Telefonaktiebolaget LM Ericsson (ERIC) 2018 Q3 法說會逐字稿

Welcome to Ericsson's Analyst and Media Conference Call for the Third Quarter Report.

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

(Operator Instructions)

Peter Nyquist will now open the call.

Thank you, Mark, and welcome to this third quarter conference call.

With me here in the room, I have our President and 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 our current expectations and certain planning assumptions, which are subject to risk and uncertainties.

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

We encourage you 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 the call to Mr. Börje Ekholm.

Thank you, Mr. Nyquist.

So welcome, everyone, to our Q3 report.

During the third quarter, we continued to execute on our focused strategy, making good headway.

We have a very strong product portfolio today, and that, in combination with a good cost structure, makes us very competitive, and that's what you see us delivering on during the third quarter.

Then move to the first slide.

What we see now is that the 5G is becoming a commercial reality, with the first deployments in North America.

We're seeing very good momentum on our 4G portfolio, that, of course, is 5G ready to a software upgrade.

So operators can thereby modernize networks without wasting CapEx and be prepared for 5G.

We see 5 -- we see very good momentum on 5G in Northeast Asia, but also in North America, as those 2 areas leading the way, but it's encouraging to see momentum also increasing in Europe.

So it's increasingly becoming visible as 5G is not only a buzzword, but it's actually true, a reality.

During the third quarter was the first quarter since the third quarter 2014 that we showed growth.

It's a small number, but we have had headwinds from contract exits during the last year that's impacting our top line, but it's still a organic FX adjusted growth of 1%.

It's driven by Network.

That grew 5%, but it's still encouraging that we have turned a trend of a shrinking top line.

Maybe more important, we have achieved a profitability on group level on net income, the first net income positive since beginning of -- or mid-2016, and we do that despite some substantial provisions during the quarter that we will outline during the presentation.

Digital Services continued to improve and on the journey towards profitability, negatively impacted by substantial provisions here, the -- on the large Digital transformation project, but it's aided or helped by significant costs out in common costs as well as R&D.

We will spend some time updating you on the SEC DOJ investigation as well, where we are engaged with the authorities to try to find the resolution, and we are well underway towards achieving our target of a 10% operating margin 2020 and 12% beyond that.

So with that, let's move into some of the overall numbers, where you can see that we continued to improve our gross margin, and that is done despite provisions.

But we see a -- that the strategy of investing in R&D to support and improve gross margin is working.

We see also that our cash flow, the free cash flow, excluding M&A, is positive, and shows strong improvement year-over-year as well as sequentially.

If we look at some of the businesses, we see that Networks grew, as I said before, 5% FX adjusted, and could deliver a 16% operating income, putting us at the level we expect in 2020 to be.

On DGS, we continued to shrink the losses.

It's still loss making, but they are shrinking.

We see lower gross margin during the quarter sequentially, and that is due -- only due to the provision for the digital transformation project.

Besides that, we see good progress on operational efficiency, making us very comfortable that we are on the right path to turn around and have low single digit margins by 2020.

Managed Services, solidly positive.

That's through cost efficiency efforts, as well as contract reviews.

And the key in Managed Services is that we now are increasing our investments in automation and machine learning to basically develop our offering towards customers, and we see very positive reception on that.

If we look at our Emerging Business & Other, we are seeing improvements, primarily driven by iconectiv.

And here, you should also expect Media Kind to be sold or partnered by year-end.

So we see that happen.

If we look at the development by market area, we see a -- overall, of course, organic sales, up 1%, but the negative being Middle East and Africa, where we are suffering from a political and challenging economic situation in certain markets in the Middle East.

We see Northeast Asia falling, which is partly driven by or caused by lower 5 -- 4G investments in mainland, but we see some good deployment of our narrowband IoT in mainland.

We see also a decline in Digital Services.

The Southeast Asian, Oceania and India is falling slightly.

That's because of a tough comparable last year when we ended a large -- some large 4G deployments in the third quarter last year, so it was a tough comparable.

Europe, we're happy to see that, that grow, and that is driven by Brazil, Mexico and some parts of Europe, and this strong growth comes from North America, which is, of course, the investments in 5G readiness basically across all our major customers.

So now I would like to turn to a different topic, and basically update you on the process with the U.S. authorities.

As we have previously disclosed, we have been voluntarily cooperating with the authorities since 2013, first, with SEC, and since 2015 with the DOJ into our compliance with the U.S. Foreign Corrupt Practices Act.

At this time, we cannot comment in further detail.

But as part of the investigations, we have identified facts that are relevant to the inquiries of the SEC and DOJ, and these are, of course, facts that we have shared with the authorities.

So we continue to cooperate with the SEC and DOJ, and we are engaged with them to find a resolution.

While we -- the length of this discussions cannot be determined today, but based on the facts that we have shared with the authorities, we believe that the resolution of these matters will most likely result in monetary or other measures taken, and the magnitude of these measures, we can't estimate today, but they may be material.

Let me assure you that we are very committed to having a robust and fit-for-purpose compliance program, and we are continuously looking to improve on ways to manage compliance risks throughout the company.

It's not only what business we do, it's actually how we do business as well.

We have been -- also, we have been working on our ethics and compliance efforts for quite some time more than a decade, so but in parallel, with the investigations we have done, we have decided and taken action to strengthen our ethics and compliance program with policies, processes and tools for preventing, detecting and remediating non-compliance.

We have accelerated those efforts in recent years.

And we've done that after a, call it, the external compliance advisory firm that we brought in, in 2016 that have assisted us and to -- and the board of the company to review our compliance program.

They have basically found the program to be good, but they have also identified areas that we need to strengthen, and we are implementing the recommendations now.

We've done many improvements over the last 2 years.

Just to get a sense for the areas we're covering for improvement, it's 4: people and culture, third-party engagement, compliance and investigation capabilities, and internal controls.

So this is a work that we work at full speed.

But at the same time, it's an effort we can never stop.

We continuously need to strengthen our compliance program, and we are taking those efforts.

If we then sum up.

We are on track with our focused strategy.

On Networks, we are already in the range we guided on margins.

ERS substitution, up to 86%, and costs are coming out.

Most importantly, our investments in R&D are paying off with a very competitive 5G-ready portfolio.

In DGS, our ambition is to have low single digit margins by 2020.

We see now that we're making progress on our turnaround plan.

We see good order intake and good development in large parts of the business, so we see losses being reduced.

But we still need to do more to turn around some of our transformation project, but we are comfortable about the target for 2020 that we will be low single digit margins.

On Managed Services, we are in the ambition we had for 2020, and that's done by the contracts we have addressed, but also through cost efforts and taking costs out in service delivery.

So now, there, in Managed Services, we're increasing our investments in artificial intelligence, automation and analytics.

In the Other & Emerging business, we are partnering with the One Equity Partners on Media Kind, and that's a transaction we expect to close in the fourth quarter by the end -- or late -- by the end of the year, really, end of this quarter, early next, with -- remains to be decided from a practical perspective.

We are making significant investments in emerging business, our IoT, UDN and Emodo, but we are also committed to be very disciplined.

So if we do not reach the objectives we put out, we will basically discontinue funding, and we -- on the contrary, if we reach, we accelerate funding.

So we try to be very disciplined in the work here, and we see good progress, especially on the IoT side, where we have taken some pretty big contracts during the quarter.

Still very low on revenues in those contracts, but a big potential for the future.

So we see that business to be on track with the shrinking loss, thanks to iconectiv.

With that, I will give the word over to Doctor Mellander.

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

Let's drill in a bit more into the segment views, starting with Networks, where we see the momentum continuing here, 5% organic growth in the quarter, a clear sign of a strategy that bites with the investment in technology, leading to the competitive portfolio that we have talked about for a while, and now we are reaching 86%.

That, in combination with further costs out, has driven up the margins on hardware and services not least, and delivering then the 41.5% gross margin in the quarter, excluding restructuring, of course.

The market mix here in Networks was rather favorable because of the strong North American proportion.

And also, when we look at the business mix, it does contain quite a strong proportion of software and capacity upgrades here, driven by data traffic, of course.

And at the end of the day then, an operating margin of 16%, which is in the 2020 target span already is quite a strong sign of execution here.

In Digital Services then, sales was down 6%, but that is a flat -- that represents, you could say, a flattening of the decline, which was 12% in Q2.

So also here, we do, as Börje said, we do see the business moving in the right direction, and of course, driven essentially by the virtualization trend and operators preparing for 5G.

The gross margin here, as you see it, we do report an improvement year-over-year, and the decline quarter-over-quarter to 36.9% is really only attributable to the extra cost provision that we have had to make in relation to the digital transformation projects that we talk about here.

This is, of course, not satisfactory, and we're taking a lot of action to accelerate the turnaround of these projects, needless to say.

But despite this then, operating income continues to improve quarter-over-quarter, and we record here a loss of SEK 1.4 billion, by no means good or accepted as such, but of course, an improvement sequentially from the SEK 1.5 billion level.

And basically, we see that the cost-out efforts here are tracking well in Digital Services.

This is then why operating income actually sort of compensated by the cost-out going from gross margin then.

We also continue with portfolio optimization, and we see more and more efficiencies here, both in service delivery and R&D as well.

When it comes to Managed Services, we report another strong quarter.

Sales down, but that's, of course, as planned, given our strategy to exit certain contracts.

That's going well, 40 out of 42 done, as mentioned.

Good also to see that we are actually growing in a couple of areas here: Managed Services, IT -- for IT, and network design and optimization.

Both of those areas show healthy growth in the quarter.

So again, here, gross margin improved significantly year-over-year, driven by the cost efficiency that we do and the 40 contracts that we have reviewed now.

Of course, automation technology playing an increasing role here, and we'll see more of that going forward as well.

So positive results for Managed Services again, stable sequentially, exceeding the 2020 target level on operating margin.

Emerging Business & Other, Börje mentioned already, it's really driven by the iconectiv number portability business that we started in Q2.

Both media assets improved and contributed to the improvement year-over-year.

And here, selective investments, yes, they will continue.

We do this in a disciplined way and with the quest to find the future growth areas, including IoT, for example.

But all in all, gross margin, as well as operating income, improving in Emerging Business & Others, both sequentially and year-over-year.

So if we look at the full P&L then, just the sort of the headline numbers there, the SEK 53.8 billion sales, the 36.9% gross margin and operating income then of SEK 3.8 billion or 7%.

And I'd like to drill into 2 aspects there.

If we move to the next one, showing the operating expenses, and then after that, we're coming to gross margin.

So on operating expenses, starting with SG&A.

Costs-out continued to impact positively here by SEK 700 million, as you can see, and -- with some offsets though.

One is then the revaluation of customer financing, mainly related to Middle East, SEK 0.9 billion.

And we also see the existence of field trials for 5G with customers.

This is going to be a fact of life for the next 12, 18 months, where we invest in the field trials, and that's, of course, paving the way for 5G together with the customers.

As we say in the report though, we, of course, maintain the 2020 target level and we will absorb the cost of field trials within our financial performance, including the 2020 target.

R&D, on the other hand, increased then, also a result of our execution of the strategy, with networks going up, ramping up still, while as I mentioned before then, we are taking costs out in Digital Services, so that's offsetting partly here.

And of course, R&D being such an important cornerstone for our gross margin improvement, we can turn to gross margin and look at how widespread the gross margin improvement this year.

You see all the segments contribute.

And when it comes to underlying margin performance over the years, we see that the strong improvement trend in 2018 continued now, delivering Q1, Q2 and Q3 of 36% and 37% here, respectively, so tracking well towards the target range of 37% to 39% that we have stated for 2020.

I mentioned a little bit before here that the gross margin in the quarter was supported by software and capacity sales.

There was also a bit of catch-up in the IPR business that we could consider going forward.

And on the other hand, we also had absorbed the provision for the digital transformation projects that we talked about before into this gross margin.

So if we move onto cash flow then.

As you see, mainly the P&L here is contributing, and we had some inventory and accounts receivable increase here, which has to do with the increased business volume, and as well as ramping up for Q4.

CapEx, under control, more or less the same level as usual.

Actually, Q3 '17 was an unusually low quarter, so that comparison is a bit difficult.

But SEK 1.1 billion this quarter is a rather normal level.

And all of this leads to free cash flow then excluding M&A of SEK 0.7 billion.

And the corresponding year-to-date number shows an improvement then year-over-year of SEK 6.7 billion in free cash flow before M&A.

Balance sheet remains resilient.

I would say, net cash has increased, as you see here, by SEK 8 billion up to a level of SEK 32 billion, and the gross cash is a solid almost SEK 66 billion.

And no issues with the debt maturity profile either, no maturities at all, as you here for -- during 2018 and 2019.

So all of this adds to the resilience of the company.

Then finally, planning assumptions, and this is all in the report.

I refer you to the full report, of course, for planning assumptions.

But to provide a little bit of color.

Starting with top line.

What we see is that North America is really performing well in Q3 already, and there was a strong jump from Q2 to Q3.

We don't expect that to continue to grow.

We expect a flattish North America into Q4, while the rest of the world can be expected to deliver normal seasonality.

And with that then the -- obviously, the group seasonal pattern will be a bit lower than the typical average levels.

So that's something to think about when modeling the future here.

When it comes to gross margin, it's good here to consider, of course, we'll continue with the costs out, on the one hand.

At the same time, as mentioned, the mix was rather favorable in the third quarter, so that's something to keep in mind, going forward, as well as the [IPR] support we had here.

Maybe to add one more factor, services as a share as a proportion is typically larger in Q4 than in Q3.

Then finally, operating expenses then.

The typical seasonality, Q2 -- or sorry, Q3 to Q4, is between SEK 1 billion to SEK 2 billion higher in Q4.

And if you compare it with last year, 2017, you see a bigger jump, but there we had actually some extraordinary items also in Q4.

So SEK 2 billion was the underlying OpEx increase in 2017, so that's a good reference to have now looking at the future as well.

So that's about it.

When it comes to the planning assumptions, there are a couple of other items written here as well, but you can look at that later and also refer to the report as such.

So with that, thank you, and back to you, Börje.

Thanks, Carl.

So just to -- as closing remarks and to wrap up.

We continue focusing or continue executing on our focus strategy.

That means that we will maintain a strong control of our cost position that we have worked hard to achieve and basically to make sure that we stay competitive on costs.

But we will continue our investments in technology leadership because that allows us to have better solution to customers, but also leverage technology to get costs down.

We will continue to invest to secure leadership in 5G, as we now see 5G moving into commercial deployment, with the first use case of 5G really being enhanced mobile broadband, basically for our customers to deal with the exploding demand for data.

They need new technologies to not have costs spiraling out of control.

The second use case that we see are gaining increasing attention across our market is fixed wireless access, clearly, the case in North America, but also, in other markets, where we see that the interest is pretty substantial.

Artificial intelligence and automation are, for us, key enablers for our future business development or future product portfolio, and we continue to increase our investments there.

So just to end, I would say we are committed to delivering our targets for 2020 and the 12% beyond 2020.

So thank you.

Thank you, Börje.

And Mark, we are now open for questions.

So please introduce that part of the call.

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

Our first question comes from Edward Snyder of Charter Equity Research.

Börje, if you could, you mentioned 5G has become a commercial reality and just -- I'm not sure if you're including the Chinese and the IoT in that statement or not, but you did call out North America and mentioned [high] mobile broadband and fixed wireless access.

So I'm just trying to get an idea of what systems you referred to in terms of commercial availability.

Which carriers are you talking about, the first deployment of systems that eventually will become commercial, and which carriers are we talking about?

And if I could, are you including the [DAD] 71 system in that statement?

Thank you.

No, you know in north -- if you look at the commercial availability, it's still very limited, but the traffic is up and running, and there are subscribers coming on.

You know that in North America, there is one large operator.

We normally never talk about the customers explicitly, but you know which one it is that have deployed a 5G network.

That actually takes in subscribers, and they have already done their first installations.

We see in China -- as a matter of fact, I mean, the 5G deployments haven't really started yet, but what we see is an increase in field trials.

We expect commercial deployments in China to be coming in during next year.

Then exactly what the timing will be, I think the future will tell, but it's all to happen during next year, which is why we see increasing costs for field trials.

And to put them in perspective, that even the field trials in China are almost the size of a small European country, so they're pretty substantial, but that we see happening during next year.

We remain very committed to gaining the market share there, and we're working very hard to make sure we have competitive offerings for the Chinese market.

Then if you look outside of China, Northeast Asia also has -- Korea is there, Japan is there.

You're starting to see commercial deployments.

There, we see no commercial networks yet, but there will be deployments starting to come online, and there are some other markets as well that are very early in deploying.

So we are starting to see the networks getting ready.

Devices will come gradually.

You'll see some devices coming earlier, and then the 2 terminals coming some time mid next year.

So it's all here starting to come together for a fairly interesting development in the near term.

And then the Chinese systems, are they concentrating just on SA systems, or will they be doing NSA systems also?

Exactly what they are going to do, we will find out.

But given the size of the deployment, there's probably going to be standalone.

Great.

And then a final question, if I could.

Perhaps if you could provide an update on your progress with Intel on their 5G network processor ASIC, especially in the light of delays that Intel is seeing in the 10-nanometer process.

Is that impacting the development or your competitiveness in 5G base stations?

And if you need to, do you have an alternative to that Intel's part?

Well, the -- what is -- just to describe the case, how we work, we, of course, work with multiple partners.

So for us, we are not relying on the single vendor for a strategic component.

And we feel quite comfortable that we are in good shape on the future development and the future roadmap.

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

Two questions from me.

I mean, firstly, on the North American deployment.

I mean where are you supplying -- are you supplying across the board in terms of 5G because you talked about upgrading your existing base stations, but there is some deployments in the United States, which are small cell based, which would not be involving your base stations.

So could you talk about the product range that you have from the low band, mid band and the high band?

And then secondly, I have a question on the cash flow.

I mean you've shown this very impressive improvement in operating income less restructuring year-on-year.

But when you look at your free cash flow improvement year-on-year, I mean, the flow through to the Q3 cash flow is much less so than the improvement in the operating income.

Can we understand what exactly is happening there?

Yes, we can take that.

Okay.

Sandeep, it's Carl here.

Let me start with the cash flow then.

Yes, what you see is a bit of buildup in working capital inventory and accounts receivables then in this quarter, but it's really a reflection of the higher business volume ramping up for next quarter.

So that's one part.

And then the other part I'd single out here is actually the CapEx piece, which in Q3 '17 was abnormally low.

There were some extraordinary positive effects there.

So there, those 2 items really explain the delta in between.

Okay.

And will this improve into the fourth quarter, this conversion?

Sorry?

Say again, Sandeep.

Will the free cash flow conversion improve into the fourth quarter?

We don't guide specifically on that, actually, I can't say.

But of course, we put a lot of emphasis on free cash flow generation, working capital release, and obviously the profit side as well.

I can also mention actually one more item.

It's -- when it comes to restructuring cost, of course, there, that we have a cash outflow from the previous program happening now with that.

And on your first question, what we see today, of course, in -- commercially being deployed now is -- it's a millimeter wave, and that is going to be deployed in a, call it, small cell or street macro fashion, and we have a competitive product range there.

And that's what we see deployed now, making less benefit of the -- our 4G portfolio.

At the same time, we see that, as we introduce mobility in 5G and NR, to have the complement of low, mid and high band in 5G and 4G, provides very good capacity in dense areas, and that's why we feel our portfolio of 4G offering that's upgradable to 5G is a true competitive advantage, and provides our customers with an actually cost-efficient way to introduce , but also to get the capacity.

Our next question comes from Aleksander Peterc of (technical difficulty)

Can I ask you to provide a little bit more color on the cost of 5G field trials?

Are we looking for at SEK 1 billion or SEK 2 billion, for example, approximately annually?

Is that happening just in the second half of this year or it's going to be spread over a longer period?

That will be my first question.

Second one, I'd like to understand a little bit the color on the sequential movement in your North American revenue, which is actually sequentially just a little bit up, but Q2 was very strong.

So do we have a pull in of revenue in North America in both Q2 and Q3 that results in this weaker Q4?

And then, generally speaking, I was just looking at a small quarterly pause in North America and then strong 5G deployments will continue next year?

Or are you waiting for other regions then to step in, in 2019?

We take the cost of field trials.

We actually expect to absorb the cost of field trials, so we're not going to put them outside of our performance.

But you can see that they're probably a few hundred million kroners per quarter.

Then on the North America pull-in, no, no, it's not really a question of pull-ins here.

It's more that we are running very high volumes in North America already in Q3, and there's not so much capacity to actually increase that volume according to normal seasonality.

So we think it will continue.

On a high volume, it's by no means slowing down.

It continue on a high volume similar to the Q3 volumes.

And we believe, by the way, that will, on that level, will more or less continue also into 2019.

And our next question comes from Alexander Duval of Goldman Sachs.

Alex here from Goldman Sachs.

Just a couple of quick questions.

Firstly, on Europe, it looks like revenues there seem to be stabilizing in Networks from an Ericsson perspective, and that looks like quite a turnaround as that was one of the tougher regions from an investment point of view in the last year or so.

So could you help us understand what's driving that turnaround?

And also, to what extent that's down to market recovery perhaps related to improvement in the network ahead of 5G?

And to what extent it's about those market share wins that have been announced in the press?

Second of all, just on the gross margin side, these continue to move in a positive direction even as you're rolling out new hardware related to these 5G upgradable base stations in the U.S. But normally, when this kind of hardware rolls out in previous cycles, we've seen lower margins because it's people intensive work or there's price discounting involved.

So is there something different in terms of these 5G associated hardware revenues in this cycle when we compare it to previous cycles?

Or was this just due to the fact that the U.S. has better margins overall?

If we look at Europe, starting with that, yes, it is a recovery.

You have seen that starting basically second quarter last year.

When we announced a win in the U.K., we have gradually strengthened our position.

It's not a whole lot of a tailwind, we feel, but we feel we have a very competitive product portfolio.

And the team in Europe and Latin America has done a great job at coming back, gaining position and gaining trust with customers and supplying customers with product.

So we see that this is achieved a little bit on our own.

If you look at gross margins, no, it's not different from the past.

What is different is that we are very disciplined in the way we approach new business, and we are super cost efficient in our service delivery.

So we're -- it's not what we do.

It may be slightly different how we do it.

Your next question comes from Achal Sultania of Crédit Suisse.

A question on North America again.

But can you just -- when you talk about these 5G readiness projects, can you talk about exactly what are you doing specifically for the customer?

Is it like installation of new sites or is it predominately upgrading of existing 4G sites?

And how does that business change?

Because we are still in very early stages of 5G, so let's say we go into 2019 and there are bigger rollouts relating to 5G, does that business mix change in the U.S. as we go into next year?

The -- what's happening is that we're selling our 4G, and our customers need to have a capacity in the 4G side.

Data traffic is kind of growing at the rate of doubling every 18 to 24 months.

That's happening today in North America.

So they need new capacity.

So you will see a combination here of modernization of some, call it, some equipment that have old gear and that needs to be modernized, but you also see a densification to deal with the capacity need again.

So you see both of these.

How that is going to play out in '19?

We -- of course, we'll see, but the millimeter wave will be deployed in a different way.

So of course, that's going to impact.

We see also, at the same time, some favorable developments.

For example, the FCC implementing a shot clock for new site acquisition and deployment.

So there are some things going on that can simplify rollout than it is today, and that's important in order to speed up the build-out.

Otherwise, this is, as Carl said, that's why it's kind of limited what can be done in North America.

The lead time to grow fast is actually quite substantial.

So that's why we think it's going to level out at a certain level right now because just the simple time to get to sites to get our crews, et cetera, are -- it's quite substantial.

And maybe a follow-up on China.

If I look at China, your revenues has actually -- Q1 was specifically weak, and then we've seen some recovery in Q2, Q3.

But historically, when China has ramped up in the mix, we've seen some gross margin pressure.

And this time around, it doesn't seem like you've seen any pressure from China rising in the mix.

So again, like can you talk about the mix, like what's happening in China in terms of product mix?

The reality is you're looking at a little bit different way of doing business at Ericsson.

So we said very early on that we're increasing our investments in R&D.

We do that in order to actually keep our costs of our product lower, and we have invested quite substantial amounts to make our service delivery more efficient.

That's the combination why you see gross margin developing favorably, and of course, our task is to make sure we're commercially disciplined to take the orders where we have the most value to the customer.

That's what we will remain to do, and that's what we have done so far and that's no change.

The next question comes from Simon Leopold, Raymond James.

I wanted to first clarify the commentary on seasonality.

I think it's unclear what normal may be in this environment over the last several years for the various regions.

So just wanted to square my math with you before asking a more broad question.

By my estimate, looking at sort of the comment on North America being relatively flat sequentially and other regions normal, that would suggest sequential growth in the high teens range, plus or minus, around 19%.

Just want to see if that's what you intend to communicate in that range.

And my broader question just relates to -- we've had a series of announcements on 5G awards, particularly in North America that have included Samsung who's been a very, very minor player for a number of years.

Just wondering how you see the competitive dynamic and what we historically thought of as a duopoly for wireless infrastructure.

North America looks like that third player is in there.

Wanted to see your thoughts on how we should think about Samsung as a competitor.

Thanks, Simon.

Carl here, I'll take the first one.

When it comes to seasonality, let me try to explain.

So if you look at the pure mathematical 5-year average, it's actually 23% up in Q4.

But that includes, for some of those years, one-off IPR sales, so it's not so relevant.

Actually, the more relevant then is to look at the underlying, and that's around 18% growth in Q3 to Q4.

Last year, as one example, was 17%.

And what we say now then given these comments around North America and given the high capacity that we are running on is that North America will be flat, that's our expectation, or flattish, while the rest of the worldwide might still show the typical underlying seasonality, which is, call it, 17%.

Hope that makes sense.

That's helpful.

And then in terms of Samsung as a competitor?

Yes.

It's -- and you have seen that on the announcement that they're clearly there and they are a competitive competitor.

They have been globally a competitor in 4G as well, and we have seen some deployments, not in North America significant, but they have a presence there as well.

That's the competitive scenario.

I think for us, we need to continue to invest in our R&D to have a competitive product portfolio, and that's what we do to offer new features to our customers.

That's the way we're going to compete.

And then I think we have a very good position in North America.

And once -- we will see how the deployments work, but we are quite comfortable with our current situation.

And our next question comes from Jorgen Wetterberg of Nordea.

I have a question on the spectrum situation going forward, looking into Q4 of 2018 and also 2019.

More specifically, we have the 28 gigahertz auction on November 14 in the U.S. How do you see that improving your outlook for the end of the year and then next year?

Yes.

I'm not so sure it's going to change our outlook for the rest of the year and into next year materially.

But it is good that spectrum becomes available.

And the U.S. has more work to do on mid band and CBRS, as well as the 3.7 to 4.2.

So we applaud every spectrum that becomes available.

I think the big issue is more the spectrum availability in Europe and the uncertainty that has created with the pricing.

But we are, in general, we will always applaud new spectrum that becomes available because it helps our business long term, because it helps the consumer long term.

The next question is from Amit Harchandani of Citi.

Amit Harchandani from Citi.

Two questions if I may.

The first question is really about the product mix that you referred to earlier between capacity and coverage within the Networks business.

Given the visibility you have at this stage, could you give us a sense for how do you see the mix between capacity and coverage shaping up at least, say, over the next couple of quarters, if not, more?

And any other drivers or parameters that we could look at to get a better understanding of how that mix shift is likely to evolve, which of course will help us also get a gauge on your margin profile?

And a second question, maybe a clarification.

I'm just wondering why the update on the SEC and DOJ investigations has been highlighted as a part of this particular release.

Is there any material information that you have submitted or you have been made aware of in the previous quarter that has seen you come up with this today and maybe not at the CMD or maybe not earlier?

So just curious on the timing of this update.

Thanks, Amit.

If we start with the first.

On product mix, I would caution against thinking capacity and coverage, because as I said, a large part of what has to be done is densification.

And to me, densification, you can define as capacity or coverage, depends on your perspective, right?

So don't think of the business that way.

I think that's -- as Einstein once famously said, one should simplify reality, but not too much, and I think that is simplifying a bit too much.

So you can see the product mix we have.

It's a mix of hardware and software.

It's -- it will, of course, fluctuate between quarters a bit, but it's also what we see in the new type of networks being built out.

Then about the timing, it's -- I think we want to work at making information available as we have it.

And we have done quite a lot of investigations over the last -- of course, we're cooperated since 2013 and '15, and we have continuously investigated the matters at hand.

And now we have shared all of those findings with the authorities.

And of course, we felt it's appropriate to bring that as an update.

So we -- and the real update here is we have seen that we have breaches of our Code of Business Ethics that results in our judgment now that there could be measures taken, and we wanted to communicate that.

Then our last question comes from Johannes Schaller of Deutsche Bank.

Two, if I could.

Just quickly coming back to North America.

I mean, you mentioned that you don't have enough capacity there, really to ramp the business further.

Is that production capacity or kind of deployment capacity from your side?

And did I get you right that you're essentially not expecting a higher revenue run rate in 2019 year than what you're seeing in H2 because of these limitations?

So basically, not more growth?

Or did I misunderstand that?

And then, secondly, just on Digital Services, I mean, you did a full review of the portfolio, Börje, when you came in, and now there are some additional provisions.

Just how certain can we be that this is kind of a one-off?

Or is there really a risk that maybe you have more provisions also to make for, for other contracts in that portfolio?

No.

If you start with the first one, on the -- we have said that there are a number of factors, site acquisitions, power crews, et cetera, that's [only meeting] the growth in 2019 in North America.

That's kind of what we have said.

We still think that's the best judgment.

Does it mean that it ultimately becomes flat?

Let's wait and see if we can add growth towards the end of the year.

But the reality is the demand, again, the data traffic, at the end of the day, it doubles every 18 months, so there is a built in demand for capacity, and that's really what ultimately will be translated into sales.

So for us, we see and we think that's a fair assessment that it's flattish next year.

If you look at the digital transformation projects, we took provisions this quarter for one large project.

That's been ongoing.

And we are -- as we also say, we're unhappy about the -- our performance on these transformation projects, and we're looking at ways to change the way we run them.

But do you still feel pretty comfortable about all the other contracts, and that we shouldn't expect anything else in terms of additional provisions there?

I feel very comfortable.

I mean we have the -- this is, as a matter of fact, one digital transformation contract that is underlying the provision.

I'm very comfortable about the rest of the portfolio.

We need to fix these projects.

Before I'll give the closing remarks to Börje, I would just like to remind you all about the Capital Markets Day in New York, November 8. And now you can actually on our website, you can register for that event.

So all of you are welcome, and I'm looking forward to see all of you there.

But before that, you will hear Borje's closing remarks.

Thank you, Peter.

No, you're all welcome to the Capital Markets Day.

Of course, I look forward to seeing you there.

Until then, we will, of course, focus on executing on our focus strategy, making sure that we have competitive products as well as a competitive cost position, critical for our long-term success.

And we will, of course, bring you up to date on our outlook as well as what we see for the future coming at the Capital Markets Day.

And until then, thanks, and hope you have a restful rest of the week.

Okay.

Thank you.

Thank you.

This now concludes the conference.

Thank you all very much for attending.

You may disconnect.