Welcome to Ericsson's Analyst and Media Conference Call for their 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 one hour after today's conference. Peter Nyquist will now open the call.

Thank you, operator and hello everyone and welcome to this second call for today. With me today, I have our CEO, Börje Ekholm and our CFO, Carl Mellander. So during this call today, we will be making forward-looking statements. These statements are based on 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. With that said, I would like to hand over to you Börje. So please, Börje. Börje Ekholm: Thank you, Peter. So welcome to our presentation of the second quarter and thanks everyone for joining. Last year, we defined the new focused strategy in order to turn our company around. We relied on three strategic pillars. The first one is to increase investments in R&D to secure technology leadership and to provide leading solutions to our customers, but also to leverage technology to improve the competitiveness of our product, so basically investing in R&D to improve gross margin. The second, was to obtain a competitive cost position in G&A, but more importantly, in service delivery by simplifying and taking cost out and that would also drive gross margin, but also structural costs. And the third is to improve our competitiveness and based on the improved competitiveness we could selectively strengthen our market position. Our ambition was to establish a satisfactory profitability level assuming flat revenues. So basically we wanted to improve our business in a fall -- in a flat to falling market by controlling what we can basically our costs. This would allow us to have a competitive cost structure that…

Thank you, Börje. Excellent and good morning, good afternoon, everybody. So let's look a bit more in detail at the numbers per segment to start with. And here we look at Networks, and as Börje said back to growth 2% in the quarter. Last time we had growth in this segment was in Q4 2015. And so that growth has also come with the improved margins, and as you can see gross margin over 40% here or 400 basis points improvement year-over-year. And this is really related to a structurally lower cost base I suppose around the service delivery piece as well as the hardware Ericsson Radio System. So, a good momentum here in North America but also other places, as Börje was talking about. In summary, good market traction and growth in the portfolio with a strong margin improvement in Networks. Digital Services has improved margins substantially still reporting a loss of SEK 1.5billion, but the direction is good and it's encouraging to see that we have been able to reduce the losses in this quarter. I want to mention that the proportion of large transformation contracts actually did increase in the quarter as we anticipated when we reported on the Q1 results and this weighs on the margin, but there are effects in the other direction as well offsetting this. That has to do with further cost reductions mainly but also stronger software margins in this business. The top line decrease you see here of 12% is coming from the continued decline in the legacy portfolio. And the new portfolio also declined in the quarter, but however, that's largely explained by a single contract delay in Northeast Asia where we have a tough comparison with Q2 2017. So encouraging improvements still SEK 1.5 billion of losses and our…

Thank you, Börje. So, operator, we are now ready to start the question-and-answer session. So please.

Ladies and gentlemen, at this time we will begin the question-and-answer session. [Operator Instructions] As always please limit yourself to one question at a time and please keep your question at a broad level. Detailed information is provided in the report and Ericsson's Investor Relations and Media Relations team will be happy to take additional questions and discuss further details with you after the call. And our first question comes from the line of Edward Snyder of Charter Equity Research. Please go ahead. Your line is now open. Börje Ekholm: Hi, Ed.

Thank you very much. Börje if I could, I'd like to dig into the Ericsson Radio System, which seems to have a large positive impact on your operating income. How much more can we expect from this? And what has changed that's giving it such an outsized impact now? Does 5G lend itself to ERS sales? Is there a redesign that's improved the cost structure of that product? Or are you bundling with systems sales to a greater extent than you had done in the past? I'm just trying to get an idea of how large of a factor is over the next -- over the near term. Börje Ekholm: Thanks for the question. No we're -- our ERS platform has a couple of key fixtures. The first one being that it is a very cost competitive platform. It's designed for cost competitiveness. So that means that when we designed it, we actually look to market demands and put the right features in place to be cost competitive. That's one thing. We continue to invest in the ERS platform to bring costs down to launch new upgrades, new solutions that lowers the cost to manufacture the hardware. And lastly, which I think is equally important for the customer decision is that it's actually ready to carry 5G traffic with a software upgrade to the hardware. So of course, if you're in a different frequency band it will differ. But for one frequency band, you may not even need to go out to a site. You can actually do it completely remote upgrade with software and carry in our traffic. And we see that responding very well with customers as they don't want to run the risk of having to make multiple site visits and tiering out what the infrastructure they have installed. So I would say it is -- we may not yet see 5G revenues on the commercial level, but we see this as the key driver for our business momentum around ERS.

So why wasn't this a larger factor in 4G? Does it play better in 5G? Or was it part of your costs or high efficiency programs awarded [ph]? Börje Ekholm: No, it's actually very important in the improvements. So we're talking about the 600 basis point improvement compared to Q2 last year. Half of that roughly comes from ERS.

Great. And then Carl, if you could, what do you the estimate the average impact of the contract renegotiations in Managed Services are on the gross and operating margin over the last year? So and will the end of that effort when you finally get to the end of renegotiation be the biggest factor in getting you to the 4% to 6% operating margin target? Or is there something else you should be focusing on for that goal? Thanks.

As a matter of fact, if you look at Managed Services, the biggest contributor to the improvement is actually the changed ways of working within Managed Services. So the way we actually serve the customer, try to automate more removing basically labor content that's a more important factor or getting efficiencies out is the more important factor in the improvement. Then of course, the contract renegotiation has added to that and the run rate of that improvement per se is about SEK800 million I believe we say that in the report. But the key reason is actually ways of working, which I think is important to remember.

Great. Thank you.

We'll continue to the next question please.

Thank you. The next question comes from the line of Alex Duval of Goldman Sachs. Please proceed ahead. Your line is now open. Börje Ekholm: Hello, Alex.

Hi, everyone. Hi, there and congrats on a strong quarter. Just wanted to ask on a couple of points. Firstly, on the OpEx, which was a little bit higher than expected in the quarter, it seems some of that was due to one-time items, but the majority was due to this R&D acceleration as you move towards 5G. The logical consequence of that seems to be that you'll have elevated R&D this year on a full year basis albeit with those nice gross margins. But is it fair to assume R&D spend, could go down next year as you already have ramped up a lot of the investment? And secondly when we think about 5G, you cited enhanced mobile broadband as being ahead of fixed access as a 5G use case. Can you talk about what's really driving that? It seems you've referenced cost effectiveness of delivering data. So maybe you could put a bit more detail around that and can you explain what is really underpinning your confidence in enhanced mobile broadband on 5G? Are you anticipating 5G handsets being released at scale over the next year or so? Many thanks. Börje Ekholm: If we look at -- the way we think about the business is of course at the investments in R&D for us is in a way needs to look at the payback over a longer period of time. So we basically see here that we need to have this R&D level for a period here when we introduced 5G developed all the feature for 5G get ready for the products that ultimately will be launched in the different markets. And here of course, we are participating in low band, mid band as well as millimeter wave products. So we have in that sense a global -- call it global opportunity for our product. Of course, it drives a little bit near term cost, but when that is going to fade away I think is too early to tell. But we remain very focused on the operating income and reaching the operating income target for 2020 of 10% operating margin. So we really think that if we are to have a higher level of R&D for a period we need to sustain that with the higher gross margin or gross profit. So it's -- we don't think -- we don't take that lightly in the sense of saying let's see what it happens but we try to run it in a very disciplined way.

What drives enhanced mobile? Börje Ekholm: Yes. What drives enhanced mobile broadband? When you look at the -- if you look at the traffic growth it's basically increasing, if you would label it in a different way eight times until 2023. So if the operators are to not have costs spiral out of control or having to degrade performance in the network they will need to lower the cost per gigabyte. How is that done? Well it's done first by adding carriers to a 4G. You get into mimo and eventually you get into 5G. So what we have looked at is to look at the costs for -- cost per gigabit transmitted. And if you look at that we see 5G can actually lower the cost or can have higher -- 10 times higher efficiency compared to a pure 4G site. So we see this as a way to manage the cost and the quality to the user to the end user. So that's why we think 5G is initially a capacity enhancer in metropolitan areas where the network is running short on capacity. Then, over time, it will evolve into broader coverage and leveraging the capabilities you get in 5G i.e. higher speed, lower latency, longer battery life, more devices per site etcetera. So the initial use case, we believe is actually just to manage the cost in the operator. After that, we will see the other revenue opportunities. So, one of the first will be we believe fixed wireless access and we -- that's clearly a interest in North America. But we see that increasing the gaining momentum in the rest of the world and it's really a trade-off building out fixed line fiber versus on air broadband. And here, I would say, it has for many operators, it makes sense to build out fixed wireless access as an access technology for broadband. And we think that actually will be a important area for revenue growth for our customers. So, start with enhanced mobile broadband as a cost case, see revenue growth as fixed wireless access. And after that, we believe we are going to see call it the massive scale and critical scale IoT. That's really will be used where connectivity is really critical first, so smart manufacturing for example connecting a factory with no latency and a very reliable and secure communication is going to be critical. We will see it in smart cities, we'll see it agriculture et cetera. But we think that's going to be phased into the market.

Great. Many thanks.

You had a question about the scale of handset as well? Börje Ekholm: Yeah. The handsets, we believe will start to come online. You will see other user devices without going into the details right now during the year. And then as we go into next year you will see other normal devices coming on.

I guess just very briefly to understand this point about massive scale IoT. Can you just clarify, why 5G would have the advantage versus other connectivity like Wi-Fi? Börje Ekholm: This is a little bit – it becomes a technical discussion. Where the – we think Wi-Fi is one access technology that makes sense in certain applications. But when you need to ensure that you have a reliable connectivity, 100% reliability in the connectivity you have to consider other factors, right? So, for example, when we look at our own factory, where we have experimented with a large scale deployment of IoT, we see that in the factory of the future you're probably going to have one device per call it square meter roughly. And when you have that amount of connectivity you will run the risk of interference in a Wi-Fi network or unlicensed spectrum. So to reduce that risk we see there is a big use case or big application for license spectrum based on 5G and that will basically ensure a more secure connectivity. And when we talk to manufacturing partners we have, we see that one of their biggest challenge in the automating the factories for the future is actually the reliability of the connectivity and they are not trusting Wi-Fi for that.

Great. Thanks.

Thanks. We continue to the next question please.

Thank you. Our next question comes from the line of Tim Long of BMO Capital Markets. Please go ahead. Your line is open. Börje Ekholm: Hi, Tim.

Hi. How are you doing? Thank you. Just wanted to ask about the European market. It's been pretty stable for you guys, but obviously North America is doing a little better here. Talk a little bit about what you're hearing. It seems for most that they're a little bit more measured in general on their approach to 5G. So when you look out the next year or two, is there a risk that that starts to look more like China is looking now, or are there other dynamics that can keep that market afloat until we get to that 5G ramp phase like you're seeing in North America? Thank you. Börje Ekholm: Thank you. No. It's – I think the European market – to put it maybe a little bit bluntly the uncertainty in the macro situation in Europe and then I'm talking about spectrum regulation, et cetera it doesn't create the best investment environment. So the discussion in Europe is very much centered of how do we deleverage the investments we have today in the best possible way, focusing less on 5G purse here as more on let's make sure we have the right capacity amount we need right now. At the same time that's where we feel that we have an advantage with our product portfolio as it is 5G ready. So the customers that buys our hardware can actually decide at some point in time in the future to switch on 5G with a software upgrade. So they are in a way hedging their bets a bit. But I think the discussion in Europe should focus more on how do we resolve the spectrum situation, how do we let the operators know more, how much spectrum will cost, and how do we change regulation to actually create a investment friendly environment in Europe than we're seeing today.

Okay. Thank you.

Thank you. We continue to the next question please.

Thank you. Our next question comes from the line of Sandeep Deshpande of JP Morgan. Go ahead. Your line is now open. We seem to have lost Sandeep. We are going to Pierre Ferragu of News Street Research. Please go ahead. Pierre, your line is open.

Thank you. Hi, can you hear me well? Hello? Can you hear me well? Börje Ekholm: We can hear you. Can you hear us?

Yes. Okay, yes, thank you. So, yes, I just wanted to go come back on your – on the Digital division where you improved the gross margin by like 15 points. And very surprisingly you've actually reiterated this performance for second quarter in a row. And so I had like three quick questions on that gross margin. First one is how much of the provisions you've taken a bit more than a year ago, are you still supporting margins in that division? So I assume you still have like projects for which you took provision a bit more than a year ago that are still running if you have any sense of the -- of how much of that is left in the number that would be very helpful? Then my second question is about the comments you made about -- on your delivery platform like being able to take down the cost of derivative and I was very curious to hear more about what you have been doing in digital services to achieve that? You know, you can say you brought the headcount down, you can take the cost of headcount down, you can improve productivity and any color you can give on that would be great? And then my last question would be, if I think about the sustainability of this margin and margin improvement, I'm starting to wonder about your pipeline or pipeline in services because you have a lot of contracts that went wrong where you lost a lot of money and this is being addressed and it’s fantastic to see the results, and then my next thought is, do you have a pipeline of additional contracts that are going to come in to replace these revenues, or do you plan to shrink the size of…

Maybe I can add just the mechanics of those provisions. So when a loss provision is made it basically means that the margin of that contract will be zero going forward, so they lost this element eliminated once and for all.

Okay. And maybe one last quick word on the service delivery platform and how you mentioned Börje in your prepared remarks that you're very happy with the way you have taken down the cost of delivering services, so I wasn’t knowing in digital services, what you have done so far to get there? Börje Ekholm: Yeah, what we have done is -- now, we want to be a little bit simple in the terms. We have created pre-integration centers that we have several of them where we can more do the pre-integration and reuse pre-integration. That has allowed us to be much more efficient in the total service delivery costs. So that's changing our cost position structurally and make us much more competitive and actually that is the key driver behind the reduced loss.

Great to hear.

Thank you very much. Börje Ekholm: Thank you very much

Thank you. We’ll continue to next question. Operator, please.

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

Yeah. Hi. My question is a more longer term one. With regards to mobile broadband and capacity increases, Börje, you've talked about that this will be a continuing driver in the future once new bands are added et cetera. What I'm trying to understand is with – in 4G we did not see this as a big driver for Ericsson. I mean this was a promise driver in 2010, 2011 but it never came through for Ericsson in terms of providing the upside. Why is it at this point? I mean, is this based on customer feedback and because in respect of having different use cases that you think this is going to happen for 5G when it did not happen into a significant extent in 4G? And my second question is actually a clarification on the previous one. Carl you mentioned that in terms of the provision where you’ve – in those contracts where you've taken provisions, are you saying that those – that the losses on those contracts now you report in your number, in the numbers we see as zero and that is important and that is part of the provision that once those contracts are restructured then you will start showing the earnings associated with those contracts? Is that how it is accounted for? Börje Ekholm: If we start with the first one. The reality is there is growth in 4G, call it, profit margin that actually is a result of the growing traffic. But it's hidden with other technologies reducing at the same time. Right? That's why you don't see the benefit. So I would just correct you on that. The second thing is, we see 5G and what I tried to say is actually, the first business case is to solve the cost position on just mobile data. The next level is when you start to get other type of business cases, whether it is fixed wireless access or, call it, massive IoT for the moment or critical IoT, that will generate new features needed, new capabilities needed in the network. And that is something that will generate extra revenues for the operator and then have the potential to generate extra revenues for us. So I think that's our whole business case here. So this is also why we invest in the, call it, Emerging Business in IoT basically to help our customers to find new revenue sources based on connected vehicles, connected everything basically. So I take a little bit the notion that there isn't any growth in the conductivity market. On a global basis there is growth in the connectivity market. We may not have captured it well enough in the past, but I think we're quite well positioned to do in the future.

Okay. Thank you.

Yeah. Sorry. Go ahead. Should I take your other question about loss provision then?

Yeah.

Yes. You're correct. When there is a loss estimated for the remainder of a contract we then make a loss provision in the P&L and it's really based on the full lifetime of that contract then. And then, of course, I mean, it's our job to try to improve over that but basically deliver on the commitment under the contract. It will stay on zero margin as long as it follows that estimation, if that improves for example of course the profit will start to generate. So that –

So sorry, Carl. So that means Carl that you are over – is that – does that mean that in terms of your actual losses because you are reporting those losses that you're generating with those contracts today were taken in those provisions last year. And so essentially, what you're reporting today is zero in those contracts and that is incrementally to you, that helps your margin as such?

Yes exactly. So for those contracts where we made the provision, that's correct, exactly.

Okay. Thank you. Börje Ekholm: Thank you.

Thank you. Our next question comes from the line of Stefan Slowinski of Exane BNP Paribas. Please go ahead. Your line is now open. Börje Ekholm: Hi, Stefan.

Yes. Hi. Thanks for taking my question. On Digital Services you're still targeting low single digit operating margin in 2020. And I'm just trying to understand maybe what the trajectory looks like from getting from here to there. You are still doing kind of minus 17% operating margins there so far this year. And you've talked about maybe addressing half of those 45 contracts by the end of this year. But should we expect kind of a steady transition towards the low single digit operating margin in 2020? Or is this a business that could even breakeven potentially as early as 2019 with a smaller uplift into 2020? Börje Ekholm: Let's put it this way. We put the guidance in place on 2020. We will not provide you any updates to that unless we feel there is a big change up or down. We are very comfortable with the guidance we've given. Of course, the improvement will not be linear until 2020. So, how that exactly is going to look like we are not going to guide in detail now.

Okay. But do you still expect, is it half of those contracts to be terminated or addressed by the end of this year? Would those be some of the larger than lossmaking ones or how should we think about how those will be addressed this year versus next year potentially? Börje Ekholm: We have a number of loss making contracts primarily in the old industry and society they were actually trying to work our way out of. So, hopefully, we will have done those, but we say half of the critical contract being addressed. We don't go into the detail there. But that's kind of the plan we are working. I would rather get those behind me in this year, if possible.

Okay. And just a follow-up question on the Networks business. It grew 2% in constant currency in Q2. I believe in constant currency it's the first growth you've seen in the Networks business since Q3 2014, if I'm not mistaken. And I'm just wondering, is that business now out of the woods? Should we expect that we've entered into a new growth phase for that business where we should see kind of year-over-year growth for the next x number of years as we go into this 5G spending cycle? Börje Ekholm: We are very happy that we have been able on the back of a strong product portfolio as well as good cost position started to see that we can take new business opportunities within Networks and that's what you see have happened that's why we get a growth of 2% in the quarter. Clearly our ambition is to stay ahead on technology never fall behind. And, therefore, we should be able to keep on developing the business like we do today and that's clearly our ambition. Then I'm not going to give you any other guidance than what we've said on 2020. So the more specific I'm not going to be, but we are very comfortable with the business momentum we see in Networks and that's really just in a way underpinned by a good growth in Q2.

Okay, Stefan you're good with that?

Thank you very much. Yes. Thank you.

We are now open for the last question for this session. So, please operator.

Thank you very much. In that case, our last question comes from the line of Tal Liani of Bank of America Merrill Lynch. Please go ahead. Your line is now open. Börje Ekholm: Hi, Tal.

Hi. I have two questions. First one is could you discuss the impact of currency? Maybe you said it and I didn't hear it the impact of currency and foreign exchange on your both revenues and expenses and margins? And second it's a broader question about the deployment of 5G. When you talk to carriers where is their mindset right now? Is it mostly consumer broadband, so just enhancement to 4G better speeds, or do you see them taking active actions to develop also the enterprise market and finding the right applications for 5G? Börje Ekholm: If we start with the latter question, the history of mobile broadband has primarily been a consumer market. You are absolutely right on that. We see carriers though increasingly focus on the enterprise market and enterprise applications of 5G. So if you take for example in China it's clearly the development, it's clearly driven by the enterprise market and the way they think about the enterprise market. But we are seeing that across the world in varying degrees, but we see that operators are increasingly getting ready to address the enterprise market. We believe that is a big revenue opportunity for the carriers and that's also when it becomes -- start to become really relevant with network slicing for example that can provide new ways to differentiate service and create new types of business. More needs to be done here. Networks not ready all the way for that, but we will see that happening over the next few years.

Yeah. On currency Tal, actually year-over-year the impact was close to zero. If you look at the sequential impact, the impact on expenses was negative around 300 million, but positive on the totality on operating income with around 0.4 billion. That's the sequential impact dimensional.

So when you say negative, you mean it's actually positive for margins right? Its negative meaning is reduced expenses?

No, no. So negative…

Okay.

Expenses increased due to the FX impact, but bottom line, 400 million positive all in all.

Got it. Thank you.

I think it's fair to update the rule of thumb, 10% on the U.S. dollar; it's about 5% and 100 basis points of margin.

Great, thank you for that question. So we will end this call with a closing remark from Börje. Börje Ekholm: Thanks Peter. So in closing, we defined our focused strategy last year with the ambition to turn the company around on a flat revenue base, so not hoping for revenue growth, and then we will do this by investing in R&D to have a competitive portfolio and grow gross margin, thanks to that, as well as to take significant cost out to service delivery in G&A. I would say that the second quarter shows that the strategy is working and that we're executing along those including having reached the cost-out target that we set. Now we see good business momentum happening with our very, call it, competitive product portfolio, but also a competitive cost structure. So we see the market in that sense in increasing the positive terms and that's the reason why we also saw networks coming back to growth in the quarter. So we're going to continue to be disciplined on the cost side. We will selectively pursue new market opportunities to expand our business, but we will do that with a very strong focus on the bottom line to ensure overall financial performance and financial health of Ericsson. So with that, thank you.

Thank you, all.

This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.