Telefonaktiebolaget LM Ericsson (publ) (ERIC) Q2 2017 Earnings Report, Transcript and Summary

Welcome to the Ericsson’s Analyst and Media Conference Call for the 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 welcome to this first call for today. We will actually have a second call at 14:00 Central European Time as well. With me here today, I have our President and CEO, Börje Ekholm; and our CFO, Carl Mellander. 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 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 word to you, Börje, please. Börje Ekholm: Thank you, Peter and welcome everyone to today’s call. During the second quarter, we continued the execution of the focused strategy we launched in the end of March and as you know that this was a strategy launched in light of a challenging market as well as to prepare ourselves to achieve satisfactory profitability beyond 2018. So in short, our strategy, our focus strategy is built upon a product and technology led approach. So here it includes investing in R&D to increase our competitiveness in networks and here it’s where we are seeing the trends already in the second quarter that we are increasing investments in R&D and the purpose again here with increasing investments in R&D is of course to ultimately lead to higher gross margin. Both because we are solving customer problems, but also that we can actually take cost out in our products by investing in R&D. The other – the next element is of course to stabilize our IT and cloud product portfolio and project portfolio. We have large ongoing transformation projects where we need to stabilize those and achieve profitability in them. And we are reestablishing profitability in managed services by managing our existing contracts as well as to invest longer term in automation. What we see in the second quarter is that the RAN market has been difficult and the market conditions have been tough. We’ve earlier had an estimate of 2% to 6% decline this year and we now see which is shared by outside market consultants a high single-digit decline in 2017. We are also, as a consequence of this strategy we decided, we see that there are a number of customer projects that we need to renegotiate and what we have tried to do here is also to quantify what we think could be an outcome of those contracts which we think could hurt operating income with SEK3 billion to SEK5 billion over the coming year. Our focus strategy, as you know, included also a efficiency program and it’s quite clear we need to improve our own efficiency and here we have quantified those actions during the second quarter and we now say there will be at least SEK10 billion in runrate improvement over the coming twelve months. This is where we intend to reduce our costs in service delivery as well as in company common costs, which includes, call it our infrastructure costs, G&A and real estate, IT, et cetera. We are also continuing our investments in innovation and new business development including our efforts in IOT as well as other new innovative solutions for our customers. If we then specifically move over to the second quarter, we saw a challenging underlying performance. Sales adjusted for FX is down 13% and we also see that a part of the explanation for the lower sales is actually reduced software sales. That has hurt of course our networks business area as well. We see continued significant losses in IT and cloud. Here it’s clearly worthwhile mentioning that the part of the losses are of course lower capitalization of R&D. Our operating cash flow was flat or zero. If we look on strategy execution, we see that we are, we are still in early phases of the program and you know our focused strategy is to reestablish profitability 2018 and beyond at the satisfactory level. So we are still early in that program. But we see some initial good signs. We have won breakthrough contract with Vodafone in the UK. We see also that our customers appreciate our Ericsson Radio System, our new radio platform. And we also note here, it’s a very competitive platform that allows customers to upgrade to narrow band IOT and 5G just by software upgrade. So they are in a way getting ready for the future with our Ericsson Radio System. We also signed an agreement to divest power modules during the second quarter. We are also executing on the review of our managed services contracts. We are, so far we have identified 42 challenge contracts, of which nine has been renegotiated or exited and this is something that will take some more time and we expect to be able to do that by the end of next year. We also continue with a plan to improve performance in IT and cloud. This is really broken down in a couple of parts, one, first is to get stability of the roadmaps and the projects and the products as well as the projects we have. There are some major transformation projects where we have – as we have told before, some challenging conditions and here we are taking efforts in order to stabilize them. We are also working hard on growing our new portfolio and it’s quite clear that our established product portfolio, classic products are falling faster than we can compensate with growth in new products. So we are intensifying our efforts to accelerate growth in the new product portfolio. If you look at the market areas, you’ll see a picture where Middle East, Africa is falling faster due to some tough macroeconomic environment. We are also seeing continued slow investments in Europe as well as a slowdown in parts of Latin America even though there are some positive signs in Brazil. And so we see challenges in our market area, Europe, Latin America. North America is falling primarily due to the reduced scope in the managed services contract. So behind that it’s a much more stable development in North America. We also see that our IPR revenues were slightly down during the quarter. If we move on to the segment summary, we see that networks was slower, sales was lower by 14%, which is due to lower software sales but also lower – or as a consequence of lower broadband investments. But it was also impacted by the reduced scope in the managed services contract. The operating margin was hurt by lower sales as well as lower gross margin, again due to the software sales. We have started to increase investments in R&D in radio and here it is again to prepare ourselves both for stronger product offering in LTE as well as getting ready for the 5G launch, which will happen in the next few years. We need to be leaders in 5G and we are committed to being up. So the investments again here in R&D in networks aims to improve the gross margin. So, of course, there is a lag between growing R&D expense and the effecting gross margin, but we expect to see that over time. During the quarter, one important driver of our long-term profitability is the penetration of Ericsson Radio System. We see here that we’ve reached 49% of deliveries year-to-date putting us well towards a plan of reaching 100% of deliveries next year. IT and cloud sales down by 10% really due to a large or a significant fall in the established product portfolio that’s not been able to compensate by the new portfolio. We see operating income hurt and of that drop compared to Q2 last year is SEK800 million in capitalization of development expenses. It’s still not satisfactory. So here we have a drop in gross margin compared to last year, but we have a turnaround plan in place that we are executing on. It consists of a couple of different parts, one is, the first is stability and it’s stability in roadmaps and we are addressing underperforming projects and also the scoping of existing as well as future contracts. We also need to establish profitability which is by improving our delivery efficiency. We are also seeing efficiency measures in R&D, but that will be used to reinvest in order to protect our long-term future. But we will also focus on lowering G&A in the business area. Longer term, we see growth through scaling of the new – our new product portfolio and new software platforms. And we expect here to see tangible improvements during 2018 in this division. There is primarily Media and here we see falling sales number. But we see that we have sequentially been able to improve our gross margin and actually reduce the loss and that is, to some extent, due to cost reduction initiatives that we have pursued during the second quarter. Earnings are also here impacted by negative development expenses or capitalization of development expenses, which makes comparables a little bit difficult. But as you know, we are pursuing strategic opportunities for our Media business. With that, I’ll give the word to our Chief Financial Officer, Carl.

Thank you, Börje. Then let’s have a look at gross margin development over time since Q1 last year then and as we expected than the gross margin is down sequentially, here, of course, Q1 is typically a stronger when it come to software sales. But if we compare a year-over-year instead then, the drop is quite significant and it has to do with the things that Börje has talked about already namely, a drop in software sales in networks, but also the margin development in the IT and cloud business. We can say that Q2 last year is a hard comparison because we had some significant software sales in that quarter. IPR stands for around 200 million Swedish Kroner of this decrease and of course, deeply unsatisfied with this level of gross margin. And that is really why we are putting the strategy that we held on in place and we will of course now, as we will talk about accelerate the actions both through invest in technology leadership which will also restore leadership position and its impact to the gross margin positively while at the same time taking cost out of the business and increasing our efficiency then. If we move on to the operating income bridge, we see that we came from a level last Q2 2016 and of an operating margin of 7% and the number of factors explain then the drop down to the 1% we are showing today excluding restructuring. First of all there is an impact of hedging. This is really a move between the lines in the P&L while the impact of revaluations and realizations of hedges were previously an operating item, it’s now recorded in the financial nets. Then, Börje has been mentioning already that SEK1 billion impact between the quarters of capitalized R&D and we will come back a little bit more to the explanation of that. Then sales drop also contributed to the negative developments. But of course, gross margin is the largest piece where both networks and IT and cloud contributed to a reduced gross margin as just discussed before. R&D is increasing somewhat partly in line with the strategy, but there is also an FX component there while SG&A is decreasing in this comparison. This is good of course, but far from enough and that’s why we are talking about our cost saving effort which we will come back to in a minute as well. If we drill down into operating expenses on the next slide here, we can see that our total OpEx in the quarter was SEK14.8 billion. And here again I must point out that large impact from the changed amount of capitalized R&D standing for SEK1.1 billion of the year-over-year comparison here. And I should say, by the way, that that’s of course has a zero cash impact. SG&A reduced, as mentioned, R&D somewhat increased with the investments we are doing mainly in the networks area then and I think now it’s time to drill a little bit more into the cost savings to address this picture of costs. So if we turn to the next one please, in the strategy we lay down then around three months ago, of course cost reduction was an very important piece as well and now we are today quantifying the cost reductions that we talk about, it’s SEK10 billion at least. If we look at the composition of this cost reduction and we say that 50% has to do with the service delivery organization. And please not here, it’s not about following sales decline, this is or adjusting to business volume, this is pure efficiency. So taking out costs of the machinery and the other 50% then relates to common costs. So of course, general and administration, but also pieces of the common platform of the company being for example, IT, real estate, et cetera where we still have potential to take out more costs and as any company, we have to be more efficient there also so that we can manage the R&D investments that we are undertaking. And how to look at this is to compare the SEK10 billion then with the current runrate meaning an annualized Q2 2017. Also important to note that this is not all, when we say at least SEK10 billion, this is the new communication but of course, we have ongoing programs as well. For example, the supply reductions that we announced much earlier where we are closing some sites, manufacturing sites. Rightsizing due to changes in business volume is of course in addition to this. And, if and when we pursue strategic opportunities, exit the business, divest some part of the business and similar that would also come on top of the SEK10 billion that we talk about here. You see the split by cost item and the G&A portion is around SEK3 billion than of this and cost of sales would be impacted by SEK7 billion and it impacts all the segments. Worthwhile also to point out that the restructuring charge range that we have talked about before, the SEK6 billion to SEK8 billion is valid, but we see that we will end up in the higher end of that range during 2017. And when it comes to 2018, restructuring charges we have to – we will come back to that and communicate more later. Next topic is on change in cash. So, the operating cash flow was zero in the quarter. So the losses were compensated by a slight improvement in the working capital side which is a good sign. And then just two items to point out, one is the repayment of the 500 million euro Eurobond, which happened in the end of June as per plan, and the other one is the dividend payment of SEK3.3 billion that happened in the quarter. So, the overall gross cash change is negative 11.3 and net cash decreased by SEK4.3 billion in the quarter. Next topic then, a couple of things that we talk about in the report. I just like to elaborate a little bit more. Those are the project risks and also the fact that we are reducing capitalization. Going first into the project risks and we have now come deeper in the analysis following now the focused strategy that we have and we have identified some increased risks, also given the current market conditions. So this has to do with ongoing projects and ongoing customer commitments. We estimate today that the impact of these risks might be SEK3 billion to SEK5 billion on our operating income. And this will then play out over the coming twelve months and this is with current visibility of course. We have a global and complex business with projects, but this is all we see now in terms of additional risks. And I think worth noting also that around 30% is estimated to have an impact on cash and the remaining 70% will not. And what risks are we talking about, it could be payment risks in some parts of the world with customers, certain challenging projects, but also following strategic direction and a more focused strategy there are possible costs related to taking strategic action and prioritizing, business transformation cost for example, to exit contracts and similar. Then moving on to the second topic here. As you have read in the report, we are talking about reducing our capitalization of certain items and this is driven by some shifts both in technology portfolios, but also ways of working. So we are reducing now in the quarter and going forward as well the capitalization of certain platform developments, costs and also the way we have been capitalizing development work in connection with software releases and finally, also certain hardware costs. And this is totally non-cash in nature. I should point that out, but the results then in the P&L from now on in the second half is estimated to SEK2.9 billion and this can be compared then with the positive effect second half last year SEK1.3 billion of this dimensions here. There is more background in the PowerPoint, but I will skip that for now for time reasons, but feel free to start in the next picture in the PowerPoint as well for more detail. Instead, I’d like to go into the planning assumptions that we talk about in the report going forward and first of all, to reiterate what Börje already said that we are adjusting our estimate for the market development for RAN equipment in US dollars done and we aligned it to the external estimates as well on the high single-digits percentage for the rest of the year. We have earlier talked about managed services and a row focus which could mean a top-line reduction of up to 10. We reiterate that here. We have talked about the cost reductions already. We have also mentioned the increase in R&D expenses and that the capitalization will have a net impact on operating income of minus SEK2.9 billion in the second half that restructuring remains between SEK6 billion to SEK8 billion although in the higher end of that range and finally then that risk in certain projects are estimated to have an impact of SEK3 billion to SEK5 billion. And then a couple of other Ericsson related items, managed services contract in North America, which we have mentioned several quarters now, we reiterate that. So it’s not forgotten. And that the business mix and overall trends that we see from 2016 will prevail into 2017 as well. All of this is of course based on the visibility we have today and current FX rates. Finally, before handing over to our CEO again, just looking at the cash flow impact of the various items that we have talked about now in the report. First of all, of course, we still have restructuring charges from the 2016 efforts and there is a spillover in cash impact of that of SEK3 billion during this year. New restructuring charges we estimate to have a cash impact in 2017 of 50% of this SEK6 billion to SEK8 billion and the remainder to be taken out – paid out in cash during 2018. The provisions and customer project adjustments that we communicated in the Q1 report was as mentioned then also have an – a cash impact of SEK5.8 billion and that will play out over several years. What we are now talking about, the SEK3 billion to SEK5 billion in additional risks with a cash impact of 30% will also then happen over several years to come. Finally, the restructuring charges to 2018 we will communicate later. Thank you so much and I hand back to Börje. Börje Ekholm: Thank you, Carl. So just to wrap up this call or the presentation part of this call, we have put a plan in place, our focus strategy, which we developed in light of a challenging market and tough environment to combat that, but to build a stronger Ericsson that can deliver satisfactory returns long-term. It’s built upon a, call it, product and technology leadership position, which of course requires us to invest in R&D which we are doing in network, but it also to establish or reestablish profitability we need to turnaround IT and cloud, a work that is ongoing and we need to turnaround our managed services. What we have done during the second quarter is of course we detailed our plans, so underlying the focus strategy, we are now clarified that our cost target is to reduce our cost by more than SEK10 billion during the coming 12 months. We see very strong commitment across our organization, but more importantly, we have gotten a very positive response from our customers and they see our effort to strengthen our product portfolio as something very positive. And so, we believe we are still underway to our target of doubling our operating margin from 2016 beyond 2018. With that, back to you Mr. Nyquist.

Thank you, Börje. With that, actually, I would like to hand over to the operator to manage the Q&A. So, please operator, you can start now with the first question.

[Operator Instructions] Our first question comes from Staffan Åhlberg from Carnegie. Please go ahead. Your line is open.

Hi, Staffan. Staffan Åhlberg: Hi, there and good morning. So, you have changed your assessment of the RAN market in 2017, but it looks not your projections of 2018. How was that changed since the Q1 report? And do you still see a stabilizing market in 2018? And if so, what are your main reasons for that assessment? Börje Ekholm: We have commented on the 2017 our items. If you look at the outside market consultants, that was predicted, call it, the high single-digits. They predict probably a small and slight decline next year. So we see that that’s a stabilization but still challenging market. Staffan Åhlberg: But it’s only a half year less than, so what’s your opinion? What is your feeling on this? Börje Ekholm: The reason why we give this number is of course, that that’s in line with what we see in the market as well currently. Staffan Åhlberg: All right. You say that you see an increased risk of further customer adjustments over the coming year? And can you tell us a bit about these contracts? As a group, have they been highlighted in previous announced risk assessments and which regions and business areas are they mainly related to? Börje Ekholm: I’ll take the first crack at this and then give the word over to Carl. But what you see here, we have said, given the strategic decisions we took here during the Q2, we see a number of contracts which we need to handle and it involves negotiating with customers, clearance on milestones, scoping et cetera. All of this, what we say is, that there is a risk in those contracts. I’ll call it, SEK3 billion to SEK5 billion. It’s nothing you know that we can confirm. Today we can say that is this, and it’s going to look this way, but it’s intense negotiations with customers in order to resolve those. We also have some other, call it, currency-related issues in those contracts. So, there are a number of, call it, risks we see that we just try to put a number on in order more to guide than anything else. And I will still stress that this is really 70% being non-cash of this. Staffan Åhlberg: Okay, but you can’t describe what it is related to? Börje Ekholm: We have – these are specific contract with customers. So it includes, for example, what is completion of a project and to go into the details in a call like this will be inappropriate towards the customers. But you have, for example, when is a project completed, what needs to be done in order to get paid, et cetera, those sorts to some extent as we take strategic decisions, those are little bit unclear and needs to be negotiated on a contract-by-contract basis. Staffan Åhlberg: Okay. That’s all for me. Thank you.

Thanks, Staffan. Go for the next question please.

Thank you. The next question comes from Sandeep Deshpande from JP Morgan. Please go ahead. Your line is open.

Hi, Sandeep.

Thanks for letting me on. My question is regarding the mix in networks, so I mean, ERS is now a big percentage of the sales, but the gross margin is still lagging, clearly software is an issue. But would you say that – at least within the hardware products that the mix has improved year-on-year? And my second question is a follow-up – is on IT and cloud. You are increasing the OpEx investments there. When do you expect to see product return and that sales growth in that business? Thank you. Börje Ekholm: If we start with networks, you are right, we have grown the penetration of Ericsson Radio System and that is a – it’s going to help the economics of that business area as we move down into 2018 and 2019. You are still not seeing the effects in the numbers. So that’s kind of the way it is, but we are also seeing the benefits here longer term. If you look at IT and cloud, yes, we have a couple of different issues going on here. One is clearly, that we have a number of projects ongoing which requires more resources than we earlier anticipated. That’s hurting our numbers. We also have – and we need to resolve them as we have customer commitments in the other end. So we are committed to resolving these projects and that’s what we are working on right now. That requires some more investments. And here we are taking those steps in order to improve profitability, but what you see here is also that the change in capitalization. So I encourage you to look at that as well when you explain the OpEx.

Okay, Sandeep, do you have any others?

Thanks.

Thanks. Next question please.

Thank you. The next question comes from Daniel Djurberg from Handelsbanken. Please go ahead. Your line is open.

Hi, Daniel.

Hi, and thank you for taking my question. It comes back to the cost savings program of SEK10 billion here and from an historical perspective, can you say something on lesson learned because you tried to take out SEK3.5 billion on service delivery and some SEK3.5 billion on common costs in the COGS and SEK3 billion on G&A and quite hasted manner in 12 months. You have been working on this for a number of years. So why should we trust this is happening now and how will you do it? Börje Ekholm: It’s a very good question and it’s a fair question. So I am not going to say anything else but that, of course, what we are doing here, it’s actually putting in place very concrete action programs in order to reduce or call it, improved utilization and in the service delivery arm, we are shortening the lead times in service delivery. So we are taking a number of very concrete actions that will pay off over time. But underlying here and there are a number of very distinct actions that we are very committed to implementing.

Okay, time will tell and I will also ask you about the IPR runrate, previously stated at SEK7 billion, you are a little bit higher level right now, are we looking at SEK8 billion or is the SEK7 billion still? Börje Ekholm: No, what we have said this, really that the underlying contract portfolio had a runrate of SEK7 billion, right.

Yes. Börje Ekholm: Then we will achieve some certain settlements et cetera that actually impacts the number. So, that’s why we are running somewhat higher. But we don’t give any other guidance except that the underlying contract portfolio gives – as a runrate about SEK7 billion.

Perfect. And are there any changes to your strategic view on the possible divestments that’s something on the Media and I think that was hardware units? Börje Ekholm: What we can say is that, we are doing a couple of things on – if we take the Media, well, both of them actually, of course, we are reducing our runrate on cost side in these areas and that’s helping the numbers to some extent. But we are also in discussions and pursuing different strategic opportunities for these parts and we will come back with information as we see more development.

Fair enough. Thanks.

Okay, thank you, Daniel. We will open for the next question.

Thank you. The next question comes from Achal Sultania from Credit Suisse. Please go ahead. Your line is open.

Hello, Achal.

Hi, Peter. Morning, thanks. Two questions if I may. First on the demand side, so, whether you are talking about high single-digit decline in RAN, obviously it’s a change versus your previous guidance. I am just trying to understand what has changed between April and July, given that a number of telcos since then have reported and CapEx numbers have actually trended to be better over that three month course in terms of what the full year guidance was. So I am just trying to understand which are the regions where you are specifically seeing more weakness or higher weakness than expected earlier. If you can elaborate on that particular point? Thanks. Börje Ekholm: I mean, we see more challenging investment environment in Europe and Latin America. That’s the clearly the market area with the biggest impact. We see macroeconomic uncertainty, call it, in Middle East and Africa. That’s hurting the investment levels. And we see also that operators have funneled the investments more into fiber investments for example than into radio capacity. So that’s really where we see the change. I would still say, it’s on a full year basis, we had the estimate SEK2 billion to SEK6 billion before, and of course it is a bigger decline that we foresee now. So, there is a change in environment. Of course, our numbers are also impacted by the managed services contracts which we reduced scoping last year already, that’s continuing to go through the numbers. And of course, we also see our continued execution of the strategic direction which will also in a way impact the numbers a bit.

Okay, okay. Got it. And maybe a follow-up on just as more like a clarification on the cost side. So when you talk about SEK10 billion reduction, is it all OpEx or is it split between cost of goods sold and OpEx and if it is like OpEx basically. One of the things I want to understand is, when I look at your IT and Cloud and Media, it seems that almost 40%, 45% of the OpEx is going - at the Group level is going towards those two areas and they still account for a very small percentage of revenues, about 20, 25. So, given that you are saying that 50% of the reduction would be networks and 50% of the reduction would be in IT, Cloud and Media, like shouldn’t we – shouldn’t there have been more scope for cost-cutting in IT and Cloud and Media long-term? Börje Ekholm: What we have selected to do here is to mention the at least SEK10 billion cost reductions and SEK3 billion of that is in the OpEx part, but specifically in the G&A, because we are also investing in R&D as we have said. So, to build the future value and to support also gross margin development, that’s important to understand. But we will take out cost of the G&A portion and the common costs as we talk about. The other SEK7 billion is in service delivery and that’s also partly, fairly large extent related to the IT and Cloud piece.

Okay, okay.

Okay, Achal. Are you okay with that?

Yes, thanks a lot, Peter.

Thanks. We are open for the next question please operator.

Thank you. The next question comes from Tal Liani from Bank of America Merrill Lynch. Please go ahead.

Hi, Liani.

Hi, thank you. My question is about gross margin and you discussed it a bit, but what are the steps that you are taking in order to improve the gross margins? What’s external to you meaning, things you cannot control and what is in your control and how could it go up once you implement your steps to improve the margins? Thanks. Börje Ekholm: What we have said that, we have on purpose put the guidance more on operating income. And the reason for that is not to go into the details exactly in the P&L statements and what we have said is we should double the 2016 operating margin beyond 2018. And that’s what we are committed to. So, with that, you can also understand that the increase we see in R&D will actually funnel into increased gross margin otherwise it’s just not a doable equation.

And if you don’t try to quantify it even just discuss it qualitatively, what are the – it’s hard for companies to work with 30% margin, below 30% margin and I am trying to understand why is Ericsson having such a low gross margin when others have higher and maybe I am not comparing apples-to-apples. So, if you can maybe discuss qualitatively? Börje Ekholm: There are a couple of things that we are – first of all, we probably have a bigger services share than other companies. So you can keep that in mind and as you can understand, with the new strategy that is going to change a bit going forward, so that’s one thing. But it’s more important to think about what we do in R&D. So if you look at what we invest in is of course to get our TK down, our product cost down, which is what we can achieve through R&D investments. The next thing is for example that when we sell software solutions to companies, we can do more pre-integrating work on our side to simplify implementation, which is then done, you actually have to increase R&D costs and take it out in more efficiency in your delivery organization. That’s another area where we are investing. So I think when you compare the gross margin, you see some lack of, call it, apples-to-apples. That’s a challenged one, but what we are trying to control and what we are working with is more to use the R&D investments to get our cost down in cost of sales.

Okay, thank you.

Okay, Tal?

Yes.

Thank you. Operator, we will go further with the next question.

Thank you. The next question comes from Edward Snyder from Charter Equity Research. Please go ahead. Your line is open.

Hi, Ed.

Hi, thank you very much for the call. Year-over-year sales in networks are down again in all regions. I know you seem to have quarters of such declines. Can you help us understand how much of that is market share loss versus more secular investments given the capacity advantage in 4G? And what do you think it would take to reverse that, where we have – given the 5G before that’s state-wise you instruct to grow or is there an upgrade, maybe an LTE advance upgrades or achieve that would spur more demand across most of the regions? Thanks. Börje Ekholm: If we look at the long-term trends, we have clear, little off-market share. That’s no question. So, that I think you have to keep in mind, then I can’t comment specifically on the past. What I can see today is that, we have no reason to believe that we continued to lose market share. So, I don’t see that happening. What we see instead is that our new Ericsson Radio System is a very competitive platform. And we are gaining a lot of customer momentum. And that’s of course because they prepare their networks for 5G. So, with our Ericsson Radio System, we are putting our customers in a good position to do a very – or only do a software upgrade in order to be more QC proof. So we believe we are in a very strong competitive position with our product portfolio.

If you can give us some color on what happened that risk of some of your contracts have changed so radically that you must undertake just a while – of renegotiation, were they just written incorrectly or poorly or have – that has changed the business you have signed that you can tell if you do all those? Börje Ekholm: First of all, we are not doing a reservation today or not the provision today because we are working through those contracts. They are on a, call it, customer-by-customer basis. So we try to frame a number which would help you to the future and to guide you more in the future and what we see here is a potential risk of SEK3 billion to SEK5 billion. We are of course, very committed to making the best out of that. But we wanted to put a frame around. But this is something that’s going to take time. I am not going to say it’s a quick thing either, because we need to work them through over the coming year and it is – part of it is of course, we could have scoped the contract better. Part of it is that we decide to conduct less business in a certain area and that puts us at the negotiating position with customers. So there are, call it, a mix of things we could have done better, but also a consequence of strategic decisions.

Last question, are they more regionally focused? Or you find that areas less turn stability or where you are seeing most of this rework, is it across the board? Börje Ekholm: You will see it in several market areas and in all of the business areas. So they are not specific regions or anything like that.

Okay, thank you very much.

Thanks. We are open for the next question please, operator.

Thank you. The next question comes from Stuart Jeffrey from Natixis. Please go ahead. Your line is open.

Hi, Stuart.

Thank you, very much and two quick clarifications please. On the operating margin target that you said you saw the doubling on 2016, I am trying to sort of factor in the SEK2.9 billion of capitalization charges, you are talking about SEK2.9 billion in the second half, do we benefit to 2016 double that for all of 2018 and are you now saying that you can hit this sort of 12% margin target even with that as a headwind? And then any clarification on that would be helpful. And secondly, on the market share comments that you gave earlier, you said that you are thinking of stabilizing your market share and RAN obviously, from a financial numbers perspective, your performance so far this year has been weaker than your key competitors. So are you saying that from an order perspective, you are starting to see market share stabilizations and you expect that to show up in financials and two, three, four quarters, again some explanation on that would be very helpful? Thank you. Börje Ekholm: Can you include the second question, I think the first question really is, we have a very bad line here actually. First question I think it was obvious. The second question, can you Stuart, repeat that? We have a really bad connection here.

The second question was on the RAN market share. I think you suggested previously that you see some stabilization after some long-term decline. But if I look from a financial perspective on what’s being reported by yourselves and your competitors by far this year, your reported revenues have been a lot more. So I am wondering whether your market share stabilization comment with specifically to order volumes by far this quarter and whether that more than translate from a reported revenue basis into market share stabilization, and do you expect that to happen that later this year or likely take it to 2018? Börje Ekholm: Okay. So you are asking if we actually are in a way losing market share now as a consequence of what happened last year and before that and if we see that to stabilize next year, is that, do I understand that correctly?

Yes, your key competitors are reporting minus 3%, minus 4% revenues and you are reporting double-digit declines, but you also just said that you see market share stabilizing. Börje Ekholm: Yes.

So I am trying to understand the contradictions? Börje Ekholm: Yes, and you are absolutely right. Of course, we see the current customer interactions, which of course says more about the future than about the history and I can’t really say if we concretely have lost or gained market share during Q1 and Q2 and we will see once the numbers comes, but what we see in customer engagements and customer discussions is that we are not losing market share anymore. So, would that translate probably to the rest of the year. I would also say that we have some – given that we have historically reported managed services contract together in networks. We have of course, a big adjustment due to the one-time contract that we took away or that we lost last year in North America. So that is quite sizable. And when you look at our total revenues in the networks, you have to look also at IPR, which impacted last year as well. So, that’s why it’s underlying pure RAN market is a better number than you see here.

I take the first question, then the first question was around the capitalization changes with the SEK2.9 billion effect on the second half this year and I believe your question was, that this alter your – the target around doubling the operating income beyond 2018 and it does not. I mean, it will continue to have certain negative effects going forward as well. But of course, we stick to the target in spite of that and as we reduce these balances, there will be a further negative effect in 2018 and 2019, but smaller than what we are talking about now for the second half.

Thank you.

Okay, Stuart? I guess, we lost him there, but let’s move to the next question and that will be the last question for this session. But I would remind you that we actually have a second call here at 2 o'clock Central European Time. So, operator, we are now open for the last question in this conference call please.

Thank you. The last question comes from Andrew Gardiner from Barclays. Please go ahead. Your line is now open.

Hi, good morning. Hello Peter, good morning and thanks for taking the question. One was related to the adjustments you are talking about on several customer projects. Assuming from a like-for-like language, you highlighted SEK8 billion SEK of such adjustments with the first quarter enhancements. Now a few months later, we are getting another potential, sort of SEK3 billion to SEK5 billion, so potentially an uplift of 50% of the original plan. I was just wondering what has happened over the last three months to result in such a significant change and because it doesn’t seem that the market has changed that much in the last few months is presumably the contract-specific. So can you give us any insight as to what happened as you got deeper into these contracts to result in such a potential and significant uplift and so what’s giving you the confidence, so that is indeed through the final assessment of those contracts and we may not get further negative adjustment in future periods?

Shall I go? Also of course, we have come much further into the analysis since then. And of course, we are making decisions under the strategy that we launched three months ago and we realized that there are some risks related also to executing on that strategy as Börje was saying before when it comes through. For example, addressing businesses that we want to either exit or transform because they are underperforming today. So there are certain transformation costs related to that which come up. Secondly, I will say it’s still a difficult market environment and there is an emerging markets component into this as well, where we see certain payment issues with customers. Those are new events coming up which were not visible at the time of the Q1 report certainly. So, as we dig deeper into this, we implement our strategy we analyze which we have identified these risks. And what we want to do is to be transparent with the amount and the analysis we have done, that’s why we put the SEK3 billion to SEK5 billion, but there are always risks in this type of business, but this time we want to increase transparency and put the frame on it. Börje Ekholm: Yes and so, I think it’s important to remember the big difference between what we took at provision in Q1 which was actual in that sense confirmed issues, right or confirmed underperformances and confirmed less value, which was why we took the charge in Q1. What we are seeing now is, we are saying, okay, let’s define what are the risks in executing the strategy, what could that be as impacting earnings. And we see this to be SEK3 billion to SEK5 billion over the next 12 months. And after that, we should be in a more steady state business and a steady state situation.

Okay, understood. Just a final clarification. With the 1Q announcement, that was 70% of the charge, it was a 70% cash impact. The – in your press release this morning you are talking about only a 30% in cash impact. So, there is a significant difference in terms of the makeup of where these potential issues may arise? Is that, struggling today why is there such a limited cash impact, customer facing, you are highlighting payment issues, it seems very sort of cash-centric issues?

Yes, this is of course based on the analysis we have done looking into the specifics and looking at what sort of balance sheet effects this could have and so, around 30% is going to be the cash impact. Of course, these are estimates as the 3.5 in itself, so that’s an estimated amount, but this is based on the same walk through of the contracts. Börje Ekholm: But you can also say the SEK3 billion to SEK5 billion is a what we say is that 70% of it is a balance sheet exposure, right. So it’s non-cash in that sense. We get paid less, for example.

Okay, Andrew?

Okay, thank you.

You are happy with that. Okay, maybe, Börje, some concluding words? Börje Ekholm: I was going to – just to conclude by saying, we have put a focused strategy in place determined to reestablish a profitable Ericsson beyond 2018 doubling the 2016 operating margin. We are committed to delivering on that that means, now that we quantify cost reduction of more than SEK10 billion that we will take out over the coming twelve months in order to again invest for the future and invest for longer term successful company. And we are in this phase of turnaround and this is going to take some time. We are trying to guide you on what we are doing and show what we are doing. But we are focusing now on executing on this strategy. Thank you.

Thank you all. Talk to you at 2 o'clock. Bye, bye.