and sub-Sahara and Africa. And some of this we knew and some of it was a negative surprise for us.

If we look at the net sales and if we try to categorize it, the different buckets here, you see that the regions or countries within those regions that has had a big impact year over year. So the Middle East, Latin America, sub-Sahara and Africa and also Russia in that bucket. Then you have the European Union countries. Part of this we knew because that was at the back end of a big project with a very important customer that was finished here in the end of last year. But some of it was also more short-term uncertainty on the capacity side.

Then we have India where we have a continued good and strong services business, and we also had a good CapEx business last year. This year the spectrum auctions, as all of you know by now, has been delayed. We are now in a situation where they are about, or very close, to being finalized. And we will see if we will have time to actually make the projects in time for this year, or if it's will be an activity for Q1, Q2.

And then on the North American side, the decline year over year is mainly related to a rescope of a major managed service contract. What we see impact here is the valuable part of that contract, the more fixed part of the contract, will impact in the fourth quarter.

So quarter over quarter per region on the next picture, it shows that we have -- here we see clearly the European sequential decline, both in the Mediterranean region as well as in Western and Central Europe. But you also see Middle East on a declining pace there, and Africa. I think important to remember, typically the fourth quarter is very big in terms of seasonality in some of these regions, such as Middle East, Latin America and Africa. So it's also good to understand that the understatement we are making is of course linked to the same reasons as Q2 and Q3.

When I look at the segments, networks sales of SEK23.3 billion in the quarter compared to close to SEK29 billion one year ago. A big decline in operating income. It is both linked to volume drop, but also a more challenging margin situation in this year for the reasons that I mentioned. This was partly offset by good work on operating expense reductions in the network segment.

We also had a good quarter for our cloud and IP business where we saw good development in sales, both for our cloud platforms, the Blade Server Platform but also continued good interest on the Hyperscale data center equipment, and also IP. But it is the main theme, is of course, the lower mobile broadband demand there.

On global services, it's also there a reduction in top line. If you look at it, the lower professional services sales is of course linked to the managed service event that I have mentioned already, but also network roll-out sales. And in turn that is linked to the challenging regions on mobile broadband.

The operating margin on professional services, it stayed stable compared to second quarter. Still, not with the ranges that we operated professional services on one or two years ago, so we still are working hard to get back to those profit levels. And then network roll-out we unfortunately had some under absorption in that [basement] at the back end of volume, so of course we will take actions there to adjust the size of the organization here in the fourth quarter.

Support solutions SEK2.9 billion in revenue and a loss of SEK400 million. The media business remains stable. We have softer sales linked to OSS, BSS that was down. This is some of the big transformation projects that we are conducting at the moment in regards to OSS, BSS where we had, last year in Q3, important milestones on one of those big projects that enable the software sales. So we have a little bit of those impacts here.

So revenue might go up and down, underlying we are working on the transformation of business models to more recurring revenues. I actually want Magnus to comment a bit on the customer agenda, please.

Thank you, Jan. On the customer agenda we are seeing an increased focus on 5G and IoT and also on higher speeds and less latencies on the 4G. We're seeing, of course, that the associations of the DSMA and DMM is driving this change. And increasingly, of course, it's digital transformation in connection with the new opportunities that 5G will give us.

Also, it is a great change in the core networks. And we, August 3, agendaized them so it's driving our R&D at the moment. As you have seen in many of our press releases, we are well-positioned for the next generation. So we're quite happy about the development that's happening, and of course, the way it place we're in for us. With that said, I hand over to Carl Mellander, Chief Financial Officer.

Thank you so much, Magnus, and good morning or good afternoon to all. So let's look into the financials, starting with the operating income. We saw the operating income decline to SEK0.3 billion in the quarter. The main reasons are the lower sales volume that Jan described earlier. Of course the sales decline of 14%, and especially in networks where the decline FX adjusted was 20%. But we also saw in parallel a decline in the gross margin for reasons that we will talk a bit more about on the next slide as well.

Restructuring was somewhat larger than Q3 2015. This is of course linked to the cost and efficiency program which is shown here as the green bar. This is the positive effect of SEK900 million in OpEx savings which the cost program has delivered. So that is the good thing around the operating income aside from the negative effects that we described.

As we go to gross margin, on the next slide here, I think this is best shown in this way as a sequential comparison from Q2 to Q3. We see that especially the lower mobile broadband capacity sales brought gross margin down. This is mainly related to regions impacted by weak macro economy, as Jan mentioned also.

We also have a higher share of services sales in the quarter at 49%. This is a very high number and this is impacting gross margin as well, due to the nature of the business there. I should also say when it comes to capacity sales that this also was a pattern that we saw in Europe more than expected.

If we move on to the cost savings program, we are doing this program in order to secure competitiveness in the market, but also resilience for the Company of course. And we are on track. We have earlier announced the target level of SEK53 billion in OpEx as a run rate in the second half of 2017. And we are heading towards that target, as I mentioned, a SEK900 million savings year over year in OpEx.

And if you look at the graph on the right hand side, you can also see where we are on a rolling four-quarter basis with SEK56.7 billion now, compared to SEK1 billion higher last quarter. But also slightly less than SEK5 billion, SEK4.7 billion, to be exact, lower than 2015 volume.

We have during the quarter announced several headcount reduction activities here, including an announcement in Sweden three weeks ago but also in certain other countries mentioned, the US, England, Spain and the UK, to mention some major ones. When it comes to cost of sales, as mentioned, and this is about the correct dimensioning in line with lower demand. So we are taking continuous action, and now further actions are now being implemented to adjust to the volume.

When it comes to restructuring charges, our previous indication that SEK4 billion to SEK5 billion for the full year still remains. We take the opportunity to state here also that we expect this high pace of restructuring to continue also in 2017.

If we move to the cash situation and the cash flow during the quarter. This is also mentioned earlier, this is really a top priority for the Company and for the whole Leadership Team of course, cash generation. Gross cash decreased SEK5.2 billion in the quarter to a level of SEK43.6 billion. And our net cash position is currently at SEK16.3 billion.

When we look at the different components here, you see that the operating cash flow was negative SEK2.3 billion. Of course, starting with a relatively low net income reconciled to cash, but also due to a certain buildup of working capital in the quarter. To main components there, trade payables decreased and advances from customers also decreased.

I would like to try to explain the trade payable piece. We have been reducing the production in the quarter to meet, or to adapt to, the weaker demand. This we did proactively and that had a positive effect on inventory, which is good. At the same time as we're sourcing less material into production, this also meant that accounts payable, or trade payables, decreased, with a negative effect on cash flow. So this is the timing aspect here in the balance sheet you can see.

Then when it comes to investing, not much to report. The Global ICT center investment is coming down as we are completing those. On the financing side it's about repayment of certain short-term borrowing, nothing special there. FX on cash was positive SEK1.3 billion in the quarter here.

So we are now treating cash as an absolutal priority, and we have been taking additional actions, both operational and structural, to improve cash flow in the very short term but also for the mid term. Thank you. I hand back to Jan.

Okay. So if we look at the planning assumptions for short term and mid term, we start with the short term and this is statements that we have made in the report. This is just a summary to simplify for you on the call. We believe that the current industry trends that we are faced with, that will still prevail in the short term, and that we will see somewhat weaker than normal seasonal growth between Q3 and Q4. It is for the reasons that I have explained.

Also important to remember that we had a very strong licensing revenue in the fourth quarter of last year. And coming to the [ben used] managed service contract in North America, that will have the full impacts of the same in the fourth quarter. And we got some questions here around if this is a structural change in the managed service business and so forth. It is not. It is quite natural that from time to time customers are looking at their strategies. So from time to time we get these scope changes in the contracts.

I think underlying demand for managed services still remains very good, focusing very much on customer experience as well as efficiencies. And as every technology cycle actually become somewhat more complex, both from the core network environment as well as on the regular environments, it is also drive to -- it's a way for customers to handle competence and competence shifts. But of course, this particular managed service contract, as all of you know, was I think, probably the biggest contract in Ericsson's history when it was announced. So of course it has an impact on the numbers and that is also why we wanted to highlight that to you.

Then the current business mix, which means that we are in a phase still of, even though from a lower level, but we still have coverage projects in many parts of the world. And the balance there between coverage and capacity, meaning that we have still, even though lower, but still hardware-centric business. And also a fairly big services share we think that will prevail in the short term. The way we see it is, it's a few quarters, two, three quarters.

Mid term, we continue to work on making sure that we have a resilient Company but also that we make cost reductions for competitiveness. That's not only related to operating expense, it is equally much the very important project that we talk about, if you read the network segment text which is called Ancillary System. That is the new radio platform and that will, of course, enable both competitiveness as well as cost reduction, and it's also very much designed for serviceability. So it's very much a work that is ongoing between the radio business and the services business there. So that's an important one.

And as Carl said, we continue to have a high pace of restructuring charges in both Q4 but also for next year.

Thank you, Jan. And, operator, we are now open for the Q&A session, so please.

(operator instructions)

Kai Korschelt, Bank of America Merrill Lynch.

Hello, gentlemen, good afternoon. I just had a couple. The first one was on the gross margin. I think if I interpret your outlook correct, we're going to stay in the high 20%s level for the next two quarters. And so, I'm wondering why is the gross margin not snapping back here?

Because I seem to remember in the first half you talked about additional cost savings, both in network roll-outs in the service business. You also mentioned the regular system is a much more costed-down product. I'm really puzzled why the gross margin wouldn't improve from the current level.

And then the second question is on the US. From what I understand and from what I see in the release, you seem to have lowered the expectation. I think you were previously saying flat, and I think now you're seeing down year on year. So I'm wondering what you think is the reason for that change in view. Thank you.

Okay, Kai. I can take those questions. I think on the cost reductions linked to both services, as well as adjusting production capacity and so forth, that is very much ongoing. And it will remain on a high pace, both in the fourth quarter and into next year. Of course, it is somewhat a challenge to adjust fast enough when you have had a challenging volume quarter. That is one aspect of it.

On the Ericsson Radio System, we state in the report a big portion of total volumes that our Ericsson Radio System so far and it's close to 10%. We also give you as a service, the ambition for next year, which is more than 50%. And remember now that this is going to increase gradually by quarter, so it's very important.

We will continue to give you that KPI because we agree with you that it's an important platform change for us. The old platform RBS 6000, or platform 5, has been with us now for four years. So it's important to get this new platform out as soon as we can.

And on the network roll-out, it is so that we need to continue to adjust the size of operations, and we will do that also in the fourth quarter here to reflect the volumes. Having said that, underlying these things, yes, we are reducing the cost base source of efficiency measures. But the big delta on gross margin is linked to capacity which you know comes with higher margin. So we think it's fair to plan for a business mix that remains the same way, and that is what we think. That is also why we write that in the report.

On the US side, the impact is linked mainly to the managed service contract, but it is also one customers there that have been reducing CapEx throughout the year. The rest of the customers are in capacity sales, yes, but it stable.

Okay, you happy with that, Kai?

Yes, thank you.

Thank you, Kai. Next question please, operator.

Achal Sultania, Credit Suisse.

Hi, Peter, thanks for letting me on. First question on the OpEx side. It seems like if I do my math correctly, it seems like you probably will have somewhere about SEK55 billion of OpEx ex restructuring for this year. And your guidance is SEK53 billion for next year. So it just seems like a small step down from where we are already. I'm just trying to understand like most of the cost cutting that you are doing right now, is it going to be more seen on the cost of goods line? Or is it still heavily tilted towards OpEx?

Important there, Achal, to look at the details, right? Because we have been supported in the OpEx line also with the net of capitalized development expenses and amortizations and also amortization of intangibles. So as we go into and we started to see a little negative on those items in Q3, but as we announced to normalize this because products have been put in general availability and that's when we start to amortize. So you have to look at the dark blue part of that bar there because that's the real underlying expense level.

That's clear. And very quickly one follow up on the services side. So now I think we see this would be the third year in a row when global services is actually down on a constant-currency basis. So I'm trying to understand, you obviously mentioned it's not a structural issue, but when you are going to negotiating or renewing some of the older contracts, what is the main discussion about?

Are you not able to offer more services around what you are already offering on top of what you're already offering? Or is it more about that pricing is coming under slightly more pressure? Just trying to understand this is now the third year where services haven't grown.

I think, Achal, you have to segregate network roll-out from the recording services as well as professional services such as system integration. And if you look at professional services, it's not been a decline in the same period. The opposite, we are establishing ourselves in a good way as a transformation partner to our customers in the digital transformations, as one example.

It's really the challenge has been around the network roll-out business. We know that business is lagging the rest of the networks business or mobile broadband business with probably three to six months. And I think the big decline really on that roll-out happened when coverage projects was completed on 4G North America, but now year and a half ago. And, as we started to enter mainland China with 4G, we don't have the same scope there. So those are the big impacts impacting network roll-out.

Okay, that's clear. Thanks a lot.

Thank you, Achal We are open for next question please, operator.

Sandeep Deshpande, JPMorgan.

Hi. My first question is regarding the business mix again. My question, the business mix is, Jan, if you remember in the modernization projects in Europe in 2010, 2011, when the last time you had seen your margins at weak levels, you had talked about in a five-year view these margins will be much better because of the software in the mix.

So what has gone wrong with that model? Because, yes, I can understand the macro impact on the top line, but what I don't understand is that this is the point when you should be seeing the positive impact from the software sales, and on the margin, whereas the margin itself is getting very badly impacted.

And my second question is to Carl on the cash flow. Are you now saying that you will not reach your full-year targets on the cash conversion? Or is it that you will try as much as possible to achieve that two optimizations in the fourth quarter? Thank you.

Okay, So I'll start with the business mix question. And I agree with you that when we were at the peak or in the middle of the modernization projects we obviously had a challenging margin as well. We had, though we did not have as high services share as we have today, to be at 49%. We have not been that high before. We have been typically between 40% to 43%. So of course that's had an impact on the overall gross margin.

Nevertheless, the more important question I think you raised, is the capacity model, does it work or not. And I think it's important to state that if we look at some countries, it's really worked out well with densification and software and hardware-related capacity. North America one example of that. It's also worked well in Europe during last year, clearly.

But where customers invested a lot in up-front capacity was, for instance, in Japan and Korea. There the same kind of model around coverage capacity has not worked as well as in North America and parts of Europe. And that I think is fair, and I think that's also something that we, as a leadership team of course, need to look at.

Another element, I think that we discussed a lot a few years ago, is the small sales deployment and whether we treat the small sales, whether it is indoor solutions or small sales as part of the bigger macro sales and the added software and so forth around those. And I think that market has not taken off in the way we expected. So it was it has become still much more macro-centric deployments from that point of view. Carl?

Yes, hi, Sandeep, Carl here. So on your question regarding the 70% cash conversion target, which, as you know, is part of the executive long-term incentive plan as well. Of course the target remains. It looks challenging, I have to say, looking at the actual so far.

This is also the reason why we have put in place even more forceful action on the cash flow. So we are working, just to mention a few examples, very hard on the collection please. Of course this is about removing any obstacle with the customers to get collection when due or even advance payments.

We're working on, as I mentioned, on the inventory in the whole supply chain, to fit demand and obviously to fit with any excess capacity there. And of course it's about -- in the projects I mentioned to make sure that we go for reaching billing milestones and acceptance criteria in the projects so that we can bill and collect within the quarter, as early as possible in the quarter. So we are taking a lot of measures. The target looks challenging, but we have by no means given up on it.

Okay, Sandeep?

Thank you.

Next question, please, operator.

Gareth Jenkins, UBS.

Hi. Just two quick ones, if I could. Firstly, I wondered around additional restructuring assets into next year and additional cost saving measures. Obviously it's been quite marked shift down in top-line performance since the last round of the SEK9 billion and the SEK53 billion have been put in place. I wondered if you can talk to that.

And maybe talk to the balance sheet. You say that you feel that you've got a strong balance sheet, but we've seen two rating agency downgrades. And I think I'm right in saying that in 2002 you had a rights issue and you had over SEK40 billion of cash on the balance sheet. So maybe you could explain to us what's different now? And at what level do start to worry about the cash level on the balance sheet? Thank you.

Okay I can start with the OpEx point there. I think there is a -- I think it's important, Gareth, to understand this, put this in a bit of context. First is that we took as a leadership team, we took action proactively at end of 2014. We accelerated actions here in the first half of 2016.

Hadn't we done that, of course we would have had a very tough situation at the moment. We agree that it's a poor and weak result in the third quarter, but it shows that it's important to be proactive on these items, for sure.

We have also wanted to highlight some of the countries where we have made announcements in the quarter. As you can see on some of those countries, not all, it is obviously important to follow the local labor laws and co-determination processes and so forth. And it takes a bit of time.

For us it's very important to make sure that we are resilient, but that we are also competitive. We need to make sure that the [fide, the wider fide] this strategy that is linked to not only access, but the core network evolution, the OSS, BSS and so forth, that is a success for us. So we will make sure that we balance long term and short term.

On the more volume-related items, of course we will adjust the capacity of the Company on those elements. And in concrete terms it means looking at owned as well as partner-related resources for project delivery. And that goes for production as well, and that we will do, and there we will adjust. That is also, we're clear on that in the report.

On the cash balance, I think it's important to understand where the Company was in 2011, 2012, where we had the handset business that was very volatile. We had -- we did not have the recurring revenue coming from services. Although we, of course, understand that the gross margins are lower in that business, but still it's more recurring revenue. So it's not relevant to look at the balance sheet in the same way as we did in 2010, 2011. So I think that's important.

When we look at the balance sheet, of course, we also know that the fourth quarter is typically the strongest quarter from an operating cash flow point of view. And as we clearly said -- and I remember we were in exactly the same situation last year. And then we delivered a very, very strong fourth quarter operating cash flow. We know that part of that obviously was linked to an IPR agreement, but still we are working hard with the fourth quarter.

So let's first do what we should do, and that is to finalize the 2016 target. And then we look forward on the business mix and the type businesses. But the Company is very, very different compared to the situation 13, 14 years ago.

Okay, Gareth?

Thank you.

Thanks, Gareth. Next question, please, operator.

Pierre Ferragu, Bernstein.

Thank you for taking my question. Jan, I'd like to come back to some of these appointment you've met, not selling as much capacity you would have liked, especially this quarter. So I understand your point, but when you look at the magnitude of the gross margin decline, you attribute to that it looks like an enormous volume of that kind of revenue disappeared sequentially.

And what I'd like to understand, and I didn't really get, since Jan said that, is why are your clients not buying these products? Is that because you have not been structuring your contracts in the right way, and it remains way too discretionary for them to commit to these software releases? Or is it because the software release is not bringing enough value to your client, so they are very happy to speak to the other one? Is that because traffic is not growing on the networks?

So it would be good to have some sense of what went wrong compared to the plan that you describe to us a few years ago. And if so, it's good to hear you talking about taking costs out and launching a new product platform. But what are you going to address that issue? How do you get these software revenues back into similar because you need them to make Ericsson successful? Thanks.

It's a very big question, Pierre, that you ask. So let me try to explain it, both on the more long-term perspective and the short term-perspective. So if we take the more long-term perspective, the fairly short answer of your question is, of course, that we are in the middle of a very important transformation industry-wide, which means that the IT industry and the telecommunication industry are gradually going to come together as one industry. And as a result of that, we are also implementing the Ericsson software model.

That will mean that we go more towards the recurring software. And when we had the Investor Day in November last year, we also said that the ambition is to be on more than 30% of the software revenue being recurring. I think that's one important aspect to this. So today we still are, at least for most parts of the network's in this twice-a-year software release model, and software buy-outs and CapEx and so forth. And of course, in that model you also become a bit sensitive to the purchasing power of customers.

The other element, of course, if you compare with 2010, back then we were peaking the core revenue linked to 3G build-outs and we had probably SEK20 billion of core revenue. That is this year started to grow a little bit at the back end of our product cold play platform that is actually showing good progress in the quarter. But we are not going to come back to those levels. So therefore, we need to be successful in digital transformation and network transformation on that end.

And then, on the more short-term question, it is not software that is the main issue on the short term. It is actually hardware capacity which is, as you know, software-like. And part of that is linked to operators being cautious on hardware capacity spend in the countries where they are impacted by macro economy. And also we saw some impacts in Europe.

So the more long-term question, I think I've answered the short term I've talked about many times. And then there is nothing else than the explanations that we have made around the gross margin.

Thank you, Pierre.

Thanks.

Next question, please, operator.

Jeff [Luver], Wells Fargo Securities.

Hello, Jeff.

Hi, guys. Two questions. First, I was hoping maybe you could provide some additional details around what you consider to be below seasonal trends for Q4. And to what extent the 18% sequential improvement we saw in 2014 is a reasonable proxy. Or if we should be thinking about a lower number.

And then, secondly, I was hoping you could touch base on the competition you are seeing in the networks business. And to what degree that's playing a role in some of the weakness we have been seeing here over the last several quarters. Thanks.

I can take the seasonal question. Carl here. The typical seasonality effect between Q3 and Q4 is an increase of around 20% on top line. This is based on a five-year average. What we see now, given market conditions, is that we don't see that step-up happening in the quarter. I believe we can indicate a mid single-digit drop from that level.

And in addition, we have also the managed services contract in the US that we referred to earlier which will now come into effect. The lowering of that volume will come into full effect in Q4.

I think, but you will know that. We are now in the monthly -- we have change models for FX a few years ago. And all of you know that we have a lot of sales in the last month of each quarter and also a lot of both software as well as hardware capacity-related sales. And so of course, the FX levels end of November is important because that's the FX rates we use for December revenue and invoicing. So I think that's important.

On the comparative question, Jeff, the short term challenges that we have had this quarter are not linked to competitive dynamics. Ericsson is operating in many countries on the mobile broadband side. That's really where we have to get services to global presence and we do business in more than 180 countries. And of course we are successfully in many emerging markets. Of course when there are challenges in those markets, we are also impacted being in those countries.

The competitive question, if there is -- when it comes to competitive dynamics in mobile broadband, it's still linked very much to new footprint or big technology shifts or anything like that. Changing pricing and so forth, it takes three, four quarters before it's impacting the P&L, right? So what we have in the P&L now are deals that we took related to coverage in Southeast Asia, for instance, four quarters ago. So that is the lead times on some of these projects.

Okay, Jeff. Are you happy with that?

Yes, thank you.

Great, thanks. Next question, please, operator.

Simon Leopold, Raymond James.

Thank you for taking my question. Hello. So I know you don't love providing longer-term guidance, and I do appreciate what you have offered us on the call today. But when I look consensus estimates for 2017 sales, I see a very broad range, ranging from low of about SEK200 billion to about SEK250 billion. So any color you could offer to help narrow that range and get folks focused on what you see as a trend for sales in 2017.

And related to that, given a less-than-seasonal growth in the fourth quarter, I assume we should think about a less-than-seasonal pattern in the first quarter of 2017. If you're able to do that.

And just as a follow up. If we can get an update on the Cisco partnership, I'd appreciate that as well. Thank you.

I think on the 2017 sales number, a couple of things on that. One is, we think that the current market situation we have with quite challenging trends in the markets that we have now discussed many times, that situation will prevail short-term. And that this two, three quarters, so that's a correct observation. We are not betting on a big change in market in the coming two to three quarters.

Then if we look at towards the end of next year -- and I also think it's important, even though not as big portion of the total, it is important to look at the sales in what we call the targeted areas. Sales in those areas shows resilience and it was growing 3%. I know that we have had high ambitions in those areas, but it still proves at least that where we have the issues now is on the mobile broadband side, particularly in the margin markets.

I think when it comes to next year, in mobile broadband I think it's too early to start to anticipate any impacts of 5G or 5G-related sales. I think where we can see some growth opportunity is, for instance, in India. It could also be some growth opportunity at the back end of a lot of discussions around public safety, either the operators or a standalone network. So that's another possible area, I think. So I think those two aspects.

And then, when we meet at the Investor Day, I hope you will be there in a few weeks' time. We were also discuss a bit more in detail how we view the market now in the more mid term versus long more long term, because I think that's also important to spend time on that on the Investor Day, so we will do that.

And the second question was around Cisco partnership. So we have -- the Cisco partnership is now -- we announced this about 11 months ago, 10, 11 months ago. And we wanted it to be really a business partnership guided by business opportunities. And in this fairly limited time, we have been able together to create more than 60 opportunities. And we see IP revenue and related professional services growing.

So I think that we have created momentum and it was very much linked to the fact that we wanted to see business growth. So I think, so far we are happy with the progress. We always want more, we're business people. But I think thanks to a push on really having a stretched objective on both sides, it has created good business momentum.

Okay, Simon?

Thank you.

Okay. Now we're open for the last question, please, operator.

Francois Meunier, Morgan Stanley.

Hello, Francois, you have the honor to ask the last question.

Thanks for that (laughter). I don't know how much current leverage you can give on this, but it looks like every time there is a product transition at Ericsson, and last time it was for the RBS 6000 and this time it is for the Ericsson Radio Systems, there is a change in gross margin. So what can you tell us about this new platform? How does it compare with the RBS 6000 in terms of pricing and margin structure? And is there anything you can do in the next 18 months or two years to basically redesign to have the gross margins higher? Or is it something which is too late?

Francois, thank you for that great last question. I think, first and foremost, I can assure you that design to cost and design to service ability has been two critical design criteria when we have developed the Ericsson Radio System, but also be related services packages. And the product itself is very limited in volume so far. We mentioned that in the report.

This will be -- if we are successful with the ambition, meaning that the product will be on a year-to-date basis next year more than 50%, then we have achieved the fastest product substitution of all radio-based stations the last 15 years. And so I think that's a very ambitious target. Rest assured, that it is designed for cost competitiveness, as well as serviceability. So it's very important. Of course we have learned a lot from the RBS 6000, both platform 4 and 5. So that's important.

And I think that when it comes to the customer benefits, that's absolutely part of the creation as well. Everything from energy efficiency -- so there are very, very important aspects here.

Another very important aspect is that this time we actually start with the emerging markets. Which was not the case with the RBS 6000 because back then it was very much the 4G paradigm in Japan and US. It's important this time as well, but we really designed to cost for emerging markets. So we are we have learned. So it's quite a lot of different things that are changed this time.

You okay with that, Francois?

Yes. We'll probably get more information at the Investor Day as well. Thank you.

That was a good comment as well. Before closing this event, I would like to welcome you all to the next event that we will have which will take place in New York November 10, which is the Ericsson investor update. With that, I would like to close this call.

Thank you all.

That concludes our call. Thank you for attending. Participants, you may disconnect your lines.