Telefonaktiebolaget LM Ericsson (publ) (ERIC) Q3 2013 Earnings Report, Transcript and Summary

Welcome to the Ericsson's Analyst and Media Conference Call for their 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] As a reminder, replay will be available 1 hour after today's conference. Our Head of Investor Relations, Peter Nyquist, will now open the call.

Thank you, operator. And hello, everyone, and welcome to our call today. With me today, I have Hans Vestberg, President and CEO of Ericsson; Jan Frykhammar, Chief Financial Officer; Johan Wibergh, Head of Networks Segments; and Magnus Mandersson, Head of Global Services; and Helena Norrman, Head of Communication. During the call today, we will be making forward-looking statements. These statements are based on our current expectations and certain planning assumptions, which are subject to risks and uncertainties. The actual result may differ materially due to factors mentioned in today's press release and discussed in this conference call. We encourage you to read about these risks and uncertainties in our earnings report, as well as in our Annual Report. With that said, I would like to hand over the call to Hans for comments about our performance and plans going forward. So please, Hans.

Thank you, Peter. Okay, so let me start with the key developments. I usually go over the things that is all important what is happening in the market in the quarter. Starting then, that with China. Of course, a large and very important market for us. In the quarter, we're seeing 2 operators in China deciding for 4G LTE made their first initial vendor selection. With both these operators, we had nonexistence on 3G. Basically a 0% market share to our technology choices. So we have been awarded by both of them to be part of the mobile broadband deployment on 4G in China with these 2 operators. So I think that is great to see that we now will be part of that. And of course, we'll excel in our technology leadership and services in order to get their prominent situation there. As I said at the press conference this morning, in respect to our customers, they have asked us not to reveal any market shares, that we refer to them the questions about China. But again, for us it's going from 0% market share on 3G with these operators to getting market share on 4G. So that's the bottom line on that. The other thing, we see LTE being deployed in more and more places in the world. And as we saw between 2G and 3G, we also see then HSPA then growing. We have several regions growing in HSPA, also the 10 this quarter. So this is driving also HSPA investment in order to have a aligned and very good performance on the network. On the Managed Services, which Magnus will talk about later, we continue to be the leader in Managed Services worldwide. Our discussions are going to the next level on Managed Services. We have historically been very focused on the network KPI's in the networks that we are now very much developing. The next level or next generation of Managed Services which is customer-centric, which means that it's much more about how the actual performance is for the consumer or the enterprise that are using the service. And here, of course, our service team, with Magnus in the lead, are developing that as the leaders in the industry. The other thing that is also clear in the market discussions is the TV and media, all operates, so our customers they realize that the majority of all data traffic over time will be video. Therefore, the TV and media discussions, everything from content acceleration, how do you package the data, how do you send it, what type of technology you have, and to the sort of end-user solutions like IPTV LTE broadcasting are very important then. And of course, the Mediaroom acquisition in the quarter had a very positive impact with our customer interaction on TV media. Finally, you cannot ignore that the quarter had a lot of consolidation, as well as M&As happening. I think it's pretty logical when you're going into the second phase of this industry, we call it the network society, and we talk about getting into the second phase when the net was going to be used in a totally different way. That all -- the whole value chain are relooked, what they're going to do and how you're going to fit into it, and that's why we see vendors taking their decisions, operators consolidating or broadening their scope by going into new verticals. So I think it is illogical, and I guess, we want to see more of it. Then we can just go back to ourself, we decided to leave handsets some 2 years ago because by coming into new phase on this industry and how we want to position ourself and how we believe we can succeed and continue to be #1. Then you cannot ignore talking about the launch that we did in the quarter as well when it comes to the Ericsson Dot System, which is redefining the old small cell market. And again, it's a lot about innovation again in our technology, but also the combination of our strength in services, getting this product out, using a lot of the current infrastructure in buildings and houses, and actually creating a very good solution for data, 3G, 4G and Wi-Fi, inside buildings. And I think this is really showing that we have the leadership in the mobility worldwide right now, and this is just how important it is for us to continue to innovate. Finally, let me go to the figures then. Net sales SEK 53 billion in sales, 3% adjusted sales growth. And of course, that led us to say that we have sales under some pressure. First of all, because of the currencies. It's 6 percentage units in between reported sales and our adjusted sales, and that's quite a lot on the turnover that we have. Secondly, as we said already in the second quarter, we have peaked in 2 large coverage projects in the U.S. And that's again, sequential we're going down in Networks in North America. And then we also saw that in Japan, we are getting closer to completion on the major projects, that is also taking us down in Japan. It's not only the gem there, so it's a little bit lower activities. Then we have the structural changes that we have had in our sales for while, but they are known and not -- they are sort of have been there for a while, meaning GSM in China and CDMA in North America. So that's how the sales figures came out. Profitability. Well, an operating income of SEK 4.3 billion, which sequentially was growth of -- actually doubling sequentially from the second quarter. And then year-over-year, we are up on that income with some -- almost some 40%. Here, we see that we all continue, as we said before, having both less impact for the modernization dilutive effect, as well, said now for 6 quarters. And we are also, as I said in the last 3 quarters, we are gradually seeing a shift of the business mix as well. So I think what we have been discussing with you on the calls for the last 4 to 6 quarter, we are really seeing right now and we see a clear improvement on the bottom line in this quarter. And that's despite the headwind we have also on bottom line from the exchange rate. I will hand over to my colleague, Mr. Wibergh, to talk about Networks. Johan?

Thank you, Hans. So in Q3 then, we had an organic FX adjusted sales of plus 4% year-over-year. Some of the contributors here were then the growth in mobile broadband businesses in Europe and Latin America. As Hans talked about, North America had a negative impact, it's mainly 2 large coverage project that peaked in the first half of 2013. That's been having a negative impact on the third quarter. We also have reduced activity in Japan, where we are getting closer to completion of a major LTE product rollout. As expected then, we have a continued structure decline in CDMA, in GSM in China, as well as in circuit-switched core. The growth and success of mobile broadband worldwide, as well as the rapid uptake of LTE is then also generating a big growth in HSPA roll out. So even though LTE is very important and spectacular, the majority of the customers worldwide are using HSPA for mobile broadband. And hence, we saw a growing business in 7 out of 10 regions for HSPA. On our IP business, the SSR platform that we introduced in the beginning of 2012, we continue with a good quarter. And 12 new SSR contracts. Of those, 4 were for fixed operators. That gives us now total of 78 customers that have chosen us in this new platform, 58 on the mobile side and 20 on the fixed. That means that we have now successfully managed the transition from our Packet Core application that's usually mobile from the unit platform that we were on onto our new SSR platform. So I feel we are very confident and we have made great progress on the mobile transition. On the fixed side then, we're still early days. We only have 20 operators worldwide that have chosen us there, but I do believe it's encouraging and a good start. Also our overall technology leadership in LTE performance is doing good. We were especially encouraged about all the strong positive feedback we got on the Ericsson's Radio Dot launch at the end of the quarter. I think that will be an extremely important product for us in the coming years. And I will come back to that at the Investor Day on November 6. Looking then at the quarter-over-quarter development, as usual, we had a decline due to the more vacation activities in the third quarter. And there was an impact from FX. Moving then to next slide and talking about the operating income and margin. About a year ago, at the previous Investor Day, I talked about the activities that we have planned to take us up from then 5 percentage point in operating margin up to 10%. And I'm happy then to say that we reached 10% this quarter and we'll be working very much in the 3 areas I talked about then, when it comes to commercial excellence, to make sure we do as much as possible when it comes to pricing and how we handle pricing and other value augmentation towards customers. It's really about optimizing the portfolio and continued efficiency gains. And then I -- we are really tracking more our plans and they are really paying off. I think the next step -- there are also we had the decreasing dilutive effects on the European network modernization projects. So the next step for me then, I will be to take it from the next quarterly double-digit, up to an annual double-digit number. Okay. And with that, I'll hand over to my colleague, Mr. Magnus Mandersson.

Thank you very much, Johan. Good afternoon, everybody. So in Global Services, we saw a stable, though small, sales increase in organic FX adjusted with 3%. Still high activity in North America, that drove those numbers up. But we're also seeing a good development on Professional Services, as well as Network Rollout. And we saw a slight decline on 4% quarter-on-quarter, and here we can refer that to the negative impact of the currency. We are seeing at Professional Services that is showing us very stable earnings. This is very much based on industrialized solutions that we are delivering out on the market. Our globalization of the operations is continuing and moving up to new levels than before as we spoke about last year on Capital Markets Day. I will come back to that when we meet a few weeks from now. We're also seeing a greater interest in our Consulting & Systems Integration solutions, where we are taking quite many contracts, 6 greater contracts in transformations over the OSS and BSS tax, and that will continue to draw a lot of attention, is really good reference cases. We're also seeing -- had a couple of acquisitions, both tactical and strategical in -- over the quarter as we have press released on Consulting & SI. We're also having a really good development on Managed Services. Here, we are #1 in the world. We, as Hans said, we are selling based on customer experience, Managed Services basically going out and measuring the experience we are having as end users on the business. 59 contracts already, 19 in the quarter, and I think that really shows our leadership. We delivered an operating income of 8%, which is equal to the same level as last year, as well as in real numbers, SEK 1.8 billion. With that, I'm handing over to Hans.

Yes, I will take Support Solutions. Quickly then, down 29% year-over-year. Half of that -- more than half of that is driven on divestments to a much leaner portfolio. And then we have, of course, continue what we saw in the first and the second quarter, lower BSS and compression business. And that's, of course, hitting us right now. However, OSS is going in the right way. And sequentially, we're up a percentage. Of course, we're volume sensitive here and that means that we are negative 5% clear improvement from the second quarter. But clearly, down from last year. We still believe that this is a very important area for the transformation, for the whole industry when it comes to TV, media, OSS, BSS, and I think we're well positioned. And it's also benefiting our service business where we are doing a lot of the integration consulting and manage around it. So that's where we are with that, and we will come back and report on that as well at the Investor Day. If we take regions quickly. North America, we talked about very much Services then offsetting the decline in Networks, making 3% growth there. Northeast Asia, down 28%, of course notable. We have talked about Japan, we have talked about China, what's happening there. The good news, of course, Europe up 21%. Middle East, up 21%. Really, it's coming to a new stage right now, showing the strength of the -- our global reach, meaning that we have had Middle East and Western Europe down, as well as some other regions which are now coming back. On Other, he was mentioning then that we're down 34%. The majority of that decline is coming from divestments that we're down that is in that bucket. IPR revenues, slight decline, nothing strange, where our year-to-date continuing to grow based on our new strategy from IPR. So that's the regional update. Jan?

Okay. Thank you, Hans. I'll go quite fast here in order to save time for question and answers. So I'll do a few highlights. We'll show you the sales growth and also adjusted for currency. A couple of messages here, look at the delta between the adjusted organic growth and the reported growth. You can see that it's quite wide gap during this year and that's obviously impacting then the top line numbers. To give you a reference point there, you see that so far, this year, we have about SEK 8 billion headwind due to currency movements then. So the Swedish kronor strengthening throughout the year if you compare with last year the same period. If you look then at the first 9 months in terms of the segments reported in organic FX adjusted, both Johan and Magnus and Hans have been through the quarterly impact here, you can see the same impact up for the first 9 months this year. Similar trends. I think also that when you think about our company and the impact of currency, the major exposures we have is in dollars. That's there, by far, the biggest currency, then euro and then yen, of course, but also Brazilian reais. We have changed, as we have communicated several times, the way we handle accounting for -- or hedge accounting. So new hedges taken after 1st of January are now reported as part of operating -- other operating income. And I think overall, what we see here in quite many markets, especially money markets, is that there is a depreciation, devaluation on currency. So it's a quite challenging year from an FX point of view. If you take the next slide then on some of the P&L comments. Here, we had a gross margin that improved significantly year-over-year to 32% from 30.4%. Very much in line with the previous communication. I mean, the modernization projects are progressing well and they -- but they still have a dilutive effect on the company gross margin. But if you compare quarter -- or year-over-year on a quarterly basis, we see an improvement. But still, if you compare with the total company gross margin, they still have a dilutive impact. The business mix, Hans commented on that, I think it was a strong radio quarter this quarter as well. And then if you compare with the second quarter, there was a small decline in gross margin. And I don't worry so much about that decline, to be honest, I think it's quite small. But it had to do with some mixes in the quarter and slight lower hardware margin related to those mixes. But also a slightly lower IPR revenue. Again, we disclosed IPR revenues on a full year basis and we want you to asses this on a full year basis when it comes to IPR or patent licensing revenue. If you take then the next slide there on the P&L. There is a negative impact from currency. I'll come back to that soon here. Operating expenses, SEK 13.5 billion compared to SEK 13.3 billion last year. The line expenses are coming down in accordance with the plan. There are 2 main or 3 main things here that I think is worthwhile to mention. The first one is that we have implemented and we have successfully implemented agile-wise working in R&D. This means that we have been able to speed up development times in our R&D projects, which then, from an accounting point of view, means that we have -- we are adding less capital -- less capitalized R&D expenses than what we depreciate. So there's a negative impact this year. Year-to-date, it's about SEK 0.5 billion. Then the other thing is that we had some other expenses related to litigations and some provisions for accounts receivables in the quarter. But message is, line operating expenses coming down and we are progressing well there. ST-Ericsson, the JV was dismantled in the quarter, all in accordance with the plan. The provision that we set aside and communicated in December of last year, we think are sufficient for implementation of the options that we choose, which is then to take on the thin modem business and then restructure the residual bucket of the JV. So that's good. If you take the next then, the operating income bridge. A few things. First one is that we have an operating income improvement of SEK 1.1 billion compared to a year ago. There is obviously a negative impact of the volume here, but there is also an underlying impact on an improved margin. The gross margin number you see there, SEK 1 billion, is obviously partly offset by the negative effect of FX. So when you look at FX, you have to look at the negative effects of FX in the margin being then partially offset by the gain here of hedges. But net-net, it's still a negative. So underlying margin has improved. And I think that's the most important on this bridge. If we go to the balance sheet. The balance sheet continues to develop relatively good. We have inventory under good control and a gradual reduction of inventory. There is a bit of timing here in regards to accounts receivables, and that's visible in the third quarter number. Again, when it comes to operating cash flow, we would like you to measure us on a full year basis. And also, thinking about the cash conversion target that we have of about 70%. Then the final slide, which is the change in gross cash and net cash. Operating cash flow SEK 1.5 billion in the quarter, obviously not enough to create the positive net cash. We also paid for some acquisitions that are visible in the investing cash flow on top of what we normally spend as CapEx. Mediaroom, for instance, is in that investment bucket and the acquisitions that Magnus mentioned here from the Services side. So all in all, a net cash of minus SEK 2.7 billion in the quarter. By that, I conclude and hand over to Hans.

Thank you. We'll not take any more time. We'll hand over to Q&A. We will have our Investor Day where we'll go to deeper into our focus areas and what we're doing. So I hand it back over to Peter.

Okay, operator, we are now ready for questions. So please, operator.

[Operator Instructions] Tim Long from BMO Capital Markets is on line with a question.

I just wanted to go a little bit deeper into North America. You talked about the 2 Networks peaking there. Just give us a little sense on kind of what your outlook is there and how you that -- how you think that will affect Q4 seasonality. And when we look into next year, do we think North America will be a headwind for Ericsson still or do you think other networks or more capacity changes in the U.S. market can help that start to grow again?

Thanks. I can refer to where we are right now. I think that's the most important. First of all, as I said before, we have other fantastic run in North America, growing 20% or 30% per quarter. We have a good market share, we have work with all the major operators in North America. We keep our market share, there's no doubt about that. But there are moments where they have been having very high volumes and levels of activity on 2 large coverage projects and that is coming down. How that will go in future, we don't guide for that. We have a good position, I think that's the most important. But the 2 large coverage projects in U.S., they have peaked. And that you can see on the sequential impact on Networks in the third quarter. Then, of course, over time then, the most important of course, what does the consumer demand in North America. What type of new device are coming, et cetera, for capacity. But again, the most important is right now, what we see right now, and that is these 2 projects have peaked.

Okay. And it's safe to assume, they the largest part of that market -- that region for you?

I missed that question.

It's safe to assume, those 2 large projects make up more than half of revenues for that -- in that region for you?

I wouldn't make an assumption. But if they were very small and not impact, then we wouldn't talk about them. They are sizable, for sure.

Simon Schafer from Goldman Sachs is on line with a question.

Hans, I wanted to go back to a comment that you made. You pointed out the mix shift away from coverage has been lasting 6 quarters now. And I guess in that context, it's a little bit surprising that even, nevermind the FX adjustments, but we have seen very little in terms of gross margin development. I'm just trying to infer as to whether you're still confident, and I think you expressed some confidence just last quarter that, that would continue, that hasn't happened in the period that you've reported. Just wondering how you see that as you go into 2014?

I again, just to reiterate what I said in previous quarters, that we would see a gradual decline or a dilutive effect from the European modernization. That is really softer during this year. That we see happening, we can confirm. The second was I said we're going to see a business mix shift from -- to capacity or less coverage. So the mix is going to be different during 2013 or gradually at the end -- during the second half. We are seeing that as well with all of the indications in the second quarter. We continue to confirm that we're seeing that. So we confirm what we have said before, no change. The gross margin, we still need to remember, we have the different aspects of the mix in a gross margin, everything from services, Support Solutions and then Networks that had 2 portions, which is both software and hardware. And that combination creates the gross margin. If you then look at the operating income, of course, important to see how that has developed. And you see Networks developing, as well as services developing as well. So I think that -- you need to look at more holistic than maybe than only the gross margin.

And I think, if I can add there to support a bit in the modeling is, if you think about Network Rollout, the Network Rollout business, you will know that, that's lagging compared to Networks business. So we still see good growth in Network Rollout. Obviously, if you think about Network Rollout and the size of the business prior to the coverage projects and modernization projects, let's say the revenue numbers in 2009, '10, will set the level of between SEK 20 billion to SEK 22 billion. And right now, if I take the first 3 quarters of this year and add the fourth quarter of last year, we're operating with around SEK 32 billion or so in top line. So I think as this capacity shift starts to come, then we will also see Network Rollout coming down. So I think that's also one important measure that we look at internally. And I think you can also look at that externally.

Jan, that's very helpful. And my second question would be, and you sort of -- just actually going back to the prior question on the U.S. side. I know you guys have been delivering, I think it was 6% and 7%, and then 3% organic growth just in the last couple of quarters. Last 3 quarters or year-to-date, you're running up in the low single-digits, mid-single digits. But in an environment of no growth in the U.S., is there a big rest on a top line level you actually start to see some more structural organic declines?

First of all, I mean the strength of the portfolio that we have is, of course, that we both have Networks and services. And years ago back or a historical 3 years, we've had times when Networks are the growth engine and where we had with services. I think that's one important thing or the strengths of our portfolio. Secondly, we're in 180 countries and 10 regions. We are now some 8 regions are currently growing and to dramatically declining. So of course, it is again the strength of the portfolio that we have and the strength or the breadth of your spread should lead us to growth faster than the market. Then of course, if the market is not growing, then we have another problem. Last time we had an Investor Day, for 1 year ago, we said that we believe that the market in U.S. dollar that we are addressing is growing 3% to 5%. So of course, in individual quarters, that's hard to follow. But over time, that's how we see it. Then I think we're well-positioned than right now. We have Swedish kronor to the dollar which is hard to overcome, given how we're reporting. So we will just continue. I think we have a good portfolio. I think we have a good market presence in all these 180 countries. So of course, I think that's the most important for us long term to continue to be the #1 in this industry.

Edward Snyder from Charter Equity Research is on line with a question.

Jan, it sounds to me like you have a number of things impacting gross margin next quarter, of course a slowdown n North America and Japan, but fewer modernization projects in Europe. Should we expect to see historic pressure in gross margins in the fourth quarter? But in the longer term, do you think you'll get away from this pattern or just basically Networks dominating this probably, no deviation from that? And then Hans, you've got a new small cell products going into production in the second half of this year. And it seems like you're getting quite a bit of interest here. What do you see is the rollout footprint for that? Are you going to see demand pick up 2013 or will carriers remain relatively cautious and will take several years to really start seeing significant rollout, a small cell. How do think that's going to evolve?

I start, then. It's Jan here. I think -- so if you then think about the -- typically what happens to our business between the third quarter and fourth quarter, is that there is a lot of project completions. So that typically, that's visible in a significantly higher Network Rollout phase in the fourth quarter. That has been the pattern for the last 4 or 5 years. Last year, we also saw a lot of project completions already in the third quarter, if you recall, still a little growth in NRO for the fourth quarter. So I think that it's reasonable to believe that there will be some project completions also this year. And on the gross margin role then, so what I've been saying now is that we had another strong Radio quarter. Of course, what is important with the Radio business is to continue to see the shift towards more capacity. That's going to be good for gross margin in the Radio area. But there are also other elements. I mean, there's a gradual shift from, let's say, Network Rollout business to more system integration business and so first could also have a positive impact over time. As well as the very important successes in the IP and OSS/BSS area and so forth. So I think we haven't -- the same strategy and the same messages that we have said to you all the time is still the right and correct ones

When it comes to the Dot or the small cell that we have developed, I guess 2 things here to clarify. It's for delivery in the second half of 2014. That's what this product when it will go out. I think that as we have seen so far, and I'm talking instead the new one here, but what we have seen so far, we have seen a great interest with the product in order to actually capitalize on indoor coverage for data because that's what we all talk about. And so much of the data coverage is indoor. Right now, the solutions are very expensive and very difficult to implement compared to what we have come up with the Dot here. So I think that we have a great demand. I think that many customers want to have it. So we are yet pushing Johan and his team to see that it gets out in time. And I think that he has not only pushed from us. He has pushed from customers as well.

And then secondly, you've get the modem assets of ST-Ericsson now. They struggled. They had some really great technology and dominated earlier, but then faded as they got into LTE. What changes do you see Ericsson making to the strategy or to the product approach that's going to make a difference in the 4G side of the business? What are you going to go do different that ST-Ericsson couldn't do?

ST-Ericsson, of course, all the time, much on the current customer base that we have with the lower-end chipset. This is a totally new chipset that we are addressing in the higher end on the smartphone market. But it's at right now, is an R&D that we're taking in, in this quarter. And the fourth quarter that is in the long term, as Jan have said, and we have said now for 4 quarters, is roughly SEK 500 million. Then we come back to the Investor Day and we'll talk about it. But again, we are actually going for another tier of the market than ST-Ericsson did.

Francois Meunier from Morgan Stanley is on line with a question.

Yes, the gross margins have improved nearly 200 bps year-on-year. And that's really good despite the FX headwind. Maybe could you tell us how the gross margin would have been without the negative headwind from FX. Was it like something like 33 or maybe even more? And Hans, I think everyone is a bit confused today with the message in terms of a future margin improvement and the change in mix. Are you still really committed to a real increase in EBIT margin and EBIT profits from here?

Okay. On the first one on the gross margin. Of course, we wouldn't mention that we have a headwind on the gross margin that is not offset by anything else. We wouldn't mention that if it didn't had any impact on our gross margin. But we are not giving out an exact numbers on it, but definitely would have an impact on the gross margin. Let's see if Johan has any other comments. On the other, I think that what we are striving for all the time is what we have a time -- had a time of investments in R&D, in a market share, as well as in building service capabilities and to see that we are really #1 in the areas. We are now in a time where, of course, we're looking a little bit more to the profitability. We have not set any cap or any targets externally. We have what the Board has given us. That's a 5% to 15% improvement CAGR per year. And we are working with that to see that we're improving. So you're going to see us continue to work with the profitability for sure. Johan and I have said several times, we're not happy with the profitability. But we know why we're here. We have taken conscious decision that we believe are the best for Ericsson, for the shareholders long-term. And that's what we're working with right now.

Okay. So then let me then talk a little bit about the FX impact and related impacts on the gross margin. So the main impact when it comes to the margin has to do with the transaction exposure. That's exports from Sweden to end customers or to local subsidiaries because they centralize all the current exposures to Sweden. That transaction exposure is, as you know, hedged. And in average, you can say that we have about 5.5 months or so of volume deployment hedged. So of course, when you see development like we have done this quarter of revaluation impact of the hedged portfolio that's predominantly related to U.S. dollars because we sell -- we have more dollars in than out. And we have then sold dollar a few months ago. And obviously then, since the Swedish kronor has strengthened a little bit here in the quarter, you get this impact. The bigger impact is in the margins. So if you think about that the transaction exposure is the main impact and the revaluation impact this quarter is about SEK 700 million to SEK 800 million. And we have 5.5 months. You could, I think, assume quite well what the margin impact is. If now the kroner versus the dollar would change going into Q4, a few things will happen. If you think for instance that the kroner were weakening, for instance, against the dollar, then obviously the valuation impact would go in the other direction. But the margin would instead improve. So it's a net game here which I think is important that everyone understands. We do not hedge all transaction exposures. We hedge in average 5 to 6 months. So with that, I think you have to do your own modeling.

Okay. So as a conclusion of this, it's probably better to look at the EBIT margin and ignore the movements on the gross margins, then?

I think that's what we are absolutely after. We have talked about that many times that we would like you to focus much more on the earnings growth because part of the earnings growth structure of the company is also growth in services. So we want you to look more at earnings growth. We are now reporting, obviously, in the P&L the impact of these revaluations of hedges. Prior way of doing this was that those kind of the movements were hitting the other comprehensive income. We want to put this now in the P&L. And that's what we have done. And so that's correct. I think, absolutely, you should look at bottom line growth.

Kai Korschelt from Deutsche Bank is on line with a question.

I just wanted to follow on the U.S. I think as you rightly said that at peak. But if I actually look at the revenues and Networks coming from the U.S., we're actually already down 30% from the Q1 peak or Q4 last year. So I'm just wondering, I mean are we actually not already at a point where rather than it having peaked, it has already declined? And we're now at a -- will start to stabilize at these sort of levels? That was my first question. My second question was, Johan, you mentioned this 10% network margin goal that on a stated EBIT base, I think you had achieved this quarter. You said you wanted to achieve it on an annual basis. Are you thinking about next year already in terms of that annual target or ambition? Or would that be further out?

On North America, I mean, we're -- of course, it's a lot of dependency on North America we'll pan out going forward. But of course, you're right. We'll come down now 30% sequentially on the Networks business coming from the first quarter, second quarter when we had a lot of parallel projects. It's more driven actually how the operators now will continue in North America than we can guide for have any clear guidance for you. I think, for us, it's -- we have a good position in North America. We are working with all operators. I think it's more about how they will act right now more than anything else. But it's clear that their coverage project that we have seen for a while, they are in a decline. That's for sure.

So -- and on my side then, I think it's 10% is too close to single digits to promise that every single quarter. And I will, at the Investor Day, extrapolate a little bit more on the activities and things we are doing. And we're not giving you any exact guidance going forward. But double-digit annually, that's where we're going.

Pierre Ferragu from BNP Paribas is on line with a question. Pierre Ferragu - Sanford C. Bernstein & Co., LLC., Research Division: Line was very bad. When I gave my name, it's Pierre Ferragu. I was wondering about -- you used to give a bit more visibility on where you were actually in the rundown assuming that you have addition projects. And we've heard a lot of very good drivers for your profitability this quarter. So less on the addition projects, north capacity of growth, the ramp-up of SSR, your SSR business. But I should be clearest on the way that we are in this subject how much is already in the margins? And you will know that I did not mention gross margin. I'm just talking about the margins that you reported this quarter. How much more is to come, how excited you are that the prospects of continuing to expand your profitability? And how long it will take? This is fully backed. Or how far, how we -- this is overall kroner you've been talking to us for more than a year now of margin expansion. So where -- why don't you give this time around much more visibility on where we stand on these actually margin drivers?

Okay. And Pierre, thank you for the question. It's Johan here. On the modernization projects, we are exactly on the timeline that we presented at the Investor Day last year in early November. So these projects are on a timeline here of being finalized throughout this year. And they still, as I said, they are still dilutive to company gross margin. But on the other hand, they are -- they have improved significantly compared to third quarter last year. So there's no changes in that timeline. There's also some initial up-selling into these projects by means of capacity and so forth. So for us, this is actually becoming, if I may say so, more of a non-issue rather than -- we will view it more as an important upside when we go into next year and so forth. So I think we have a very good progress in the projects overall. On the business mix, we saw -- start to shift in the business mix in the second quarter. That has continued this quarter. And that's also why I make the statements I make that the Radio business is strong. Then there is still some, obviously, structural impact that may impact these things on a quarterly basis and so forth. And that the most important one, this year perhaps, is the circuit switch decline. And we had some big deployments last year on that business. So -- but overall, I think we are well on track with these very important margin drivers. Anything else?

No, I agree. I think that we, at least, we feel that this was a conscious decision to gain market share in Europe we think absolute was is the right way. And we start seeing that right now. And that's what Johan is saying. We are now having a broad base in Europe of Networks where we can first of all, get our next stage of capacity. But not only that, we can get the adjacent services and products that you have the possibility when you have the footprint. Pierre Ferragu - Sanford C. Bernstein & Co., LLC., Research Division: And maybe one quick follow-up on the same sort of vehicle. My understanding was actually you're very poor compared to modeling and rollouts, obviously, is much driven by modernization in Europe. And as this is coming down into your mix, we don't really see they can matter, your improvement in your rollout operating margin. And we don't either see that much of a decline in terms of decline in rollouts. So is there something else here I'm missing to lessen that number?

No. I think that what you see is a gradual improvement in the profitability of Network Rollout. But you still see a lagging indicator to Networks. And that's not only for modernization. Obviously, modernization projects might have had, as we have discussed many times, a much weaker Network Rollout margin, right. But there is still activities ongoing on coverage around in the world. So I think that I've said this many times that the Network Rollout business will -- I mean the current level of earnings are not okay. We will not make lots of money on this business. But the aim we have is obviously to try to be about 0 here. So and I also made the statement I did there around trying to not validate the Network Rollout revenue prior to this coverage and modernization cycle versus where we are now. So I think we -- I think that is -- that should be enough for you to make -- draw your own conclusions.

Achal Sultania from Crédit Suisse is on line with a question. Achal Sultania - Crédit Suisse AG, Research Division: Just coming back to the impact on gross margins from European network modernization. I think you mentioned this in the past that you had about 150 to 200 bps of gross margin impact from these contracts over the last few quarters. Can you give us some sense of how much we've already seen, a reversal of how much we've already seen in the first 3 quarters of this year? And any sense of is it more like than half of that we've already seen less than half? And then I've got a follow-up on LTE rollouts in Latin America. We saw Latin America coming back to growth year-on-year in revenue terms in Q2 this quarter. Again, it's down year-on-year. Can you provide us some update of what's happening with LTE rollouts in that region, how top line should actually grow for you specifically in LatAm?

Okay. So on the modernization projects, what we have said, and what we have presented to you was what they presented in at the Investor Day last year. And there we made some different focuses, and of course, if you measure where you can conclude the margin impact. I think, overall, what -- I repeat what I have said to Pierre, and that is that we are on the timeline that we presented last year. And we are happy with the progress. The overall impact is still dilutive versus last year, Q3. It has a positive impact on the margin. On Latin America, the -- I think there are a couple of things for Latin America. First is that there is a little bit of a challenge in some bigger countries in terms of macro economy. There, as you have seen, there has been some currency movements there in Latin America, which one have to think about when you model things. I think the LTE rollout pace is still slow. And there was and still is, some enhancements on the networks. That is obviously good. It's more to do with WCDMA. But it will obviously prepare the Networks for LTE. But I think overall, I would say that Latin America is quite slow. And it's mainly driven of macro. Let's say the position is there. We have a strong position. But right now, it's a little bit more of a marco uncertainty in that region.

Our final question comes from Chetan Udeshi from JPMorgan. Sandeep S. Deshpande - JP Morgan Chase & Co, Research Division: Actually, this is Sandeep Deshpande of JPMorgan. Hans, maybe you can give a clarification. I mean, there's a slight -- what I don't understand is that on one side, you're saying that your coverage projects are declining in the -- or rather capacity projects are declining in the U.S. Whereas you seem to be fairly confident that your margins will continue to improve through next year on the back of the -- and of European modernization, et cetera. So can we understand, are we going to see margin improvement in the phase of no -- of very low revenue growth next year or how should we be looking at these moving parts?

Thank you for the question. First of all, I've talked about the coverage projects in the U.S. are declining. It's not capacity projects. So we'll just clarify that. Secondly, I mean we have sort of our focus clear that we should grow faster in the market. We have a portfolio for it. And we have the global reach for it. So I think that's where we are starting when we have a discussion in Rollout and in saying how it's going to look in the first half of 2014 or something like that. And, well, of course, there are some mixed sort of sentiments in different markets. And we are working with that. But I think that our portfolio is not strong that we should be able to grow faster than that. And that should give the growth that then will be given from the market as well. So I think that I'm not here to guide how it's going to be in 2014. And what we really want to convey is that we are working right now to the profitable growth. We have been in the face of investment. We are now pushing for profitability. That doesn't mean we're not pushing for growth. We have both a strong mobile Networks portfolio where the service piece we're adding now in the TV media, the OSS/BSS, the IP portfolio in order to be even more relevant in the market. So it's about execution for us it's either to sell-through all of that. And then we're going to see how that turns out in growth numbers. Sandeep S. Deshpande - JP Morgan Chase & Co, Research Division: So just to follow up on that, Hans. Would you say that as, I say, China market starts to grow next year, through their gee projects they're getting there, et cetera, it will not be dilutive to your margin because that will be additive clearly to your revenue, but will it be dilutive to margin?

Always, we want to have and sort of new deals that -- remember now, we have talked for 2 years that we have an unusually high portion of sort of coverage project in the European modernization. And that's what we have talked so much about it. We have all the time, as long as I've been in the company, always have new deals that is the more challenging because they were breaking in. And then where we have more -- where we have been in for a while and doing capacity. And of course, we're going to have that in the future as well. But if there's something special like the European modernization, we will save that. So we will work with all the sort of more challenging project, and of course, the ones that are more mature. And that's our business. And that's how we have worked for 137 years, but at least the last 10. So that we need to handle in the company that we'll also have some time for projects at the same time, as well some more mature where we have a better profitability. And that's our job. So if there's something special, we'll come back on that.

Okay, thank you. Before ending this call, I would like to remind you about the Investor Day that will take place here in Stockholm on the 6th of November. I think the last slide you have here, you would find the link how to apply for the Investor Day. So we'll come here to Stockholm on the 6th of November. Thank you, and bye.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.