Telefonaktiebolaget LM Ericsson (ERIC) 2017 Q2 法說會逐字稿

Welcome to Ericsson's analyst and media conference call.

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 the call.

Thank you.

Welcome to the second call for today.

With me here in the room I have Börje Ekholm, President and CEO of Ericsson; and Carl Mellander, our Chief Financial Officer.

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 results may differ materially due to factors mentioned in the press release and discussed in the 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 the word to you, Börje, please.

Thank you, Peter, and welcome, everyone, to this call and -- for the second quarter of our performance.

So if we start with the first slide, we launched a focused business strategy about a quarter ago.

And we have -- and this strategy, of course, was based on a certain assumption about the market and incorporating that it would sustain a difficult market conditions during our implementation.

It included steps to basically have a product-led and technology-led focus in the strategy, built upon achieving technology leadership.

So it included to invest in R&D for competitiveness in our networks.

We want to stabilize the IT & Cloud product road maps and projects, a large digital transformation project ongoing and focus on the growth of new products.

It also included to restore profitability in Managed Services and for the future to invest in automation.

This focused strategy still is in place, and we continue to execute on that during the quarter.

And already when we launched it, the focused strategy included a review of our cost.

So already when we launched -- or already when we launched the program, we said that.

And during the second quarter, we have now been able to quantify and plan the activities we will implement.

So when we look at this, we now see that we can take out at least SEK 10 billion in run rate improvement on the costs side during the coming 12 months.

The costs we take out will be primarily in service delivery and in group common costs, such as IT, real estate and general and administrative.

What we see now is also that we see a tougher general RAN market, where we now expect the market to decline high single digits.

And as a consequence of that market outlook, we see we need to accelerate the pace of implementation and execution of our cost reduction programs.

And we are intensifying the focus on that and that will, of course, be the near-term focus over the coming 12 months.

As we have reviewed our project based on the new focused business strategy, we have also been able to quantify some risk in our market and customer projects.

And we estimate those to be a potential risk of SEK 3 billion to SEK 5 billion over the coming 12 months.

So we see our focused strategy continues to be in line for doubling the 2016 operating margins beyond 2018.

But of course, we recognize that it is challenging coming 18 months in order to strongly focus on executing on this strategy.

We'll then move forward to a summary of the second quarter, we see that the underlying performance is challenged.

Sales fell, if you adjust for foreign exchange, with 13% year-over-year.

We see Networks margins decline due to lower software sales.

The decline was partly offset by higher margins in our Ericsson Radio Systems.

So we are making continuous strides on that product.

We see continued significant losses in IT & Cloud, partly explained by change in capitalization of development costs.

But still the losses are at a level that is not sustainable, and we need to focus on executing our turnaround plan in that area.

Operating cash flow was 0 during the quarter.

We're also starting to see some initial signs of traction in our strategy execution.

We had a breakthrough contract with Vodafone U.K. that we lead them into 5G.

We are also receiving very positive feedback from customers, and we're seeing that on contracts as well on the -- on the Ericsson Radio Systems and its competitiveness.

And it's worth to remember here that Ericsson Radio Systems allow the operators to have a baseband which is software upgradable for narrowband IoT and 5G, which makes it, in that sense, a future-proof investment compared to some of our colleagues in the business.

We also signed an agreement to divest Power Modules, which we expect to close during Q3.

We have also started the journey to review and resolve challenged contracts in Managed Services.

We have been able to either exit or renegotiate or transform about 1/5 of the contracts under review.

On IT & Cloud, we have put a lot of emphasis on securing the product road map and securing our large digital transformation projects.

These are, as we have described before, difficult ones.

So we have felt that first we need to do is to make sure we stabilize them in front of the customer.

And that's what we're doing.

We also see that we have started to increase our investments in R&D.

And I want to actually give some extra words on that because there are a couple of reasons why we need to invest in R&D.

One is, of course, to secure that we have a competitive product portfolio beyond 2019.

But equally important is that by investing in R&D, it allows us to work -- to improve the gross margin of our business.

And that's equally important in order to finance the future Ericsson.

So we are accepting higher R&D expenses that will over time be paid back in greater gross margins.

If you look at the market areas, we see a rather large decline in Europe, Latin America, Middle East and Africa.

There are a little bit different backgrounds here.

Europe and Latin America is, of course, impacted by slower mobile broadband investments in the market, and we feel that this putting pressure on us.

We also see continued slowdown in Latin America, although Brazil has a little bit more positive outlook.

In Middle East and Africa, I would say it's still a very difficult macro environment, even though we're sensing a little bit more optimistic view from some of our customers.

In North America, the big -- it's actually a stable underlying development.

The reason for the decline is really the loss of the Managed Services contract we had in Q3 of last year.

We also see IPR revenues down with about 10%, which is worth to highlight.

So then stepping into the segments.

We can see that sales for Networks were down 14%, adjusted for FX.

It is -- the large Managed Services contract is one explanation and the other is lower software sales and lower mobile broadband investments.

Still, the operating margin were quite decent, being almost 10%.

And here you'll see that the decline is really due to the sales falloff and hurting also gross margin.

But as a matter of fact, underlying here is a little bit different moving pieces, where we've been able to offset the lower -- large part of the lower software investments with Ericsson Radio Systems.

We are -- we have started to increase our investments in R&D, which is to some extent visible in the numbers here as well.

The key driver for the long-term gross margin of this business and the operating margin and performance is the penetration of Ericsson Radio System, where we are on the way to basically have 100% deliveries in 2018 and we're halfway there with 49% year-to-date.

IT & Cloud has lower sales of -- by 10%, FX adjusted.

And here it's 2 things going in opposite directions.

One is the legacy portfolio falling off relatively quickly.

And our new portfolio of new products starting to grow but cannot offset.

And the growth in new products are 7% over the last 12 months.

So there is an underlying growth.

But it's still not large enough to offset the decline in the legacy portfolio.

So the operating income here is minus SEK 2.4 billion.

SEK 800 million of the deterioration compared to Q2 last year comes from lower capitalization of development costs.

We also see a lower gross margin and lower sales, which is clearly contributing to the deterioration also.

Here you see the underlying OpEx to be slightly down if you adjust for the development expenses.

We recognize that our IT & Cloud are underperforming, and we need to attack that quickly.

At the same time, we need to work with our customer engagements on the other side, which is why we have said the first step is to create stability: Stability in road maps and in transformation projects that are ongoing.

So we're starting to see some emerging signs that we're getting increasing stability in the projects.

We, after that, needs to work on our profitability, which is taking out costs, making the structure more efficient, so here it is in service delivery.

So part of the SEK 10 billion comes in service delivery here for this part and also in reduced G&A.

We intend to reinvest efficiencies we are going to get in R&D.

So here it's really, we can assume a stable level of R&D.

Longer term, we see growth as we launch new software platforms.

In our Other business, which predominantly is the Media business.

Also here, we see legacy portfolio falling faster than we're able to compensate the growth in new products.

And so total volume is down, or total sales FX adjusted is down 11%.

Operating income is also down, which is due to lower sales, but also from the capitalization -- lower capitalization of development expenses.

We are all starting to see some benefit of the cost programs we have put in place in our Media business, which has led to a sequential margin improvement during the quarter.

And as you know, we are pursuing or exploring new strategic opportunities for our Media business.

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

Thank you, Börje.

Good morning, good afternoon, everyone.

So we will then drill down into some other aspects here.

Gross margin, to start with.

And we show here, over the past 6 quarters how gross margin has developed.

Obviously, we had a sharp decline in Q3 last year, and we have stayed around that level since then.

And in Q2 last year we had an unseasonably strong software sales.

So it's a bit of a hard comparison.

But clearly, the level we are at now is highly unsatisfactory and it's driven by the low software sales and IT & Cloud losses that Börje was talking about earlier.

But obviously, here we are accelerating our actions to take out costs out of the business, but of course as well as investment in R&D in order to improve the gross margin situation, which is clearly not on an acceptable level.

If we move to the operating income bridge, we start with -- from the left then, with the operating margin Q2 last year, excluding restructuring of 7%.

There's a change in the way we report revaluations and realization effects in our hedging.

So the impact was actually positive in the results now in the quarter, but it ends up in the finance net as opposed to last year due to how we fund the forecast hedging.

Then the second aspect is exactly the capitalized R&D, the SEK 1.1 billion delta between the quarters.

So as you can see, the last quarter there was a positive impact from the SEK 0.7 billion, meaning that we capitalized more than we amortized in these R&D platforms.

But now this quarter, we're actually amortizing a higher amount and that means that the net effect is negative SEK 0.4 billion instead.

The volume we've talked about and how our sales have declined.

And we've also talked about the reasons for the gross margin decline from 33% to 30% so I'll speak more about that.

And then we have slight increase of R&D and improvement in SG&A leading then to the 1% operating margin that we have reported today.

If we move on then to operating expenses.

So here again, it's fair to say that the overall OpEx here is impacted by, again, by the capitalization of R&D and that changed effect that we talked about.

Still, of course, OpEx is still too high and needs to come down, and hence the cost program that we will be talking about in a minute as well.

We can move to that page actually, which is around SEK 10 billion cost reduction efforts that we have now communicated today.

And let me back a little bit up here.

Of course, in the strategy that we are now 3 months into, we also talked about the need to address our cost situation.

It's an absolute strategic imperative for us as well.

And today, we have chosen to quantify that cost.

And we are saying that at least, at least SEK 10 billion of cost will be taken out of the business.

And we can break it down in different ways, as you can see here on this slide.

First of all, 50% service delivery and 50% common cost, which includes then G&A, but also platforms like IT and real estate and other things, which together form the basic infrastructure for the company.

And there is potential to take out costs there.

In terms of understanding how to measure this, you can take a baseline in the current run rate, which is basically Q2 times 4. And important to note that when we say at least SEK 10 billion, there are also other elements will -- which this will come on top of.

I think that's important to say.

So for example, it will come on top of the ongoing reductions that we have.

We are mentioning the example of supply here, which also will impact cost of sales positively.

It will also come on top of any rightsizing that we, anyway, would do in terms of as a response to, for example, lower business volumes.

And it will also come on top of execution of strategic opportunities if we, for example, exit business or if we would divest a part of the business.

And when it comes to those items that I mentioned, rightsizing and strategic opportunities.

There, there is, of course, an opportunity to save both on cost of sales as well as OpEx as well.

Within the SEK 10 billion then the split that we state today is SEK 3 million (sic) [3 billion] in G&A and SEK 7 billion in cost of sales.

We have earlier communicated a restructuring charge range between SEK 6 billion and SEK 8 billion, as you know.

And what we're saying today is that we will end up in the higher end of that range in 2017.

When it comes to next year's restructuring charges, we will come back to that later on.

This will impact all segments.

And we're starting very detailed planning and implementation immediately of this cost effort.

Okay, if we move on to the next piece, which is about the cash situation.

So operating cash flow ended up at 0, meaning that we were able to compensate for the loss in the quarter with improvement in working capital.

So that is good and we're beating last year, both the quarter isolated as well as year-to-date when it comes to the operating cash flow situation.

That's very good.

When it comes to financing, 2 elements to mention there.

You see the SEK 5.6 billion.

That is mainly the repayment of a Eurobond, a EUR 500 million bond that was repaid according to its maturity in the end of June.

And the second item is a dividend paid out to shareholders, SEK 3.3 billion.

And taken all together then this quarter, these aspects reduced our gross cash SEK 11.3 billion and net cash change has been SEK 4.3 billion.

If we move on, I want to highlight 2 other aspects that we talk about.

And Börje has mentioned them briefly earlier.

The first one is around additional project risks.

And as you know, in Q1 we announced certain provisions and write-downs for customer contracts and similar.

That was the SEK 8.4 billion.

Now we have come, of course, deeper into the analysis and looking at the impacts both of our focused strategy, but also realizing some other effect in the contracts partly driven by the macroeconomic situation, lack of hard currency and that type of issue.

And when we go through that then, we see that there is a risk for further hits to the P&L.

We had done an estimate here saying that between SEK 3 billion and SEK 5 billion might be the hit in the P&L the coming year.

And this is then with all the current visibility we have.

Now these are the identified risks and an assessment of what that might bring.

Important to note that a smaller percentage than earlier will impact the cash spend, so it's really 30%.

And what are these risks?

And there are different types.

One is related to payment risks, where we have customers with difficulty paying us.

Of course, we are in situations there with customers to resolve those situations, but this is what we see now.

There are also some challenging projects.

Could be cost situations, scoping et cetera, which we are, of course, working hard to turn around as well.

And then following the strategic direction with more focus.

This is a transformation of our company and there will be costs related to, for example, exiting parts of our businesses which is not performing today.

So that's about the project risks.

Then when it comes to the capitalization, which we have already mentioned several times here.

This is really due to some shifts that we see both in technology and in portfolio, but also in ways of working in the company.

Just to take one example, we have capitalized the development related to our software releases.

And those releases used to come twice per year.

So then capitalization has been done during 6 months to develop it and then the amortization has, again, happened over 6 months until the next release comes out.

But that logic has changed with more frequent releases.

So we are going to discontinue that practice.

It is not relevant anymore.

That's one example.

We also capitalize other R&D when we talk about product platforms.

This is very -- highly regulated way of doing it.

Now we see that certain platforms are either completed, so we don't capitalize on those anymore.

Others are discontinued in what we communicated in the first quarter following strategic choices.

So all in all, this brings the capitalization down, meaning that R&D expense is to a higher degree taken in the P&L immediately.

So this is what this is about.

And the impact then, the rest of the year will amount to, in our estimate, SEK 2.9 billion negative, which can then be compared with SEK 1.3 billion positive, the previous year's same period.

Very important to say, of course, in this community also, this has no impact on cash.

So this is a pure accounting P&L item that we talk about.

And also no cash flow impact whatsoever.

There is more background in the PowerPoint that you will receive on the next slide, but I think for the sake of time we will not go through that in detail now.

Instead, let's go into the planning assumptions.

If we move on, and this is a summary of basically what we have said earlier or what we are seeing today in the report.

You find all of this in the report as well, of course.

We talk about the RAN equipment market outlook, which we have revised downwards.

We talk about the top line impact of focusing our Managed Services and NRO operations and business.

We talk about the cost reductions, the increases in R&D.

We mentioned, here again, the capitalization as well as the restructuring charges that will come in, in the rest of the year.

And also the risks that we have identified between SEK 3 billion and SEK 5 billion then to come in the coming 12 months.

Still -- the Managed Services contract in North America is still valid as an effect on top line going into the third quarter as well.

This is all based on the current visibility we have of our business and the current FX rates.

Hopefully, this provides some guidance for all of you.

Finally, I would like to end by mentioning a few words about the cash flow impact of all the items that we have talked about now, just to bring a little bit more clarity.

So 4 items to talk about here.

The first one being restructuring from last year, where there's a balance of cash out, which will happen in 2017 and that's SEK 3 billion.

Then, the restructuring charges from this year will hit the cash flow to 50% this year and 50% next year.

Then to repeat what we said in Q1 regarding the provisions and adjustments there, the SEK 8.4 billion.

SEK 5.8 billion of that will hit cash and that will play out over several years.

And then, finally, the risks that we identify now.

The SEK 3 billion to SEK 5 billion will have a 30% cash impact and that will also come -- over a couple of years to come.

Restructuring charges 2018 to be confirmed later.

Thank you very much.

And I hand back to Mr. Börje Ekholm.

Thank you, Carl.

So we'll end this presentation part with just summarizing the message, which is that we have a focused strategy in place set at the time to reflect the market environment and the difficult conditions.

So it includes a couple of components.

It includes to invest in technology leadership and market leadership, and it includes prioritization in our portfolio.

So Networks, IT & Cloud and Managed Services.

And of course, new innovation efforts in the area of IoT.

But it also includes an effort to reduce our costs and increase our efficiencies, which is, of course, now quantified to be more than SEK 10 billion over the next 12 months.

So we now have the plan in place, and we have started to execute on this plan.

We have a strong commitment throughout the organization.

But we also have very positive responses from customers.

And here I would just like to highlight that one of our global operators actually rate us now as #1 on the RAN market on technology, which shows that we are in a very strong technology leadership position.

So we see that this puts us well underway to double the 2016 operating margin beyond 2018.

With that, thank you.

I give the word over to Mr. Nyquist.

Thank you, Börje.

And that gives about 30 minutes for Q&A.

So operator, I open the Q&A session.

So please.

Our first question comes from Alex Duval of Goldman Sachs.

Just a couple, if I may.

First of all, you talked about this extra R&D, which will help drive better gross margin on your products.

Could you explain a bit about what adjustments you're making and how that's helping the gross margin?

Is it about more functionality, simplifying those products to have fewer customizations?

How should we think about that?

And secondly, you talked this morning about 2018 market revenues being flat to slightly down in '18 versus '17.

What kind of things are you baking into that?

To what extent are you baking in some early benefits from 5G?

Do you benefit from any U.S. public safety?

How should we think about the inputs into that assumption?

Okay.

If we start on the R&D.

There are a couple of different ways, where we see the benefits in gross margin.

And of course, one is that we can develop new products.

We can solve customer needs, which allows us to get paid in a different way.

That's one way.

But let's leave that out.

But what you see also is if you look at the introduction of new technologies, what it allows you to do is actually to lower the cost in your product.

They call it the product cost, the underlying cost structure.

And here it is incorporating new technology into the next platform, for example.

So speeding up platforms are important.

But we also see it on, for example, transformation projects, where can see quite substantial productivity gains from doing more preintegration of solutions and becoming more standardized in -- or modularized in our offerings, which allows us to create more gross margin as well.

So there are a couple of different things going on here that will help our gross margin going forward.

But of course, this is an important part of our strategy.

And I can recognize your question coming out of, if gross margin wouldn't change, the cost program is not enough.

But the reality is we also see that we will improve gross margin in our business.

Then the second question.

We are more taking the outside market analysts' views into account, when we say 2018 would likely be a tough market as well, only building in and incorporating what they see.

So that's kind of the guidance we're doing.

Not to guide on our business specifically.

Our next question comes from Simon Leopold of Raymond James.

Wanted to see if I could get a little bit more clarity on what's going on with the R&D expenses.

And you did spend some time in the prepared remarks.

What has me thrown is the comparison to the prior quarter.

In the March quarter you had highlighted a couple of onetime items, most notably some write-downs of assets.

And so after adjustments, the Q1 R&D expense was about SEK 6.7 billion.

So this quarter, it seemed a bit higher than what we were expecting.

So ultimately, I'm really trying to understand how to think about normalized R&D in light of the moving parts.

And whether or not I'm really looking at the March quarter appropriately, or whether I overadjusted the onetime items.

So bottom line, what should we think about in terms of the run rate of R&D when we consider the large difference of adjusted numbers from March versus the June you just reported?

Carl?

No, I think, yes, we have -- so we have the special effect regarding the capitalization of R&D.

And I mean that must be factored in now going forward as well.

So this is an impact that we will continue to see.

And in terms of run rate as a baseline, we -- I think we can use the Q2 number to extrapolate.

What we say in general is that R&D might increase temporarily because of the investments that we make.

But over time, we should be back to the level that we have seen over the recent years.

So if we think about what you reported in the June quarter versus the prior year, rather than dwelling on the March '17 quarter, it still seems to be significantly higher.

I'm just wondering, am I making an inappropriate comparison to 2016 due to an accounting change?

It's not the change in accounting, but what you have that impacts is the development expenses, right.

So they are -- you can look at -- we're capitalizing less R&D today.

And my friends, the auditors tell me I can't call it underlying cost, but that's what I'm going to do now anyway, which is really what you should adjust then for the development cost as we capitalize development expenses.

And when you do that -- you had a slide, Carl, which is Slide #12, I think, in the deck.

You can see the SEK 7.9 billion, which is more of the, as I call it, underlying.

Okay.

So that helps me out.

So I think in the past we had been thinking that by the second half of 2018, the overall operating expense run rate should be in the neighborhood of SEK 54 billion.

Is that the right number we should be thinking about as the target for the second half of '18?

What we want to do and that's why we've been very cautious and making sure that we don't guide on OpEx, right?

Because of what we are saying is we are actually going to see increase in OpEx, or at least maybe not OpEx, but we're going to see increase in R&D.

And then we're going to take costs out of G&A.

But we're going to see increased costs in R&D to finance the growing gross margin.

So we have said that we are going to guide on rather the operating income.

Our next question comes from Sébastien Sztabowicz of Kepler Cheuvreux.

I've got one question on Managed Services.

You mentioned in the press release the SEK 140 million operating profit improvement on a run rate basis already.

Could you please quantify the level of proceeds you have recorded in H1 with these 42 loss-making Managed Services deals, please?

And also, on network rollout, what was the contribution at the operating profit level from network rollout since the beginning of the year?

The first question on Managed Services.

Can you clarify that again, the SEK 140 million you talked about that were the...

Yes.

I would say expecting the level of proceeds you recorded with these 42 loss-making deals that you have in Managed Services.

What was the losses in H1 with all these deals?

We haven't broken out that level of profitability, specifically for the Managed contract.

We said that the 42 are the ones under review, they're underperforming contracts.

And we have completed 9 of the 42 then, and the remainder will be handed over the next coming 12 to 18 months.

But we haven't given a specific number on that.

What we probably can say is that the first 9 months were rather the smaller or easier ones.

Okay.

And for the Network rollout business, what was the level of proceeds?

Yes.

We don't disclose the profit margins within the segments.

Our next question comes from Tal Liani of Bank of America.

I want to go back to the SEK 3 billion to SEK 5 billion.

I have 2 questions.

I want to go back to the SEK 3 billion to SEK 5 billion that you discussed.

You said before that you're going to double margins versus 2016 beyond 2018.

And now you're repeating the same guidance.

And that means that you're growing basically your margin -- profit margin assumption by SEK 3 billion to SEK 5 billion even times 2 or SEK 3 billion to SEK 5 billion.

So I'm trying to understand if you -- what's the connection between the SEK 3 billion to SEK 5 billion in extra expenses and the reiteration of the doubling margin kind of guidance or doubling margin expectations for the year.

Yes.

It's 2 different time frames.

So the SEK 3 billion to SEK 5 billion is over the next 12 months.

We will see those happening.

And then the doubling of the margin is, as you said, beyond 2018, right?

So it's 2 different time frames.

Right.

But the base is changing.

It's not a one -- is it the onetime -- no.

No.

The base is still 2016.

The 6-point, whatever, it was, 6.3 -- 6.2.

Yes.

6.2.

Right.

So the SEK 3 billion to SEK 5 billion is -- can you give more color on this because you have 42 contracts you want to renegotiate.

And I assume that you first negotiate the easy ones and then you negotiate the tough ones.

So is the SEK 3 billion the SEK 5 billion, does it cover all the contracts that are now -- you're targeting to renegotiate?

Or does it mean that beyond the next 12 months, the 12 months after that, it might be even greater because they're going to be tougher contracts.

And how long does it take you to complete the 42 contracts?

And how much of these 42 contracts, how many of these are covered by the SEK 3 billion to SEK 5 billion?

The SEK 3 billion to SEK 5 billion covers in a way -- it's not tied to the Managed Services contracts.

There are other big projects and big customer engagements that are included in the SEK 3 billion to SEK 5 billion.

So that's where we view the risk.

And we have said that, we don't know really what it's going to cost.

So this is a estimate of the risk.

And we believe that risk is SEK 3 billion to SEK 5 billion.

We have also said that by the end of 2019, we will have completed either exit, renegotiation or transformation of the challenged Managed Services contract.

And together, with other businesses we're stopping, we'll -- will have a top line impact of about SEK 10 billion.

So this is what the guidance we have given.

So what you should see here is we're working on turning the company around over the next 12 to 18 months to put ourselves going out of 2018 as a company, which is focused much more on the future than on execution of the near-term strategy.

Got it.

I have one.

I think just one last follow-up, if there is any follow-up.

I just want to understand the rationale, not the mechanics.

I understand the mechanics of why you don't capitalize R&D.

I want to understand the rationale, why stop capitalizing the R&D?

When it comes to the R&D capitalization, it's really a function of changes in the actual business.

So some of those platforms that we have been capitalizing in the previous periods are done, are finalized.

Others, we have decided to discontinue in terms of strategic choices.

So they are also discontinued from a capitalization point of view obviously.

And this is a cyclical thing and now we see the effects of this playing out in the second half.

Our next question comes from Sandeep Deshpande of JPMorgan.

I have 2, if I may.

Firstly, again, on this SEK 3 billion to SEK 5 billion where you talk about that you're going to have an impact on the operating income from this SEK 3 billion to SEK 5 billion.

Can you square it with what you had said in March?

I mean, that there are some write-downs on some contracts.

So is this associated with that?

Or is this more than that -- is addition to that?

So I'm trying to understand how that works with those contracts that you wrote down at that point.

And then secondly, with regard to the sales line itself, can you talk about I mean, your growth potentially in the U.S. with the first [set] contract, et cetera that AT&T has got and whether you're going to be involved?

And whether that is included in the downgrade that you are putting through on the Network market in this year as well -- or RAN market this year as well as next year?

Thank you.

No, first of all, on the SEK 3 billion to SEK 5 billion, it's different contracts.

So it's in addition to the provisions we took in Q1.

In order to take provisions, we need to see that the -- call it -- the losses are confirmed.

And here, we -- these are ongoing contract negotiations, where we have tried to quantify the potential risk.

So instead of having to send out the press release every quarter telling you this quarter it was this, we're putting a guidance in place to say -- help you realize or figuring out what's the size that we could see these type of extraordinary costs to be.

These are not the normal contracts.

We -- a project business will always have some projects that do well, some that do poorly.

These are specific contracts where we're not -- where we're kind of to some extent not working with a customer long-term.

So there are some specific contract negotiations that are ongoing.

That's why we separate them out.

And here it's not a confirmed loss.

So we don't -- today, we are just trying to quantify the risk, not saying exactly what the number will be.

Understood.

So Börje, does that occur -- for the full year that you're taking.

You took SEK 7 billion to SEK 9 billion in Q1 and now SEK 3 billion to SEK 5 billion, so that would mean for the full year, you've now taken provisions of SEK 10 billion to SEK 14 billion.

Is that correct?

Is that how we should look at it?

Yes.

We talked, SEK 8.4 billion.

SEK 8.4 billion.

The first quarter.

Yes.

And now we're saying SEK 3 billion to SEK 5 billion for the coming 12 months.

And how that will exactly play out over time this year and next year, it's really early to say because that depends on the outcome of these customer negotiations, resolution of payment problems, et cetera that we have in there.

And then on the -- what we have said is only on guidance on the market, we don't guide specifically on our sales forecast for next year.

So what we say is that -- we have taken a view, supported by outside market consultants to say there's high single digits this year and probably leveling off a little bit next year.

Our next question comes from David Mulholland of UBS.

Just 2, if I may.

Firstly, on the commentary that there was earlier around the difference between whether there's a competitive for market share issue today.

I just wonder if you can help square the defense you gave on not seeing it being a market share question earlier with the desire to reinvest in technology today.

And I guess, a question whether that's to maintain your technology leads or catch back up.

And then, secondly, just as a follow-up.

You've been talking for a little while about software sales having been weak in networking.

I wonder if you can just help us to understand what the cause of that is because I would have thought that at this point in the cycle software sales should actually be quite strong.

So is this a volume issue?

Or is this a pricing issue on the software side?

If we start on the latter part, we -- it's surely a combination of competitive pressures as well as more cautious mobile investment.

And that's why we see software sales being down.

As a matter of fact, software sales have been trending downwards for some time.

So that should be seen in that light.

If we look at the market share situation, we -- given the engagements we have with customers, we don't believe we are suffering market share losses.

But I guess, just to clarify then, why do you feel the need to reinvest in the technology in the context if you're not seeing kind of more pressure from a market share perspective?

No, we think we can -- I mean, there are a couple of reasons.

I tried to outline that we'll reinvest in R&D actually in order to get the product cost down.

So it's not necessarily growing market share with the R&D money, right?

It's actually getting the cost structure structurally down in our products.

That requires R&D.

So that's one element.

The other one is -- and I took an example, just of a digital transformation project, where we do more preintegration in order to increase productivity and service delivery.

So it becomes an NPV decision, whether we -- if we would control the business on OpEx and not on cash realized, we would take a different view.

But we're trying to optimize the total value of the company, not the OpEx line.

Our next question comes from Luke Wilson of BNP Paribas.

So do you require Ericsson to be an investment-grade company and what's your opinion on holding that rating with the S&P?

And then my second question is do you -- what are your plans for the dividend?

Is there any plans to cancel it this year in relation to your cash plays?

We have always stated and maintained that investment grade is important for the company and as you know that we are placed between investment grade with S&P and noninvestment grade by Moody's.

We stay in close contact with both of those agencies, of course, to discuss our plans and actuals and let's see what will happen there.

When it comes to the dividend, obviously that's a board and ultimately an AGM shareholder decision.

So I can't really speculate on that.

So our last question will come from Douglas Smith of Agency Partners.

Perhaps just a little more color on the planning assumption markdown from the minus 2 to 6.2 high single digit.

Is that based mainly just on operators shifting their spending plans to other areas in wireless, such as optical or switching, or data center?

Or does it have something to do with operators waiting on 5G because it's not really quite ready to ship yet?

Well, we don't think it's really related to 5G.

But of course, there could be some hesitations due to that.

But we think it's more a matter of customers being more cautious on investments.

It can be due to competitive pressures in their business.

But it can also be macroeconomic.

So we see that happening.

We see slower investments in certain parts of the world.

So there are a combination of factors.

What we have tried to do now is also to take a external market consultant point of view in order not to be viewed as guiding on our own revenues or anything.

But we have just taken their number, which is the high single digit, to use that as a guidance tool for the market.

And this external survey you mentioned, is this something which is public or private?

Is it something you're publishing?

Or is it something which is in the market to view?

The problem is actually the disclosure of the name.

Otherwise, we would be happy to do that.

But it is publicly available, but we're not allowed to disclose the name, I believe.

So by that, Börje, maybe some closing remarks.

Yes.

So it's clearly been a tough Q2 and a nonsatisfactory profitability and sales development.

We have, however, a plan in place, a strategy in place that aims to bring us back into a solid profitability profile in 2019 and beyond.

And we are focused on executing on that plan, which includes targeted investments in parts of our business, but also to take out the cost to get efficiency gains.

So with that I would just like to conclude and say thank you.

Thank you all.

Thank you.

And goodbye.