Telefonaktiebolaget LM Ericsson (ERIC) 2016 Q4 法說會逐字稿

Welcome to the 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.

(Operator Instructions)

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

Peter Nyquist will now open up the call.

Thank you, operator.

Hello, everybody, and welcome to this afternoon's call today.

With me here today I have our President and CEO, Borje Ekholm; our CFO, Carl Mellander; and our Executive Vice President, Jan Frykhammar.

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

These statements are based on our current expectations and certain planning assumptions, which are subject to risk 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, Borje, please.

Thank you and welcome, everyone, to this call covering the Q4 and full year 2016.

So if we start with the business environment for 2016, we can see that the tough market continued in the fourth quarter along the same lines as earlier in 2016.

Operators have been cautious on making new investments.

We also see that the emerging markets have impacted investment levels throughout.

We see continued convergence across telecom, IT and media sectors going on in the market, most notably with some big transactions also happening.

We also see the customers are increasingly focusing on transforming their business into becoming more digitalized; and that is also starting to be good trend that we believe will continue for the future.

And this market, or this macro environment, of course, impacted us and we saw that sales and gross margins declined, primarily linked here to the mobile broadband business.

The IPO market continues to shift, and we see the future growth potential to be in emerging markets and emerging device vendors, and as well as new licensing platforms.

Professional Services margins was negatively impacted by a number of major IT projects that are in start-up phase, digital transformation projects in start-up phase.

Sales in targeted areas were flat; but most importantly, the cost and efficiency program we have launched in 2014 is tracking on target.

We saw some higher restructuring cost during Q4, as we've been able to take out costs faster than we earlier anticipated.

If we then look at the financial statement, and we'll go into more details here, I want to just say sales were down by 10% for the full year.

But most importantly, we had a very good operating cash flow, generated SEK14 billion for the full year, of which almost 20, a little less than 20 came in Q4.

And of course, that puts the Company in a very good financial position after a tough first three quarters of the year.

And so a great job done by the Company and all the employees here focusing on driving down working capital in the company.

We then look at the proposed dividend.

The board is proposing SEK1.00 per share, which is lower than last year.

And the reason why the Board has arrived at this is, of course, the earnings 2016, but it's also the market outlook we see, as well as factoring in strengthening the balance sheet in order to have capital available for future investments.

And then the Board arrived at the conclusion of SEK1.00 per share.

The ambition is, of course, that with this new level, we can also see growth of future dividends, which I think is important for the shareholders.

With that, I'm going to give the word over to Jan to go through 2016 performance.

Okay.

Thank you, Borje.

I'll talk a little bit about fourth quarter.

And we ended then on a safe number of 65, with more than SEK65 billion, compared to approximately SEK74 billion in 2015.

That was, if I look at the isolated Q4 number for 2016, it was obviously a bit higher than what we anticipated when we had the Q3 earnings call in end of October.

Of course, we got help by FX in the quarter, but we also had some hardware deliveries in some specific countries that customers really wanted us to deliver and also pay for in the fourth quarter, and also previously planned for Q1.

We didn't really dare to bet on that we could do those deliveries when we met in October.

So those were the two main reasons for slightly higher top line than what we thought in October.

So on the gross margin then, excluding -- and I think also that it's important that we have disclosed here a number that is called, we call it FX and IPR adjusted sales.

And that is, of course, because we had this big IPR revenue in fourth quarter of 2015, linked mainly to the Apple deal.

So to create better comparability and for you also to model in a better way, we have adjusted for that in the comparison here.

So looking at gross margin then, Carl will come back and talk about the gross margin in detail, so I'm not going to destroy his presentation.

So it's for you to explain later on.

I think the other thing that we felt was good was, as Borje said, was the operating cash flow.

And that was a key priority for the quarter.

Still obviously, we feel that we have too volatile, too much volatility in the cash flow between the quarters.

But we have had that situation for quite many years.

It's still a priority to try to balance it in a better way going forward.

But still, net-net good performance on the fourth quarter.

If you look at the regional sales, looking at them, the growth rates compared to the fourth quarter of 2015 compared to fourth quarter 2016, you can look at this PowerPoint and say that it's been mostly red throughout this year, and there's been one region that has been on green for all quarters this year.

And that's Southeast Asia and Oceania.

They've been up a lot, driven by, of course, Indonesia and 4G deployments in Indonesia, but also continued high activity in Thailand.

Now in fourth quarter, we also saw some increased sales in Vietnam.

But it's also good, actually, to see that it's not only one region that is on green.

It's actually three in this quarter.

So at least some more greens.

As I say, not being too much analytical on that, but I think it's good to see Northeast Asia coming back a bit and also Middle East.

Another reflection you can do, of course, on this slide is to see Latin America, 19% down.

When we started 2016, we felt that Latin America, we knew that it was going to be a challenging market, especially in Brazil and so forth.

But we believed that Mexico could offset that, if you look at the full-year picture.

That did not become the case and that's the way we look at it, Mexico now, we feel it's more uncertainty in Mexico, as well.

So Latin America has the challenging 2016 and will, we think, also have a challenging 2017.

I think that's what I want to say there.

And then if you look at the quarter-over-quarter regional sales split, yes, we have seasonality in this business.

We all know that.

So here all regions are on green.

But I want to highlight, obviously, the ones that have the most growth between the quarters.

And its Northeast Asia.

That's not only seasonality.

It's also the fact that we have a strengthened position in Japan.

And that's something that we have managed to achieve a few years ago, but now we start to see deployments and also radio deployments towards the Japanese market.

So I think that's good.

China has been basically, if you look at 4G, it's been pretty stable across the quarters and compared to last year.

We have seen declines on 3G investments and also one of our customers there that has been reducing CapEx a lot.

Still, Northeast Asia, driven then by Japan in fourth quarter, fairly stable business in China, and also good performance in Taiwan, managed to deliver a very strong Q4.

Middle East came back, not so much driven by mobile broadband.

There was some mobile broadband investments into Iran, but mainly actually project completions in certain markets, such as Ethiopia and Saudi there.

So that was driving that business.

Mediterranean typically has big seasonality in the fourth quarter.

And overall, if you looked at the year there, it's quite challenging year in Mediterranean.

So I think that's kind of the quarter-over-quarter split.

If you take the segment summary, Networks, here we then disclose both Networks and Support Solutions sales adjusted for FX and IPR, to make it easier for you to model.

And you see the reasons there.

I'm not to go through them in more detail than that.

I think it's good to see that Networks, excluding the restructuring charges, is back at 10% in the quarter, after a very weak Q3.

Now it's obviously a key priority to make sure that we stay on those levels going forward and even improved from that, but we'll see.

We'll take it quarter by quarter.

At least, it's good to be back at 10% for Q4.

Also important to note the Ericsson Radio System, we use the abbreviation ERS for that.

We like abbreviations in this company.

But it's been 15% of total Radio unit volumes for the year, has been ERS, and with a good progress, both in Q3, but especially so in Q4.

For next year, we estimate that the full-year Radio volumes, 50% of those will be Ericsson Radio System, and it's going to be a gradual improvement through the quarter.

And I think that's a very important product substitution that is ongoing in the Company.

Global Services, also recovery between the third quarter and the fourth quarter, still not reaching the same excellent profitability that the unit had in fourth quarter of 2015, but still improving compared to Q3.

We had some lower managed services sales that we knew, and you knew it as well, because we were clear on that in October.

It's this rescoped managed service contract in North America, that has now full effect in Q4.

We have Professional Services operating model, excluding restructuring charges, that is 10%.

We still continue to strive to get back to this range between 12% and 15%.

We think it's doable.

It will take a couple of quarters.

But we have obviously had a year where we have had a lot of big system integration projects in start-up phase, but also some [City May] support revenue that has been reduced.

So we will work hard on that.

And then Network Allowed, still not profitable.

Support solutions, it is, as we know, a top-line challenge in that business.

It's a lot of legacy softwares, both on TV and media, as well as OSS/BSS that is going to be replaced by more cloud-based software deliveries.

And that transformation has not yet offset the reduction in the legacy sales.

Fourth quarter of 2015, we had big TV and media software volumes towards one particular customer in North America.

But still, net-net the bottom line is obviously not good in this area.

I think by that, I hand over to Carl.

Thank you, Jan.

So if we move to the next picture here, talking about the operating income development and excluding restructuring, first of all, again let's remember then the significant IPR and licensing revenue that we had in Q4 2015, which is distorting the picture a little bit when we look at 2016.

But if we normalize from that, you can see in the bridge, we go from an operating margin from 10% down to 7%.

And good news is that the cost and efficiency program is on track and delivering results, but unfortunately not really enough to offset then the negatives here, which come with lower volume and also gross margin decline, which I'll come back to on the next page here, as well.

But all in all, operating income of SEK4.4 billion in the quarter, which is 7%.

And this is excluding restructuring charges, which were SEK4.6 billion in the quarter, a little bit more than anticipated for the reasons that we mentioned earlier here that we actually accelerated the cost savings program.

If we go to the next one then, look at gross margin, specifically.

And you all know this, how the gross margin has developed over the last eight quarters.

Very clear that we have seen downward pressure and the downward trend during this time, due to the weakness, of course, of the mobile growth end markets, in general, but also lower IPR licensing revenue and an unfavorable mix, you can say, between [coverage and] capacity and the Services share being higher than earlier.

What's important to note, as well, is that gross margin stayed flat between the quarter.

So sequentially from Q3 to Q4, we remained at 29.4%.

This is in line with the planning assumptions that we discussed when we presented the Q3 report.

We ended up more or less in line with expectations from that point of view.

Clearly, we are very unhappy with this profitability level, as Borje already said.

This is a reason why we're working so hard on trying to control what we can control.

And one important part of that is, of course, to make sure that we deliver on the cost efficiency program, which I can talk about on the next picture here.

So cost savings, of course, goes both in the direction of cost of sales and OpEx.

You see the graph here illustrating the OpEx development, excluding restructuring then.

So SEK5 billion less of OpEx in 2016 compared with 2015.

This is the result so far of the cost savings programs on the OpEx side.

And we are on target now to reach the SEK53 billion that we have communicated multiple times before.

When it comes to cost of sales, a lot of actions ongoing.

Jan talked about the Ericsson Radio System being one of the big enablers here.

But we're also talking about actions within the supply chain and in service delivery to improve the gross margin by becoming more efficient and taking out cost there.

As already mentioned, the execution pace was faster than expected when it comes to the programs in several countries, both North America, Latin America and the Mediterranean region, to mention a few, where we have had ongoing restructuring programs.

And they actually exceeded our expectation when it comes to speed, which is a good thing, of course, and that's enabled us to actually take more of restructuring charge into Q4 than we had anticipated.

But we think this is a very good thing, because we are executing faster on the cost savings.

We are thereby not saying that the cost overall will increase for the savings program, opposite to that.

We are saying that we maintain the overall cost picture; and therefore, we're also then reducing the restructuring charge expectation for 2017 now, down to approximately SEK3 billion.

This is, of course, with the current plans that we have and the current visibility.

Next picture talks about the cash flow situation.

And I can just join Borje and Jan thanking everyone internally and letting you know externally how happy we are with this result that we finally actually recovered pretty well in the fourth quarter, improving our net cash position and of almost SEK15 billion in the fourth quarter.

So as already mentioned, this puts us in a much stronger position than we were, for example, at the Investor Update in New York, when we looked at the challenging first nine months that we have had and the challenge in reaching the cash conversion targets, et cetera.

But we actually made that.

So that's quite good.

We can move on then.

Just to reiterate that from 1st of January, we are implementing our new structure for external reporting.

As you all know, we will be reporting in the three segments, Networks, IT, and Cloud and Media.

And to enable further analyses and so on, we will issue restatements according to this new structure in March.

And there you will get 2015 full year, but 2016 also by quarter, to enable comparison over time.

Okay.

And then finally from me, we have a number of planning assumptions that we would like to share with you.

So first of all, we are saying that the industry trend and the business mix in mobile broadband are likely to prevail during 2017, as well.

So the tough market continues.

What Jan mentioned around hardware deliveries coming into Q4, which were originally planned for Q1, we need to consider that, as well, then when we model Q1.

And that's around SEK2.5 billion of sales.

We said in New York in the Investor Update that we expect the RAN equipment market in dollars to decline by minus 2% to minus 6%, and we maintain that.

That's still the range that we see coming for the market as a whole.

We also have the managed services contract in North America that we have talked about several times.

And this will impact sales when we compare Q1 2015 -- or sorry, Q1 2016 and Q1 2017.

So that should also be taken into consideration.

And then finally, on business, we talk in the report of today about our IPR business.

And we established the baseline based on the current contract portfolio at SEK7 billion on an annual basis.

This is not a forecast of revenue for 2017.

It's a number intended to guide a little bit, to talk about the existing portfolio, the existing contracts that we have in licensing, which amounts to SEK7 billion.

And then we repeat on the cost and efficiency what we have said before, the ambition to improve gross margin in the second half of 2017 with the actions we're taking and the SEK53 billion OpEx run rate.

Finally, the SEK3 billion restructuring charge for 2017, I've already mentioned.

So all these planning assumptions are there to make it easier to model, of course, based on the visibility we have today.

With that, thank you and back to Borje.

Thanks, Carl.

Before we enter into Q&A, let me just finalize with one slide on the path forward.

We're working on a couple of different things, one being reviewing our priorities to set the future direction for Ericsson.

This, of course, includes refining our current strategy to focus our investments on areas where we both can and must win.

I want to take the time to do this thoroughly.

We want to involve the team at Ericsson, for a couple of reasons, but two being we need to do that to ensure the quality and the decision-making.

Ultimately, we need to arrive at the right decision.

And maybe more importantly, I believe it's critical that we cast out a strategy for Ericsson as a company that we're all aligned behind and can execute as quickly as possible.

To do that, we need to take the time to form that view along the leadership team.

We also need to increase our focus to get back on the strong profitability level.

It is unsatisfactory as it looks today.

That means we will prioritize profitability over growth, but it also means that we will review our efficiency and effectiveness across our different parts of the operation.

And lastly, we are spending, we are in a technology industry.

We need to be technology leaders, stay at the forefront of the technology development.

And here, Ericsson has a unique set of assets with our products, but we also have services and solutions.

And that package creates a unique position for us to compete in the market.

And that's something we need to leverage, but it's also something we continuously need to invest in and develop.

So with that, I want to leave you with a notion that we are working on our priorities going forward.

We have a strong financial position to start from, and this is something we will come back to you in due course.

Okay.

Thank you, Borje.

Now, operator, we are ready for the Q&A.

But before you start, I would actually urge you to limit yourself to one question at a time, so we can have an efficient Q&A for the further half an hour that we have here.

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

(Operator Instructions)

As always, please limit yourself to one question at a time, and please keep your questions at a broad level.

Detailed information is provided in the report, and Ericsson's Investor Relations and Media Relations team will be happy to take additional questions and discuss further details with you after the call.

Alex Duval, Goldman Sachs.

Yes.

Hello, everyone.

Many thanks for the question.

Just wanted to ask if you could clarify again on the quantum of revenues that got pulled forward in total in the fourth quarter from the first quarter.

So basically hardware, as well as any associated other types of revenue we should take into account.

And then, related to that, what the precise EBIT pull forward into the quarter was at a group level.

That would be my first question.

I've got a quick follow-up.

Carl here.

The amount pulled forward was SEK2.5 billion for hardware.

We haven't specified the specific EBIT related to that.

But the top-line number to model with for Q1 is SEK2.5 billion.

That's very clear.

And then, on the SEK7 billion patents flow you've identify for 2017, that's obviously around SEK3 billion lower than you reported in 2016.

So I wondered if you could just clarify a little, given that's a very high-margin revenue stream, why the run rate seems to be so much lower.

I appreciate, obviously, there was some one-offs in 2016.

But could you help us understand, is that about market-share shifts with existing customers?

Is that to do with new terms for renegotiated deals?

Is it ASP pressure in smartphones?

Just to really understand the extent to which those different things could be drivers.

And then I assume that any change in revenue that one should model would be dropping through at roughly 100% profit dropped through to bottom line.

Okay.

Alex, Jan here.

No, I think the reason that we want to, the reason that we really want to disclose this baseline number is, of course, that we feel we have not been, I think, clear enough on what is the underlying baseline number on all the contacts we have.

So I think the way to look at this is, of course, that this is a number that reflects the contracts we have, but also with the given volumes and mix we have in the end of the year.

And of course, in reality then, this might be -- our view is that we should look at this, of course, as some kind of baseline number.

And then, on top of that, there might be, of course, new contracts coming in, new signed contracts, which we all know is an ambition we have, to make sure that all handset manufacturers are licensed, to start with.

I think the other aspect is, of course, that there is always deals going on.

We could be selling patents.

We can be, settle deals.

We could be -- deals that has an element of forward-looking running royalties, but also settlements going backwards and so forth.

And if we look back a few years, that has been the case.

But I think view this more as a baseline number.

And then obviously from there, we can then also discuss with you in a better way on a quarterly basis.

Now we deviate from the baseline, because of X, Y, Z, something like that.

So that's how I want you to -- or how we want you to think about this number.

So it's nothing has really happened in the market around price reductions or structural changes.

It's just a way for us to try to be better in communicating around this portfolio.

That's very clear.

So should one assume therefore that it's prudent to assume somewhere between SEK7 billion and the SEK10 billion we saw in 2016, more towards the midpoint, or is there any kind of color you can give on that?

Alex, you're one of most brightest individuals I know.

So I'm sure you will figure something good out.

Are you happy with that, Alex?

Many thanks.

Appreciate it.

Thanks, Alex.

We're open for the next question, please, operator.

Kai Korschelt, Bank of America Merrill Lynch.

Hi, Kai.

Hello, gents.

Thanks for taking my question.

I just had a quick one on demand in emerging markets.

And I appreciate at the moment, things are still quite weak, but it looks like the economy is, particularly Brazil, Middle East maybe, Africa, are stabilizing, and usually with some sort of lag that feeds through to telco spending.

So I'm just wondering, at this point, in terms of maybe forward-looking discussions with your clients in these regions, are there any signs yet of maybe the intention to potentially spend more?

Because it is a big part of your revenue.

And then, the second one was just a quick follow-up.

Borje, I appreciate you need some time to formulate a new strategy, but I'm just wondering roughly what sort of timeline should we think about when you might communicate any updates to the market?

Thank you.

Okay.

So, Kai, it's Jan here.

I'll start with your first question there.

I think the way to think about the fact that there is obviously uncertainties, as well as opportunities in certain countries, I think the way to think about it is really that we still believe that the forecast that we talked about in November when we met in New York, that is we're between minus 2% to minus 6% in US dollars, is still valid.

I think that's the best way to explain that.

At least that's how we think about this.

So if we feel that we need to update that, we'll do that once we have sufficient information.

But I think for now, we believe that, that is still the valid range.

Borje?

On the last one, Kai, I think the way to think about this is not that we're making a statue that's going to sit and we will unveil on a specific date.

But you will gradually see us instead implement and focus our efforts as we move forward.

And this is a gradual event, therefore, and something that's going to happen continuously.

So I think you should more see what we do over time and see it from there.

But it is important to take the time now to get a shared view internally, and that will take some time before you really see the actions.

Okay.

Thank you.

Thank you, Kai.

And we're ready for the next question, please, operator.

Gareth Jenkins, UBS.

Thanks.

I have one follow-up and one question.

The follow-up was just on that last question for Borje.

It was more what your initial impressions coming into Ericsson from the outside are in regard to cultural changes that need to be made.

Is it speed of decision-making process, or things that you've been impressed with, or maybe less impressed with, in terms of business processes relative to some of your other investments, historically?

And then I have a question.

Thank you.

Thank you for the question.

Yes, coming into the Company, I've been associated with Ericsson for a long time, and I think the really positive thing is the level of competence we have in the Company.

We have great capabilities in our members of the team Ericsson.

And actually there is something that's even more important -- it's called passion.

If it's possible to have blue blood flooding in your veins, that's what you feel when you get into this Company.

And that makes me really happy and proud.

So that is the foundation of what we can build on going forward.

What you can say that I think we need to be better at, there are a couple of things.

You indicated one.

I think agility, speed or flexibility is important.

We're too slow.

We can change there.

We need to be having more accountability, clearer accountability internally.

That is something that can change.

So there are a number of tweaks we can do in the way we operate and the way we work that will make us more competitive.

And that's something that we, of course, will start implementing as soon as possible.

And then if you look, there is not a coincidence, we talk about profitability before growth.

We may have been too geared on the top line, and we want to shift our focus a little further down the P&L statement.

That's great.

Thank you.

Can I ask one financial question, which is, I think your provisions were quite high in the quarter.

Can I assume that, that's all restructuring and that there's nothing in there for any bribery and corruption provisioning, at this stage?

Thank you.

Yes, you are correct in your assumption.

Thank you.

Thank you, Gareth.

We're open for the next question, please, operator.

Sandeep Deshpande, JPMorgan.

Thank you very much for letting me on.

I actually have one question for Borje.

When we look at Ericsson today versus -- you've been with the Company for a while, on the Board of Directors -- what has really changed in terms of the restructuring which has already been announced -- the restructuring costs, and the operating expenses are going to go down to SEK53 billion, which is in line with what you had in operating expenses 2009-2010 time horizon.

But your gross margin is substantially lower.

And so, given that a lot of the cuts have already happened, how will the mix be changed?

What are your initial thoughts on changing the mix to take that gross margin up?

Because Ericsson doesn't have a lot of manufacturing facilities to shut down or any of those easy fixes to change the mix.

And then, I have a follow-on question for Jan.

Jan, do you think that Japan has, you've seen some improvements there, do you think that the spending cycle is starting there, and when does the 5G spending cycle start in Japan, based on what your conversations with customers are?

Thanks.

So I should start?

Thank you for the question.

No, this is why we need to look at and prioritize our investments going forward.

We're rightsizing the Company size now.

We're getting into a efficiency situation.

You have also seen that we talk about improving gross margins.

We're taking all of those steps.

And that's something we will continue to do.

Of course, we are reviewing other further opportunities for efficiency improvements.

But I do believe we are going to have a good size.

But as every company, we need to just look and review that we're doing enough and that we cannot do more.

But the real benefits, or the real gains, come out of prioritizing our investments going forward, by investing in areas where we can win and where we can see attractive margins for the future.

That will gradually change the mix.

So it's right, as you say.

That's really where the change of the game can come from, not from cutting yourself to success, I don't believe so.

Sandeep, on Japan, I think we have had, as an industry, I think, a CapEx level in Japan that's been on almost minus 40%, minus 45% on a yearly basis for the last, say, two years.

So it's been a challenging market, where CapEx has really been reduced.

We are not betting on any significant increases from the levels we have today, but we think that the CapEx has stabilized.

That's not the same thing as saying that the investments on 5G RAN has commenced.

I think that's probably an 2018 event or so.

But I think what is important is that when you think about the wider 5G market, that involves very much core and virtualization of applications and so forth, that has commenced.

So we are running projects with all our customers around virtualization and applications and so forth.

And in that context, they are preparing themselves for, obviously, for 5G-ready core, one may say that.

Thank you.

Okay.

Are you happy with that, Sandeep?

Yes.

Thank you.

Thank you, Sandeep.

Next question, please, operator.

Jess Lubert, Wells Fargo Securities.

Hi, Jess.

Hi.

Good morning.

Two questions.

First, I was hoping you could help us understand how much currency positively impacted the Q4 results, and if current exchange rates were to prevail, to what extent should we expect your business to outperform the industry growth rates presented at the analyst day?

Okay.

Yes, it's Jan here.

If you look at the top-line impact -- the major currency in terms of FX we have is US dollars, or US dollar-linked currencies, you can say.

And typically, top line in a given quarter is between 40% and 45% US dollars.

And we also do monthly -- our monthly closings, we always do on the FX the month before the closing rates.

So in this particular case, we obviously had the P&L FX on the closing rate of the end of November.

Those rates are disclosed on a monthly basis at the IR web page.

We had approximately SEK2.5 billion of FX year-over-year quarterly impact.

The big impacts on bottom line from an FX point of view, you can say that the big impact -- the impact, you can say, is on transaction exposure, meaning exports from Sweden then, which then impacts margin in a positive way.

That's mainly US dollars, where we are long in US dollars.

Euro doesn't really matter, because we are basically having zero transaction exposure there.

And all of those things are actually disclosed in the annual report every year.

And I think it's good to look back to those when you make those assessments.

But at the moment, obviously FX has been impacted mainly by the US dollar development against SEK.

And then it's transaction exposure that has the big impact, especially towards US dollar, you can say.

The rest, read in the annual report, please.

There is a second question, I think.

Yes.

So the second question, I was hoping you could update us on the Cisco partnership, how that's performing from an engagement and/or revenue perspective and how you're feeling about the ability to achieve the $1 billion in incremental sales over the next few years?

Yes.

This is Borje here.

We've entered into this partnership a little bit more than a year ago, and we have made progress.

We see the number of -- what is it called, service engineers, right -- service engineers, certified engineers being 2,500, up from about below 100, at least, when we started.

So that is a major progress.

And we're also seeing that we take orders.

We have run a couple of fairly sizable projects together.

So there are positive momentum in the partnership.

At the same time, that's always the case, I think, now we've been there for a year, we always need to assess how can we make it stronger and more successful.

And that's something we will, of course, continuously do.

And I think also the other comment one can make on the $1 billion ambition then, that was really a business driven ambition that we set, together with Cisco, in order to create business momentum.

And I think it has served a purpose to create business momentum.

Then let's see if we deliver $1 billion or not in 2018 and 2019.

But the main purpose is, again, to get business momentum going.

Okay, Jess?

Thanks, guys.

Okay.

Open for next question, please.

Edward Snyder, Charter Equity Research.

Hi, Ed.

Thanks a lot.

You had pulled forward from Q1, like you mentioned, SEK2.5 billion into Q4.

Is that going to be replaced in Q1?

Do those customers still pulling in orders from, say, the second quarter, or was it pretty much the end of the year, and we can expect it to be removed from what normally would be seasonality in Q1?

And then, in general, what is the impact -- you mentioned you have about 15% of your own radio networks in the radio systems going to, hopefully, 50% in 2017.

In general, what's the impact of that on the margin profile, specifically gross margins of the network business?

Thanks.

Carl here.

No, the SEK2.5 billion, basically, we can see as gone from Q1.

That's how we see it.

So they were pulled into the fourth quarter.

And basically, if you look back over a five-year period, the normal typical seasonality is minus 22% from Q4 to Q1 in top line.

And from that then, we should also consider this SEK2.5 billion as a negative.

I think on the margin impact on the Ericsson Radio System, I think that I'm not going to give you the details, Ed, on that.

But I think the first important thing with Ericsson Radio System is obviously that it brings a significant reduction on total cost of ownership towards our customers, which makes the platform, together with the related services, more competitive.

It's also a platform that is prepared then for 5G high-band radios that will come later.

And so it is, from that point of view, a very important product substitution.

Of course, it also brings with it a possibility for us to do design to cost and design to service.

And that is obviously why we say that this one of the key important projects.

Of course, we are trying to make sure that this also means that we have an improved gross margin from the business.

And we see some early signs of that in the business, but I think we want to deliver consistently before we start to talk about that as a positive.

I think that's wise to do.

But of course, we have that ambition.

Thank you, Jan.

Ed?

Thank you.

But one more question.

If I could touch on 5G for a moment.

It looks like a lot of the preliminary work Verizon and a few other carriers have done, especially in the higher frequencies, have got them convinced that this isn't really going to work well, if at all, for a mobile system, for all the reasons I'm sure you're aware of, in the smart antenna aspect of it.

And it looks like a lot of the initial work is being done now on fixed-broadband access to the home, some of the trials, et cetera.

Does that change your calculus, especially given the radio aspect of it, in terms of the total volumes available or even needed?

If you switch the topology from more of a cellular mobile application to a fixed-broadband application, it has to impact, I would think, your view long term what 5G would do for your radio Networks' revenue line.

Have you had discussions with them?

What's your impression of this?

Is it too early to really tell just yet?

Are there other developments going on that could change that calculus?

Thanks.

Well, I think that the use case that is mostly discussed at the moment, especially in North America, is exactly what you refer to.

So to replace fiber to the home with a wireless use case.

And of course, that will mean that there will be also lower-band solutions and more small sets and so forth.

And I think what is important is, of course, that when we talk about Ericsson Radio System, that's a new hardware platform with both baseband and radios.

It will be run on the same software, both for 4G and 5G.

That's important.

And I think that what we are doing now, together with customers around the world, we are really taking their use cases down to real business cases.

And of course, some of these use cases will require different building block and so forth, right?

So I think that's really what we are doing.

And of course, for us and also our customers, it's important to take, if you bet on a few business cases and then start to be the relevant solutions on those.

And some of the use cases will require perhaps more small cells, some of the use cases will require only a mega radio on high band, and so forth.

So it depends a little bit on the use case.

So from that point of view, I think it's a little bit too early.

But that's also why we have more than 25 different MOUs working with customers on different use cases in trials, to learn.

If I could, I apologize, maybe slip one more in real quick.

You mentioned small cells.

I don't know if, it may be a little bit early, maybe you're not involved with it just yet, but if you saw in December, Global Star got authorization from the FCC to convert their 2.4 gigahertz band, or a section of it, to terrestrial cellular.

And given the power levels, they're looking at a small cell.

I know that there's been a lot of talk about small cells over the years, really hasn't panned out.

But it would seem to be a lot of that has to do with the technology issue on where you're trying to put it and not having a clear band.

And I'm sure you guys are intimately aware of all that.

It sounds like from the first blush that this might in fact be an area where small cells could flourish, given they have a license to this, not just in the US, but internationally.

Have you looked at that yet?

Does that change the calculus for the small cells, especially in regard to 5G, because you don't have the frequency problem and it sounds like it would work well?

No, I agree with you that we have been talking about small cell for many years.

But we have also been a company that has been quite realistic around the potential for small cells, as you remember, Ed.

I think the approach that we take, just to be clear, is that we want to make sure that we have radios across all relevant frequencies, but also make sure that we have, let's say, run those radios on the same softwares, for spectrum efficiency and so forth.

And some of the use cases will be requiring smaller radios and also the small cells the way we have defined it, which means that you have a capacity booster as part of a macro cell.

So I think that 5G, depending on the use cases, may mean certain different building blocks.

And I think that's also why eventually we can actually get a good return on the small cell portfolio we have.

But again, this is too early to speculate in, I think.

But we have the portfolio, so anyone that wants to buy small cells, please, we have a great portfolio today.

Thank you.

Thank you, Ed.

We have to continue this.

And I think we have open up for the last question for this session.

So, please?

Achal Sultania, Credit Suisse.

Hello, Achal.

Hi, Peter.

Hi, guys.

Two questions, if I may.

First, on the Services side, I think this was always considered to be a much more resilient business.

And I think we've seen three years in a row that business services revenue in organic terms is now down year on year.

And we obviously understand Sprint contract has been scoped down.

I think there was some press around some contract in Italy which has also gone to competition.

What exactly are the trends that you're seeing in Services?

Is there more pressure from your customers around a renegotiation of some of these large five-, seven-year contracts, or the scope of those contracts are changing a lot as we move towards 5G?

Just trying to understand what exactly is changing in the Services business.

I think, Achal, you're being a little bit unfair to a business that has been delivering, at least on Professional Services, very good incomes for many years.

But I also, at the same time, I agree with you that the top line, in organic terms, have been coming down, and that's mainly related to the network allowed business that was really big a few years ago at the back end of modernization projects in Europe, big 4G deployments in North America and so forth.

But I think also what is important is, of course, that when you sign up a customer, when you sign up a customer for five or seven year managed-service contract, or a five-, seven-year IT transformation contract and so forth, these are long-term undertakings.

And of course, at some point, sometimes customers decide for a different business strategy, and that's perfectly fine.

But you also have to all the time make sure that you stay relevant.

And I think we have invested for staying relevant.

This particular year, we have had some challenges, obviously, with the startup of some of these big IT transformation projects.

I think the main focus going forward is obviously to make sure that those projects, from a Services point of view, becomes better from an earnings point of view.

And also, when it comes to managed services, that we take the next step in the evolution in managed services, so we go from one too many service delivery models to automation models.

And that is obviously one of the key investment areas that we are making.

So that hasn't happened so much in the market, it's obviously so that some of the big contracts or the contract you refer to has obviously -- it is a big contract, so it has impact.

Other than that, no major structural changes.

Okay.

That's helpful.

And maybe a second question on the gross margin strategy.

I think just coming back to the same point, I think this was asked previously.

Your guidance is that second-half gross margins this year would be better than the full-year 2016.

And now, obviously, that means slightly better than 30%.

I'm just trying to understand, there's still a big gap between what the gross margins that the competition does, be it Nokia or Huawei.

So what are the things beyond the current cost-cutting plan that is under your control that will allow gross margins to expand?

I understand maybe mix can improve, maybe top-line trends can improve.

But I think those are some of the things which are 100% not in your control.

So just curious, what other things under your control, beyond the current cost-cutting plan, that could help gross margins go up?

Okay.

Well, I think we can make the list like 25 items.

That's why we are excited about the opportunities.

But I think one of the key things that we always have to work on is, of course, to be at the forefront of technological development, linking that to services and products.

Because then you can be early out and be first in some of the advanced markets.

I think that's one key aspect of what you're asking.

The second aspect is, of course, that you have to make sure that you bring value also in these complex transformations.

They are multi year.

But the good thing with multi-year transformations, whether it's on managed services or on IT, is that you actually have time to improve also on the learning curve over time.

So there are several aspects beyond pure cost cutting.

I think that we will spend a lot of time to continue to focus on differentiation for relevance.

And so a margin improvement plan is not only about cost cutting.

It's equally much about being first when technology's changing, but also being very innovative when it comes to new service delivery models and so forth.

And those are just some aspects.

I think when we communicate externally, of course, we tend to talk about OpEx and cost of saves and pure cost cuts.

But internally, our focus is on broader than that.

Thanks, Achal.

Before handing over for the closing remarks from Borje, I would like to invite you all to Mobile World Congress in Barcelona between the 27th of February and 2nd of March, where both we will have a program for the sell side and the buy side during those days.

So please, Borje.

Thank you.

And then I just wanted to end with the notion that we are working on prioritizing our investments going forward into areas where we see the greatest potential for us to strengthen our Company.

In the near term, we will focus on improving our profitability to get stable development in the Company.

And from there on, we can invest in growth.

So with that, thank you, everyone, for participating.

Thank you.