Telefonaktiebolaget LM Ericsson (ERIC) 2017 Q4 法說會逐字稿

Welcome to Ericsson's analyst and media conference call for their fourth quarter report.

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

(Operator Instructions) As a reminder, replay will be available 1 hour after today's conference.

Peter Nyquist will now open the call.

Thank you, operator, and everyone, welcome to this call for the Q4 report for 2017.

I just want to start with that, unfortunately, our CEO and President, Borje Ekholm, cannot participate.

As he said this morning, as you probably heard in the morning conference, he's got the flu, and he is focusing on curing himself right now and cannot fulfill the full program today.

But we have our CFO, Carl Mellander instead, who will go through the whole presentation and also be here to answer your questions.

But before starting, I would like to make these remarks.

During the call today, we'll be making forward-looking statements.

These statements are based on our current expectation and certain planning assumptions, which are subject to risks and uncertainties.

The actual results may differ materially due to factors mentioned in today's press release and discussed in this conference call.

We encourage you all to read about these risks and uncertainties in our earnings report as well as in our annual report.

And another remark as well, because it's -- as you probably would see in the presentation as well, a majority of the slides are adjusted for restructuring charges and certain items affecting comparability in the slide package that now Carl Mellander will start presenting.

So please, Carl.

Thank you, Peter, and good morning, good afternoon, everyone, on the call.

Thanks for calling in.

Before jumping into the numbers, let's start with a few remarks on the business environment and some interesting factors that we record and observe in the market as well as for Ericsson as such, then.

Obviously, 5G traction is increasing.

We see that both on our -- in our radio business as well as core.

A lot of customer engagement going on in the area of 5G, preparing for 5G.

Digitalization is also clearly accelerating in our customer dialogue, large need for customers who digitalize their operations, and we are partnering and supporting them in that.

We confirm today the RAN equipment market outlook, the minus 2% 2018 we have talked about before, which mimics also external bodies.

Estimates is confirmed here.

We see positive momentum in North America, of course.

We -- some of the CapEx budgets, as you all are aware of, are increasing, partly as a result of the tax reforms but partly also by the general market momentum there.

And we're also involved in the FirstNet development, together with one of the large operators there as well as early or initial 5G deployments there.

China is a little bit more difficult to predict.

Of course, the investment levels in general are down, although we are happy to record an improved market share as we disclosed -- discussed, rather, in the Q3 report as well.

The U.S. dollar is weakening, and we should pay attention to that when assessing the numbers going forward for Ericsson, given the dependence on the U.S. dollar.

When it comes to the right side here, Ericsson then, we see good traction for our 4G portfolio and with its 5G readiness.

We have been happy to be entrusted by several customers new business in the 4G area, preparing for 5G as well, including Deutsche Telekom, Verizon and others.

And I mentioned already the market share gain we have seen in Mainland China as well.

When it comes to the digital services side, we will, of course, come back to the financials in detail.

But when it comes to the product side, we have reached better stability, and we have delivered new versions of some of the new parts of the portfolio, both in BSS and Telecom Core.

Managed Services, rather flat on the total.

But Managed Services for IT, which is the higher-end side of Managed Services, has grown, and we see that as very encouraging.

Also, network design optimization services have grown in the quarter, also good to see.

And then, finally, the Emerging Business.

Rather good momentum there with the iconectiv solution there.

As you know, we are on track for the launch of the number portability contract in the U.S., but we also see that some of our investment areas, innovation areas like UDM and IoT are getting traction also with customers.

We move to the full year then.

10% down on top line, both in reported and currency adjusted.

Of course, an operating income of minus SEK 38.1 billion in the full year.

And we will dig into more of -- around that later on, but of course, it includes large amounts of one-offs, impairments, provisions, et cetera.

Free cash flow is something we are happy with at SEK 5.1 billion 2017.

That is clearly improved over 2016, as you can see here.

And moreover, the profile of free cash flow over the year has been much improved, much smoother than earlier volatility.

It's been a challenging year, no doubt about it.

We are executing on the strategy we presented end of Q1.

So as some examples then, we are investing in R&D, clear relation between investment in R&D, technology leadership and gross margin improvement.

We are taking out costs.

We'll talk more about that.

We have been very busy reducing the risk and gone through projects, contracts and balance sheet items to mitigate or evaluate or, in some cases, taken risk to the P&L during the year, and that process has now concluded.

I'll come back to that later.

I move on rapidly to the strategy execution progress here.

And here, we repeat the targets we talked about at the Capital Markets Day in November in New York, and you all remember that, with the key number here being the operating margin then, above 10% by 2020.

We see increased stability in road maps.

I mentioned that.

The strategic review of Media is completed, and I will say a few words about that.

You have all read the press release this morning.

Managed Services in terms of strategy execution is also delivering.

You all know that we identified 42 contracts to be transformed, exited or renegotiated, and 23 of those have now been completed.

When it comes to cost reduction then, we have seen a net reduction of 17,000 employees and external workforce during the year, and that same number for the second half of the year is 15,000.

So this is accelerating over the year.

This will show itself in improved gross margin and OpEx numbers as we go along.

We'll come back to that.

When it comes to the investment and growth side then, the LTE market share improved in Mainland China and a number of other wins, as I mentioned before, in preparation now for 5G.

Let's move on to Q4 2017.

So these are the quarterly numbers.

I think you have all both read them and looked at them by now.

Sales down 7% year-over-year, so a little bit less than the market development.

We are happy to say that the gross margin has improved.

Of course, we are very unhappy with the mix here, that the decline in Digital Services is almost offsetting the improvement that we see in Networks.

The operating income then, adjusted, at SEK 0.4 billion.

It's a decline year-over-year definitely, but in there, we also have the famous capitalization effect, which had an impact of SEK 2.2 billion year-over-year.

The other effect impacting operating margin is that we do increase the investment in R&D, so OpEx is up.

Cash flow performance, SEK 10.1 billion then in free cash flow in the quarter, as mentioned.

Not as strong as last Q4, but we should be -- we judge ourselves, and we hope you do the same when it comes to cash flow, on the full year.

And there, again, we had an improvement of SEK 5 billion.

The dividend proposed by the board to the AGM is SEK 1, which is identical then to last year, which means a payout -- a cash payout of around SEK 3.3 billion.

Market areas then, and I won't go through all of them here.

Just to mention Northeast Asia where we have a decline.

This is on the base of the reduction in Mainland China mainly.

While, on the other hand, on the other side of the spectrum, North America is growing.

And this is then in dollar terms.

You can see a growth of 10%, bodes well for the future and, of course, helped also this quarter as well.

I continue rapidly into Networks and the other segments here.

So when it comes to Networks, we see stability.

We see clear improvements of gross margin year-over-year and stable gross margin sequentially.

And if you look sequentially at least, then the project in China that we talked about in the Q3 report has materialized, not all, but more than half of it.

And that has weighed on the gross margin by around 1 percentage point in Q4.

We have a lot of cost-out activities going on in Networks, so -- and it's mainly related to the services portion of Networks then.

And we see that services margins are clearly improving in direct correlation to cost out, so that's good.

But also, hardware margins are increasing, of course, and that's on the back of Ericsson Radio System.

Speaking of Ericsson Radio System, now we are up to 71% of all the radio unit deliveries in the quarter coming out of the new platform.

This is strong, and we'll continue on that path.

The full year number is 61%.

Digital Services then, recording a large loss, SEK 2.7 billion.

If we exclude the capitalization impact, which is not really related to the underlying business, the loss is still very large at minus SEK 2 billion.

What we see in Digital Service is that the legacy products and services continue to decline, and it's not offset then year-over-year at all with growth in the new portfolio yet.

We, however, saw a very strong sequential growth in the new portfolio actually, over 15%.

And here, you can see 35%.

That's for the entire segment.

Unfortunately, the growth mainly relates to services.

And this is where we get into gross margin issues as well because we are still working through the large transformation projects that we have talked about several quarters.

They are still there.

Those are long-term commitments with customers, and we are working through them.

We even increased the resources in those projects to make sure that we complete them with quality.

But this hurts the gross margin, of course.

And you see reduced services margins, and the overall gross margin has continued down.

On the positive side, as mentioned then, stability in road maps is improving clearly.

Revenue Manager is one example.

It's a product that's now stable and ready.

And we do have better control, better discipline in projects now, better visibility.

So we hope that all the improvements we are doing, all the strategic execution we are doing in Digital Services now will be visible in the second half of 2018 in improved gross margins.

45 customer contracts have been identified here, and only 2 of them have been handled so far.

But all of them -- or I should say half of them, first of all, will be managed, exited or renegotiated or transformed in 2018.

And that will have a material impact when we succeed with that on the gross margin of Digital Services as well.

You see that, on each of these slides, we repeat also the Capital Markets Day target.

And just to have that said as well, all those targets for the group as well as for all the segments remain.

So we keep those targets totally active.

And then moving to Managed Services.

Sales down around 3% then, adjusted for FX.

And you can see that gross margin sequentially was improving.

This is a strong point.

Here, this also has a very close correlation to cost out in services.

But also, it's correlated to the contract reviews, where we have completed 23 out of 42.

So the annualized profit improvement there is SEK 0.5 billion.

Only part of that is in the P&L in Q4, but it is supporting the gross margin improvement there.

Then we have had a bit of seasonality in some costs here in Q4, which came into OpEx.

That actually brought the operating income down from Q3.

I think, on the full year, we are okay.

This will be more stable next year.

And the important aspect to look at here, I would say, is gross margin because that's really talking about the underlying business performance, and we should expect this to incrementally improve going forward as well.

Segment Other then, quickly.

So here, we have the Media Solutions and Red Bee Media.

And I'll come back in a second to the closure of those processes around strategic options.

But let me say the following.

We have had good -- very good improvements in margins in both Media Solutions and in Red Bee Media during 2017.

This is also related to cost out, a lot of operational improvements, and at the same time, we managed to win new business.

So we believe that we have increased the value of both Media Solutions and Red Bee during 2017.

And if we move then to the announcement of today, we are happy with the solutions in both of these cases now.

We're bringing in One Equity Partners, an experienced private equity firm with assets in technology and telecoms and -- Media, sorry.

And One Equity Partners will then be a majority owner of the Media Solutions entity going forward, and we will then stay on as a minority owner with 49% of the shares, a certain board representation.

And we believe this is a good solution, bringing in a competent partner that can help develop this business and take it to the next stage better than what we could have done within Ericsson.

So we will, as you see here, transfer assets and stuff to an independent new co when this transaction closes then in Q3, and we will operate it from there with equity -- One Equity Partners as the majority shareholder.

When it comes to Red Bee Media then, on the other hand, we have surveyed the market.

We have gone through alternatives and concluded now and decided that we will keep Red Bee Media in-house and continue to develop it as a rather independent but still an Ericsson entity.

And frankly, bids received, terms and conditions offered from external partners did not reflect the value that we see in this business.

So we believe that we can create value here going forward under the Ericsson umbrella.

So we are happy with this.

We are enthusiastic to take us on -- the Media assets in this fashion now going forward.

Next slide around the reported versus adjusted.

I think this is well known to you.

I won't go into it too long.

But just to record that the reported loss of SEK 19.8 billion, of course, is burdened by one-offs, write-downs, provisions, et cetera.

And you can see the details of them here.

Maybe one detail to point out.

The asset write-downs that we estimated to SEK 14.2 billion when we released the announcement on January 15 became SEK 14.5 billion in the P&L.

Actually, this is a translation effect of FX going from the balance sheet value of SEK 14.2 billion down to the P&L, and that's another SEK 300 million there.

But it's exactly -- other than that, it's exactly what we announced then in January.

We also have the U.S. tax revaluation, of course, SEK 1 billion, following the new tax code.

The important message, what I really want to state here then is that we now have concluded this review.

So we have gone through contracts.

We have gone through projects.

We have gone through risks in our balance sheet.

We have concluded that now, and we can draw the famous line in the sand.

Obviously, in any company, additional risks can come in the future, but now we have concluded this process, and we will close now that we know of impairment, provisions and adjustments.

Moving on quick, gross margin bridge then.

Again, Networks performing well, improving gross margin.

The same goes for both Managed Services and Other, bringing the total upwards 0.5 percentage point.

But of course, Digital Service moving in the opposite direction here.

Looking at operating income.

As you can see here, there is a fall, of course, of the operating income, both percentage-wise and absolute terms from Q4 '16.

The majority of the impact comes from nonoperational costs and expenses.

And here, you have the capitalization, amortization of intangibles and other such nonoperational effects.

And the other big factor is volume, obviously, which is down as we looked on earlier, and that has, of course, an impact on operating income.

But the underlying gross margin has improved.

That's good.

And R&D and SG&A developed more or less as expected in the sense that we are investing in R&D, so that increases, while SG&A is down.

And that trend will continue.

We'll come back to that later on a little bit as well.

Okay.

Drilling into R&D and SG&A then.

It's important here in R&D to keep track of this -- the capitalized R&D.

As you know, we have made changes in how we apply that.

So the swings can be quite large between quarters.

And here, you see SEK 1.7 billion actually of R&D is explained by the changes in capitalization.

But following that then, you see in Digital Services, we have actually reduced R&D, taken costs out there by streamlining the portfolio and similar.

Networks, we are investing, as you know, and the same goes then for Emerging Business, where we put a little bit more money into some of the emerging technology.

On the SG&A side, to your right here, we go from -- talking adjusted numbers, now, from SEK 7.8 billion to SEK 7.4 billion.

And in simple terms, that represents also the saving we have after the savings -- cost-saving program, SEK 0.4 billion.

But obviously, we have some other effects there as well, including FX, which worked in our favor when it comes to costs, less amortization of intangible assets.

And then there's a couple of other factors which came in, in the opposite direction here.

And there we have certain accruals for incentives.

We had some retroactive salaries and a number of smaller items there, which correspond to the SEK 0.2 billion plus then.

But net-net, down SEK 400 million, which is equal to the cost saving visible in the P&L.

So a little bit more on the cost program as such, the SEK 10 billion program.

Annualized run rate-wise, we have now achieved SEK 6 billion out of the SEK 10 billion, so more than half completed from the sense of achieving the actions that will deliver the annual run rate.

We see in -- if we start with the cost of sales side.

Cost out is clearly visible now in gross margins, as we have talked about now here today, in Networks, in Managed Services and in Other, where we have the 2 Media assets.

So there we see that the cost saving is biting, to some extent.

When it comes to cost of sales, of course, there is always an in-built (sic) [built-in] delay from actually creating a saving until it's visible.

And the reason is, of course, that cost typically passes through the balance sheet in terms of work in progress before taken to the P&L.

Average is around 64 days for that delay on average group total.

When it comes to G&A then, we have, as mentioned, reduced SEK 400 million in the quarter, and of course, we expect this to increase as we come into 2018 in Q1 and Q2.

We are removing overlaps in business areas, taking out support function.

We're doing simplifications in support function.

We continued execution of all the initiatives under this SEK 10 billion umbrella now going into Q1 and Q2.

Other examples are in real estate and IT where we can make savings by, in the case of real estate, consolidating sites.

I mentioned in the Capital Markets Day a number of sites that we are closing down, so there is saving to be -- to still be realized there.

And we put a lot of attention also on discretionary spend, of course, in order to reduce everything related to travel, management consultants and all other external spend as well.

We can expect additional cost savings to become visible -- more and more visible in the first half of the year.

I should also just mention here again that -- and I think, actually, I did in the beginning.

15,000 headcount, that's a combination of employed and external workforce, have left the company during the second half.

And here, you see another number, 14.3 -- 14,300, and that's in the selected categories that are detailed here on this slide.

We feel good about the cost program.

We are impatient here.

We want to drive this as fast as possible and we are.

But there is a delay effect until we see it fully in the P&L.

Let's be clear about that.

Cash, another favorite topic.

Here, we are doing quite well.

In the quarter, we have increased gross cash by SEK 12 billion, but maybe more importantly, net cash by SEK 10.6 billion with the strong performance both in operating cash flow, which, among other things, contain, of course, further efficiencies in inventory and the supply chain, just to mention one item; in investing, where we have reduced CapEx, more discipline in CapEx, but also, of course, the function of the Global ICT centers where CapEx was large before and it's coming down now as we conclude those projects or build up.

And then on the financing side, we've raised a couple of credits related to our 5G R&D with Swedish Export Credit and Nordic Investment Bank, good terms, and further supporting our gross cash position, now ending up at SEK 67.7 billion, which is a comfortable position to be in.

Next slide.

Not to go in all the details here again, but just to point that the debt maturity profile, which also gives resilience and strength to our strategic execution, namely that the debt maturity profile is -- looks like it does with 0 repayments coming up in 2018 and 2019 now after these last refinancings.

The U.S. dollar exposure is something we keep an extremely close eye on, and we're taking proactive measures to reduce exposure here.

But as a rule of thumb, we want to offer this, which we have stated also before, that 10% fluctuation of the U.S. dollar effect -- rate results in 5% impact on sales and 1 percentage point on operating margin.

So that is good to pay attention to as we go forward now into Q1.

Last Q1 2017, the average U.S. dollar rate was around SEK 9. And today, we are below SEK 8, and let's see what Q1 will deliver.

But with the current rate of today, at least, it has a clear impact.

Okay.

Planning assumptions then.

And here, you can read this.

We reiterate the RAN equipment estimate, minus 2%.

When it comes to net sales, we basically talk here about the currency, but also the IPR side, where we say that SEK 7 billion is really the amount of current contracts in the portfolio.

And with the current FX rate, this is what can be expected, of course, with upsides coming from possibly new signed contracts with new, for example, emerging handsets or device manufacturers.

Restructuring, SEK 5 billion to SEK 7 billion estimated at the moment.

And then Digital Services improvement visible in the second half.

And here, we have added also a table showing the specific result or impact of the capitalization, both in the actuals but also going forward first quarter 2018 as well as 2019 to make it a little bit easier to simulate the future.

So just by closing off then, we have worked a lot with the risks -- commercial risks and in balance sheet this year.

We have concluded that now.

There is no need for additional write-downs or adjustments with the visibility we have, which is very good.

Cash flow was strong, covering the dividend also.

Our balance sheet is strong, and I would say we have resilience, we have flexibility now in our balance sheet to execute on the strategy.

Then looking at the 2 largest segments.

Very solid performance in Networks, gross margin improving.

And we see the correlation between investment in R&D, competitiveness in the market and gross margin.

We see that materializing already now.

However then, Digital losses, of course, very large losses and an enormous sense of urgency in the whole company related to Digital Services and the turnaround that we need to execute.

We continue to execute on the plan, on the strategy that we have laid out, and some positive signs we are seeing there in stability, as I mentioned.

So with that, I think 2017 was a tough year, but we have laid the foundation for a stronger Ericsson going forward and a stronger Ericsson in 2018.

Thank you.

Thank you, Carl.

Before handing over to the Q&A, I just would like to repeat that Borje Ekholm, our President and CEO, as he said this morning at the press conference, has the flu and is home curing himself this afternoon, so he couldn't fulfill the program.

Just saying that again.

And then, operator, we are open for the Q&A.

So please, you can open up.

(Operator Instructions) Our first question comes from Rich Kramer of Arete Research.

I'm just trying to run the numbers, and they -- to a sense, they don't seem to add up entirely towards your 2020 goals, especially given your comments about realizing SEK 6 billion of your SEK 10 billion OpEx savings already.

Can you be more specific about whether it's going to be removing costs from product or changing the mix of what you sell to improve the gross margins?

Or if it's in services, wouldn't that imply a much steeper reduction in sales?

And I also noticed that you had an extremely sharp decline in inventories in the fourth quarter.

Shouldn't that also be -- since it's typically a lead indicator of your sales, imply a much lower sales base as we head into the first half of the year?

If I start with the last part on inventory then.

What you see in inventory is also a reduction related to the provisions that we have made.

The SEK 3.2 billion that we talked about, part of that is inventory related, which means you get a hit in the P&L but then the inventory is reduced, so net, no effect on the cash flow.

But that has also brought the inventory down.

Having said that though, there is also a big efficiency drive, and we see results of that in the whole supply chain.

So inventory is coming down because of lower stock levels, thanks to a different way of running our supply chain globally.

So we are quite happy about that.

But when it comes to the targets, we stick definitely to the targets, and all the detail around the segments that we discussed then in -- at the Capital Markets Day still remain.

Yes, we are taking out cost on the product side, definitely.

We see that, that is a competitive advantage now that we have with the Ericsson Radio System, and that will continue as we continue to launch new generations of that, taking out cost on our side, but of course, improving also benefit for the customer.

But on the service delivery, yes, we are taking out cost there as well, both in Managed Services, Digital Services as well as Networks, and that will also contribute to a further improved gross margin.

And just the final thing then, you mentioned the SEK 6 billion.

Just to be very clear, the SEK 6 billion is what we have achieved in a run-rate saving, but that is by no means visible today in the P&L.

So the full effect of the full SEK 10 billion will come into the P&L after half year 2018 when we have completed the program.

But it's only a fraction of the SEK 6 billion that you can see in the P&L today.

Our next question comes from Achal Sultania of Crédit Suisse.

One question on OpEx, and then second one is on Media.

So on the OpEx, I just wanted to get my math right on this.

So if I look at 2017 OpEx, your OpEx is about SEK 59 billion, give or take.

And then you are saying that there is going to be another SEK 2 billion to SEK 3 billion headwind from higher capitalized expenses going forward.

So -- and then out of SEK 10 billion of savings that you are planning, only, I think, SEK 3 billion is aimed at OpEx.

So does it mean that your OpEx is going to be broadly flat from the SEK 59 billion level we've seen just now?

Yes.

The answer is rather flat, rather stable.

Yes, exactly.

You can say that.

If I can add, I mean, for Q1, if I can -- I mean, you are asking for full year maybe.

But when it comes to the first quarter, just to maybe give some color there, we have a strong seasonal effect.

If you look back the past number of years, OpEx is typically down SEK 2 billion from Q4 to Q1, and that's roughly 50-50 between SG&A and R&D.

Now R&D, we continue to invest there, of course, and we will see a certain increase in R&D.

But when it comes to SG&A, the savings will continue and be visible, so there, probably a conservative estimate.

I would say, those -- the increase in R&D and the saving in SG&A will net out.

That would be my conservative estimate for Q1.

Then we have, of course, the FX effect as well, not to forget that.

That will be to our benefit, let's say, on the cost side probably in Q1 if current levels continue.

Okay.

And maybe just second one was on Media.

So if I understand this correctly, you are splitting this Media business into 2 parts.

One is your broadcast or Red Bee, and the second one is Media Solutions.

If I go back at the Analyst Day, I think you mentioned -- some of the numbers you gave kind of implied that the Media business was SEK 4 billion in sales for 9 months of '17 and about SEK 2.5 billion of EBIT loss.

Now given that one asset is still owned by you and the other asset is going to be owned by the equity investor, like can you give us some sense of how big both those are in terms of revenue or EBIT contribution?

Yes.

So Media Solutions is around SEK 3 billion in top line, and Red Bee is around SEK 2.5-ish billion, let's say.

A lot of work has been done actually during 2017 to improve the profit levels here.

So we have a certain loss.

Red Bee Media, the broadcast side, is around SEK 0.3 billion -- or say SEK 300 million loss in the full year 2017, but we are steering that now towards a breakeven situation.

And when it comes to Media Solutions, yes, we will have a 49% ownership of that, so basically 49% of the results.

We don't expect that to weigh on Ericsson going forward in any material way.

So basically, the top line of Red Bee Media and the whole consolidated P&L will remain but with improved profitability, passing breakeven, while Media Solutions then, we have 49% of the result of that.

And that, as I said before, has improved tremendously during 2017.

So just to get that right, Media Solutions is higher loss -- is making more losses, significantly higher losses than Red Bee?

Yes, that's true.

Our next question comes from Sandeep Deshpande of JPMorgan.

Two quick questions, if I may.

Firstly, was there any consideration for this 51% transfer to this private equity firm?

And secondly, if you look at the gross margin in the fourth quarter of '17, you had indicated that there was going to be some negative impact to that gross margin from the China deal that you took.

So if you correct for the China gross margin -- the China impact, what was the gross margin?

And now will that impact go away in the first quarter?

And so should we be seeing a positive impact to the gross margin into the first quarter and thus 2018?

Starting with your second question.

The impact in Q4 on the Networks gross margin was around 1% negative of this China contract that we talked about.

So yes, 1%.

And sorry, the first question...

No.

I mean, so that continues -- sorry, the first question -- second question, does that continue impacting 2018 or that stops now completely?

So we have delivered more than half of the project, meaning that certain parts remain in 2018.

We don't see any material impact on the Networks margins of the remaining part at all.

When it comes to the One Equity Partners then, we don't disclose the commercial details of the transaction at all, so that remains confidential.

Our next question comes from Simon Leopold of Raymond James.

I just wanted to get a clarification first.

On this activity you're doing in terms of the Media Solutions unit, I want to square the operating expense commentary, where you suggested operating expenses would remain fairly similar around that SEK 59 billion level.

I believe that includes or reflects the cost savings that would result by moving the Media unit out of the operating expenses and into a JV.

Is that how we should think about that treatment?

I just want to make sure I understand that as well as the timing.

Now -- yes, so definitely.

Let's come back to how exactly I will account for it.

But assuming that, as you make that, it will be the equity method, let's say, where we have 49% of the result as one line in the P&L.

Then clearly, that -- then OpEx would be impacted, so -- I mean, as both SG&A and R&D would come down.

And you've commented earlier on the trends in China and North America.

It sounds like you're suggesting China is a little bit worse than you were anticipating, and North America, you had talked about being somewhat better.

I'd like to see if we can get an update on how you see your European business, particularly around some of the opportunities and developments.

Perhaps does 5G start contributing?

Has your outlook on 5G contributions changed at all since last time you updated us?

Yes.

When it comes to Europe, I would say investments remain rather stable there but on a low level.

So that scenario continues as we see it.

And of course, there's a lot of focused network transformation and so on.

Data consumption keeps increasing.

Also, [the air] quality improvement demands are there.

But we would -- I would say the investment levels continue on the low side.

That's our estimate.

A lot of trials going on for 5G in Europe.

Of course, some operators expressed a certain level of cautiousness, but we are working with them on both the trials and business models and so on.

When it comes to our contribution on 5G, I think that was your second question, when it comes to IPRs and similar patterns?

Yes.

Yes.

So that has increased quite a lot.

Our contribution levels have increased.

We are in the lead there.

And then, as you know, there's a certain voting around -- among peers there for what contributions get accepted, and then our share that has increased a lot.

I don't have the numbers with me at this point.

If anyone can nod or help me around the table?

No.

But okay, it is a positive story anyway, and we can come back in different calls around more specifics on that.

Our next question comes from Stefan Slowinski of [Audio Gap].

Just to clarify, now that you're essentially keeping the Red Bee business and also going to be consolidating at least 49% of the other Media business, does that mean that we should adjust your 2020 revenue target accordingly to reflect that?

And are you still committing to the at least 10% operating margin target for the group in 2020?

We are.

So the Media assets were excluded already at the Capital Markets Day when we talked about the bridges and the targets, so this does not affect it.

We remain completely committed to the -- both the top line target that we expressed, gross margin as well as the 10% operating margin.

Okay.

But what you're saying is the Media businesses were excluded at the Capital Markets Day.

So now if we re-include them, would you still be able to hit the at least 10% operating margin target for the group in 2020?

Yes, yes.

Absolutely, yes.

So basically, the target remains exactly as stated at the Capital Markets Day.

Okay.

But presuming the sales target needs to get revised higher as you're going to be incorporating a business that you weren't incorporating when you gave those original targets.

Yes.

This is -- I wouldn't say it's not that material.

I mean, today, it's SEK 2.5 billion.

It's a bit more than 1% of net sales.

And then, if you remember, we gave a range also at the Capital Markets Day of top line.

So I wouldn't say that this particular factor influences that at all.

Okay.

Okay, great, and just one follow-up.

Just on the operating cost side, obviously, your margin targets longer term were largely driven by gross margin improvements.

We've seen some of those on the Network side, not on Digital Services, but there wasn't really a significant contribution, if you will, in terms of operating cost assumptions and cuts there.

Now that you're kind of on track to hit the midyear 2018 SEK 10 billion cost plan, would you take the opportunity to look at where you are and say there's more we can do here, especially on operating costs, to extend that between now and 2022 to drive even larger efficiencies out of that and out of the cost base?

I think prudent cost management and taking inefficiencies out and introducing efficiencies will always be part of everyday life here.

We don't now talk about another program on top of the SEK 10 billion.

It's -- for us, it's important to deliver on that now, and we think we have good progress showing the SEK 6 billion out of the SEK 10 billion done in terms of annualized run rate.

Yes, very little visibility, but that will increase now going forward into 2018.

And now is not the time for us to quote another number or start a second program on top of that.

We will -- we focus on delivering this.

Our next question comes from Aleksander Peterc of Société Générale.

I'd just like to clarify something regarding your market guidance.

So the minus 2% you stated that's unchanged.

However, my understanding is that this is in U.S. dollar terms.

And given that the USD has depreciated against all major currencies, particularly the euro, by about 10% since your November update, isn't the implicit constant-currency market outlook now lower?

Could you confirm that?

And then also further to the Media partial disposal, can you give us timing for the deconsolidation of the business that you are now putting into -- you're consolidating with the equity method?

From which quarter we should do that?

And secondly, your SEK 59 billion OpEx level, is that excluding the, I presume, about like SEK 2 billion to SEK 2.5 billion OpEx that goes out with the Media exits?

Yes, okay.

So when it comes to the market decline there, we stick to and you know that we are -- we concur with external agencies here as well when we talk about the minus -- first of all, minus 8% in -- historically, then in 2017, minus 2% going forward.

And then '19, by the way, will be minus 1%, and 2020 will be flat.

That's the -- our outlook at the moment.

And this is expressed, of course, in U.S. dollar terms.

How that will play out with different exchange rates, I can't really comment on that.

But we see that this as an external assessment, estimate of the market as such in RAN.

And then, of course, we have our own U.S. dollar exposure to deal with, but that's our job to work on that, yes.

So your other question on Media Solutions and on the OpEx.

OpEx levels actually, when we exit that business, the 51%.

Yes.

So I mean, this will, of course -- as mentioned, this will reduce our costs, and it's not so that we will take that and reinvest somewhere else necessarily.

We have the plans in Networks on certain increase and the plans for the other segments as well, and that is not going to change because of disposing of Media.

So maybe -- sorry, we got a question before how OpEx will develop full year, and we said it's flattish.

It doesn't include then the change of the Media Solutions.

Right.

So that goes out, of course.

So -- and your last question around the timing.

So we expect this to close in Q3.

That's what we think.

And then that's when the new consolidation method of this will come into effect as well.

Our next question comes from Douglas Smith of Agency Partners.

In the morning press conference, before Borje lost his voice, he mentioned that there was no 5G revenue in the plan for 2019, 2020.

Is that because the revenue recognition for 5G is still so uncertain?

Or is the logic that any 5G would be offset by 4G going down?

No.

I think probably what he meant to say was that it's still small.

Of course, it will grow but from a low base, starting extremely small '18 and then increasing a bit '19.

I mean, '20, we should see a little bit more material revenue.

Okay.

And you've mentioned also -- yes, I'm sorry?

No.

Go ahead, please.

You had mentioned earlier as well that you didn't sell as many receivables as normal in the quarter.

What's the logic for that?

The logic for that is that we prefer to deliver on real operational improvements, of course, in our working capital.

And selling receivables is something we can do.

It's a tool that we have to our disposal.

Sometimes, we do more.

Sometimes, we do less.

But now the overall strategy is to bring that down and instead deliver on proper operational improvements.

So we reduced it quite a lot, and we wanted to state it to illustrate that the improvement we see in the cash flow we have generated is actually generated in the business.

It's not so that we have gone out and sold SEK 5 billion more of receivables or something that, on the contrary, we have been bringing that number down.

Our next question comes from David Mulholland of UBS.

Just 2 quick questions on the accounting side.

Firstly, just coming back to the 2020 targets.

Whenever you gave those, they were based on [8.20 SEK-USD], and you've obviously flagged the currency impact but you're also reiterating the target.

So can you just clarify?

Is that reiterated based on [8.20] or at the current FX rate?

And then just secondly, on the IFRS revenue accounting changes.

There's a bit of color in the release on what it would have been in 2017 and '16.

It looked like it would have been a negative in operating profit in '16 and a positive in '17.

How should we think about this impacting what you report in the business through 2018 as you start to implement it?

Yes, exactly.

So when it comes to the 2020 target, to start with, yes, of course, a weaker dollar would give us headwind.

Our focus is then to mitigate any such development so that we deliver on this target as well.

You can say when we expressed the target on stage there in -- at the Capital Markets Day, we also said that it's somewhat on the robust side.

And if you look at the ranges that we have by segment, there is a range, and there is a little bit of headroom there.

But of course, it's about mitigating dollar should the dollar fall, and this could include, of course, working with the business mix as such, further cost reductions.

Of course, we have our investments in R&D, bringing out competitive products, which will also sort of improve the margins and somehow -- somewhat counter this as well.

We are also looking into reducing the exposure as such, so natural hedging, for example, matching in and outflows of currencies, which we have done in the past as well, but we can do more.

Then there is another phenomena actually to mention here maybe.

And sometimes, we refer to it as pocket currency, meaning when we sell to customers in U.S. dollars, customers who are not in the U.S. but have a different currency in their home market.

It could be Russia, it could be Brazil, for example, just to pick a few.

And what we typically see is that when the dollar weakens, purchasing power in those countries and with those customers increase, which somewhat then offsets the reduction in U.S. dollar sales.

So there is a lot to say around this, but the short answer is that we keep the commitment exactly as on Capital Markets Day at 10%.

And then on the IFRS impact?

IFRS, exactly.

So there, we will -- you're right in what you said.

So -- but we will issue a restate in March, and then all of that will become totally visible, how it will be.

So I would actually refer to that.

It's coming out in a month -- 6 weeks, in March.

And then we could -- you will look at all the effects there.

You find in the report already the equity adjustments that have come both out of IFRS 15 and IFRS 9.

And our last question comes from Amit Harchandani of Citi.

Two questions, if I may.

The first question I have is really with respect to the Media business.

You've talked about retaining 90 -- 49% stake to capture the upside in the business, but you also said that is the part that is the most loss-making.

So I'm struggling to understand.

Wouldn't you also be capturing or being exposed to the downside and the losses in the coming years as you try to turn this around?

And I can't quite understand the strategic rationale to keep the ownership at 49%.

Why not 20%?

Or why not 30%?

Just trying to get my sense of the rationale on that one.

And then I have a follow-up.

Thank you for the question.

First of all, on profitability, in Q4, this business was breakeven, to start with.

So during the full year, yes, there were losses, but it has greatly improved during the quarter.

So it's not sort of -- it's not weighing on the results even before this transaction.

Why 49%?

This is a function of engaging with partners, with possible takers here, and this is -- happens to be now the commercial deal that we have.

We think it's good.

We are a minority.

We think the upside could include, as I mentioned before, I mean, further consolidation as well.

And also, when it comes to the strategic angle here, the customers in question here are often the same as for our telecom business, so we think it's not a bad idea to remain in this.

It's relevant for the customers.

And therefore -- we are not in the driver's seat, but we have a minority stake, which means that we can take part of the development of this piece as well, which is important for our key customers, the operators.

Okay.

And just to understand.

There are no further liabilities or commitments from your side in terms of supporting restructuring -- further restructuring within this business after the transaction closes?

No.

I mean -- so we don't disclose all the terms around this.

It's a commercial agreement we have, but the simple answer is no.

Okay.

So we just stick to the restructuring envelope that you have given as overall for the business?

Yes, absolutely.

Thank you, Amit.

So we close the Q&A here, and I think that maybe Carl wants to make some closing remarks.

No.

Just to say that -- again, that 2017 was a year of a little bit of turmoil, and we've had our fair share of that, coming, of course, from the overall market development.

But I think we have started off on strategic execution in a good way.

We have delivered on certain parts of that and established our position better.

Now we've laid the foundation for 2018, and I think we are building a stronger Ericsson through all the activities we have in strategic execution.

And of course, from my point of view also, I'm very satisfied with the way the balance sheet has developed, both in terms of derisking but also creating resilience going forward to carry this turnaround phase around.

We are, by no means, done.

Digital Services remain a great big area of concern, and we are, of course, gathering the whole company and the executive team around resolving that problem.

But don't forget that there are also other very positive points here, with a stable Networks; Managed Services improving; actions on the Media Solutions and Red Bee, which will take us forward and create more value; strong cash flow and, increasingly so, cost out.

Thank you.

Thank you all, and goodbye.