Telefonaktiebolaget LM Ericsson (ERIC) 2017 Q3 法說會逐字稿

Hello, and welcome to Ericsson's Analyst and Media conference call for the third quarter report.

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

(Operator Instructions) And as a reminder, replay of this will be available 1 hour after today's conference.

Peter Nyquist will now open the call.

Sir, please begin.

Thank you, Hugh.

And hello, everyone, and welcome to this call today, the second one for this day.

With me here, I have our President and CEO, Borje Ekholm; and our CFO, Carl Mellander.

During this call, 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.

Actual results 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 the word to you, Borje.

Thank you, Peter.

So welcome to this report for the third quarter.

As you may now have seen, we have a challenging market, but we feel we are stabilizing our situation.

And we are, if we adjust for significant onetime costs associated with the implementation and execution of our focus strategy, reaching a breakeven result.

During the third quarter, we've had a very strong focus on our strategy execution and we are seeing initial good signs of traction in the market.

We have a slight growth in our Networks if we adjust for foreign exchange as well as the re-scoped Managed Services contract from last year.

We are also seeing an increased stability in road maps and projects in IT & Cloud.

And as you know, here, we've had several difficult product development efforts as well as digital transformation projects ongoing and we are gradually seeing increased stability here, less customer escalations.

If we look at our sales, we're down 3% for the quarter on an FX-adjusted basis.

That's almost entirely explained by the lost -- or the re-scoped Managed Services contract last year.

And as I said, our adjusted operating income is actually a breakeven.

This is thanks to a very strong development in Networks where we see an adjusted operating margin reaching 11%, which, in reality, is due to the improved gross margin in the business as we actually invest more in R&D as well.

We see increased losses in IT & Cloud due to 2 things: one is simply a bookkeeping measure, which is that amortizations happen to be higher than the capitalization of R&D expenses, thus explaining a large part; and the second part is that the big transformation projects that are ongoing with a very large component of service content, we are -- impacting gross margins negatively in IT & Cloud.

In the second quarter, we communicated a risk that we saw due to current market conditions as well as our focused strategy of SEK 3 billion to SEK 5 billion in extra costs.

Here, we have taken during the quarter SEK 2.3 billion and we expect the total range to be sufficient, but will end up in the higher end of that estimate.

We've had restructuring charges of SEK 2.8 billion during the quarter, which SEK 1.6 billion of that is related to a write-down of our investment in the GICs, Global Information Centers.

But we also see here that we are accelerating our pace in Q3 -- Q4 to run the efficiency program, so we now guide for higher restructuring charges for the last part of the year.

Of course, Q3 is a seasonably hard quarter on cash flow.

But our free cash flow was only slightly negative at SEK 500 million, which is really due to a good working capital management as well as lower CapEx.

So then moving on.

We see that we're making progress on our strategy execution.

We are pushing out Ericsson Radio System, which is a very competitive product portfolio that actually positions our company -- the customers to be 5G ready.

So it's simply a software upgrade on our existing hardware and it can carry 5G traffic.

It's also prepared, of course, for Narrowband IoT and cap them in the same way.

That's a very strong offering.

We get a good customer traction and reception of that, which, of course, is contributing a lot to the improved performance in Networks.

We are also seeing that we need to position ourselves for 5G in China, and we are increasing our market share in the LTE market in China.

We, in this report, as well guide that, that will dilute earnings in the fourth quarter, but the ambition still is for double-digit margins in Networks.

In China as well, what you see is a slowdown of the LTE market following the very rapid build-out and now the market is more normalizing.

What I also think here is worth to remember when -- the costs during the fourth quarter is more of a timing difference than anything else.

And it's as well very important that we position ourselves for the 5G market by increasing our market share in 4G.

5G will be basically very tightly connected to the 4G implementations and therefore this is strategically important.

We are working to review our Managed Services contract and we know the known strategic contracts in Managed Services.

We have reviewed 13 of 42 contracts, challenged contracts, with a run rate improvement of SEK 400 million that we'll receive during next year.

Our efficiency program is gaining traction.

We have a net reduction of 3,000 employees in the quarter and that's actually net after we hired 1,100 R&D engineers.

And as you know, our efficiency program is focused on service delivery and the, call it, overall structural cost of the company.

So we are shifting here from, call it, service delivery common costs into investments in R&D and that's an important transition to position ourselves for strength in our technology leadership.

And we have already before indicated the need that we see of increasing R&D investment and we do that in order to secure 5G leadership.

We are also seeing that we get stability with many fewer escalations in the challenging projects we have in IT & Cloud.

And maybe, most importantly, we're getting very positive customer feedback, both on the long-term strategy, but also in our 5G-ready portfolio.

So we see the future fairly bright in that sense.

Looking at the different market areas.

The North America, that's down the most, down 6% FX-adjusted.

It's almost entirely explained by the re-scoped Managed Services contract.

So we see the North America market to be stable.

Europe and Latin America.

We see stability in Europe.

We see Latin America still being down.

There are bright spots, for example, Brazil, where we actually see growth.

Northeast Asia is due to the normalization of the investment cycle in the region.

Southeast Asia is flat.

And we actually see growth in Middle East and Africa, which is explained by multiple customers in multiple countries.

So there are many contributing parts.

If we move onto the segments.

We see the sales for Networks being down 1%, again entirely due to the Managed Services contract in North America.

And if we only look at the business outside of that contract, it's actually growing by a couple of percent.

Operating margin, 11%, thanks to improved gross margin, which is then, in a way, negatively impacted by the capitalization impact of SEK 700 million year-over-year, so the underlying op gross margin is a quite good development.

We also increased investments in R&D to make sure that we are a technology leaders.

And here, we have recruited almost 1,000 engineers only in the Networks side.

We have a strong delivery of Ericsson Radio Systems with 55% year-to-date and that's a very important substitution.

On IT & Cloud, we have a sales that fell 9%, largely due or entirely due -- well, largely is the truth because it's -- we see a slower market also for growth -- for our growth portfolio.

But it's really, to a very large extent, explained by a rapid decline of legacy products.

We see a slower market also for the growth portfolio.

That's due to some extent a very difficult quarter last year, but it's also that it is a little bit choppy between quarters because they are due to some large project sales that may shift between quarters.

So I think you should look at that over time instead.

Operating income, minus SEK 3.1 billion, due, as I said before, to a weakening gross margin due to the large digital transformation projects, which have a bigger service component in them.

But it's also explained by the capitalization impact of that year-over-year that's with SEK 1.1 billion where amortizations exceed capitalization.

So it's a bookkeeping effect.

We see the turnaround in progress.

We have achieved the first phase, to a large extent, which is stability and product road maps as well as in challenging projects, and now we can turn our attention to get the efficiency and service delivery out and that's where we're working and accelerating during the fourth quarter.

Here, we see great opportunities for pre-integrating our solutions with our Global Centers and bringing them to market with less need for customization.

So here, we see a good potential to improve our efficiency and service delivery.

Other, we see sales being down 11%.

It's due to lower legacy product sales that the new portfolio cannot offset.

We have some very good customer tractions on our new portfolio in Media, but it has not been able to compensate for the legacy products.

We also see that our Media business or Broadcast Services business has had a negative sales development during the quarter.

If we look at operating income, we have been able to partly offset the decline in volumes with cost reductions, and the team has worked hard to balance the costs.

We also have a capitalization impact that's quite significant year-over-year.

The key here is that we need to do -- while we pursue strategic opportunities for these businesses in Other, we're at the same time conducting the business and accelerating the business in a good way.

So here, we have announced a number of good contract wins for our Media portfolio during the quarter, and of course, that's important for us to run the business in the best possible way.

So that's what we're doing, continuing to look for strategic opportunities.

With that, I give the word over to Carl.

Thank you, Borje, and good morning or good afternoon, good evening to everyone.

So let's start by looking at the gross margin then.

We can see that the gross margin now has stabilized after this dramatic decline that we saw in Q3 a year ago.

And now gross margin is at 30%, improving somewhat sequentially, but also, of course, year-over-year and this is again driven by the improvement that we have seen in the Networks business.

Still, of course, we are far from satisfied with this level.

It's clearly not acceptable with the gross margin around 30%.

But our focused strategy aims at reaching substantially higher gross margins.

And it is the way we want to demonstrate, of course, how successful we can be in managing the price and post strengthened conditions in our customer contracts over time.

Turning to operating income then, looking at the bridge from Q3 last year to now.

First of all, and as Borje has said already, FX actually had an important impact in the third quarter result here, so we start by adjusting for the volume, FX-related, but also this 1 specific Managed Services contract in North America.

And by the way, this will be the last quarter that we refer to that as a deviation parameter because from Q4 that will be on a normalized basis.

And you can follow here and see the improvement in gross margin in Networks contributing to bottom line and also a certain reduction in the SG&A, but we don't want to take too much credit out of that when it comes to the cost program as this is also driven by FX.

But I'll come back to costs in a minute here.

There is one more big red bar here and that has to do with the capitalization effects that Borje was talking about as well.

And in the second quarter report we explained this quite well, I think, and we talked there about technology shifts and shifts in the portfolio, which makes us actually capitalize less of development costs than earlier, some platforms are ready, et cetera, and this has an effect on the operating income.

And the delta here, as you can see, is SEK 2 billion, development costs, capitalization in combination with deferral of certain costs for hardware.

With that, we arrive with an adjusted number of bottom line of 0 as you know and as you see in the report.

One more factor to mention here, and that is the divestment of the Power Modules business, which actually created a capital gain of SEK 300 million.

So we count that as an extraordinary item as well, not to take a credit for that.

So underlying business excludes that gain.

Moving to the operating expenses then.

On the left, the R&D development, and if we eliminate the capitalization effects then, as you can see and look in the middle, we compare apples with apples and see that the R&D spend in the quarter was stable year-over-year.

And as you know, and as we mentioned, our strategy includes an additional investment also in R&D to gain technology and cost leadership.

When it comes to SG&A then on the right side.

As I mentioned, there is a small reduction helped by FX, but no real visible impact from the cost reductions yet.

We have a high activity level, though, in the cost reduction effort.

So if we move to that, here, we talk about the SEK 10 billion cost reduction that we have talked about.

And we, as you know, we talk about at least SEK 10 billion to be delivered by midyear 2018.

We are accelerating measures in the quarter, and Borje already talked about the 3,000 employees net reduction in the quarter.

But there are also a couple of other things to talk about, one is the Global ICT Center consolidation, where, as many of you will know, we are running 3 such centers globally.

Now based on technology development and also actually differences in our portfolio, we have less need, we have an overcapacity now and we are also able to consolidate this testing activity for R&D into 2 of the remaining centers then.

So we will close down this one in Canada and divest the facility.

And as you saw, we make a write-down of SEK 1.6 billion as well in the quarter related to vacating this center.

Positively, though, is that this will contribute with the SEK 300 million run rate improvement in costs and that's from the second half of 2018.

We have good progress in other areas as well such as IT.

For example, supply has done a good job in taking out further costs.

And we are working also, as one additional example, on the real estate footprint globally where there's also a potential for further cost savings.

Restructuring then, we are increasing the estimate for the fourth quarter to -- we are now talking about SEK 3 billion to SEK 4 billion in the estimated charges for restructuring, which takes the full year total to SEK 9 billion to SEK 10 billion.

And this is an effect of accelerating the program, but also, of course, having the ICT Center consolidation write-off included in restructuring.

Let's move to cash flow.

We are, as Borje said, quite pleased with the cash generation in the quarter.

Typically weak in Q3, but in this quarter we generated a breakeven operating cash flow.

Gross cash increased during the quarter with SEK 800 million to SEK 55 billion of gross cash, which is a strong position.

And also, when it comes to net cash then, we are now at SEK 24 billion, up from SEK 16 billion a year ago.

So we believe we have a strong balance sheet position.

And if we turn to the next slide, we can also look at the free cash flow generation.

And here, you can see what components are contributing to the radically improved free cash flow generation in the quarter then.

You see both working capital delivering much better than last year and also a reduction in CapEx.

And on the M&A line, you can see specifically then the Power Modules divestment.

Also, on the right side, we included the debt maturity profile to give you a little bit more on the capital structure side there, and as you can see, there are no material debt maturities until 2020.

Next slide is a summary of the capitalization.

We have mentioned most of it, I think, already and it has to do with the product platform in R&D, also software development as well as hardware costs.

And just to sum it up then, the total negative impact in this quarter was SEK 1.5 billion and that you can compare with a positive SEK 0.5 billion Q3 '17 -- sorry, Q3 '16.

And it was exactly in line with the guidance that we provided in the second quarter report then.

And we maintain also that the total will be around SEK 2.9 billion second half, meaning at SEK 1.4 billion of such impact will happen in the fourth quarter.

And as you can see, this primarily impacts then IT & Cloud Networks.

The following slide has more detail when it comes to capitalization.

I didn't intend to go through it now, but this is for your reference so you can know exactly what lines are impacted by this as well.

If we then turn to the cash flow impact.

Also here, you can see we have updated it since the last quarter, and we, as you can see here, detailed here that the customer and market risk provisions that we make now in the quarter have a very limited cash impact, SEK 0.7 billion out of the SEK 2.3 billion.

Finally, then, looking ahead into Q4 and beyond, our planning assumptions and please refer to the report for the full detail here.

But the highlights here, we specified a little bit more detail.

The RAN equipment market declined to 8%.

It's in line with what we said before, high single digit.

We talk about the top line impact of our focused business, same as earlier.

China will have an impact on top line in Q4 and that's why we mentioned that the actual top line will be a little bit lower than the average seasonality would suggest.

We have talked about the cost savings already.

We have talked about the increase in R&D expenses, capitalization, restructuring.

And the fact that we maintain exactly what we've said before regarding the additional risks in customer contracts, the SEK 3 billion to SEK 5 billion, and what we're saying now is that we will end up in the higher end of that range.

And China, we have also mentioned already.

So thank you so much.

With that, I hand back to our CEO, Borje Ekholm.

Thank you.

Thank you, Carl.

So in just summing up before we enter Q&A.

We had a stable performance in a very challenging market.

We have been focusing on executing on our focused strategy.

And we are seeing some encouraging signs of improvement in our performance.

We still have a long way to go, but we are feeling that our strategy gives us the benefits that we would see.

We're on track for the SEK 10 billion cost reductions mid-2018.

And we intend to accelerate activities in Q4 of this year.

Even though we took out 3,000 net reduction in headcount during the quarter, we will continue to accelerate that.

We also look forward to seeing you all at our Capital Markets Day in New York in a few weeks' time where we'll outline a little bit more where we are on strategy execution as well as where we see the strategy going forward.

With that, thank you and give the word over to Peter.

Thank you, Borje.

And operator, we are now ready for the Q&A sessions, so please.

(Operator Instructions) Our first question is over to the line of Edward Snyder at Charter Equity Research.

A couple, if I could, please.

You're gunning for lower gross margins in Networks in next quarter primarily in China, but you're holding the line hopefully on double-digit operating margins in Networks within the same period.

Is that a shift to the expenses to maintain at double digits?

Because you also mentioned hiring, I think, it was close to 1,000 engineers mostly in Networks.

I'm just trying to get an idea of what you're giving up in Networks to hold the double-digit operating margins with gross margins declining.

The answer is we're not giving up anything.

Well, if gross margins are dropping and you're at 25.4% this quarter, I would expect the incentive compensation somehow on the operating line.

Are you delaying investments?

Or what's your strategy there?

No, we're not delaying investments.

We are conducting the business like we do.

We are only guiding that it will have a dilutive effect on margins, but we're not giving up anything.

Okay.

And then I know 5G is still more of a dream than a reality with you still doing a lot of tests on that.

But is there anything in the sub-6 gigahertz rollout of 5G that benefits you more than others?

I know Massive MIMOs have been talked about ad nauseam and it's relatively expensive and our issues with it.

But if that should occur, should we expect, given its impact on the radio, a bigger positive impact on your Networks division than just, say, something like Narrowband IoT or any of the other features that IT is being touted to do?

And if I could, a follow-up on 4G.

Similarly, we've had a lot of upgrades coming to 4G.

We've got everything from carrier aggregation to cellular MIMOs, Power Class 2 and 256 QAM, are those all fairly well neutral to your networks that have already been accommodating your radio systems?

Or could we see maybe even a modest benefit if some of the more mature upgrades of 4G start rolling out?

What we see is basically -- we should first start with 5G.

5G, I think it is fair to say that a few months ago or maybe a year ago it was mostly a buzzword.

That buzzword is now changing into some concrete actions, and we are seeing North American operators, for example, pursuing fixed wireless access where we expect to see commercial shipments in the not-too-distant future.

So it's moving very rapidly away from a test bed, test case, engineering case only into commercial deployment.

So of course, that is something that, net-net, will provide new type of revenue sources for our customers and therefore provide opportunity for increased investments.

At the same time, I think it's also important to remember that 5G is really dependent on 4G.

So if you're going to have mobility in the 5G world, at least initially, you need to base that upon a 4G footprint.

That's why it's so important for us to position ourselves in the 4G market ahead of what's coming in 5G.

And as we see that, that positions us well for the future and you should remember here that our ERS portfolio is actually fully upgradable via software upgrades to Narrowband IoT as well as 5G.

So when you talk about different features, that is in the road map, some of them done and in the road maps and being delivered in our 4G portfolio.

It sounds like from what you've just described then, a lot of -- or some of these upgrades are not going to have much in terms of a revenue impact.

They're just software, certainly there's no hardware change out to those.

And you mentioned the U.S. and fixed broadband.

When you're talking 5G, short term anyway, are you pretty much referring to fixed broadband over any kind of mobile networks?

And how does that apply to T-Mo's Band 71, they're talking about putting "5G" on that network.

Does that have any benefit to you?

Without commenting specifically on customers, the reason why I mentioned fixed wireless access is more that it's the first use case probably deployed.

I do -- I think -- or I know there are a lot of development efforts going on in the low bands, and T-Mobile being one.

And that is, of course, the very important part to provide the much broader coverage of 5G.

It can be inserted in any device -- or IoT applications.

So here, it's a lot of development going on globally.

We are one of the few that are active in high band, mid-band and low band.

So I believe we are well positioned with our portfolio as we see it today and we have great opportunities going forward.

We're now over to Stuart Jeffrey at Natixis.

I was hoping to dig a bit more into IT & Cloud.

Just a couple of sub-questions on that, if I may.

First one is you mentioned delivery costs being a big issue on the call this morning and being a big driver of gross margin.

I was wondering if you could explain what you're doing there and why it's not been possible to make those cuts already.

And secondly, you spoke also about some transformation contracts coming online.

Was wondering if there's any accounting benefits, perhaps some revenue recognition or something like that, that could start once the contracts go online.

And then, thirdly, again, on Internet and cloud -- IT & Cloud, you spoke about letting up to SEK 10 billion of revenue go from some of these contracts.

I was wondering if you could talk a little bit about the timing of that through 2018, 2019.

Will most of this come in 2019?

Or will we see a large amount next year already?

Yes.

If we look at it by country, there's a customer service delivery already now.

And first, we need to deliver the projects.

And the projects with the large digital transformation projects have a larger service component, an SI component, than on a normal project.

So that has led to an increase in the service delivery costs, which then has a lower gross margin.

So what you see here is effect of us being firmly committed to delivering to the customer.

Ultimately, that's what we need to do.

So we have secured our deliveries, that has had a negative impact on gross margins because of increased SI costs.

So the next phase here is to move to efficiency, that's when we can take out service delivery costs, but we needed to do the deliveries first.

Then the other (inaudible).

Yes.

So the other one was more on you said when certain of these transformation contracts and it continue to develop, but there is a sort of revenue recognition.

I would just say that typically we recognize revenue based on milestones in the contracts.

And with a rather large number of contracts, we will do that as business as usual.

I don't foresee any specific impact on delta explained by that.

And I think the last question was referred to the Managed Services contracts as well as the MRO and...

We should say the SEK 10 billion we have guided for includes multiple different type of contracts.

It's in Managed Services, MRO as well as digital transformation contracts.

And there, we've said that they will -- or we expect them to negatively impact top line to SEK 10 billion by the end of 2018, so 2019 and forward.

So we are working our way through those contracts.

And you know here we have a number of old Industry & Society contracts, for example, that we're working our way through on Managed Services contracts, some other MROs, et cetera.

So it's a mix of contracts here.

Simon Leopold at Raymond James.

Just wanted a quick clarification before my question.

In the release, there's a reference to a SEK 132 million sales adjustment.

Just if could give us a little bit more detail on what segment that was and what that item is.

I think you're asking a very specific...

A very specific question.

We need to -- are you referring to...

Maybe while you're looking on that, my broader question then.

So more broadly, last quarter, you talked about the post-2018 operating margin target of being twice the 2016 level or over 12%.

I'd like a little help in terms of trying to understand the view on that as it stands today and maybe help us think about what operating expenses should be in 2018 relative to 2017 given the moving parts of the change in the capitalization versus the cost cutting.

Should we think about the absolute value of operating expenses being similar in '18 as-reported operating expenses in '17?

Or am I getting that wrong?

On the -- let's just say this on your second -- on your question, we'll come back around the SEK 132 million.

But the -- what we have said and we are very committed to is to reach a target of doubling the operating margin.

We've said that is beyond 2018.

So with that, you can infer it's already past 2018.

So we also see the opportunities of getting there and that we should reach that realistically.

Of course, we have, on purpose, avoided to guide on OpEx because we see the strategy we are pursuing is actually, short term, going to increase R&D expenses and we should get payback on that invested gross margin over time.

So we're not focused on individual lines in the balance sheet from a guidance perspective.

So we need to see improving gross margins.

And how we're going to get that, we will talk more in detail at the Capital Markets Day.

So please bear with us until then.

You will get more details and I think you can get a more detailed guidance what you need.

And so should I say the SEK 132 million question then.

So this is part of the provisions that we made amounting in total to SEK 2.3 billion of operating income effect then.

And we don't detail the specifics here about the contracts, but basically one part of these adjustments involve an impact on net sales and you can see there specifically exactly what lines are impacted.

It's one of the contracts that we have adjusted for taking a provision for during the quarter exactly, sorry.

And you asked about the segment, it's the Networks segment.

We're over to TV4 and Jens Nordström.

This is Jens Nordström from TV4.

I made my question in Swedish, so international listeners will have to bear with us for a moment.

Borje (foreign language)

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We go to the line of [Karan Samtani] at BNP Paribas.

I just have 2 questions.

Do you think your SEK 10 billion cost-reduction plan is enough considering the pressures you've mentioned?

And just on the restructuring costs that you've outlined today.

I know you said 50% then will be cash in '17, 50% in '18.

So should we expect the cash impacts in '18 to be greater than '17 considering that you've got another SEK 10 billion worth of restructuring to come through, as you mentioned, at the end of Q2?

I can take the second one then.

So we will announce later at the Capital Markets Day the estimate for restructuring charges in 2018.

We haven't done that today.

But what I can say is that cash effects of -- if you look at the restructuring targets now, we have a balance sheet position right now of SEK 3 billion and we have more restructuring charges with some will be immediately going to cash flow in the fourth quarter.

And so, let's say, next year, the cash flow will be impacted by the provisions we already have done now with the around SEK 4.5 billion, I would say.

And the new charges that we actually do in 2018, we will have to come back with both the target amount as well as the cash flow impact on it.

The third question was whether SEK 10 billion is enough.

Yes, and I'll take that.

We have put a focused strategy in place, which aims at then doubling the operating margin beyond 2018.

And in that, we see that we should save or have efficiency gains of SEK 10 billion by mid-next year.

So that achieves our goal.

So that's why we believe this is the right level.

And we have said, by the way to quickly recount what we said, is that we will have at least realized the SEK 10 billion in efficiency measures by mid-next year and we think that is enough.

And just to follow up.

So in terms of your cash position for full year '17, I mean do we -- should we expect the net cash position to be lower than year-end '16 then given that the charges have gone up?

We can -- I mean, I can remind everyone that Q4 last year was an extremely strong quarter from a cash flow point of view, exceptionally strong.

We are working hard to generate cash flow in the fourth quarter as much as we can, of course, but we don't guide specifically on the number for the fourth quarter.

Okay.

But I mean if you have, say, SEK 7 billion of cash outflow plus SEK 3 billion of outflow for your dividends, then we are talking about SEK 10 billion of cash outflow?

Yes, but as we don't go into providing detailed guidance on line by line item neither in the P&L statement nor in the balance sheet, you have to bear with us and we're not going to do that.

We think that doesn't help building a stronger company for the future.

We are now over to the line of Stefan Slowinski at Exane BNP Paribas.

Just wanted to maybe start talking about 2018 from a geographic standpoint.

You stated that you're still maintaining the outlook of potentially the Networks business being down low single digits.

But a lot of your commentary around the different geographies, kind of point more to stabilization.

You talked about China kind of normalizing, the U.S. being relatively stable despite the M&A uncertainty, MENA being up, Asia relatively flat, Europe stable.

Are you being overly cautious on your 2018 outlook?

And is there potential we could actually see the market stabilizing next year rather than being down again?

What I think you see is actually that we think it's going to be a tough market next year and we plan accordingly.

We, at the same time, see our business being well positioned because we have a strong product portfolio.

And we see that in our Ericsson Radio System gaining a lot of traction and momentum with customers that we think it will put us at a very attractive position in the market.

So you'd expect to be winning market share going into next year?

Let's debate market shares once it has happened.

But our -- we believe we have a very attractive product portfolio at this stage.

And here, again, it is important because 5G is happening.

Our -- if you install our equipment, it is with a software update.

It's actually ready for 5G.

So customers see this and see the attractiveness of doing exactly that.

Okay.

And if I could just have just one follow-up there.

I mean, in terms of the software upgrade, I guess the question is what does that mean for you from a revenue standpoint for 5G upgrades if it's "just a software upgrade?" Is that a higher margin revenue for you, but a lower absolute revenue level than typically you would expect with a hardware sale?

You're probably going to look at us more as a software company down the road.

And what implications does this have for your margins longer term?

Let's -- we have set the guidance of doubling our operating margin beyond 2018.

So that's the way we work.

We are now over to the line of Achal Sultania of Crédit Suisse.

Just one clarification.

On the Services contracts, I think you mentioned that you've kind of addressed 13 contracts out of 42 that you were aiming to address.

And I'm just trying to get a sense of how much of -- and then you also talked about SEK 10 billion impact because of these low-performing contracts that you would see between '16 and '19.

Just trying to understand how much of that impact we have already seen probably by the end of this year in terms of revenues.

Any color on that would be helpful, like have you seen half of the revenue impact already?

Have you seen 20%, 25%?

Any color would be helpful.

Well, first of all, the SEK 10 billion relates to many different parts.

So the SEK 10 billion, you can find in Managed Services contracts, you find it in fiber deployment, you find it in MRO and you find it in Industry & Society projects.

So they actually belong to both Networks as well as IT & Cloud.

So you see the impact of the SEK 10 billion in both parts.

And so what we're talking about here in the 13 out of 42 contracts, that's only for Managed Services.

So it's a little -- I recognize it's a little bit difficult to put it together, but we do not feel it's appropriate to go into all the details on individual contracts because that's kind of, I think, could potentially put even customers and question us.

So I don't -- we have decided not to go into detail.

But we foresee that the total effect until the end of next year is SEK 10 billion.

Okay.

And maybe just a follow-up on IT & Cloud.

I think at the time when you presented the plan back in March, you talked about trying to look at some assets, some hardware assets on the Cloud side, which could also be up for strategic review like Media.

Any update on -- we haven't heard about any -- you talk about those assets in Cloud.

Any update on that side?

No, we're still working on that and reviewing our different options.

And as soon as we have something, we will communicate that.

We go over the line of Douglas Smith at Agency Partners.

Yes, just a bit of a clarification on some of the previous discussion on margin.

Is there a route you see to getting Network margins to 40% like some of your competitors have?

Or is that comparing apples to oranges in a sense?

Let's go into this a little bit in more detail at the Capital Markets Day.

But I would also encourage you to think about the Networks business after this -- today consists of both Managed Services and our more product-driven Networks business.

So it depends on a little bit of business definition here.

Maybe I cannot say.

I was only going to say the details here I think we can discuss at the Capital Markets Day.

And then just to add, we will issue a restate in December around the new segment structure and then Networks will become in the new form, which then will exclude Managed Services, so just for information.

Right, got it.

Okay.

Then on the 1,100 new R&D hires, can you give a bit more clarification on where those R&D people are and what they're doing?

Is it mainly in Sweden or mainly in 5G?

It is mainly in Sweden in Networks, so it's partly used in 5G.

So it's important to secure our technology leadership in 5G.

But also, in, for example, ASIC development and other parts of our total radio portfolio.

That's over to the line of Richard Kramer at Arete Research.

Now we had a bit more time to look through the numbers, I'd like to ask about the cash flow.

Maybe excluding some of the adjustments, it seems like you had SEK 2.2 billion of one-offs with the Power Modules in iconectiv business and another sort of SEK 3.4 billion where you've reduced net working capital of the SEK 2 billion of IPR income.

So my question is what do you think the ongoing cash burn of the business is excluding these one-offs and excluding obviously the ups and downs of working capital and your consistent, very consistent, sort of SEK 2 billion a quarter IPR income?

And do you see that potentially getting to cash breakeven at some point in the next year because it does seem that when we take away these one-offs and squeezes, it's still a cash-burning business?

So for -- it's important we have to realize that the iconectiv is not part of the free cash flow.

But it was cash-in on the balance sheet, no?

It was cash-in, but it's accounted for according to IFRS rules as a loan and that wouldn't be the case under U.S. GAAP.

But unfortunately, we will report under IFRS, so that's why it looks this way.

So it's a part of our free cash flow.

Yes, but the underlying point is that if we take away the IPR and the sort of working capital squeeze, the business is still burning cash at a sort of operating level.

And my question is how long do you think that, that will continue to be the case given that one would expect a shrinking business to require less working capital?

Honestly, if we take away all revenues, it's relatively negative.

So that's -- the reality here is, I think we have some positive factors in the cash flow and some negative factors.

We had put in place a restructuring plan and the turnaround plan that's built upon a focused strategy.

That will take some time to work through.

And you can just look at the numbers.

It hasn't been a high profit margin.

So of course, you should expect weak cash generating in the core business while we do the turnaround.

Once we're through the turnaround, it's a very different picture.

But through the turnaround, our financial position is strong enough and the equity is strong enough to carry us through.

So with that, we would like to conclude the Q&A.

And maybe, Borje, you want to have some concluding words.

Yes.

Thank you all for listening in.

And you have heard that we've had a challenging market around us, but we have a stable quarter with growth in our Network products business, and we are still focusing on IT & Cloud to turn that around.

We've taken the first step.

We've got the stability in products and project road maps.

And now we focus on executing on our cost and efficiency program that should deliver SEK 10 billion in savings by mid-next year.

And thank you all for listening in.

Thank you all.

Thank you so much.

See you in New York on the 8th of November.

This now concludes today's session.

So thank you all very much for attending, and you can now disconnect.