Telefonaktiebolaget LM Ericsson (ERIC) 2018 Q2 法說會逐字稿

Welcome to Ericsson's analyst and media conference call for their second 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 hello, everyone, and welcome to this second call for the day.

With me here today, I have our CEO, Börje Ekholm; and our CFO, Carl Mellander.

So during this call today, we will be making forward-looking statements.

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

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

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

With that said, I would like to hand over to you, Börje.

So please, Börje.

Thank you, Peter.

So welcome to our presentation of the second quarter, and thanks, everyone, for joining.

Last year, we defined a new focus strategy in order to turn our company around.

We relied on 3 strategic pillars.

The first one is to increase investments in R&D to secure technology leadership and to provide leading solutions to our customers, but also to leverage technology to improve the competitiveness of our product, so basically investing in R&D to improve gross margin.

We -- for the second was to obtain a competitive cost position in G&A but, more importantly, in service delivery by simplifying and taking costs out, and that would also drive gross margin but also structural costs.

And the third is to improve our competitiveness.

And based on the improved competitiveness, we could selectively strengthen our market position.

Our ambition was to establish a satisfactory profitability level assuming flat revenues.

So basically, we wanted to improve our business in a flat to falling market by controlling what we can, basically our costs.

This would allow us to have a competitive cost structure that once we see growth returning in the industry, we would be in a very good position.

It's been tons of hard work in the company, but it is rewarding to see that hard work now paying off.

And we see good progress in turning around the performance, and it's visible in the second quarter following a good first quarter as well.

Well, you also see a increasing momentum in the business, and now we see Networks returning to growth for the first time in some time.

So I would say a lot of work remains, but we feel traction is very good.

So at the Capital Markets Day last year, we put a target for 2020 of reaching an operating margin of 10%.

We see that we're tracking well towards this objective with the execution we've done on our strategy the first half-year this year.

We continue to invest in technology leadership.

We have increased the -- or we have hired more than 2,500 engineers over the last year, and that we do to improve our cost position in the what I would call a 4G portfolio but also lead the way into 5G.

We have achieved the cost-out objective we set last year of SEK 10 billion run rate.

Of course, our work on the -- we may have reached this objective, and we have finalized that program we've had in place, but the work on the cost side never ends.

We will not have any more programs, but we will work with continuous improvement in the business.

And we continue to invest in capturing selective market opportunities where we have a competitive advantage.

We know that pursuing this type of opportunities can and will have some short-term costs, but they are long term attractive.

So we will capture those but having a very strong discipline and a strong focus on the operating profit level, although it may impact lines above operating profit.

We see traffic demand in the Networks continue to grow very strongly on a global basis, basically doubling every 18 to 24 months.

And we see now operators investing again in order to provide the user experience to their end user and, at the same time, manage costs.

We see this can only be done really through the use of technology.

We also see the 5G discussion is heating up.

The standard has accelerated more than a year, and operators are increasingly preparing to invest in the network and preparing for 5G.

We see the first business case for 5G being enhanced mobile broadband, but the interest for fixed wireless access is heating up globally as well.

We see that operators are increasingly wanting to install 5G-ready hardware.

And of course, they do that for the simple reason of not having to rip anything out as you upgrade to 5G.

And here, we are -- our ERS portfolio is really only a software upgrade away from carrying 5G traffic.

So based on the progress and the visibility we have, we feel comfortable that we're on track to achieving our long-term objective of 10% -- or 12% operating margin beyond 2020.

Our top line has also started to flatten out with a decline of only about 1%.

The reason for the decline is really the strategic priority to exit some parts of our business and contracts.

In addition, we're now seeing Networks actually returning to growth in the quarter on the back of a more competitive cost structure.

Gross margin has continued to improve as a result of costs out and increased ERS penetration.

Operating income, still not where we want it to be at 2020, but it's a clear improvement compared to last year as well as the first quarter.

Our focus on free cash flow continues, and it has also improved compared to last year.

We are now only slightly negative, and that's primarily a result of the acquisition in Emerging Business but also less sale of trade receivables in the quarter.

Overall, we have achieved savings in excess of our target of SEK 10 billion.

The full effect of all the actions will not be fully visible in the P&L until the second half of this year.

We have achieved structural run rate savings in G&A of SEK 2.7 billion by the end of Q2, fully visible in the P&L.

In service delivery, we have reduced costs in excess of SEK 8 billion on a run rate basis.

We see this in an improving gross margin in all segments and -- for basically a total uplift of 300 basis points in gross margin during the second quarter.

So while we have achieved the SEK 10 billion target, we see new opportunities to continue to improve our efficiency.

And we estimate the restructuring costs, therefore, to remain at SEK 5 billion to SEK 7 billion for the full year even though we only used SEK 3 billion during the first half of the year to complete the SEK 10 billion target.

Our service delivery was clearly not cost competitive before.

But following the changes in ways of working as well as simplification and delayering, we have now a much more competitive cost position.

With the changes we have done, it's not only lowering the -- our cost position or improving our cost position, it's making us much more flexible and more agile as well, which allows us to respond quickly to customer needs.

So unfortunately, we have had to reduce our workforce by a gross of 23,000 and net 20,500 after hiring 2,500 engineers in R&D.

This has clearly put a lot of stress on the organization.

The hard part is -- may not be to take out this amount of costs, it's really to do with while protecting the top line.

And I would say here we're -- we see that we made good progress during the last year and the second -- first and second quarter.

Of course, the focus on the total workforce, and that's the only way to track the full costs.

So it's -- again, that's why we're tracking total workforce.

We see a reduction in total workforce in the second quarter of this year as well, and that is net after having increased our headcount following some new contracts we have taken, both in Managed Services as well as other parts of the business.

So in short, as a result of this reduction in costs, we clearly have a much more competitive cost position than we had a year ago.

We see good growth in North America, and that's really on the back of our customers getting ready for 5G and actually preparing the network.

In China, LTE investments have continued to fall, which has impacted the Northeast Asia market area.

Overall in Europe, we see good growth, but it's offset by some declines in certain markets as well as exited contracts, which is why you see a slight decline in sales in market area Europe and Latin America.

In Middle East and Africa, we had a slight decline due to some countries with monetary restrictions.

In Southeast Asia, the decline was more related to timing of contracts.

So we continue to execute on our focused strategy, putting us comfortably on track towards the targets for 2020.

In Networks, we see penetration of ERS continue to increase and it's now 84%.

We've also taken out significant costs in service delivery.

Now we have increased our investments in R&D to strengthen our cost position but also to prepare for 5G.

Losses are reduced sequentially in Digital Services, but we have clearly more to do.

We have seen cost efficiency gains in service delivery, and we're also changing the ways of working in R&D, resulting in some improvement on R&D spend.

In parallel with these cost activities, we're also increasing our investments in 5G-ready and cloud native products.

Managed Services achieved a second quarter of positive operating income.

This is clearly on the back of costs out but also contract reviews.

There are some onetime positive effects in the second quarter, but here we see a much more competitive offering in the market as well.

And we continue to increase our investments in automation and machine learning, and we see some very important selective customer wins happening right now.

In our Other business, operating income is still negative and is negatively affected by the Media business to the tune of about SEK 0.4 billion.

We continue to invest in selective new technologies in this area like IoT where we see very good growth.

But it's also quite clear from the performance that the revenues are not yet covering costs, but we would also say that we see good progress on our offering.

So with that, I'm going to give the word over to you, Carl.

Thank you, Börje.

Excellent.

And good morning, good afternoon, everybody.

So let's look a bit more in detail at the numbers per segment to start with.

And here, we look at Networks.

And as Börje said, back to growth, 2% in the quarter.

Last time we had growth in this segment was in Q4 2015.

So that growth has also come with the improved margins.

And as you can see, gross margin, over 40% here or 400 basis points improvement year-over-year.

And this is really related to a structurally lower cost base and both around the service delivery piece as well as the hardware, Ericsson Radio System.

So a good momentum here in North America but also other places, as Börje was talking about.

In summary, good market traction and growth in the portfolio with a strong margin improvement in our Networks.

Digital Services has improved margins substantially.

Still reporting a loss of SEK 1.5 billion, but the direction is good.

And it's encouraging to see that we have been able to reduce the losses in this quarter.

I want to mention that the proportion of large transformation contracts actually did increase in the quarter, as we anticipated when we reported on the Q1 results.

And this weighs on the margin, but there are effects in the other direction as well offsetting this.

That has to do with further cost reductions mainly but also stronger software margins in this business.

The top line decrease you see here of 12% is coming from the continued decline in the legacy portfolio.

And the new portfolio also declined in the quarter, but however that's largely explained by a single contract delay in Northeast Asia, where we have a tough comparison with Q2 2017.

So encouraging improvements.

Still SEK 1.5 billion of losses, and our job is, of course, to take this number up towards the 2020 target of low single-digit profit.

Managed Services executing on the strategy, as Börje mentioned earlier, taking costs out, working through the 42 nonstrategic contracts, 33 done to date, but also staying disciplined when it comes to taking new business, new contracts, which is extremely important here as well.

And this is working well now with, as you can see, a strong margin development in the quarter.

I should mention that there are certain one-offs here in the margin, about SEK 100 million in one-off effects positive.

We are divesting the field service activity in Sweden, and we are happy about a new owner taking over this business that can develop it further.

So this is also another sign of strategy execution.

Emerging Business and Other, a collection of different parts.

Of course, iconectiv in the North American market doing well with a number of portability contracts which has started now.

When it comes to the future growth areas, we invest selectively in areas which we believe could be the future possible growth areas and scalable, including IoT, for example.

And to mention one example, we have signed a contract with China Mobile, which we announced earlier, around the device connectivity platform.

And here it's, of course, about being very disciplined when it comes to investment in this area.

As you know, we committed to a target of breakeven by 2020 in this total portfolio.

The Media side then, yes, we're accelerating and full speed ahead on closing the MediaKind transaction.

Gross margins there have improved.

Börje mentioned that the loss in this quarter from Media is around SEK 400 million, but we see a steady improvement there in margins.

And in the Red Bee Media piece, we see positive signs now, as we are clear on keeping this business in Ericsson, that customers actually take more comfort in that and entrust us with their business.

So we have promising signs there also in, for example, the managed OTT platform.

Moving on to the gross margin.

This is to say that we see improvements in gross margin across all the segments.

All segments are contributing here, which is strong.

And also, all what we call both hardware, software and services in our business are all contributing to an improved gross margin.

There is also a market mix factor here.

We should say that.

So it's a positive market mix this quarter.

This can vary over time, of course.

Final comment here is that the sequential improvement you see is really derived from Managed Services further improving, and Networks and Digital Services were stable sequentially.

If we move to the cost bridges.

R&D continues as planned and it follows the same pattern with the increased investments in Networks while we are reducing some in Digital Services.

When it comes to SG&A then, the saving out of the cost program in the quarter was SEK 0.7 billion, and we had a couple of items offsetting this, namely a revaluation of customer financing, SEK 0.2 billion, and then certain other items here amounting in total to SEK 0.5 billion.

And this includes also provision increases for variable compensation compared with 2017 where, of course, Q2 was a very weak quarter where such provisions were dissolved.

What's not shown on this picture is the third line in OpEx that you have noted now which follows the IFRS 9. It has to do with impairment on trade receivables, and there we have SEK 0.4 billion in Q2 versus SEK 0.2 billion in Q2 2017.

Operating income then.

You can see what the big contributors here are.

And then a relevant question to ask here is, of course, how are we going from this 4% to the 10% target in 2020.

And just to mention some of the building blocks there.

Starting with Digital Services.

If we just for a minute assume that we would take that up to breakeven, this would be a contribution then on bottom line for Ericsson, about 3 percentage points.

This means continued cost out in service delivery and SG&A but also efficiency and R&D rates are working; and then also a factor of mix, where software becomes larger in terms of proportion.

So that's the Digital Services side.

A breakeven would contribute 3 percentage points here.

Then Networks, of course, we're continuing with the Ericsson Radio System penetration.

We are at 84%, as you saw before, and, of course, we're going for 100%.

But it doesn't stop there because this portfolio will continue to develop, of course, and deliver a better margin over time as well.

More service delivery efficiency, better scale.

Remember that Q2, of course, is seasonally low in the top line in Networks as well.

So there, we have another, say, call it, 2 percentage points to be gained in our planning.

And then finally, we have Emerging Business and Media there contributing a bit more than 2 percentage points as well from Media, improving towards breakeven, but also the Emerging Business where we will control the portfolio to deliver a breakeven.

And that has to do with, of course, the amount of investment we put into new areas.

So all in all, with those improvements and the detailed plans behind, we would have a path towards the 10% operating margin by 2020.

Cash flow was clearly improved from previous year, and we've had a number of quarters now in a row where we surpassed the year-over-year comparison.

And the main contributor here is working capital, where we see further improvements now in the quarter.

The free cash flow then, and you can see the isolated number here, but also important to see that year-to-date number is SEK 0.3 billion negative, and that can be compared with the same period last year of minus SEK 4.6 billion.

So a clear improvement of more than SEK 4 billion between the years.

The financial position remains strong.

Here, we feel very confident, solid cash position.

We have also in the quarter signed a 5-year related loan with the European Investment Bank to further strengthen the debt side here and the debt maturity profile.

It's a 5-year maturity.

And that is a loan that we haven't drawn down yet.

Therefore, it's not visible here in the graph.

Next slide is around a couple of other financial items that we talk about in the report.

And in the interest of time, I will not walk this through now, but we included here for you future reference.

But it has to do with a bit of explanation around impairment losses, the finance net, taxes, pensions and restates between units that we have done in the quarter.

It's all in the report as well.

A final word from me around the planning assumptions then.

And here, again, I'd like to refer you to the report where this is all detailed.

There are no major changes since Q1 here except for one thing.

We mentioned the cost for separation of the Media Solutions or now renamed MediaKind business, and that's SEK 0.3 billion to impact in Q3.

So with that, thank you for this part, and back to you, Börje.

Thank you, Carl.

So before we head over to Q&A, let's summarize where we are.

So we set out on a journey of a focused strategy last year with the objective to turn the company around on a flat revenue base, i.e., not hoping for revenue growth to help us out.

We will do this turnaround by investing in R&D to have a competitive portfolio and by taking out significant costs in service delivery and G&A.

It's been a lot of hard work by my colleagues in the company, but it is, of course, satisfactory to see that we're executing on this strategy.

We see good improvements in our gross margin, indicating a competitive offering and competitive cost situation.

We're now adding a second quarter with improved performance to the first quarter, including reaching the cost out objective.

We will continue to execute on the strategy, investing for technology leadership and, at the same time, keeping a tight cost control.

And we know that when we have a more competitive business, we will see new opportunities materialize.

We're seeing very strong business momentum in our business, and we already now see Networks returning to growth in the second quarter.

In addition, we see the market increasingly gaining momentum.

Operators are needing to invest in capacity to manage the sharply growing data traffic.

And we see that this gives many new opportunity, especially with our 5G-ready 4G portfolio.

So we will use our cost competitive position and competitive product portfolio to selectively grab new opportunities.

However, we will always remain disciplined in order to assure overall financial performance.

With that, thank you.

Thank you, Börje.

So operator, we are now ready to start the question-and-answer session.

So please.

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

And our first question comes from the line of Edward Snyder of Charter Equity Research.

Börje, if I could, I'd like to dig into the Ericsson Radio System, which seems to have a large positive impact on your operating income.

How much more can we expect from this?

And what has changed?

It's giving you such an outsized impact now.

Does 5G lend itself to ERS sales?

Is it a redesign that's improved the cost structure of that product?

Or are you bundling it with systems sales to a greater extent than you had done in the past?

I'm just trying to get an idea of how large a factor this can be over the next -- over the near term.

Yes.

No, thanks for the question.

No, we're -- our ERS platform has a couple of key fixtures, the first one being that it is a very cost competitive platform.

It's designed for cost competitiveness.

So that means that when we designed it, we actually looked to market demands and put the right features in place to be cost competitive.

That's one thing.

We continue to invest in the ERS platform to bring costs down, to launch new upgrades, new solutions that lowers the cost to manufacture the hardware.

And lastly, which I think is equally important for the customer decision, is that it's actually ready to carry 5G traffic with a software upgrade to the hardware.

So of course, if you're in a different frequency band, it will differ.

But for one frequency band, you may not even need to go out to a site.

You can actually do a complete remote upgrade with software and carry in our traffic.

And we see that responding very well with customers as they don't want to run the risk of having to make multiple site visits and tearing out what they have -- infrastructure they have installed.

So I would say it is -- we may not yet see 5G revenues on the commercial level, but we see this as a key driver for the -- for our business momentum around ERS.

So why wasn't this a larger factor in 4G?

Does it play better in 5G?

Or was it part of your cost or efficiency programs awarded?

It's actually very important in the improvements.

So we're talking about the 600 basis point improvement compared to Q2 last year.

Half of that roughly comes from ERS.

Great.

And then, Carl, if I could.

What do you the estimate the average impact of the contract renegotiations in Managed Services are on the gross and operating margin over the last year.

So -- and will the end of that effort, when you finally get to the end of renegotiation, be the biggest factor in getting you to the 4% to 6% operating margin target?

Or is there something else you should be focusing on for that goal?

Well, as a matter of fact, if you look at Managed Services, the biggest contributor to the improvement is actually the changed ways of working within Managed Services.

So the way we actually serve the customer, try to automate more, removing basically labor content, that's a more important factor, or getting efficiencies out is the more important factor in the improvement.

Then of course, the contract renegotiation has added to that.

And the run rate of that improvement per se is about SEK 800 million.

I believe we say that in the report.

Yes.

But the key reason is actually ways of working, which I think is important to remember.

Okay.

Thanks, Ed.

The next question comes from the line of Alex Duval of Goldman Sachs.

I just wanted to ask on a couple of points.

Firstly, on the OpEx, which was a little bit higher than expected in the quarter.

Seems some of that was due to onetime items, but the majority was due to this R&D acceleration as you move towards 5G.

The logical consequence of that seems to be that you'll have elevated R&D this year on a full year basis, albeit with those nice gross margins.

But is it fair to assume R&D spend could go down next year as you'll already have ramped a lot of the investment?

And secondly, when we think about 5G, you cited enhanced mobile broadband as being ahead of fixed access as a 5G use case.

Can you talk about what's really driving that?

It seems you've referenced cost effectiveness of delivering data, so maybe you could put a bit more detail around that.

And can you explain what is really underpinning your confidence in enhanced mobile broadband on 5G?

Are you anticipating 5G handsets being released at scale over the next year or so?

If we look at -- the way we think about the business is, of course, that the investments in R&D for us is, in a way, needs to look at the payback over longer periods of time.

So we basically see here that we need to have this R&D level for a period here when we introduce 5G, develop all the features of 5G, get ready for the products that ultimately will be launched in the different markets.

And here, of course, we are participating in low-band, mid-band as well as millimeter-wave products.

So we have, in that sense, a global, call it, global opportunity for our products.

Of course, it drives a little bit near-term costs.

But when that is going to fade away, I think it's too early to tell.

But we remain very focused on the operating income and reaching the operating income target for 2020 of 10% operating margin.

So we really think that if we are to have a higher level of R&D for a period, we need to sustain that with a higher gross margin or gross profit.

So it's -- we don't think -- we don't take that lightly in the sense of saying, let's see what it -- happens, but we try to run it in a very disciplined way.

What drives enhanced mobile?

Yes, what drives enhanced mobile broadband?

When you look at the -- if you look at the traffic growth, it's basically increasing, if you would label it in a different way, 8x until 2023.

So if the operators are to not have costs spiral out of control or having to degrade performance in the network, they will need to lower their cost per gigabyte.

How is that done?

Well, it's done, first, by adding carriers to 4G.

You get into MIMO and eventually you get into 5G.

So what we have looked at is to look at the costs for -- cost per gigabit transmitted.

And if you look at that, we see 5G can actually lower the cost or can have high -- 10x higher efficiency compared to a pure 4G site.

So we see this as a way to manage the costs and the quality to the user -- to the end user.

So that's why we think 5G is initially a capacity enhancer in metropolitan areas where the network is running short on capacity.

Then over time, it will evolve into broader coverage and leveraging the capabilities you get in 5G, i.e., higher speed, lower latency, longer battery life, more devices per site, et cetera.

So the initial use case, we believe, is actually just to manage the cost in the operator.

After that, we will see the other revenue opportunities.

So one of the first will be, we believe, fixed wireless access.

And we -- that's clearly a interest in North America, but we see that increasing, gaining momentum in the rest of the world.

And it's really trade-off building out fixed line fiber versus on-air broadband.

And here, I would say it has -- for many new operators, it makes sense to build out fixed wireless access as an access technology for broadband.

And we think that actually will be an important area for revenue growth for our customers.

So start with enhanced mobile broadband as a cost case, see revenue growth as fixed wireless access.

And after that, we -- I think -- we believe we are going to see the, call it, the massive-scale and critical-scale IoT.

That's when it will be used where connectivity is really critical first.

So smart manufacturing, for example, connecting a factory with no latency.

And a very reliable and secure communication is going to be critical.

We will see it in smart cities, we'll see it agriculture, et cetera, but we think that's going to be a phase -- phased into the market.

I guess the third question is about -- he had a question about the scale of handset as well.

The...

Yes, the handsets, we believe, will start to come online.

You will see other user devices, without going into the details right now, during the year.

And then as you go into next year, you'll see other normal devices coming on.

Great.

And just...

Are you good with that, Alex?

Yes, just very briefly to understand this point about massive-scale IoT.

Can you just clarify why 5G would have the advantage versus other connectivity like WiFi?

This is a little bit -- becomes a technical discussion where the -- we think WiFi is one access technology that makes sense in certain applications.

But when you need to ensure that you have a reliable connectivity, 100% reliability in the connectivity, you have to consider other factors, right.

So for example, when we look at our own factory where we have experimented with a large-scale deployment of IoT, we see that in the -- in a factory of the future, you're probably going to have one device per, call it, square meter roughly.

And when you have that amount of connectivity, you will run the risk of interference in a WiFi network or unlicensed spectrum.

So to reduce that risk, we see there is a big use case or big application for license spectrum based on 5G that will basically ensure a more secure connectivity.

And we -- when we talk to manufacturing partners we have, we see that one of their biggest challenge in the automating the factories for the future is actually the reliability of the connectivity, and they are not trusting WiFi for that.

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

Just wanted to ask about the European market.

It's been pretty stable for you guys.

But obviously, North America is doing a little better here.

Talk a little bit about what you're hearing.

It seems for most that they're a little bit more measured in general on their approach to 5G.

So when you look to next year or 2, is there a risk that, that starts to look more like China is looking now?

Or are there other dynamics that can keep that market afloat until we get to that 5G ramp phase like you're seeing in North America?

Thank you.

No, it's -- the -- I think the European market -- to put it maybe a little bit bluntly, the uncertainty in the macro situation in Europe, and then I'm talking about spectrum regulation, et cetera, it doesn't create the best investment environment.

So the discussion in Europe is very much centered of how do we deleverage the investment we have today in the best possible way, focusing less on 5G per se, as more on let's make sure we have the right capacity amount we need right now.

At the same time, that's where we feel that we have an advantage with our product portfolio as it is 5G ready.

So the customers that buys our hardware can actually decide at some point in time in the future to switch on 5G with a software upgrade.

So they're, in a way, hedging their bets a bit.

But I think the discussion in Europe should focus more on how do we resolve the spectrum situation, how do we let the operators know more, how much a spectrum will cost, how do we change regulation to actually create a investment-friendly environment in Europe than we're seeing today.

Our next question comes from the line of Sandeep Deshpande of JPMorgan.

We seem to have lost Sandeep.

We're actually going to Pierre Ferragu of News Street Research.

Can you hear me well?

Hello, can you hear me well?

We can hear you.

Can you hear us?

Yes, okay.

Yes.

So yes, I just wanted to go -- come back on your -- on the Digital division where you improved the gross margin by like 15 points.

And very surprisingly, you've actually reiterated this [gentlemen], so a second quarter in a row.

And so I had like 3 quick questions on that gross margin.

The first one is, how much of the provisions you've taken a bit more than a year ago are [actions regarding] margins in that division?

So I assume you still have like projects for which you took provision a bit more than a year ago that are still running.

If you have any sense of how much of that is left in the number, that would be very, very helpful.

Then my second question is about the comments you made, Börje, on your delivery platform, like being able to take down the cost of your delivery platform.

And I was very curious to hear more about what you've been doing in Digital Services to achieve that.

You can take like the number of head count down, you can take the cost per head come down, you can improve productivity.

And any color you could give there on that would be great.

And then my last question would be, if I think about the sustainability of this margin and margin improvement, I'm starting to wonder about your pipeline, your deal pipeline in services, because you had a lot of contracts that went wrong where you lost a lot of money, and this is being addressed and it's fantastic to see the results.

And then my next thought is, do you have a pipeline of additional contracts that are going to come in to replace these revenues?

Or do you plan to shrink further the size of the service business in Digital?

That's my third question.

So if we start with the latter.

The strategy is to be more software led, which means that we are prepackaging solutions more, which would ultimately down the road reduce the service need.

At the same time, we continue to see, even as we do that, quite a high service content in the product delivery.

So I don't think it's realistic to assume that we will see a dramatically shrinking service content.

It will be -- it will happen, but it will happen very gradually.

So if we look at the more recent wins we have, for example, in packet core, they are very similar in structure as it has been before, slightly higher software content, but it's really -- in broad terms, it's very similar.

Then on your first question, we, of course, have some large transformation projects where we took provisions last year that are -- we're working through.

And as deliveries of these end, they will move into a profit-generating phase.

We're not there yet, but we are working through some of them.

And it -- we don't go into the details, but it has only had a fairly small or a fairly limited impact.

Maybe I can add just the mechanics of that -- of those provisions.

So when a loss provision is made, this basically means that the margin on that contract will be 0 going forward.

So the loss is eliminated once and for all.

Okay.

And maybe one last quick word on the service delivery platform and how you -- you have mentioned, Börje, in your prepared remarks that you're very happy with the way you've taken down the cost of delivering services.

So I was wondering in Digital Services what you have done so far to get there.

Yes, what we have -- I mean, what we have done is we -- now if I -- we want to be a little bit simple in the terms.

We have created pre-integration centers, that we have several of them where we can more do the pre-integration and reuse pre-integration.

That has allowed us to be much more efficient in the total service delivery cost.

So that's changing our cost position structurally and make us more competitive.

And actually, that's the key driver behind the reduced loss.

Okay, Pierre, thank you.

Our next question comes from the line of Sandeep Deshpande of JPMorgan.

My question is a more longer-term one.

With regards to mobile broadband and capacity increases, Börje, you've talked about that this will be a continuing driver in the future once new bands are added, et cetera.

What I'm trying to understand is within 4G, we did not see this as a big driver for Ericsson.

I mean, this was a promised driver in 2010, 2011, but it never came through for Ericsson in terms of providing the upside.

Why is it at this point?

I mean, is this based on customer feedback and because in respect, having different use cases, that you think this is going to happen for 5G when it did not happen into a significant extent in 4G?

And my second question is actually a clarification on the previous one.

Carl, you mentioned that in terms of the provision where you've -- in those contracts where you've taken provisions, are you saying that those -- that the losses on those contracts now you report in your number -- in the numbers, we see a 0, and that is -- and then that is part of the provision that once those contracts are restructured, then you will start showing the earnings associated with those contracts?

Is that how it is accounted for?

If we start with the first one.

The reality is there is growth in 4G, call it, profit margin that actually is a result of the growing traffic.

But it's hidden with other technologies reducing at the same time, right.

That's why you don't see the benefit.

So I would just correct you on that.

The second thing is we see 5G -- and what I tried to say is actually, the first business case is to solve the cost position on just mobile data.

The next level is when you start to get other type of business cases, whether it is fixed wireless access or, call it, massive IoT for the moment or critical IoT, that will generate new features needed, new capabilities needed in the network.

And that is something that will generate extra revenues for the operator and then have the potential to generate extra revenues for us.

So I think that's our whole business case here.

So this is also why we invest in the, call it, Emerging Business in IoT, basically to help our customers define new revenue sources based on connected vehicles, connected everything basically.

So I take a little bit the notion that there isn't any growth in the connectivity market.

On a global basis, there is growth in the connectivity market.

We may not have captured it well enough in the past, but I think we're quite well positioned to do in the future.

And to your earlier...

Okay.

Yes, sorry, go ahead.

Okay, should I take your other question around loss provisions then?

Yes.

Yes, you're correct.

So, I mean, we -- when there is a loss estimated for the remainder of a contract, we then make a loss provision in the P&L, and it's really based on the full lifetime of the -- of that contract then.

And then, of course, I mean, it's -- we -- it's our job to try to improve over that but basically deliver on the commitment under the contract.

It will stay on 0 margin as long as it follows that estimation.

If that improves, for example, of course, the profit will start to generate.

So that's what I can...

So sorry, Carl.

And so that means, Carl, that you are over -- or you said -- does that mean that in terms of your actual losses, because you are reporting those losses that you're generating with those contracts today, were taken in those provisions last year?

And so essentially, what you're reporting today is just 0 on those contracts, and that is -- incrementally, that helps your margin as such?

Yes, exactly.

So for those contracts where we made a provision, that's correct.

Exactly, yes.

Our next question comes from the line of Stefan Slowinski of Exane BNP Paribas.

On Digital Services, you're still targeting low single-digit operating margin in 2020.

And I'm just trying to understand maybe what the trajectory looks like from getting from here to there.

You're still doing kind of minus 17% operating margins there so far this year.

And you talked about maybe addressing half of those 45 contracts by the end of this year.

But should we expect kind of a steady transition towards the low single-digit operating margin in 2020?

Or is this a business that could even break even potentially as early as 2019 with a smaller uplift into 2020?

(inaudible).

Yes.

Let's put it this way.

We put the guidance in place on 2020.

We will not provide you with any updates to that unless we feel there is a big change, up or down.

We're very comfortable with the guidance we've given.

Of course, the improvement will not be linear until 2020.

So how that exactly is going to look like, we're not going to guide in detail now.

Okay.

But you still expect -- is it half of those contracts to be terminated or addressed by the end of this year?

Would those be some of the larger or loss-making ones?

Or how should we think about how those will be addressed this year versus next year potentially?

We have a number of loss-making contracts primarily in the old industry and society that we're actually trying to work our way out of.

So hopefully, we will have done those, but we say half of the critical contract being addressed, we don't go into the detail there.

But that's kind of the plan we're working.

I would rather get those behind me in this year, if possible.

Okay.

And just a follow-up question on the Networks business.

It grew 2% in constant currency in Q2.

I believe in constant currency, it's the first growth you've seen in the Networks business since Q3 2014, if I'm not mistaken.

And I'm just wondering, is that business now out of the woods?

Should we expect that we've entered into a new growth phase for that business where we should see kind of year-over-year growth for the next x number of years as we go into this 5-year spending cycle?

We are very happy that we have been able, on the back of a strong product portfolio as well as good cost position, started to see that we can take new business opportunities within Networks.

And that's what you see have happened.

That's why we get a growth of 2% in the quarter.

Our -- clearly, our ambition is to stay ahead on technology, never fall behind.

And therefore, we should be able to keep on developing the business like we do today, and that's clearly our ambition.

Then I'm not going to give you any other guidance than what we've said on 2020.

So more specific, I'm not going to be, but we are very comfortable with the business momentum we see in Networks, and that's really just, in a way, underpinned by a good growth in Q2.

Okay, Stefan, you're good with that?

Yes.

And our last question comes from the line of Tal Liani of Bank of America Merrill Lynch.

I had 2 questions.

First one is, could you discuss the impact of currency?

Maybe you said it and I didn't hear it, the impact of currency and foreign exchange on your -- both revenues and expenses and margins.

And second, it's a broader question about the deployment of 5G.

When you talk to carriers, where is their mindset right now?

Is it mostly consumer broadband, so just enhancement to 4G, better speeds?

Or do you see them taking active actions to develop also the enterprise market and find enterprise applications for 5G?

If we start with the latter question.

The history of mobile broadband has primarily been a consumer market.

You're absolutely right on that.

We see carriers, though, increasingly focus on the enterprise market and enterprise applications of 5G.

So if you take, for example, in China, it's clearly -- the development is clearly driven by the enterprise market and the way they think about the enterprise market.

Well, we're seeing that across the world in varying degrees, but we see that operators are increasingly getting ready to address the enterprise market.

We believe that is the big revenue opportunity for the carriers, and that's also when it becomes -- start to become really relevant with network slicing, for example, that can provide new ways to differentiate service and create new types of business.

More needs to be done here.

Network's not ready all the way for that, but we will see that happening over the next few years.

Yes.

On currency, Tal, actually year-over-year, the impact was close to 0. If you look at the sequential impact, the impact on expenses was negative, around SEK 300 million, but positive on the totality on operating income with around SEK 0.4 billion.

That's the sequential impact I mentioned.

So when you say negative, you mean a -- it's actually positive for margins, right?

It's negative, meaning it's reduced expenses?

No, no.

So -- no, no, no.

So negative (inaudible) as expenses increased due to the FX impact.

But bottom line, SEK 400 million positive all in all sequentially.

And I think it is fair to update the rule of thumb, right.

10% on the U.S. dollar is about 5% and 100 basis points of margin.

Exactly.

Great Tal.

Thank you for that question.

So we'll [end] this call by a closing remark from Börje here.

Thanks, Peter.

So we -- in closing, we defined our focused strategy last year with the ambition to turn the company around on a flat revenue base.

So not hoping for revenue growth.

And we would do this by investing in R&D to have a competitive portfolio and grow gross margin, thanks to that, as well as to take significant costs out of service delivery and G&A.

I would say that the second quarter shows that the strategy is working and that we're executing along those, including having reached the cost out target that we set.

Now we see a good business momentum happening with our very, call it, competitive product portfolio but also a competitive cost structure.

So we see the market in that sense in increasingly positive terms, and that's the reason why we also saw Networks coming back to growth in the quarter.

So we're going to continue to be disciplined on the cost side.

We will selectively pursue new market opportunities to expand our business, but we will do that with a very strong focus on the bottom line to assure overall financial performance and financial health of Ericsson.

So with that, thank you.

Thank you all.

Thank you.

This now concludes our conference call.

Thank you all for attending.

You may now disconnect your lines.