Welcome to Ericsson's analyst and media conference call for their fourth quarter report. To view visual aids for this call, please log on to www.ericsson.com/press or www.ericsson.com/investors. [Operator Instructions]. As a reminder, replay will be available 1 hour after today's conference. Peter Nyquist will now open the call.

Thank you, operator, and everyone, welcome to this call for the Q4 report for 2017. I just want to start with that, unfortunately, our CEO and President, Borje Ekholm, cannot participate. As he said this morning, as you probably heard in the morning conference, he's got the flu, and he is focusing on curing himself right now and cannot fulfill the full program today. But we have our CFO, Carl Mellander instead, who will go through the whole presentation and also be here to answer your questions. But before starting, I would like to make these remarks. During the call today, we'll be making forward-looking statements. These statements are based on our current expectation and certain planning assumptions, which are subject to risks and uncertainties. The actual results may differ materially due to factors mentioned in today's press release and discussed in this conference call. We encourage you all to read about these risks and uncertainties in our earnings report as well as in our annual report. And another remark as well, because as you probably would see in the presentation as well, majority of the slides are adjusted for restructuring charges and certain items affecting comparability in the slide package that now Carl Mellander will start presenting. So please, Carl.

Thank you, Peter, and good morning, good afternoon, everyone, on the call. Thanks for calling in. Before jumping into the numbers, let's start with a few remarks on the business environment and some interesting factors that we record and observe in the market as well as for Ericsson as such. Obviously, 5G traction is increasing. We see that both in our radio business as well as core. A lot of customer engagement going on in the area of 5G, preparing for 5G. Digitalization is also clearly accelerating in our customer dialogue, large need for customers who didn't like their operations, and we are partnering and supporting them in that. We confirm today the RAN equipment market outlook, the minus 2% 2018 we have talked about before, which mimics also external bodies. Estimates is confirmed here. We see positive momentum in North America, of course. Some of the CapEx budgets, as you all are aware of, are increasing, partly as a result of the tax reforms but partly also by the general market momentum there. And we're also involved in the FirstNet development, together with one of the large operators there as well as early or initial 5G deployments there. China is a little bit more difficult to predict. Of course, the investment levels in general are down, although we are happy to record an improved market share as we discussed, rather, in the Q3 report as well. The U.S. dollar is weakening, and we should pay attention to that when assessing the numbers going forward for Ericsson, given the dependence on the U.S. dollar. When it comes to the right side here, Ericsson then, we see good traction for our 4G portfolio and with its 5G readiness. We have been happy to be entrusted by several customers new business in…

Thank you, Carl. Before handing over to the Q&A, I just would like to repeat that Borje Ekholm, our President and CEO, as he said this morning at the press conference, has the flu and is home curing himself this afternoon, so he couldn't fulfill the program. Just saying that again. And then, operator, we are open for the Q&A. So please, you can open up.

[Operator Instructions]. Our first question comes from Rich Kramer of Arete Research.

I'm just trying to run the numbers, and to a sense, they don't seem to add up entirely towards your 2020 goals, especially given your comments about realizing SEK6 billion of your SEK10 billion OpEx savings already. Can you be more specific about whether it's going to be removing costs from product or changing the mix of what you sell to improve the gross margins? Or if it's in services, wouldn't that imply a much steeper reduction in sales? And I also noticed that you had an extremely sharp decline in inventories in the fourth quarter. Shouldn't that also be -- since it's typically a lead indicator of your sales, imply a much lower sales base as we head into the first half of the year?

If I start with the last part on inventory then. What you see in inventory is also a reduction related to the provisions that we have made. The SEK3.2 billion that we talked about, part of that is inventory related, which means you get a hit on the P&L but then the inventory is reduced, so no effect on the cash flow. But that has also brought the inventory down. Having said that though, there is also a big efficiency drive, and we see results of that in the whole supply chain. So inventory is coming down because of lower stock level, thanks to a different way of running our supply chain globally. So we are quite happy about that. But when it comes to the targets, we stick definitely to the targets, and all the detail around the segments that we discussed at the Capital Markets Day still remain. Yes, we are taking out cost on the product side, definitely. We see that, that is a competitive advantage now that we have with the Ericsson Radio System, and that will continue as we continue to launch new generations of that, taking out costs on our side, but of course, improving also benefit for the customer. But on the service delivery, yes, we are taking out costs there as well, both in Managed Services, Digital Services as well as Networks, and that will also contribute to a further improved gross margin. And that's the final thing. Then you mentioned the SEK6 billion. Just to be very clear, the SEK6 billion is what we have achieved in a run-rate saving, but that is by no means visible today in the P&L. So the full effect of the full SEK10 billion will come into the P&L after half year 2018 when we have completed the program. But it's only a fraction of the SEK6 billion that you can see in the P&L today.

Our next question comes from Achal Sultania of Crédit Suisse.

One question on OpEx, and then second one is on Media. So on the OpEx, I just wanted to get my math right on this. So if I look at 2017 OpEx, your OpEx is about SEK59 billion, give or take. And then you were saying that there is going to be another SEK2 billion to SEK3 billion headwind from higher capitalized expenses going forward and then out of SEK10 billion of savings that you are planning, only, I think, SEK3 billion is aimed at OpEx. So does it mean that your OpEx is going to be broadly flat from the SEK59 billion level we've seen just now?

Yes. The answer is rather flat, rather stable. Yes, exactly. You can say that. If I can add, I mean, for Q1, I mean, you are talking about full year maybe. But when it comes to the first quarter, just to maybe give some color there, we have a strong seasonal effect. If you look back the past number of years, OpEx is typically down SEK2 billion from Q4 to Q1, and that's roughly 50-50 between SG&A and R&D. Now R&D, we continue to invest there, of course, and we will see a certain increase in R&D. But when it comes to SG&A, the savings will continue and be visible. So that's probably a conservative estimate. I would say, the increase in R&D and the saving in SG&A will net out. That will be my conservative estimate in Q1. Then we have, of course, the FX effect as well, not to forget that. That will be to our benefit, let's say, on the cost side probably in Q1 if current levels continue.

Okay. And maybe just second one was on Media. So if I understand this correctly, you are splitting this Media business into 2 parts. One is your broadcast or Red Bee, and the second one is Media Solutions. If I go back at the Analyst Day, I think you mentioned -- some of the numbers you gave kind of implied that the Media business was SEK4 billion in sales for 9 months of '17 and about SEK2.5 billion of EBIT loss. Now given that one asset is still owned by you and the other asset is going to be owned by the equity investor, like can you give us some sense of how big both those are in terms of revenue or EBIT contribution?

Yes. So Media Solutions is around SEK3 billion in top line, and Red Bee is around SEK2.5-ish billion, let's say. A lot of work has been done actually during 2017 to improve the profit level here. So we have a certain loss. Red Bee Media, the broadcast side, is around SEK0.3 billion or let's say SEK300 million loss in the full year 2017, but we are steering that now towards the breakeven situation. And when it comes to Media Solutions, yes, we will have a 49% ownership of that, so basically 49% of the results. We don't expect that to weigh on Ericsson going forward in any material way. So basically, the top line of Red Bee Media and the whole consolidated P&L will remain but will improve profitability, surpassing breakeven, while Media Solutions then, we have 49% of the result of that. And that, as I said before, has improved tremendously during 2017.

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

Yes, that's true.

Our next question comes from Sandeep Deshpande of JPMorgan.

Two quick questions, if I may. Firstly, was there any consideration for this 51% transfer to this private equity firm? And secondly, if you look at the gross margin in the fourth quarter of '17, you had indicated that there was going to be some negative impact to that gross margin from the China deal that you took. So if you correct for the China gross margin -- the China impact, what was the gross margin? And now will that impact go away in the first quarter? And so should we be seeing a positive impact to the gross margin into the first quarter and thus 2018?

Starting with your second question. The impact in Q4 on the Networks gross margin was around 1% negative of this China contract that we talked about. So yes, 1%. And sorry, the first question...

No. I mean, so that continues the second question, does that continue impacting 2018 or that stops now completely?

So we have delivered more than half of the project, meaning that certain parts remain in 2018. We don't see any material impact on the Networks margins of the remaining part at all. When it comes to the One Equity Partners then, we don't disclose the commercial details of the transaction at all, so that remains confidential.

Our next question comes from Simon Leopold of Raymond James.

I just wanted to get a clarification first. On this activity you're doing in terms of the Media Solutions unit, I want to square the operating expense commentary, where you suggested operating expenses would remain fairly similar around that SEK59 billion level. I believe that includes or reflects the cost savings that would result by moving the Media unit out of the operating expenses and into a JV. Is that how we should think about that treatment? I just want to make sure I understand that as well as the timing.

Yes, so definitely. Let's come back to how exactly we will account for it. But assuming that, as you make that, it will be the equity method, let's say, where we have 49% of the result. That's one line in the P&L. Then clearly, then OpEx would be impacted, I mean, as both SG&A and R&D would come down.

And you've commented earlier on the trends in China and North America. It sounds like you're suggesting China is a little bit worse than you were anticipating, and North America, you had talked about being somewhat better. I'd like to see if we can get an update on how you see your European business, particularly around some of the opportunities and developments. Perhaps does 5G start contributing? Has your outlook on 5G contributions changed at all since last time you updated us?

Yes. When it comes to Europe, I would say the investments remain rather stable there but on a low level. So that scenario continues as we see it. And of course, there's a lot of focused network transformation and so on. Data consumption keeps increasing. Also, the quality improvement demands are there. But I would say the investment levels continue on the low side. That's our estimate. A lot of trials going on for 5G in Europe. Of course, some operators expressed a certain level of cautiousness, but we are working with them on both the trials and business models and so on. When it comes to our contribution on 5G, I think that was your second question, when it comes to IPRs and similar patterns.

Yes.

Yes. So that has increased quite a lot. Our contribution levels have increased. We are in the lead there. And then, as you know, there's a certain voting around -- among peers there for what contributions get accepted, and then our share there has increased a lot. I don't have the numbers with me at this point. If anyone can nod or help me around the table. But okay, it is a positive story anyway, and we can come back in different calls around them more specifically.

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

Just to clarify, now that you're essentially keeping the Red Bee business and also going to be consolidating at least 49% of the other Media business, does that mean that we should adjust your 2020 revenue target accordingly to reflect that? And are you still committing to the at least 10% operating margin target for the group in 2020?

We are. So the Media assets were excluded already at the Capital Markets Day when we talked about the bridges and the targets, so this does not affect it. We remain completely committed to the -- both the top line target that we expect, gross margin as well as the 10% operating margin.

Okay. But what you're saying is the Media business were excluded at the Capital Markets Day. So now if we re-include them, would you still be able to hit at least 10% operating margin target for the group in 2020?

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

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

Yes. I wouldn't say it's not that material. I mean, today, it's SEK2.5 billion. It's a bit more than 1% of net sales. And then, if you remember, we gave a range also at the Capital Markets Day of top line. So I wouldn't say that this particular factor influences that at all.

Okay. Okay, great. I just want to follow up. Just on the operating cost side, obviously, your margin targets longer term were largely driven by gross margin improvements. We've seen some of those on the Network side, not on Digital Services, but there wasn't really a significant contribution, if you will, in terms of operating cost assumptions and cuts there. Now that you're kind of on track to hit the midyear 2018 SEK10 billion cost plan, would you take the opportunity to look at where you are and say there's more we can do here, especially on operating costs, to extend that between now and 2022 to drive these and larger efficiencies out of that and out of the cost base?

I think prudent cost management and taking inefficiencies out and introducing efficiencies will always be part of everyday life here. We don't now talk about another program on top of the SEK10 billion. For us, it's important to deliver on that now, and we think we have good progress showing the SEK6 billion out of the SEK10 billion done in terms of annualized run rate. Yes, very little visibility, but that will increase now going forward into 2018. And now is not the time for us to quote another number or start a second program on top of that. We will be focused on delivering this.

Our next question comes from Aleksander Peterc of Société Générale.

I just like to clarify something regarding your market guidance. So the minus 2% you stated is unchanged. However, my understanding is that this is in U.S. dollar terms. And given that the USD has depreciated against all major currencies, particularly the euro, by about 10% since your November update, isn't the implicit constant-currency market outlook now lower? Could you confirm that? And then also further to the Media partial disposal, can you give us timing for the deconsolidation of the business that you are now putting into -- you're consolidating with the equity method? From which quarter we should do that? And secondly, your SEK59 billion OpEx level, is that excluding the presumed about like SEK2 billion to SEK2.5 billion OpEx that goes out with the Media exits?

Yes, okay. So when it comes to the market decline there, we stick to and you know that we concur with external agencies here as well when we talk about the minus -- first of all, minus 8% historically, then in 2017, minus 2% going forward. And then '19, by the way, will be minus 1%, and 2020 will be flat. That's our outlook at the moment. And this is expressed, of course, in U.S. dollar term. How that will play out with different exchange rates, I can't really comment on that. But we see that this as an external assessment, estimate of the market as such in RAN. And then, of course, we have our own U.S. dollar exposure to deal with, but that's our job to work on that, yes. So your other question on Media Solutions and on the OpEx.

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

Yes. So I mean, this will, of course -- as mentioned, this will reduce our costs, and it's not so that we will take that and reinvest somewhere else necessarily. We have the plans in Networks on certain increase and the plans for the other segments as well, and that is not going to change because of disposing of Media.

So we got a question before how OpEx will develop full year, and we said it's flattish. It doesn't include then the change of the Media Solutions.

Right. So that goes out, of course. And your last question around the timing. So we expect this to close in Q3. That's what we think. And then that's when the new consolidation method of this will come into effect.

Our next question comes from Douglas Smith of Agency Partners.

In the morning press conference, before Borje lost his voice, he mentioned that there was no 5G revenue in the plan for 2019, 2020. Is that because the revenue recognition for 5G is still so uncertain? Or is the logic that any 5G would be offset by 4G going down?

No. I think probably what he meant to say was that it's still small. Of course, it will grow but from a low base, starting extremely small '18 and then increasing a bit '19. I mean, '20, we should see a little bit more material revenue.

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

No. Go ahead, please.

You had mentioned earlier as well that you didn't sell as many receivables as normal in the quarter. What's the logic for that?

The logic for that is that we prefer to deliver on real operational improvements, of course, in our working capital. And selling receivables is something we can do -- it's a tool that we have to our disposal. Sometimes, we do more. Sometimes, we do less. But now the overall strategy is to bring that down and instead deliver on proper operational improvement. So we reduced it quite a lot, and we wanted to state it to illustrate that the improvement we see in the cash flow we have generated is actually generated in the business. It's not so that we have gone out and sold SEK5 billion more of receivables or something. On the contrary, we have been bringing that number down.

Our next question comes from David Mulholland of UBS.

Just two quick questions on the accounting side. Firstly, just coming back to the 2020 targets. Whenever you gave those, they were based on a SEK20 dollar, and you've also flagged the currency impact but you're also reiterating the targets. So can you just clarify? Is that reiterated based on a SEK20 or at the current FX rate? And then just secondly, on the IFRS revenue accounting changes. There's a bit of color in the release on what it would have been in 2017 and '16. It looked like it would have been a negative in operating profit in '16 and a positive in '17. How should we think about this impacting what you report in the business through 2018 as you start to implement it?

Yes, exactly. So when it comes to the 2020 target, to start with, yes, of course, a weaker dollar would give us headwind. Our focus is then to mitigate any such development so that we deliver on this target as well. You can say when we expressed the target on stage there in -- at the Capital Markets Day, we also said that it's somewhat on the robust side. And if you look at the ranges that we have by segment, there is a range, and there is a little bit of headroom there. But of course, it's about mitigating dollar should the dollar fall, and this could include, of course, working with the business mix as such, further cost reductions. Of course, we have our investments in R&D, bringing our competitive products, which will also sort of improve the margins and somehow, somewhat counter this as well. We are also looking into reducing the exposure as such, so natural hedging, for example, matching in and outflows of currencies, which we have done in the past as well, but we can do more. Then there is another phenomena actually to mention here maybe. And sometimes, we refer to it as pocket currency, meaning when we sell to customers in U.S. dollars, customers who are not in the U.S. but have a different currency in their home markets. It could be Russia, it could be Brazil, for example, just to pick a few. And what we typically see is that when the dollar weakens, purchasing power in those countries and with those customers increase, which somewhat then offsets the reduction in U.S. dollar sales. So there is a lot to say around this, but the short answer is that we keep the commitment exactly as on Capital Markets Day at 10%.

And then on the IFRS impact?

IFRS, exactly. So there, you're right in what you said. So -- but we will issue a restate in March, and then all of that will become totally visible, how it will be. So I would actually refer to that. It's coming out in a month -- 6 weeks, in March. And then we could -- you will look at all the effects there. You find in the report already the equity adjustments that have come both out of IFRS 15 and IFRS 9.

And our last question comes from Amit Harchandani of Citi.

Two questions, if I may. The first question I have is really with respect to the Media business. You've talked about retaining 49% stake to capture the upside in the business, but you also said that is the part that is the most loss-making. So I'm struggling to understand. Wouldn't you also be capturing or being exposed to the downside and the losses in the coming years as you try to turn this around? And I can't quite understand the strategic rationale to keep the ownership at 49%. Why not 20%? Or why not 30%? Just trying to get my sense of the rationale on that one. And then I have a follow-up.

Thank you for the question. First of all, on profitability, in Q4, this business was breakeven, to start with. So during the full year, yes, there were losses, but it has greatly improved during the quarter. So it's not sort of -- it's not weighting on the results even before this transaction. Why 49%? This is a function of engaging with partners, with possible takers here, and this is -- happens to be now the commercial deal that we have. We think it's good. We are a minority. We think that the upside could include, as I mentioned before, I mean, further consolidation as well. And also, when it comes to the strategic angle here, the customers in question here are often the same as for our telecom business, so we think it's not a bad idea to remain in this. It's relevant for the customers. And we are not in the driver's seat, but we have a minority stake, which means that we can take part of the development of this piece as well, which is important for our key customers, the operators.

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

No. So we don't disclose all the terms around this. It's a commercial agreement we have, but the simple answer is no.

Okay. So we just take the restructuring envelope that you have given as overall for the business?

Yes, absolutely.

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

No. Just to say that -- again, that 2017 was a year of a little bit of turmoil, and we've had our fair share of that, coming, of course, from the overall market development. But I think we have started off on strategic execution in a good way. We have delivered on certain parts of that and established our position better. Now we've laid the foundation for 2018, and I think we are building a stronger Ericsson through all the activities we have in strategy execution. And of course, from my point of view also, I'm very satisfied with the way the balance sheet has developed, both in terms of derisking but also creating resilience going forward to carry this turnaround phase around. We are, by no means, done. Digital Services remain a great big area of concern, and we are, of course, gathering the whole company and the executive team around resolving that problem. But don't forget that there are also other very positive points here, with a stable Networks; Managed Services improving; actions on the Media Solutions and Red Bee, which will take us forward and create more value, strong cash flow and, increasingly so, cost out. Thank you.

Thank you all, and goodbye.