Welcome to Ericsson's Analyst and Media Conference Call for their first quarter report. To view visual aids for this call, please log on to www.ericsson.com/press or www.ericsson.com/investors. [Operator Instructions] Peter Nyquist will now open up the call.

Thank you, Rihana. Hello everyone and welcome to this call today. Today, I have with me Börje Ekholm, President and CEO; and Carl Mellander, our Chief Financial Officer. I will start with the usual disclaimer text. During the call today, we would 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 those words, I would like to hand over to you Börje, please. Börje Ekholm: Thank you, Peter. And thank you all for dialing in, and welcome to our first quarter 2018 report. As you know, a year ago, we announced our new focused strategy, including a plan on how to turn the company around. Our strategy is based on what we need to do to be a successful company long-term and really five to ten years out. And any action we take today has to purpose to strengthen of our competitive position and build a strong Ericsson long-term. This strategy had two parts or two immediate actions. The first one is that – the first priority was to stabilize the company and simplify our business as well as to take costs out. And during last year, we reduced the workforce by 17,000 net, and we had savings by the end of last year of SEK 6 billion run rate. And we see these effects now flowing through our P&L. By the end of the first quarter, we had reached SEK 8.5 billion in run rate savings. The other component of our strategy…

Thank you, Börje. And good morning, good afternoon, everyone. Before diving into the specifics per segment, I would like to make a comment when it comes to comparability. Last year, not least in Q1 last year, we had, as you know, a number of extraordinary items, provisions, write-downs of assets and so on, which we reported on clearly in that report. And since then, we've had a series of restatements as well, latest now the IFRS-16 restatement of previous periods. So now, as we come out of that period and these restatements, new accounting standards and these ex-o items from 2017, we had the intention now to go back to a more simplified way of reporting. We will not have an adjusted set of results on top of – the reported, instead, we will go for a simplified structure with reported numbers and reported excluding restructuring. And this is what you will see now going forward here when we compare also with the last year. So let's look first of all at networks. Sales down 2% at this point if we adjust for FX then, with a certain regional mix, which Börje already explained to a large extent, then good momentum in North America, Latin America and Middle East, and certain markets, while Mainland China is decreasing in size. If we look at the gross margin, driven by further penetration of the Ericsson Radio System, but also significant cost out. I mean, in the services delivery side, we see that it's now exceeding 40%, excluding restructuring, with an operating margin then following also at 13.5%. So clearly, it is a sign that the investments in R&D are paying off now. We continue here, of course, to invest in R&D for a leading portfolio, and then continue the transitioning into ERS…

Okay, thank you, Börje. So Juan, we are now open for questions, if you can start.

Thank you. Ladies and gentlemen at this time, we will begin the question-and-answer session. [Operator Instructions] And our first question comes from the line of Edward Snyder from Charter Equity Research. Please go ahead, Edward. Your line is open.

Thank you very much. Börje Ekholm: Good morning, Edward.

A couple, if I could. First off, China has to push – China has made a big noise especially last year about being the first to deploy commercial 4G networks. That accelerate in your opinion, the momentum towards that end in next 18 months or so or do you expect like T-Mobile will just market like LTE advanced systems with a few tweaks and going to 5G? And if you could maybe comment on how the U.S. and China trade tensions impact the Ericsson other than the currency impact? Are you helped or hurt if it become more acute? Thanks. Börje Ekholm: I'm sorry. I didn't hear the beginning of the question. Can you repeat that, please?

Sure. China has discussed or made proclamations in fact they wanted to be the first country to deploy commercial 5G network. I mean, in many respects, they are a bit behind in 4G. Have you seen any motion on the ground that suggest things might be accelerating in the 5G systems or they just going to know they've got 4G out fully, just use more advanced 4G networks like LTE advanced, but if you tweaks on like T-Mobile did with 256 QAM on the 4G in band 71 and call it 5G. So are you seeing any motion in China to an acceleration of 5G? Did that change your outlook over the next 18 months on when you think you'll see commercial 5G revenue? Thanks. Börje Ekholm: No, what you see – I would say, actually the 5G has accelerated all throughout last year in China. And you see that in the way their standard has evolved during this period. So we see no reason to say that China is slowing down. They are going to be early in deploying 5G. You also see North America, also investing heavily to be more heavily, but investing in order to be early on 5G. So I would say you see the 5G development is led by North America and China. That is – or China, and I would add Korea, Japan.. You'll get a fuller picture but that's kind of the – what you see. What you see is, though, the high band more in North America whereas you see probably more in industrial application in China. So you may see a little bit different applications at the end of the day. But they are clearly pushing along. So we expect to see – when we provided guidance to the capital market on the Capital Markets Day in November, we said that our guidance is to know 5G revenues. We didn't say that because we didn't believe in 5G. We said that in order to be prudent on managing our cost structure. But what we see is clearly that we expect to see commercial 5G revenues already this year, and we will for sure see a little bit of a ramp next year as handsets come available.

Okay, thank you, Ed. Are you happy with that?

Yes, thank you.

Next question please.

Thank you. Our next question comes from the line of Simon Leopold from Raymond James. Please go ahead. Your line is open.

Hi, Simon.

Great, thanks for taking my question. I wanted to get a little bit more clarity on how to think about gross margin through 2018? The quarter you just reported was surprisingly strong. I know that there is some seasonal aspects that help in the March quarter. But I think, my confusion may be a little bit amplified by the restatements from IFRS 15, looking at what 2017 gross margins were much lower than we had anticipated. So I'm trying to figure out how much of the outlook for 2018 is affected by the restatements in the accounting change? How much is the cost reduction? I think, I'm looking for a bridge. Thank you.

Okay, hi, Simon, Carl here. So first of all, when you look at the gross margin improvement, I think just to start on from last angle then, about half of the 600 basis points improvement comes from the cost-out. And of course, that initiative continues and will generate additional benefit as we go forward because, as Börje said, there is a delay also from action to visibility in the P&L. So that's about half of it and then, say, about two percentage points come from the Ericsson Radio System. Hardware margins are lowering the cost of sales there. And of course, we expect the penetration of that also to continue. So those are some of the hints. And maybe to mention the third element as well, and that's a mix of things. But it includes also the contract renegotiations and exits that we are doing. And of course, that effect will also continue to increase over time. Then, of course, there are – that could be seasonal variations, but also geographical mix variations over the quarter. So it's not going to be a linear journey and necessarily a road up from here. Individual quarters can vary. But I would say the fundamentals that I just mentioned and cost-out, ERS and contract exits, they have affect this quarter and that will continue also throughout the 2018.

Okay, would you expect...

Sorry, go ahead.

Yes, I just wanted to clarify, would you expect that the March quarter would mark a high for the year because of typical seasonal patterns, but we should look for meaningful year-over-year improvement throughout the balance of the year? Börje Ekholm: What I can say, there is nothing material in the mix of business. For example, there is not a particularly strong software component in Q1 that would indicate a typically higher gross margin from that point of view. So – but I also wanted to comment on IFRS 15. I mean that the numbers will report now. They are compared with 2017 restatements, of course, as you know. I mean, using exactly the same accounting principle. So I – there is – I wouldn't use that as any reason to explain a delta now in the gross margin, because now it's sort of apple-to-apple when it comes to the IFRS portion of it. I hope that responded to your question, Simon.

Yes, that’s helpful. Thank you very much.

Thank you, Simon. Next question please operator?

Thank you. Our next question comes from the line of Richard Kramer from Arete Research. Please go ahead, Richard. Your line is open.

Thanks very much, Carl. Just to follow-on from that and a quick clarification. You seem to be telling analysts this morning that having less transformational deals in the Digital Services mix is sort of something you didn't have in the mix, may have boosted gross margins by 100 basis points or more. Can you just comment on the flexibility you have under the new IFRS standards in terms of timing of revenue recognition on these long-term deals? And maybe a sort of broader question for Börje. You spent a lot of time in Mobile World Congress, sort of suggesting that regions like Europe needed to move more quickly on 5G, a lot of European and LatAm carrier, sorry, which is your single largest region seemed to have a very little plans to aggressively pursue 5G, many of them are just now putting in second LTE carriers. Do you see any risk or – within your expectations for the 2020 revenue? Does that require European carriers to start to move aggressively towards 5G, where you don't really see the conditions for that happening in place right now? Thanks. Börje Ekholm: Should we take the last question first. As we said, at the Capital Markets Day in November, we do not have in our guidance or our forecast any revenues. And that means no revenues from 5G. So that doesn't require any revenues in Europe either. So I don't – it's not going to have – we won't plan that way. Do we would expect that to be the case? No, we do expect to see revenues, but we don't know when that would happen. You're also right in the sense that Europe has some regulatory hurdles, and they have some uncertainties that doesn't drive operators to invest in 5G. But what they want to do, though, is to prepare their networks to be ready for 5G. That means, as you invest in 4G, you want to buy a platform that allows you a easy or cheap, inexpensive, whatever you want to label it, but an easy path into 5G. And that's what we see our product portfolio is gaining increasing traction. And you've seen that we have taken a number of accounts in Europe, and that's done based on the technology we offer and the solutions our product offer. So in short, no, we don't need 5G revenues in Europe to reach the plan. We, as a matter of fact don't need 5G revenues anywhere to reach the plan because it's not included. But we have included all the costs to develop 5G in the forecast.

Should I take the other question you have mentioned you have…

Yes, please. Thanks.

When it comes to IFRS 15, of course, it provides, I would say, a prudent way of recognizing revenue. And when it comes to these contracts that you referred to, they are – as revenue recognition is driven by milestone. So it's really a matter of which milestones and – are reached within the certain quarter. And it's right that in Q1, the proportion of these contracts was a little bit lower. And so that is a secondary reason for the improvement in gross margin in Q1. But a major and absolutely biggest reason is cost-out. So if the mix can and will vary between the quarters, but again the cost-out is the big, big driver here.

Okay, and should we expect a second cost-out plan, sort of, when you reach the steady state in first – after first half, should we expect that to extend through 2019, since there is clearly between Managed Services and some of the other divisions more work to be done? Börje Ekholm: As I said during my presentation, we will not have an additional program. What we are going to do is to work continuously on making ourselves more efficient and take cost-out. It's critical that we have a ways of working that actually ensures we long-term have a competitive cost structure, and that you can only do if you continuously focus on that.

Okay, thank you.

We’ll open for the next question, please.

Thank you. Our next question comes from the line of Douglas Smith from Agency Partners. Please go ahead. Your line is open.

Can you hear me?

Yes, Hi, Doug.

Hi, yes. Just two quick questions about networks, throughout the previous year, the gross margin on network hovered pretty close to 35%. Do you expect or should we expect the new normal in networks is now 40%-ish for 2018? Börje Ekholm: I think, what we see now is that cost-out in service delivery is proving itself in the P&L, and that in combination and with the Ericsson Radio System penetration is driving the gross margin up to this level of above 40%. And I think, in both cases, I mean, this will continue. We have also been awarded additional business from some customers, as we have talked about, and that is based on the technology level. So more business is there to be taken based on the strengths of the Ericsson Radio System. So I think all of these aspects, of course, support and improve gross margin towards the levels needed for the 2020 targets.

Okay, that’s great. And just a follow-up on another statement you made about gaining market share. Do you anticipate perhaps gaining further market share? Should we expect that either from Chinese or non-Chinese competitors? Börje Ekholm: We focus on running our business in a disciplined and prudent way. So when we see that we have an opportunity to expand our market share based on our technology and technology leadership, we will try to do so. So this will depend on situations that come up and in specific situations that we compete in. But of course, it is important what we achieved last year to gain market share and at the same time expand gross margin.

Okay, thank you.

Thank you. And we will go for the next question, please.

Thank you. Our next question comes from the line of Alexander Duval from Goldman Sachs. Please go ahead. Your line is open.

Duval from Goldman Sachs. Thank you for the question. Just a couple. First of all, just wanted to clarify exactly what your RAN revenues growth at Ericsson would have been in the quarter excluding FX? Obviously, you talked about networks being down in constant currency about 2%, but given that there are some of these lower-margin items outside of RAN that you've been exiting, be great if you could give a bit of a viewpoint on that? And secondly, on your 10% long-term group margin, you said today that you're comfortable about that 10% for 2020. But could you clarify is that minimum level? Obviously, if you add up the margin midpoint through different segments where you have targets for 2020, it actually comes to something that's higher than 10%? So just wanted to understand, is that a minimum and then what are the kind of things that would be needed to be achieved in order to do meaningfully better than 10%? Would need to do for example, significant 5G revenues to do that or there would be other things? Many thanks. Börje Ekholm: If we start with the second question, the answer is yes. You have done the math right. And when we put the plan out for 2020, we wanted to make sure that we had a plan, which is robust and gives cushions in. Then – so that's we're tracking well along the plan. And if it becomes better or not, that's – that depends on how the markets, that's what happens, et cetera. But we're very committed to at least reaching 10%. But you can see that – from the math that our plans are higher than that. That's no secret. We’re a cautious bunch. We want to make sure that we put out numbers that we can deliver. On your first question, related to the growth. Actually we break down the growth in the report between products and services, but we don't go further than that specific parts of the networks business.

Okay, got it. And just one quick follow-up on your Digital Services area. You've talked about some of the rationalization you're trying to do in the number of products there. And one of the things you've talked about in the past is about making installation of products easier for customers, you can reduce escalations and then hopefully have a lower amount of OpEx in my mind at least to support all those products. Could you give a quick flavor of what the customer reaction is and how that's trending? You gave a bit of an overview of that at Mobile World Congress, but it would be great to hear the latest trajectory. Many thanks.

I think, when it comes to the products that, what we call, the flagship products, then the focused portfolio in Digital Services. Of course, the idea there is to scale our software sales through these products and lead with solutions rather than as previously was the case with services, but also building efficiency in the support of those products. That's a simplification. I think – and Börje you can fill in also, but when it comes to customer dialogue around this, I – my perception is that, that is positive. I think some of the products are gaining a lot of traction with customers when they’re modern and so on. Börje Ekholm: No. The message from customers is actually that these are critical pieces for their business, and to realize the potential of their own business and our commitment to deliver them are well appreciated by customers. And as we work this through, we're getting signals from customers that we're performing on the deliveries, and that's really the key here.

Great. Many thanks and congrats on the strong quarter.

Thank you, Alex. We are ready for the next question, please.

Thank you. Our next question comes from the line of Sandeep Deshpande from JPMorgan. Please go ahead. Your line is open.

Hi, Sandeep.

Hi, thank you for letting me on. I have two short questions. Firstly, my question is regarding the balance sheet. I mean, you have taken some – in the balance sheet where you've discussed the provisions, you have taken some additional provision in the quarter. Is this provision not restructuring related and which is why it has not been called up in the restructuring? And then secondly, my question is, again, on the Digital Services business that you have touched many times. But I'm trying to understand that this cost, which has gone out of the Digital Services business, would it mean now that future projects undertaken by the business will have a similar cost structure and then a similar margin structure? Thank you.

Yes. On the provision side, I thought with that, and – yes, some of it is restructuring, about SEK 1.2 billion for restructuring added then in the quarter. There are also, given the new accounting rules here, there is a little bit of a difference in loss provision. So there are certain loss provisions for contracts taken in the quarter in accordance with the stricter IFRS-15 rules. So it's a mix of both.

Okay, thank you. Börje Ekholm: On the cost-out in Digital Services, yes, we have changed the way we work and the way we put our – the way we run the projects. And that's why we're very comfortable about it going forward, but we should have a lower cost structure in our project than we have had in the past. We're also – we have to be – we have said this before, one of the reasons we have struggled in some of the large transformation projects is our ability to take the projects, i.e. scoping and define the scope and define what's covered, et cetera. And here we're also putting better measures in place compared to what we have had in the past. So I would say we should avoid the mistakes we've had to large extent, and we should have been able to improve the profitability on new and future contracts.

Okay, thank you.

Thank you. Let’s go to the next question please.

Thank you. Our next question comes from the line of Amit Harchandani from Citigroup. Please go ahead. Your line is open.

Good morning. Good afternoon. Amit Harchandani from Citi. Thanks for letting me on two questions if I may. Firstly with respect to adoption of your technology by customers, could you give us a sense for what are the puts and takes that are being discussed with these customers that are in turn translating into decision for going ahead or not going ahead with 5G? How do you sense customers thinking about it in terms of their own economics? That would be my first question. And secondly, could you maybe give us your view on IPR as a revenue stream. You have given us a baseline revenue. How are thinking about visibility on that revenue stream and what are you factoring in, in terms of your outlook towards 2020? Thank you. Börje Ekholm: On the first question what you see – I think it is – if you look at what does 5G bring to a operator. And you know – I think, the first used case or the first business case, where it actually makes economic sense for an operator to use 5G is for enhanced mobile broadband. And the reason for that is that today basically data traffic grows or doubles every 18 to 24 months. And in order to avoid having an exploding cost structure in an operator, you need basically to reduce the, call it, a dollar per gigabit gigabyte. And one way to do that is, of course, to add carriers to 4G. But eventually in order to get the increased efficiency, they are going to go to 5G. So we believe, actually the first used case is not the new application. It's actually going to be for – to be for enhanced mobile broadband in order to augment capacity in areas where you have restricted capacity. What does that mean for the operator, and this is in a way of saying that, yes, it's better to invest in a network which is easily upgradable into 5G, because then you can add the capacity as you need it and you can add it in locations where you need it. And that's where we see very good discussions with many customers on investing in 4G, as they get ready for 5G. So that’s why we feel we have a very strong product portfolio and a very strong offering that helps the customer to longer-term lower the cost per gigabyte, and that's ultimately what needs to happen for their own business. And the second question…

And the second on IPR, Amit, and Carl here. As you know, then, we have SEK7 billion as revenue base line for IPR business for this year. And I think – and you know that, the upsides we are pursuing, of course, relate to emerging handset vendors who are still unlicensed and – but also the IoT side of course, and even 5G patterns. But I would say, if you have the longer time horizon 2020, we have taken a robust view in our own planning and in our own targets, I think, when it comes to the IPR revenue seeing that's rather stable in the planning as such.

Okay, but – thank you.

Amit, thank you. We are now ready for the last question for this session. So, operator please.

Thank you. Our last question for today is from Stefan Slowinski from Exane BNP Paribas. Please go ahead. Your line is open.

Yes, hello. Can you hear me?

Yes, hi, Stefan.

Hi. Thanks for squeezing me in. It seems like your ducks are lining up here in a row. The underlying market is stabilizing, you're winning share, 5G revenues are beginning cost cutting plans is taking shape and should be fully felt by the end of the year, currency is at 8.4, again, moving in your direction. So my question is, if those current industry and market and cost-cutting trends continue, why won’t you would be able to hit that 10% margin target in 2019 rather than in 2020? Börje Ekholm: Let’s put it this way. We put a plan in place that we wanted to make sure we can reach. That's why we have all along felt comfortable about our guidance and said that we're going to reach at least 10% margin by 2020. I think we see many good developments happening and we see a lot of improved competitiveness through a better cost structure on our side. So we're going to work hard to capture upsides. But I – when I see here today, I don't feel like I should promise that. But I feel also that we're really motoring along our plans to reach 10% plus by 2020.

Okay, thank you very much.

Thank you. Stefan.

So we thank you for this session. I don’t know if anybody – if you have any concluding remarks before we close that. Börje Ekholm: Yeah, standby. Thanking all of you for dialing in and for good questions. We put a plan in place, a new focused strategy and a turnaround plan in place last year. The execution of that plan has been going on for a year now. We’re seeing that flowing through the P&L in the first quarter and we are very comfortable about our objective of reaching at least 10% operating margin by 2020. So thank you all for participating and I wish you all a good weekend.

Thank you.

Thank you very much and bye-bye.