Telefonaktiebolaget LM Ericsson (publ) (ERIC) Q2 2013 Earnings Report, Transcript and Summary

Helena Norrman - Chief Communications Officer, Head of Group Function Communications and Senior Vice President Hans Vestberg - Chief Executive Officer, President and Director Johan Wibergh - Head of Business Unit Networks and Executive Vice President Magnus Mandersson - Head of Global Services Business Unit and Executive Vice President Per Borgklint - Head of Business Unit Support Solutions and Senior Vice President Jan Frykhammar - Chief Financial Officer, Executive Vice President and Head of Group Function Finance

Mark Sue - RBC Capital Markets, LLC, Research Division Stuart Jeffrey - Nomura Securities Co. Ltd., Research Division Gareth Jenkins - UBS Investment Bank, Research Division Achal Sultania - Crédit Suisse AG, Research Division Alexander Peterc - Exane BNP Paribas, Research Division Mark McKechnie - Evercore Partners Inc., Research Division Didier Scemama - BofA Merrill Lynch, Research Division Pierre Ferragu - Sanford C. Bernstein & Co., LLC., Research Division

Welcome to the Ericsson's Analyst and Media Conference Call for Second Quarter Report. To view visual aids for this call, please log onto www.ericsson.com/press or www.ericsson.com/investors. [Operator Instructions] As a reminder, replay will be available one hour after today's conference. Helena Norrman will now open the call.

Operator, and hello, everyone, and welcome to our call today. With me here today, I have Ericsson's CEO, Hans Vestberg; CFO, Jan Frykhammar; Head of Global Services, Magnus Mandersson; Head of Networks, Johan Wäreby; and Head of Support Solutions, Per Borgklint, which will be making the presentation and taking questions. After I have reminded you of that, we, today, 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 to read about these risks and uncertainties in our earnings report, as well as in our Annual Report. With that said, I would like to hand over the call to Hans Vestberg for comments about our performance and plans going forward.

Thank you very much, Helena, and most welcome to our analyst call. We will be a little bit brief. We had our press conference this morning. But I know some of you have not the chance to attend, so we'll go through the slides as we usually do. Starting with the key development. I usually go over a little bit to what's happening in the quarter. A couple of things. First of all, we see clear indications and discussion with our customers all around the world that superior performance on the network and network's performance is a key differentiator and extremely important for our customers. That's, of course, for us important as technology is geared for prepared [ph] performance as well our services, when it comes to optimization and design, et cetera is coming in there. But it's clear that networks becomes more and more relevant and important. On those networks, we see also the video traffic continuing, which now had -- we estimate that we will have a growth of video traffic in the network [ph] of 60% annually and very much driven by TV and media. We also saw in the quarter 2 large market being in vendor selections for 4G. Russia has been there for a while. We -- some conclusions, we communicated a win on MTS. So we are now in -- on the 4G in Russia as well. So we want to see how that continues and when do we start to deploy, but at least we have a good win there with MTS, and we're working with others at the moment. In China. Public information, China Mobile has started their 4G process just recently. Hard to predict when it's going to be ended or concluded, but right now, they have started process, it's on 1 of the 3 operators who started that process. So that's where we are on that. A lot of dynamic in the industry in the quarter, both from our customers, merging, and doing alliances as well as on our competitive side where we also see a lot of things happening. So it is an industry that are dynamic for sure. When it comes to macroeconomic, I usually comment that, and we have not seen any major changes. We still have a challenged situation in parts of Europe, parts of Middle East, we still have political unrest and uncertainties. That was where -- and that was not worsening, but that has not improved neither, so we have pretty much the same situation. And we conclude by that the fundamentals were for the industry mobility, broadband -- the mobile broadband and the cloud is long-term, those fundamental remain very, very, very interesting and attractive. Now let's look at the second quarter, starting by net sales, SEK 55.3 billion in sales. That is currency adjusted sales growth of 7% reported sales flat indicate, of course, that headwind of some currency are pretty strong, especially on the euro, dollar and the yen, so -- but encouraged to see the second quarter in a row, a growth of 7%. We had the same in the first quarter. High activities on projects, both in Europe and North America, both on services and products. Sequentially, we had the growth on 6% quarter-over-quarter, so that's also good to see, then very much driven by Global Services. If we look at the profitability, we had some SEK 3.4 billion in operating margin before the one-offs, which was 2. That was one with the cable operations that we announced in the quarter, that we will exit and report to divest. That is SEK 0.6 billion. Then we had a loss related to the sale of a division within Telcordia ACS of SEK 0.3 billion, so if you take that the way, the underlying margin went up 6.1% compared to 3.1% last year. So I will come into that as the segment heads will discuss, as well as Johan will go through the particulars of it. So by that, I will hand over to Johan Wibergh to talk about the Networks. Johan?

Thank you, Hans. So first of all then, we had a organic FX adjusted sales that were up 8% year-over-year then. And the underlying business has really been developing in the right direction. There've been big mobile broadband deployments in North and Latin America. That was some of them impacted by lower business activity in South Korea. There are some delays there in LTE licenses. And the continued structure decline in CDMA, that goes on. GSM in China, which also is a structural decline, as well as the circuit switch core, where we are between 2 different phases. The traditional technology is decreasing, and investments involved that has not really started yet. We can also clearly see that our investments in the European modernization have paid off, and we are seeing ourselves now as being the leader in mobile infrastructure in Europe. The quarter-over-quarter sales were flat. We have 2 coverage projects that peaked now in the first half in North America. On the operating income then, we had a -- it was SEK 1.3 billion, with a 5% operating margin. Hans already said there was a one-time, one-off event on SEK 0.6 billion related to the cable business. We also are seeing now a gradual decreasing negative effect from the network modernization in Europe. We see that our efficiency activities are on track. And at the Investor Day back in November. We communicated that we will work within 3 areas to improve our profitability for the Networks segment. The first there was commercial excellence, which is really about monetizing our footprint and getting a good grip of stabilizing the pricing in the market. We feel very good about the price development. I think that's starting to stabilize in the industry. Second phase was operation effectiveness, which is really taking advantage of scale advantage, increasing efficiency in R&D. And the third item were cost adoption to make sure we pay to the cost structure to our business. All operation effectiveness and cost activities are on track, so that is pretty good. So if you will then take the 5% operating margin, you will get up to 7% adjusted for one-time events. You get 8% if you take away restructuring. And on top of that, you have a very strong currency headwind in the quarter. Moving on then, we see, as Hans also was talking about, an increase in operator focus on network performance is a key differentiator. This is good for us, because we are really competing on getting a premium price for technology leadership. We have seen during the quarter a big uptake for our air product and pending integrated radio products spreading to more and more customers, and when they see all the benefit that product is giving. The IP portfolio then. Momentum versus our platform continues. Another 15 customers that have chosen us for the SSR product, now total of 66. But also is very encouraging is out of those 66 contracts, we have 16 customers that have chosen us in the fixed side, and we continue to invest in strengthening our sales force within IP as well as broadening the product offering. On heterogeneous networks [indiscernible] that's a debate within the industry and how you can increase coverage and capacity specifically indoors. And we're getting good feedback on our heterogeneous networks strategy. We're already the leading vendor in that [ph], and we are out now trialing small cell products that will come into shipment during the autumn. And it really shows good performance advantage when you get the combined effect of the corporation between the macro and the small cell. And with that, I'm done, and handing over to Magnus Mandersson.

Really nice of you, Johan. Thank you very much. Good afternoon. Global Services showed a very good -- it's picking up in the quarter. Compared to last year, we are up 9%, in Swedish kronor, it's 3%. We have seen also a strong development. I think on Professional Services, when it's currency adjusted, I would say it's almost 5% up. We are seeing still a good development on new contracts in consulting and systems integration. We also had a good intake of Managed Services contracts, 19 in the quarter, which is up more than a year before. We broke 1 billion subscriber level on Managed Services, which is also a milestone, so we're very promising there. Network rollout continue to grow, very high activity in North America. And we're also seeing then that the balance in the portfolio or the customer portfolio is a bit better compared to last year or last quarter. You can see that our operating income is now improving quite a lot compared with Q1, where we showed this quarter 6%, which is quite stable with previous quarters as we have had. If we look into the operating income then, we're showing SEK 1.6 billion in profits. We have a one-off of SEK 0.2 billion, and again, we -- if you look into the professional service operating income, we, as we said last year, when we met on the Market Capital Day, we should continue to see improved percentage per quarter. We're doing that this quarter, so we are now 14% including restructuring. And you could also see that we have developed quite a lot of positive momentum on the network rollout we had in Q1, as you remember, 16%. We are now down to minus 9%. And compared to a year back, we had a 11%. So we're really seeing a good trend, and this is, of course, demonstrated by gradually decreasing negative impact to the European modernization. So quite happy with that. I think I hand over here to Per Borgklint.

Thank you. So, I guess, for solution, we had a very weak quarter in terms of sales. And we can see that the unrest in Middle East is impacting our BSS sales, but also, fairly, a bit of a slowdown in Latin America, and fairly slower in North America. But in general, those sales is taking off, and we are seeing that we are also being ranked by Gartner, as #1 worldwide. We see a continuous strong demand for [indiscernible] and BSS. And also for the media part, but we should also remember that Q2 last year was very strong quarter in terms of media sales and media margins and BSS margins as well. What we see is that the sales cycles were very long and volumes vary very much between the different quarters. And operating margin was minus 12%, hit by a SEK 0.2 billion one-time affect relating to the divestment of the ACS business of Telcordia. And we continue to further enhance and invest in our strategy. And we announced the Microsoft Mediaroom acquisition fairly recently and hope to close that in Q3 and get moving forward.

Thank you, Per. Thank you, all. Okay, quick summary of the regions. Six of the 10 regions growing in the quarter, fairly similar to the first quarter, couple of the regions that I pick out. North America, of course, has been mentioned here by Johan. Year-on-year, growth 18%, sequentially coming down then a little bit. Still very important market, the biggest telecom service -- telecom market in the world where we have a very, very good position. Western and Central Europe, up 10% indicates, of course, the -- what write about in the report about our gain in market share and leadership in Europe, that we have a very high activity there. And, of course, on the flip side, India continued to have a tough time for us. I would say there are 2 things. One, the quarter stands [ph] from operators investing in that environment at the moment, and then we also have a macroeconomic effect in India at the moment. So this is short-term looking a little bit challenging. On the other hand, there is big demand for mobility and mobile broadband in India, long-term. Right now, it looks a little bit more challenging there. We're doing good development on services. We took large Managed Services here [ph] in the quarter in India that also if you look at our headcount, was the majority of the increase of our headcount in the quarter. Northeast Asia, we talked about them a little bit. But 3 important countries here, Korea, Japan and China. They are all, for different reasons, declining. Some are temporary, some are more structural. Korea, a lot about they had a very high activity last year. They are waiting for new licenses, so it's no loss on market share, it's just a little bit less of activity in Korea at the moment. Japan, a little bit less activity, but more important, the currency development between the yen and the Swedish krona is impacting that. And finally, China. Here, we have one customer on 2G, GSM investment that is coming down, and that structure will not come back. So I think those are the 3 different -- of course, in China you have the 4G coming up right now that over time might offset the 2G decline. So that's why you have some temporary, some more definitive. Johan [ph] mentioned [indiscernible], that's down 13% majority of that down is due to IPX divestment. We see a good development, a stable development on licensing and IPRs that we are focusing a lot on. Good. Jan, please.

Okay. Thank you, Hans. Let me then start with the sales growth and what Hans already have mentioned then and the segment heads as well. But we decided to summarize the FX impact in terms of top line here on one slide. And here you can see the difference between reported top line and FX adjusted top line. And you can see that we have headwind this year, both in Q1 and Q2. As Hans said then, if you look at the different -- the group for first half, sales for organic FX adjusted grew 7%, and you can see then the Networks, Global Services and Support Solutions numbers there. Again, you have to mention currencies that are important here for us, it's dollar, euro and yen. We have -- our main strategy here to handle currency is, obviously, by means of natural hedges. We can always work with the more short-term hedging, which we do. But for the long-term, we work with natural hedges, meaning that we try to match revenue and cost currency. We have improved the net FX exposure the last year as seen is U.S. dollars. But we still have a unfavorable exposure into yen, and that's also visible into the numbers. We have also changed the -- or we have terminated hedge accounting for new hedges. That has been down from 1st of January 2013. The impact of unrealized and realized hedges will be reported and is reported both in the first quarter and second quarter on the other operating income in the P&L. We also have a bit of a -- it's one of those currency years, I would say. We have quite many depreciation and devaluations on currencies all over the world. We are a company that is operating in 180 countries. This is what we as management are set to manage. And we do that, as I said before, mainly, by means of natural hedges. Then if you take the P&L, main P&L comments, starting with the gross margin. So compared to a year ago, the 32.4% this quarter, 32% a year ago, also 32% in the first quarter of the year. What is good news really in the report is the improvement in hardware and services margins. That's driven by a couple of things. The first thing is that we continue to see the declining negative impact from the European network modernization projects. If you look at the isolated margin, the project still have a dilutive impact on group gross margins, but it's an improvement if you compare year-over-year. What is good as well is what Hans mentioned on the network modernization projects in Europe. We start now to see capacity as well as LTE up-selling into the installed base, which is good. The business mix then, we have said now for a few quarters that we think that the business mix will gradually start to shift towards more capacity during the second half of 2013. The good news is that we have seen that shift happening already in the second quarter. And the way we look upon that and the way we measure that is, obviously, by means of stand-alone radios and standalone digital units being then sold and delivered into base stations on ground, as well as capacity-related software into the base stations. We also had an increased services share and compared to a year ago, it's 1 percentage point higher, so it's 45% compared to the first quarter, it's 4 percentage points higher. And each percent increase here of services shares approximately impact the gross margin of the company of about 0.3 percentage points. That's important to remember. Other P&L comments. I think a lot has been said on the one-off items. And I think I'll skip those. It's visible in the text, it's very clear. I think there should be no major events around those. We have a headwind also on the P&L for FX. On the other hand, if the currency turns in the other direction, we will have some positives. But, again, we are working on 180 countries, and we will continue to do the best thing for the long-term earnings of the company. Restructuring charges, SEK 0.9 billion in the quarter, SEK 300 million higher than a year ago. It's -- majority here is related to the service delivery transformation. That initiative is now up and running in this quarter at the speed where we think it will be for the rest of the year. And then we have no changed bookkeeping with regards to ST-Ericsson in this quarter. We continue to use the same principle as we did in Q1. So we don't take any income from ST-Ericsson, however, we work, of course on the -- to make sure that the provision we set aside in Q4, that, that is on track, and we are on track. Net exposure is SEK 1.6 billion there. Then just on the next picture here. We did some slide innovation, also as a CFO and created an operating income bridge, where we come from the reported operating income in the second quarter of last year compared to the reported operating income this year. And there was, obviously, some one-time items last year in Q2. We had some resolution of the third-party issue with regards to divestment of Sony Ericsson. So that was a positive last year. For comparison reasons, we should really remove that, so last year was SEK 1.7 billion. And then you can see that -- you see the operational improvements here in terms of gross margin improvements, as well as operating expense reductions. And then also, of course, the impact of the new way of accounting for ST-Ericsson. So all in all, I think this bridge should clarify a lot of questions with regards to operating margin. So then we go to the balance sheet. Despite the increase in sales volume, we managed to reduce trade receivables with about SEK 2 billion compared to the first quarter. That, together with good inventory management, created a positive operating cash flow of SEK 4.3 billion. I think also the -- what is important to -- or what is important to see here is the trend on the inventory. We continue to manage the inventory down. This is, as you know, a lot related to projects. So let's see what happens with this now and that we see our business mix shift here towards more capacity. If you take next slide then, the gross cash. This is, obviously, what we live out of, so it's very important. Here we have a change in gross cash of minus SEK 7.3 billion and a change in net cash of minus SEK 4.8 billion. The majority of the change here is related to dividend payouts. But we have also paid back some loans at maturity, everything in line with the strategy that we communicated last year when we took the new loans we'd informed to increase our net -- our gross debt. So all in accordance with plan. So if you exclude the dividend, this is a positive net cash quarter. I think with that, Hans, I hand back to you.

Thank you. Just want to sum up a little bit also what we're doing in TV and media as we have announced 2 acquisition that we intend to do in the latter part of this year. But starting just where [ph] how we believe the TV and media industry now are merging with the telecoms, very much in 3 different angles. One on the network, as I said in the beginning, majority of everything that's going to the net result video, and that means that our networks need to be video-enabled, they need to be both able to deliver content timely and actually harmony timely. Another thing when it comes to media transformation is the multi-screen. All media and video content will go over different type of solutions. Everything from linear broadcasting, all the way out to IPTV, smartphone, pads, over-the-top services. And that's, of course, also another area where it's transforming. And finally, the whole TV and media is coming close to telecoms, means also that our Professional Services business is coming closer that both from system integration and Managed Services. That combination to our Networks or Support Solutions, and those services creates a very unique capability for us to take a leadership position in TV media. Either working directly with TV and media customers or with Telecom operators, because both of them will emerge closer. And if you look at our assets, we have a good customer base, we will end up also, the final acquisition with 25% of the IPTV market in the world. We have already have the first LTE broadcasting solution. We are expanding now to almost 2,000 customers in TV and media. So we have a great position and footprint here. When it comes to competence, when we have included the Red Bee we will have 1,800 people, employees working in TV and media, which is I would say the most sizable broadcasting services. We will be a world leader [ph] in multi-screen compression as well, that's very important. And finally, when it comes to scale, the scale in Networks is important, because that's where we carry it. We will be managing some 200 channels for global broadcasting and also, of course, we'll have a lot of work with our compression, CDM and MDM that we have in Support Solution. All that, including then the asset of acquisition we're doing. We did Technicolor last year. We are now intending to acquire Microsoft Mediaroom. And Red Bee Media will strengthen us in TV media. And it will both be able to sell to new customers this portfolio, but it also to sell our traditional operators that will have a broader portfolio for TV and media. By that, I just want to sum up. Our work in this executive team is very much on executing on this -- executing on our investment that we have done in mobile infrastructure and services to see that very profitable growth, and see that we leverage the investment we have done in OSS, BSS, TV, media, IP. That combination is very important. We will control what we can control, cost and efficiency. We will not rest on that. We will continue to look for improvements on every area we can that we have on under own control. But we will not compromise on our technology and service leadership, because that's the base, and that will create, that we continue to have the leadership in the industry. And as I said in the beginning of the call, we gradually saw the improvements that we have talked about. We are not satisfied in profitability yet, we continue to work on that, but this is a marathon, and Ericsson is standing out in that marathon, and we'll continue to do so.

Thank you. Well, with that operator, we have come to the time to open up for questions.

[Operator Instructions] Mark Sue from RBC Capital Markets is on line with a question.

If I take a multiyear view, Ericsson has already invented itself as more services you have now performance leadership in networks. And you're also winding down the network modernization. If I look forward over the next few years, do you feel that those competitors are now acting more rationally and that industry profits can improve? And typically, that since the biggest player ends up with the most profits, can you -- is your ambition to exceed Nokia Siemens' operating margins, which are now almost 12%. Or maybe if you could kind of help us understand, what's kind of weighing on the rate of margin improvements for Ericsson going forward?

Now, you are right. We continue to transform the company to continue to keep our leadership. And as said before, I will not compromise on technology and service leadership, so that's clear. Then when we talk about competition, it becomes harder and harder to talk about who is the competitor for us, because we are in multiple segments. We're in mobile infrastructure, we're in IP, we're in Support Solution services. And there are different main competitors in all of them. So when you try to generalize, it's a little bit harder nowadays. But, of course, the traditional mobile infrastructure has had an overhaul of competition in the last 10 years, that's for sure. And we think we're doing the right thing by investing more in research and development and also in the footprint that we've done, and now we're executing on that, so -- and on the question on NSN, I mean, I don't have the details on what type of profitability levels they have and what does it include, and so I cannot comment on that. Our ambition is a continue to improve and to have the leading margins in all the segments we are acting. I think that's the most important. But maybe Johan can say a little bit about mobile infrastructure and what he thinks about the competition in that area.

Thank you, Hans. Now it's the -- I mean, this is really a long-term business. It's quite long technology cycle. It is important to be a technology leader to get the price premium out. And there's a lot of tough demands. I think in that respect, I'm extremely happy with our position and strength. I feel really comfortable where we are on that. Secondly, then, on pricing, I mean, we are the clear leader in mobile infrastructure. Of course, to say a leader, we have a big responsibility to secure that there is a mature way of handling pricing in the market, and we really act in that way. And I do believe we are seeing a stabilization of the competitive environment in market due to the low profitability that exist in this segments. And I'm quite optimistic about the future.

Stuart Jeffrey from Nomura is on line with a question.

A question on Network Rollout revenues. It's now, I guess, your visibility is better than most other areas, and it continues to grow really strongly. You flagged that some of the North American contracts are now at a peak. And so can we now start to assume that Network Rollout as a whole has peaked and that it unwinds as North American and European rollout start to ease back? Or should we assume that maybe the Russian and Chinese builds provide a full offset? And then secondly, just linked to that, is it still safe to assume that much of the losses in Network Rollout is still related to the European modernization contract, and that the profitability will improve even if the Russian and Chinese rollout starts up?

Okay, Stuart. It's Johan here. I think I answer that question. I think, first and foremost, that there is, as you know, in most contracts, a lag between the billing of products and services. And you are right, of course, you see that there is still high activity level in the first half. And it's visible in the Network Rollout numbers, both in the first quarter and the second quarter. And I -- let's come back in the third quarter and see if the trend on capacity change that has happened in the quarter, which is predominantly impacting Networks, if that also impacts Network Rollout. I think it's a bit early to say at this point. You're absolutely right in assuming that majority of the Network Rollout top line, as well as challenges on bottom line is related to the European modernization. We have said that before, that's correct to assume. We are not going to take the Network Rollout earnings light until we are at the profitability level where this business does not dilute the overall Ericsson profitability.

Gareth Jenkins from UBS is on line with a question.

Jan, I think I remember you saying that there's around 150 to 200 basis point margin impact from network modernization. Can you give us a sense of how much of that has now alleviated, i.e. how much of that you've recovered in terms of network modernization and how much is still to go? Secondly, I just wondered if you could give us a sense in the market like Japan, where you've moved from coverage to capacity, what sort of pause or delay in revenue there is between those 2 periods and what the margin followed [ph] the capacity expansion is versus the coverage. Then, sorry, finally, on China and Russia, I just wondered if you can give us a sense of how much that will be overlay business versus single-run business particularly in Russia actually?

Okay, Gareth. So I think if you go back to the Investor Day there in November, we made some pictures on the dynamics of the gross margin and the Investor Relation team worked hard on getting those boxes correct. So I think you should go back to that, to those boxes and look at the impact. I think the most important issue here or the most important statement is really that we start to see at the footprint now is yielding returns. That is one important statement. And the other statement is that we continue to be on track with the timeline that we have communicated now for, I think, it's almost 2 years, which means that during the course of this year, the projects will gradually come to an end. And as they come to an end, we can also engage with customers in discussions around capacity as well as upgrades to LTE and so forth. So I think we stopped there in terms of estimating exact percentages and so, of course, an impact in the quarter. Hans, you also have something?

Yes, the question related to China and Russia. I think the China is premature to answer. I mean, of course, going to 4G is going to be at least for the operator has announced that they are in the process right now. It will be a fair amount of new technology coming in, of course, on 4G. And in Russia, it's a little bit different, some overlaid [ph] they've already marked their regular base stations in Russia, some of them, so it's going to be more fill-ins on that. Some will roll out new technology. So it's a little bit blended, I would say. China too, early to really assess exactly how that will be done. And we are just starting to process, and we will know better later on how that will pan out on TV LTE 4G with China Mobile.

Achal Sultania from Credit Suisse is on line with a question. Achal Sultania - Crédit Suisse AG, Research Division: A couple of questions if I may. First, on the U.S. business, that part has been quite strong over the last few quarters. Sales growth has been about 20% or so. And then you also talked about 2 large broadband coverage projects having peaked in the first half. So going forward, how should we think about the balance between top line growth for U.S. and then the gross margin improvement? Can you give us some sense of which of these 2 is going to have a bigger impact on your bottom line as we go into 2014? And then I've got a follow-up on China.

Maybe you were a little bit unfair in that we have had a quite okay growth in North America. I think we have had fantastic growth in North America, the last 5, 6 quarters. We are averaging 20% growth there right now, 18% in this quarter. So I think we -- in a larger telecom market in the world, we have a very good position. We're working with all the major operators there. So I think that to point to the credit to the North American team and our technology and service team, I think they have done fantastic jobs. I just want to make that clear. Then, of course, there are also in North America, coverage projects and capacity projects coming up and down. And we have had 2 projects, one that we already talked about in the first quarter, that we believe had peaked. And we talked about the second, we believe also has peaked right now. That doesn't mean that they go away and vanish. It's just that we don't see that they will continue to grow in activity at the moment. They will come down as they have been deploying quite a lot. However, the most important for us in North America, long-term is the continuation of innovation and technology development focus on the superior performance and network continuing. That's good news for Ericsson, given our size and our market share in that market. So far, we have seen that, that's continued. Still you can have more really quarters coming up and down a little bit, but in general, we believe we have a very good position there, and what we are trying to say that maybe you shouldn't expect now that we're going to have this growth of 20% in the quarter, but we're not saying that it will go to something different neither. But maybe not expecting that high type of growth right now. But again, long-term, good position, underlying demand is correct, innovation, technology forefront, superior performance. All of that is very important in North America. And if that stays there with our footprint, long term it's good Achal Sultania - Crédit Suisse AG, Research Division: And then on China, obviously, China has been quite weak over the last few quarters. How should we think about some sort of stabilization in your China revenues going forward?

Now I think that GSM is structural. They will not come back in the GSM revenues for us. It will most probably continue to go down. Just so we're clear on that. We are, of course, taking a significant drop already, but we still have some business on GSM. Remember, we also have 3G WCDMA in China that we are selling. So that is going fine, so we should not blend that in. But given that they are in the process right now to go to 4G, that will mean that structured GSM will go down. When 4G will come in and what type of market share we will have, that's too early to have any views on and when it will happen.

Alexander Peterc from Exane BNP is on line with a question.

You're saying that this year are the first signs of more capacity of work coming through really in the just reported second quarter. Are you talking about some of your internal leading indicators on the matter, or are you actually talking about profitability impact within Networks, because when I look at the Networks margins underlying, of course, I struggle to see a very tangible [indiscernible] there. So could you just explain what is holding back Networks' margin. Is it scale affect, not enough growth with these stages of FX [ph]. That bit of clarification there would help.

Okay, no. I mean, I think we look at both. So we had a very strong radio quarter. And, obviously, the business mix discussion around coverage and capacity has very much been around radio and related services. So we had a very strong radio quarter. Then as we also mentioned clearly in the report is that we have some more challenging areas, and some that has been known for some time. For instance, the structural decline in GSM, as Hans mentioned, as well as [indiscernible] core decline that Johan mentioned before. So this is a very strong radio quarter, and it's visible in our radio P&L, and it's also visible in the leading indicators as I highlighted to before. We look at things like number of standalone radio and Digital units being shipped to base stations out there in the installed base, as well as capacity upgrades in terms of software.

Mark McKechnie from Evercore is on line with a question.

My question is, looking at the U.S., down 3% sequentially, obviously, your biggest geography. You talked a little bit about that, Hans, but I wanted to ask, maybe for the team, as you move from covered projects, where you're shipping pretty big revenue, but different margins. The capacity, are you finding -- what's your profitability looking like in the U.S. relative to other regions that are still more in the coverage space? And if you could kind of walk us through, you talked about continuing spend there, but I want to understand how your margins there would be -- your margins and revenues impacted as you shift from coverage to capacity?

There are no major differences between different countries. It's the type of projects we are doing. There can, of course, be some local changes. But in general, it's more about if it's a capacity or a coverage project. The coverage project that in our business model is used when it's the highest competition, because we're fighting on the footprint. You have to enter new technology or a swap-off even, and, of course, that were affecting the footprint. In the second phase, we sell capacity, we sell additional services on top of the network, and that has a similar profile or profit regardless where it is. So I think we are not getting into that, we have a certain profitability in a certain market or not. It's more about the nature of the business we're doing and the business model we have. That goes for Managed Services, for Managed Services in North America, or if it have in Russia, whatever. It's also that in the beginning on the Managed Services contract, where the challenge, because then we're doing transformation and transitional employees putting on our own tools [ph], et cetera. And then we come into the phase where we sort of can leverage our scale. And that's no different neither from a different country or another. So it's more the type of business model we're into more than a particular country, I would say. Then, of course, there can be some small deviations, locally what we're doing and not doing broader scope, et cetera. But as you in drawing the conclusion of a certain country having better profitability than another, it's more the scopes and the type of business model we're applying in that moment.

Yes. I mean, the specific question I've got is would you expect your overall operating profit to actually increase despite what's happening with the revenues in that, in any given region? But the U.S., especially, would you expect your operating profit to grow year-on-year -- or I'm sorry, quarter-on-quarter now as you move towards capacity builds?

We don't guide on that level on quarter. But what we have said is that we are focusing on everything we can control, being either cost efficiency of the company and seeing was that products are performing well. And over time, that should increase our profitability. And we have said, we're not happy with the profitability right now. We're seeing gradual improvement in the first quarter, gradual improvement in the second quarter. And we are continuing to work. And for us, this is a long-term work in order to see that we can have an audience [ph] that sort of are on a level that we really feel good about, and we have a way to go there. But we also know why we're here. We have invested more in R&D, we have invested in new areas. We have invested in market share. And that we all think is very good long-term for Ericsson in order to be even stronger and more competitive in an industry that this is a little bit sensitive right now. We think that we can stand out even better if we do that right. But calling into quarters, how they will go back and forth, that's difficult. What we said before, we have good visibility on the coverage projects. We can see them, we know the milestone. They can come up and with acceptance, but fairly good visibility on those, I'll have to say. And we have had that for quite a while, especially European modernization. Capacity, of course, can come a little bit in and out, a little bit quicker, but still we see that there are engagement in those discussion with our customers right now and that they see that they need capacity on certain coverage for the [indiscernible] done. And that's sort of what we have in front of us. And we will continue as a team to execute on everything we can control to improve the profitability of the company.

Didier Scemama from Bank of America is on line with a question.

Just like to go back to your [indiscernible] you made already several times in the previous quarters that you expect to see a gradual improvement in margin as capacity sort of become more prevalent in the mix in the second half of this year. I guess my point is, I understand why the U.S. is probably going to get better. I also understand why Europe is probably going to get better because, it's probably as bad as it gets now. But at the same time, we're probably going to get into substantially more activity in terms of coverage in emerging markets, whether it's Brazil or Russia or China. And I do understand the timing of it is essential here. So I guess what I'm trying to get to is do you think it's possible that we see margins recover in the back half of this year? But perhaps, as we move into next year, your margins fall back, your gross margin in particular, as coverage project in emerging markets become substantially more important in the mix.

Okay, Didier. It's Johan here. So fundamentally, as a company, we have had about 1.5 years that has been quite an extreme situation, because we -- in the radio and related services project dimension we have had basically most projects being what we call coverage projects. As a company, we have always had a mix of coverage and capacity projects. Now the statement around business mix that we made previous quarters was, obviously, to handle the fact that we were gradually going to move away from this extreme situation that we have had for 1.5 years. The good news is that on the radio side, we have seen that happening already in the second quarter. So I think that this is a gradual thing that we need to -- and then as leaders, we also need to continue to balance these things. There will always be coverage projects, but we would never comment like we do now unless we believe that this is something that is fundamentally good in the quarter.

Okay. Now the quick follow-up. I mean, if look at and NSN, I think the assumption was that NSN was perhaps not going to be as competitive as they had been, perhaps when the 3G rollout happened. And it turns out that now, they are restructured, and the margins are even higher than yours despite being smaller in size. Are you concerned that they become more aggressive on price as we sort of hearing that they are extremely aggressive on the 4G options in China. How do you see, therefore, the competitive landscape going forward between yourself and NSN and people like Samsung also are starting to show up in terms of LTE overlay?

It's a good question and a lot of facts coming at the same time. I'm not sure that we should comment on NSN. I mean, as I always say, we respect all competition, and they are doing everything they can do with their asset and what they are planning to do. We will do what we are doing. We are addressing far many more markets and far many more product areas than they are doing. We are trying to build transformative sort of company here, continue to develop and be strong in many areas. So I'm not sure that it getting into a comparison one-on-one here would be really relevant. I don't even have their figures and where they are. But for us, it's more important to focus on that the areas on execute and on assets. We have and we are technology leaders, service leaders, and that's really what we need to leverage in the 180 countries we're into. And then we want to see how it pans out in the market. But it's clearly that mobile infrastructure has undergone a dramatic change in the last 10 years, where basically the only one that stayed around this mobile infrastructure is Ericsson. Everything else is combinations or bankruptcies or new competitors. So we don't expect that this will stop. We just need to see that we continue to be #1 in that ever-changing world.

Our final question comes from Pierre Ferragu from Bernstein. Pierre Ferragu - Sanford C. Bernstein & Co., LLC., Research Division: We found this incorrectly [ph] in the second half. One of the key driver of the margin improvement will be a lot of this modernization projects in Europe coming to an end. And so my question is, when -- usually, when you -- when banks going through closing that kind of project, it can happen that a lot of costs gets booked to what yen [ph] as a project because they are not well recognized [indiscernible] of the project during the lifetime of the project. So how would you assess the risk of actually negative surprise [ph] as it hits your P&L as a one-off as these projects are coming to an end in the next 6 months?

Jan here. The way we operate all our project and project accounting is that we update the planned cost estimates on a monthly basis across all projects and we track deviations between actuals and planned cost. So I would view those additional finalization cost surprises as a quite smaller risk. I think we managed really well here. In fact, if we managed to conclude the projects really well, we may have some positives. But we do this really good. There is a very detailed review of all of the costs involved in the projects, both actuals as well as planned costs. And we adjust the cost levels that we recognized in the P&L all the time.

So with that, we have come to the end of this call. And I would like to thank you, all, for joining, and I hope that you will be with us for the third quarter report at the end of October. Thank you.

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