Telefonaktiebolaget LM Ericsson (ERIC) 2017 Q1 法說會逐字稿

Welcome to the Ericsson's analyst and media conference call for the first 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 1 hour after today's conference.

Peter Nyquist will now open up the call.

Thank you, and welcome all to this second call for the day. With me here today I have our CEO, Börje Ekholm; and our CFO, Carl Mellander. So during the call today, we will be making forward-looking statements. These statements are based on our current expectations and certain planning assumptions, which are subject to risks and uncertainties. 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 start off this call by inviting Börje Ekholm to begin. Please, Börje.

Thank you, Peter. Welcome, everyone, and thank you all for joining. So let me start with the start with the starting point. We see our company performance to be unsatisfactory, clearly highlighting the need for the new focused strategy we laid out a few weeks ago. The quarter was very challenging overall and very tough, but it's also a mixed picture. We see Networks delivering a solid result despite declining sales, but we also see accelerated losses in our IT, Cloud and Media businesses, and here, we need to take additional actions. The strategy we launched, a more focused strategy, with the objective to regain technology and market leadership, resulting in an improved profitability. We see here that we basically need to focus our portfolio on areas where we can and must win.

We will also intensify the focus on our cost structure in order to make us more efficient and lean. This will include simplifying the way we work internally as well as making portfolio choices.

We also see that we need to selectively increase our investments in some of the core areas to make sure we have the competitive products we need to win in the market, again, a few years out. And we expect our strategy -- still stand behind that, we should see significant improvements already during next year. But we also have this ambition to double our operating -- call it, underlying operating margin beyond 2018.

Looking at the first quarter, we see sales down about 16% if we adjust for foreign exchange. We also have significant adjustments that we will go through in more detail of SEK 13.4 billion during the quarter, in line with the announcement we made in the end of March. It includes restructuring charges, asset write-downs as a consequence of the new strategy as well as provisions and adjustments relating to certain customer projects. Our cash flow was worse than -- or slightly better than last year, but still negative, SEK 1.5 billion, and we also see that our cost and efficiency programs not yielding the necessary result, given the profitability outlook as well as our market outlook.

If we look under different segments, we see Networks falling by 18%. It's due to lower mobile broadband investments, but it's also due to the reduced scope in the Managed Services contract in North America and lower IPR revenues. We also had a pull-in, as you all know, into Q4 of last year of some hardware deliveries, which also impacted Q1 sales volume.

The operating margin was, however, 12% or we made a little more than SEK 4 billion in this area despite lower IPR revenues. So we think that is a very solid performance. We also see that we have -- historically, we've lost market share for the last several years, and we've seen that kind of stabilize during the last few quarters, which is due to our Ericsson Radio System platform, which clearly is a competitive platform in the market.

IT & Cloud is down 7%. That's really our services side. They're growing, but what we see here is lower legacy product sales, and we do not see our new products being able to offset that decline. So the decline in legacy products are happening quicker than we anticipated and have seen before.

Our operating margin, also, here fell due to lower sales, of course, but also a falling service margin. Here, our performance is not satisfactory. We need to do a number of actions, and we're undertaking those already as a consequence of the strategic announcement. It's really to accelerate product introductions to get our new products to catch on faster, streamline the service organization as well as tightening scope on contracts as much as we can. And we expect to see improvements here during 2018.

For our Media business, we also see here sales down more than 20%, partly explained by lower IPR revenues, but the big part here is actually the legacy product portfolio also falling off faster than we've been able to grow our new products. And that has resulted in, as you can see, a big loss of SEK 1 billion here, which is due to lower gross margin and sales. And for this unit, we are -- we're basically looking at this from 2 product parts, one is the product and one is our broadcast services, and we're exploring strategic opportunities for this business.

With that, I'm going to give the word over to Carl Mellander, our CFO.

Thank you, Börje. So very important to consider when looking at this first quarter report is the difference between the underlying business, which we just talked about here now and the one-off items, the extraordinary items. And here I'd like to go through a little bit more what those extraordinary items are. And as you see here, they fall into 3 categories. First of all, restructuring charges, of course, of SEK 1.7 billion. This is business as usual, and we have indicated a total of between SEK 6 billion and SEK 8 billion for the full year, which also is in line with the amount we had in restructuring during 2016. The second category is write-downs. This is as a direct consequence of some of the strategic decisions that we have made and which we communicated in the end of March. So here, we're talking about some specific assets and capitalized development in intangible assets that we have taken an impairment on, following those strategic decisions around focused portfolio.

The third category is around provisions and adjustments and for customer contracts, and this can be broken down into several different components as well. First of all, we have, as you can see, hit on net sales by SEK 1.4 billion, and this relates then to certain settlements with customers, but also the revaluation of discounts in certain customer contracts where volume has decreased.

And secondly, we have had to reassess the value of our trade receivables in connection with some customers, some contracts, and taken an impairment there or has set the provision, I should say. And then, finally, then, part of the SEK 8.4 billion also, provisions in connection with some specific projects. And those projects are mainly in the IT & Cloud space. We have discussed them before also, explaining that those are complex undertakings. And here, we have seen, during first quarter, some negative development, which has made it necessary for us to make provisions for costs where we don't see that we will be able to recover those costs with future revenues.

So all in all, SEK 13.4 billion in the quarter in extraordinary items. And as you can see then, the underlying business, excluding all of those items and on a gross margin of 30.5% and an operating income of SEK 1.1 billion.

Finally, on this picture, we talk about the cash impact, and we are mainly talking about provisions here. So by definition, it's an estimate of future impact, but we estimate that cash impact to be SEK 5.8 billion, and this will come over several years, depending on how specifics in those contracts and projects develop.

We move on to look at the geographical sales split, and here, we have used the new split of the company in terms of geography, the market area structure. So as you can see here, Southeast Asia, Oceania and India grew slightly by 1%, and that growth really comes from Southeast Asia, where the growth continues in mobile broadband investments, while India is showing challenged markets with consolidations coming up, but also a challenging pricing situation on the market for operators at the moment.

Northeast Asia, flat year-over-year. As you can see, Mainland China declined somewhat, but we do see growth now coming in, in Japan and Korea, offsetting China. In general, I would say China is stable, relatively stable market, from what we see.

North America, also stable as a market. We see downturn in our own sales year-over-year, and this has mainly to do with the Managed Services contract, which we have talked about repeatedly the last couple of quarters as well.

Europe and Latin America, different story. Here, sales is really down by 16% year-over-year. And of course, we do see a slowdown in Latin America in general, an uplift in Mexico, while Brazil is compensating somewhat for that. But overall, Latin America down with challenged macroeconomics as well. When it comes to Europe, the level is continuously low when it comes to CapEx investments by operators, and this is also reflected in our downturn. Finally, Middle East and Africa, challenged macroeconomics and this is impacting us indirectly, of course, via the investment budgets of our customers.

If we move on to look at gross margin and the delta here, what explains it year-over-year is really, first of all, the IPR licensing revenue piece, and Börje mentioned it already that, and as many of you will remember, Q1 2016, we had a couple of one-off items in IPR and licensing revenues and these were not repeated now. So with the total volume in IPR of SEK 2 billion, and that's then on the top line, that fell short compared with last year quarter 1 by SEK 1.8 billion. And this, of course, has an impact on gross margin.

Networks, fairly stable. If anything, a little bit positive, while both IT & Cloud and Media then caused the gross margin, overall, to come down for the reasons explained here on the slide, and we can move to the next one.

Looking at the gross margin on a sequential basis instead, we see that we actually improved gross margin from fourth quarter, and the part which is positive here, to start with, is on the Network segment side as well where the share of capacity business as well as the share of IPR business increased. And frankly, the absolute amounts are down, but of course, when we look at gross margin percentage, this has a positive impact because the share was higher. IT & Cloud, again, reduced margins in those large transformation projects that we talk about and the IT Managed Services as well, while Media, in this comparison, was flat sequentially.

Operating income then, if we look at this bridge, again comparing with Q1 last year, IPR took its toll on the operating income as well, of course. With shrinking volume and the gross margin decline that I just described, we also had negative impact on the operating income.

Expenses, I'll come back to in a second because that contributed slightly then to the bottom line in this quarter. Cost savings, as Börje already said in his intro here. We are not satisfied with our cost structure, and we need to do more. That's quite clear. We have the ongoing program, which is not yielding the sufficient results, if we look at the current market situation as well as the position of the company.

So here, we will focus more, do more on structural actions. And of course, now that we have stopped the specific guiding on the SEK 53 billion in OpEx, it's very important to note this does not mean that we put less effort on cost reductions because this is of course key to our competitiveness going forward and we aim to surpass this ambition over time, while, of course, the cost level can temporarily increase as we invest in certain of the areas to regain leadership.

The gross cash position then, you can see the operating cash flow in the breakdown there. Of course, also very impacted between net income and operating assets from the extraordinary items, but it washes out on the total. And you can see restructuring cash out in the quarter was SEK 1.6 billion. Investing capital, investments are coming down on CapEx now as we are closing or completing the ICT center build-out. And then you see that the effect of the EUR 1 billion raised through to Eurobonds is coming into the cash flow here as well, and that's the SEK 10.9 billion that you can see. But overall, net cash decreased by SEK 2.9 billion in the quarter.

A few words on reporting then. We are going to change the external reporting, latest Q1 2018, to reflect our internal organization. What we do now as a small first step is to rename the Media segment to Other, and we will also go from the 10 regions that we reported on before to 5 market areas to reflect how we are now setup, going forward, in Ericsson. We will of course, provide you with the restated numbers well in advance as well.

Finally then, these are the planning assumptions that we have included in the report, some of which are repetitions from earlier, but we want to put them here so you know how we see the outlook. And first of all, we expect then that the trends that we see currently in the industry, but also in the business mix, now replaced in mobile broadband will prevail during the year. We stick to our previous estimate of minus 2% to minus 6% decline in the rent equipment market in dollar terms.

We reiterate the fact that the rescoped Managed Services contract will have an impact on sales. And then we have a new item, which you'll also find in the report, and that's the fact that, now, with our strategy regarding Managed Services and NRO, which includes certain streamlining and addressing low performing contracts, we expect that the top line effect of that will be up to SEK 10 billion by 2019.

We repeat, when it comes to the IPR business, that the baseline on the contract portfolio as it stands is around SEK 7 billion. And finally then, that the restructuring charges for the year will be SEK 6 billion to SEK 8 billion, as I said before. This is what we see now based on the visibility we have today.

So with that, thanks a lot, and back to you Börje.

Thanks, Carl. So just to wrap up before we get into Q&A. What we see now is, as we said, we had a tough quarter, a challenging quarter. We put our new strategy in place, which leads -- or which includes much more focus on areas where we can and must win. We're also allocating more resources to increase the pace on innovation and new business development. Our new strategy or focus strategy, the purpose of that is of course to reestablish or revitalize our technology and market leadership, but it should lead also to restoring profitability, and we are big believers in, first, we have the stability, then we need profitability, and from there on, we can grow. So our near term priority is to restore profitability.

We're going to take significant actions internally, and we're doing that. We're simplifying our organizational structure under a new leadership team, and we expect to see significant improvements in profitability already in 2018 from the actions we take now, and they should start to come through during next year. We also see, with our focused strategy, we're on the path towards doubling the 2016 operating margin when we are beyond 2018.

With that, I give the word over to Peter for any questions.

Yes. Thank you, Börje. So operator, we are now ready for the Q&A session. So please.

(Operator Instructions) Our first question comes from the line of Pierre Ferragu.

Börje, I'd like to come back to the area for which you're considering strategic options. So I had in mind that Media of course and cloud infrastructure as well maybe IP routing. And so when we look at the new reporting structure that you've given over recent months, it looks like these areas, actually they're losing a lot of money, like SEK 8 billion to SEK 10 billion, in what I have estimated, and so my question was what do you really mean by strategic options, what are the options you have at hand? Of course, we can imagine you could find a buyer, but I would assume like the risk that you don't find a buyer for some of these activities is real. So if you don't find a buyer, are these activities that you would shut down as well? Would you consider that option? What I'm trying to say, though, is whether, over time, we should consider these activities are not going to be part of Ericsson anymore.

No, I understand. You want a backstop?

Exactly.

In reality, what we have said, and that's what we're doing, we are focusing our efforts on 3 parts in the company, which is Networks, it's Managed Services and it's the Digital Services. That's where we are going to focus our investments in order to make sure that we win in those areas. That includes investing in our current product portfolio for 4G and LTE, of course, in Networks. It includes investing in our solutions for Digital Services and it includes investing in automation and basically getting the benefits from more use of old technology in our Managed Services. That's our core focus. Then we've said we will explore strategic options for our IT & Cloud infrastructure hardware business, which is just a portion of what we're doing there, then we are looking at alternatives, which basically have the purpose to make our solutions more attractive for our customers. At the end of the day, that's really what matters. We have also said we're pursuing strategic opportunities for the Media business, which of course it includes all different options, partnerships, divestitures, et cetera, but the reality here is we are focusing on making sure we maximize the value at the same time. We think we have great products going into the market within the Media business, and we already see traction on those. But we think in order to gain the critical scale to actually succeed in a very fragmented and evolving Media marketplace, we need to look at different opportunities to do so, and that's what we're doing right now.

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

A couple of questions. You said you expect -- you had some write-offs in the IT group, some strategic realignments there that increased your cost. I'm just curious if that reorganization of the products that you wanted to make traction in the market (inaudible), did you run into technical difficulties that said you basically said you aren't going to be able to get the cost structure there. I'm just trying to get a feeling for what happened in the IT structure that caused its big write-off.

Do you want to take it?

When it comes to the write-offs and the provisions that you talked about that, it's really related to some specific customer commitments and contracts that we have where we have had negative development in those contracts. And therefore, estimating then the future business plans of those contracts, we see that we do have excess costs compared with what we will be able to invoice the customer and get paid for, and so this is really the issue. Very complex projects, and we have now, given these recent negative events, take a new view on that. We estimate the cost overruns to enhance the provisions.

I guess, what I'm trying to get to is the change in terms of the contract by the customer or the scope of the contract or was it just realizing you aren't going to be able to deliver on what the original terms for the cost that you originally thought you could?

I think when it comes to scoping, we have learned a lot during the journey here and some of those projects, I think we can say, could have been scoped in a better way.

These are -- I think what we're trying to say is really that these are very complex projects, they're multiyear implementation, phased under multiyear, when they are up and running at the customer premises or customer solutions, more than premises. So when we have done the scoping to some extent, we could have done it better, and that's what we're working on improving for the future. It's not that we're not capable of delivering the solutions, we just think it's going to get slightly more expensive than we expected before on a couple of these projects.

So it sounds like less than a change in the market or eroding market profile and more just learning curve on how to do these projects and how to scope them better?

That's correct. Okay, ED, you're good with that?

He had one more question.

You had one more question?

Yes, one more real quick. We're kind of reliving, to some extent, the microcosm we went through from the 2G to 3G transition, way back when you had -- the scope of the industry was too large to support the demand profile and went through that big wave of consolidation. And it sounds to be similar here in that 5G or even 4G is not keeping up demand-wise with this -- with the base of suppliers that we have here. To what extent do you see -- I know there are trials going on, on 5G, any change or any hope in terms of pickup in demand for the new systems that will probably release some of the pressure on your sales force or your sales line? Or are we looking at a longer slog before we can see a pickup in revenue or a decline in the kind of base of suppliers until we get to some sort of rationalization in the market?

Well, that's a few billion dollar question you're asking there. The reality is -- the way I at least look at it is the LTE technology will live for a very long period of time, and you can look at the demand for data through the handsets or through the terminal. It's growing still at a very high rate. That will, for a long period of time, be provided by the LTE generation. So it's really important that we continue to invest in technology for 4G. Then I think that 5G is starting to take some definition and some shape, and we're starting to see field trials, big commercial deployments are still going to be a few years out, but I do think that we should think differently of that market whereas 4G really will say human communication channel, 5G will be increasingly utilizing machines. So it's going to be a different market when that comes, and I think that's what we should prepare ourselves for. So reality is we still see a pretty good 4G market that will then later be complemented by 5G.

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

Just 2 quick ones if I could. One, I wondered if you could just talk about what's changed in the market since the start of the year, if anything, versus expectations. I think you touched on pricing in India and M&A there, and also, obviously, Mexico and Brazil. But I wonder if you could just widen that out in terms of whether you've seen any other changes since the start of the year. And then secondly, I just wondered what systems you are now putting in place, and I'm talking about process and internal systems to Ericsson to avoid some of the visibility issues that we've seen in the past. Is it more around price war rooms or what kind of internal systems and processes and checks and balances have you instilled?

If you look at the market, I think Carl outlined what we see. We don't see a whole lot more than that. I mean, it is a very competitive environment, but it's a tough market. We have said already in our strategic forecast, which has not changed, that the market this year would fall 2% to 6% in USD terms for equipment. We still think that's a reasonable estimate. And then, after this year, it would start to level out. So that -- nothing has changed in that. So I think that's kind of what we see. We don't -- we wouldn't say anything else. We see it, it is -- we're so geographically diverse so we'll always have some regions which are weaker or stronger than others. And of course, it is a challenging part -- in parts of the world like Mexico and India, et cetera. And those, we're seeing as well. If we look at the way we run the pricing, it has a big element, actually, of price control in the way we run already. So that's not a big difference. Where we're changing is more on scoping of big transformation projects to implement and streamline our service delivery. So we at least mitigate the risks in them as much as we can. Did I miss any question? Talked about systems to avoid previous situations that we have had right there, Gareth. And that's what I'm saying -- I think, that I think that this is about the project scoping that we're trying to get the processes in line in order to make sure we mitigate the risks of scope issues. So it's all about a learning process within the company.

Could you elaborate on that? Is that regular meetings between services and product? Is it having software systems in place to work through it? What's of the...

This is why we actually changed the organization where we have moved products and services together now. And this was really in IT & Cloud area so we have merged our product organization with a service delivery in order to get that tighter process to manage the scope better.

Our next question comes from the line of Tim Long from BMO Capital Markets.

A few-parter here, just talking about getting the longer-term margin outlook. Just give us a little color on how you think the gross margin and the OpEx split will look, getting to those numbers. And then, just curious about the revenue backdrop also to get to that. It sounds like you're assuming some stabilization in '18 and probably beyond. Could you talk a little bit about how you think the gap is filled before we get the real 5G build going? So what do you think it is following this year that will help the industry recover a little bit? Is it just pure capacity upgrades? Or maybe there's early 5G? That would be helpful.

Carl here. Maybe I'll at least take the first part where you talked about the margin development going forward. I mean, what we do say now is that the actions we are taking now and following the focused strategy will give, clearly, an improved profitability by 2017 -- or sorry, by 2018, I'm sorry. And that we will double then profitability going forward. So of course, it's around continuous improvement in Networks. We talked about some of the factors here earlier, including Ericsson Radio System, but also services streamlining. Of course, when it comes to IT & Cloud, many actions to improve also the situation there in terms of scoping on new contracts and managing the existing complex contracts that we have. And the exact numbers of gross margin, we're not really talking about in the report, so I think I'll leave it at that, that clear improvement by 2018 through the actions we are taking now. When it comes to costs then, we have, as we said, then, stopped the specific guidance on the SEK 53 billion in OpEx. And yes, we're aiming for better numbers, but temporarily, then, as we said, we might also increase the R&D piece of that number in order to invest in some of the areas where we need to regain leadership. So that's I think as much as I can say.

Great. Thanks, Carl. Are you happy with that, Tim?

Yes. Just curious on the revenue side, what do you think for the industry will help things stabilize?

I think we haven't changed really our strategic forecast from November where we said 2018 total equipment purchases in U.S. dollars would stabilize. Nothing has changed in that outlook.

Our next question comes from the line of Simon Leopold from Raymond James.

I wanted to see if you can elaborate a little bit on IT & Cloud, maybe some more specifics would be helpful. And what I'm really trying to get at is how to think about the revenue and profitability trends for the balance of this year. And maybe part of it is that I'm a bit lost by the pro forma or the gross income being significantly negative even on somewhat similar revenue year-over-year, although down slightly. So I think I'm a little bit lost on the gap. But ultimately, I'm trying to get a better understanding of the trends.

Yes. Again, the trends for the rest of the year, we're not really guiding on. But we say that, especially in IT & Cloud, by 2018, we will see effects of the actions that we are taking now. So I think that's really -- and we've described what the actions are that we are taking as well. So the impact will be visible in 2018.

And I think the challenge here is also that we see that we need to -- and that's what we said on the cost side. We are going to see some increased investments also to make sure that we accelerate our new products and bringing them to the market faster, and that we will also probably have some costs for changing the structure in there. That's what we see right now, and we haven't really guided any more specifically than that.

Well, I guess, what I'm worried about is that if we make assumptions that are based on our prior models and sort of ignore this March quarter and maintain assumptions is a risk of disappointing investors in future quarters. If we make adjustments that are too extreme, then it sort of throws the credibility of what the estimates are. So if there's anything incremental you can give us in terms of what -- how to think about it differently versus what we may have been thinking last quarter.

I think the -- let me describe what in reality has happened, which is that this legacy product portfolio in IT & Cloud has fallen faster than any time before. So call it, it's an accelerated reduction in there, and we have not been able to compensate that with our new product portfolio. And at the same time, you see an increasing volume of services, which is due to large IT transformation projects and they are growing as a portion of the business area. In addition, those services have had a compressed margin in Q1, more so than before. And I think that's really what has happened, and we have said that we will not guide on the detailed quarters going forward. But there, you have the causes behind the deviation in Q1.

Our next question comes from the line of (inaudible) Smith from [ Agency Partners ].

I just wanted to revisit this issue of the customer provision. And is it in your analysis that the sales incentives were inappropriate and they rewarded winning short-term contracts, but not long-term profits? Or is it, in your analysis, more of an engineering issue about being able to deliver what the salesman promised?

No, it's -- the -- I think it's fair to say that we do have a number of very large IT transformation, digital transmission projects at our customers. And here, we're -- this is a new market. So it's an element of, call it, not knowing exactly how -- what demands you would put on a new system, so we label it as where we have to improve the scoping. So it's more our old ability to scope these projects well enough when they're in areas that have not -- we nor anybody else have done before. And that's really why we're -- this is, call it, a step-by-step learning experience where we have taken -- of course, here, you can accuse us of having taken some projects with now we have to provide again. But they're really done because we are entering a new area where it takes some time to build the experience base internally to scope them well enough. And it's not sales incentive or anything like that, it's rather our -- when you enter unchartered territories, by definition, you don't know all the facts.

So do you imagine this is an industry-wide problem, just inability to scope correctly?

I don't know, but I can only judge from ourselves. I think we have taken the steps now to learn from our past experiences in order to make sure that we're better at it going forward.

Okay. A quick clarification. Would I be reading it right when you say, strategically, you're looking for Ericsson to be a somewhat smaller company, but a much more profitable company? Is that a good way to put it?

The -- what we have said is that we will manage ourselves out of unprofitable projects or contracts within Managed Services and NRO. We have also said that we're pursuing strategic opportunities for some parts of the company. So your assumption, I think, could basically be confirmed with that, right.

Our next question comes from the line of [ Terrence Anthony ] from BNP Paribas.

I just had 2 quick questions. Do you think you can hold on to your investment-grade rating given the cash outflow for the provision for the increased costs from your added investments, the restructuring, which isn't paying off and the cash generation remains weak, and on top of that, you've got the DOJ investigation overhang? And the second question is, again, in terms of your contracts, do you anticipate any further provisions as some of your other customers try to renegotiate them?

Should I take it? When it comes to investment-grade rating, of course, it's something important for us. And the board has also stated that earlier that investment-grade rating is something we deem important. Of course, we can't really speculate what the rating agencies will do, but we are in close contact with them, of course, to deal with this. So let's see. For us, it's important to remain investment-grade. When it comes to further provisions, I would say, I mean, by definition, what we have visibility on now is what we have taken action on in the quarter. So all the provisions we have done is based on our assessment of the current situation. And this is all we have visibility on now. Of course, as in any project business, you don't know if this is -- it has an inherent risk to it, of course, this type of business. But we don't have any more visibility into that at the moment.

Okay. Just one quick follow-up. Would you be willing to raise equity to defend that investment-grade rating?

Now. You're asking very hypothetical questions. I think what we're -- the rating is of course, important. We believe we have a plan in place that puts us in a solid financial position to deliver on that. That's really what we are focused on.

Our next question comes from the line of Johannes Schaller from Deutsche Bank.

Two, if I could. Firstly, on IT & Cloud. I think it's clear that you have a lot of strategic options here, but if we assume you would not find a buyer or a strategic partner for that business, but you would have to keep operating that business as it is right now, can you outline a little bit more what your strategy would be in that case? I think it would be very helpful for us to understand the plan here a bit better. And then, secondly, Börje, I think, when you came out with the new strategic plan, you said the R&D budget would be more or less the same going forward, but it would be allocated in a different way. You seem to be indicating an increase in R&D now over the next quarter. So maybe you could help us understand a bit better what has changed over the last weeks and your thinking about this.

If we start with the first question, it's -- we're -- we have laid out the strategy 4 weeks ago, and we're focused on implementing that. That includes pursuing some strategic options or alternatives on parts of the business. We haven't really focused on -- assume for the moment, we do not achieve that. What we are focused on is executing on it instead, and so we're -- let me not go into any hypothetical questions, basically. So here, we don't have any reason to not believe we can deliver on the strategy. If we look at what we see that -- and this may have been poorly expressed a few weeks ago, but the reality is we saw already at that time more of a shift in costs. So we would -- I don't think we would materially need to increase R&D, but we saw that we may need to shift some into R&D, but where we see that we need to invest more right now is actually in the introduction of new products and to drive acceleration of our new product portfolio in IT & Cloud, and that's really where we see the need for more investments.

Understood. So maybe just a clarification on your first answer to IT & Cloud. So should we take from that, that, really, you're not really thinking too much about running this business on a kind of Ericsson-alone basis, but really, your strategic priorities would be for a partnership or some sort of other transaction?

That's correct.

Our next question comes from the line of Achal Sultania from Crédit Suisse.

So a couple of clarification questions from the morning's call. I think if I look at the U.S. trends, I think revenues were down 10%. Can you give us a sense of whether the RAN part of the business in the U.S. was actually flat? And I'm just trying to get a sense whether the trends in the U.S. are actually improving or not versus last year.

Yes, it's Carl here. Yes, RAN market and sales flat. The main explanation for the 10% drop in sales in North America is really this Managed Services contract that we were talking about before.

Okay. And then just, basically, in one of your comments in the press release, you talked about SEK 10 billion headwind coming from low margin contracts that you have in Managed Services and Network Rollout. What should we assume for -- this is from a base of 2016? Or this is from a base of 2017, this SEK 10 billion impact?

Well, you should look at this from, of course, a 2016 number. So -- and what we're saying here is that, that's the type of -- that's -- it's in order to give you some guidance on what the size of the business we're trying to change the terms of or possibly Managed Services outflow, and that's up to SEK 10 billion. So it's to give you some sort of qualification to it.

Okay. But basically, of that SEK 10 billion, is it safe to assume that almost half of that would be this one large U.S. customer in that case?

No, no. That's all red. They resolved, right? That's already not part of it. It was not part of Q4 either.

Okay. I'm sorry, I'm still confused because I think the large U.S. customer you had, that contract expired, I think, in Q3 last year. So should we use like -- should we use a 2016 base to measure this SEK 10 billion headwind or should we use 2017 base?

Well, let's think about this how to explain it, but of the contract volume we had at the end of last year, we see that about SEK 10 billion of them in NRO and Managed Services, we would need -- we are in the process of renegotiating or changing the terms of. Is that clear?

Yes. Okay, okay, that makes sense. Okay, that makes sense.

And the last question will come from the line of Richard Kramer from Arete Research.

Two quick ones. Just to sort of follow-up on some of the points that have been raised. I guess, Börje, for me, the key question is do you believe you have or are potentially continuingly losing business because of all the uncertainty and what's clearly extensive pending restructuring you have still to do in the business? And again, in this sense, I'm not sure if we should read this current announcement as an incremental or further need for restructuring or is this just a sort of more urgency behind the plan that you laid out in late March? And Carl, equally, can you tell us the SEK 5.8 billion that you mentioned, is that the only cash component of restructuring we're likely to see over the next few years? Because it seems that between the provisions and restructuring you've announced that we would have expected a good bit more.

Okay. If I talk with my -- as a matter of fact, we believe we have, over the last 5 years, actually experienced a loss of market share. We have -- what we're seeing now is we think that has flattened out during the last few quarters, partly due to Ericsson Radio Systems, partly due to other competitive product offerings we have. So we don't believe we have lost market share, but I think our numbers for the first quarter really shows the need to keep a very high pace at the restructuring we're doing and a bigger sense of urgency in the company.

Okay. So on the second question, Richard, Carl here. The SEK 5.8 billion refers to the SEK 8.4 billion relating to the customer contracts. So if I had to estimate the cash component, that when it comes to normal restructuring charges, yes of course, it will be significantly higher. And we estimate, as you saw the charge to the P&L, SEK 6 million to SEK 8 billion, and the cash impact is rather similar to that.

And just to be clear, are you telling us that we shouldn't expect further, given the tone of this report and the, certainly, Börje, the comments you made about IT & Cloud in the first quarter and the legacy business there, isn't it prudent for all of us to expect further restructuring coming sort of to resolve your dissatisfaction with the level of profitability over the course of the year beyond what you've announced in March?

No. That's -- we, in a way, we -- when we did the announcement in March on the SEK 6 billion to SEK 8 billion, you remember, we raised what we think will be the normal restructuring at the time to SEK 6 billion to SEK 8 billion, and that's in reflection of what we see we need to do on IT & Cloud. That has not changed in the last 3 weeks.

By that, we are closing the Q&A session. And maybe, Börje, you want to have a closing remarks?

I want to say it's been a tough quarter, but I would also highlight that our Network business, which is 3/4 of our sales, have been very stable, performed well. And we have, clearly, profitability issues in IT & Cloud and Media, where we are taking actions in order to mitigate those and improve the profitability significantly for next year, but then establishing a new baseline beyond 2018. So with that, thank you.

Thank you, Börje, and thank you all for today.

Thank you.