Welcome to the Ericsson’s Analyst and Media Conference Call for the Fourth Quarter Report. To view visual aids for this call, please log on to www.ericsson.com/press or www.ericsson.com/investor. [Operator Instructions] As a reminder, replay will be available 1 hour after today’s conference. Peter Nyquist will now open up the call.

Thank you, operator and hello everybody and welcome to this afternoon’s call today. With me here today, I have our President and CEO, Börje Ekholm; our CFO, Carl Mellander; and our Executive Vice President, Jan Frykhammar. During the call today, we will make 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 to you, Börje, please. Börje Ekholm: Thank you and welcome everyone to this call covering the Q4 and full year 2016. So if we start with the business environment for 2016, we can see that the tough market continued in the fourth quarter, along the same lines as earlier in 2016. Operators have been cautious on making new investments. We also see that the emerging markets have impacted investment levels throughout. We see continued convergence across telecom, IT and media sectors going on in the market, most notably with some big transactions also happening. We also see that customers are increasingly focusing on transforming their business into becoming more digitalized and that is also starting to be a trend that we believe will continue for the future. And this market or this macro environment, of course, impacted us and we saw that sales and gross margins declined and primarily linked here to the mobile broadband business. The IPR market continues to shift and we see the future growth potential to be in emerging markets and emerging device vendors and as well as new licensing platforms. Professional…

Okay. Thank you, Börje. I will talk a little bit about fourth quarter and we ended them on the sales number of 65 – little bit more than SEK65 billion compared to approximately SEK74 billion than in 2015, the big – obviously, if I look at the isolated Q4 number for ‘16, it was obviously a bit higher than what we anticipated when we had the Q3 earnings call in the end of October. Of course, we got helped by FX in the quarter, but we also have some hardware deliveries in some specific countries that customers really wanted us to deliver and also pay for in the fourth quarter and also previously planned for Q1. We didn’t really dare to bet on that we could do those deliveries, when we met in October. So, those are the two main reasons for slightly higher top line than what we thought in October. So, on the gross margin then excluding – and I think also that is important that we have disclosed here a number that is called – we call it FX and IPR adjusted sales. And that is, of course, because we have this big IPR revenue in the fourth quarter of ‘15 linked, mainly, to the Apple deal. So to create some better comparability and for you also to model in a better way, we have adjusted for that in the comparison here. So looking at gross margin then and Carl will come back and talk about the gross margin in detail. So I am not going to destroy his presentation. So, it’s for you to explain later on. I think the other thing that we felt was good was, as Börje said, was the operating cash flow and that was the key priority for the quarter. Still…

Thank you, Jan. So if we move to the next picture here talking about the operating income, development and excluding restructuring. First of all again, let’s remember then the significant IPR and licensing revenue that we had in Q4 2015, which is distorting the picture a little bit, when we look at 2016. But if we normalize from that, you can see in the bridge, we go from an operating margin from 10% down to 7%. And good news is that the cost and efficiency program is on track and delivering results, but unfortunately, not really enough to offset the negatives here, which come with the lower volume and also gross margin decline, which I will come back to on the next page here as well. But all-in-all, operating income of SEK4.4 billion in the quarter, which is 7% and this is excluding restructuring charges, which were SEK0.6 billion in the quarter, a little bit more than anticipated for the reasons that we mentioned earlier here that we actually accelerated the cost savings program. If we go to the next one and look at gross margins specifically and you all know this, how the gross margin has developed over the last eight quarters. Very clear that we have seen a downward pressure and the downward trend, during this time due to the weakness, of course, of the mobile broadband markets in general, but also lower IPR licensing revenue and an unfavorable mix, you can say, between coverage and capacity and the services shared being higher than earlier. What’s important to note as well and it’s that gross margin stayed flat between the quarters, so sequentially from Q3 to Q4, we remained at 29.4%. This is in line with the planning assumptions that we discussed when we presented the Q3 report.…

Okay. Thank you, Börje. Now, operator, we are ready for the Q&A. But before you start, I would actually urge you to limit yourself to one question at a time, so we can have an efficient Q&A for the further half an hour that we have here. So please, operator, you can open up for the Q&A.

[Operator Instructions] We have a question registered from the line of Alex Duval from Goldman Sachs. Please go ahead. Your line is open.

Yes, hello everyone. Many thanks for the question. Just wanted to ask if you could just clarify again on the quantum of revenues that got pulled forward in total in the fourth quarter from the first quarter, so basically hardware as well as any associated other types of revenue, we should take into account. And then related to that, what the precise EBIT pull-forward into the quarter was at the group level? That will be my first question. I have got a quick follow-up.

Well, it’s Carl here. The amount pull-forward was SEK2.5 billion for hardware. We haven’t specified the specific EBIT related to that, but the top line number to model for Q1 is SEK2.5 billion.

That’s very clear. And then on the SEK7 billion patents you have identified for 2017, that’s obviously around SEK3 billion lower than you reported in 2016. So I wondered if you could just clarify little given that’s a very high margin revenue stream, why the run-rate seems to be so much lower. I appreciate, obviously, there were some one-offs in 2016, but could you help us understand? Is that about market share shifts with existing customers, is that to do with new terms for renegotiated deals, is it ASP pressure in smartphones just to really understand the extent to which those different things could be drivers? And then I assume that any change in revenue that one should model would be dropping through at roughly 100% profit drop through to bottom line?

Okay. Alex, Jan here. No, I think the reason that we want to – the reason that we really want to disclose this baseline number is, of course, that we feel we have not been, I think, clear enough on what is the underlying baseline number on all the contracts we have. So I think the way to look at this is, of course, that this is a number that reflects the contracts we have, but also with the given volumes and mix we have in the end of the year. And of course, in reality then this might be – our view is that we should look at this, of course as some kind of baseline number and then on top of that, there might be of course new contracts coming in, new signed contracts, which we all know is an ambition we have to make sure that all handset manufacturers are licensed, to start with. I think the other aspect is, of course, that that there is always deals going on. We can be selling patents. We can be settle deals. There could be deals that has an element of forward-looking running royalties, but also settlements going backwards and so forth. And if we look back a few years, that has been the case, but I think, view this more as a baseline number. And then obviously from there, we can then also discuss with you in a better way on a quarterly basis. Now, we deviate from the baseline because of X, Y, Z, something like that. So that’s how I want you or how we want you to think about this number. So it’s – nothing has really happened in the market around price reductions or structural changes, it’s just a way for us to try to be better in communicating around this portfolio.

That’s very clear. So should one assume therefore that it’s prudent to assume somewhere between the SEK7 billion and the SEK10 billion we saw in 2016 more towards the midpoint or is there any kind of color you can give on that?

Alex, you are one of the most brightest individuals I know. So I am sure you will figure something good out.

Many thanks. I appreciate it.

Thanks Alex. We are ready for the next question, please operator.

Our next question comes from the line of Kai Korschelt from Bank of America/Merrill Lynch. Please go ahead.

Hi Kai.

Yes. Hello gents. Thanks for taking my question. I just had a quick one on demand in emerging markets and I appreciate at the moment things are still quite weak, but it looks like the economies, particularly Brazil, Middle East, maybe Africa are stabilizing as usually with some sort of lag that feeds through to telco spending, so I am just wondering at this point in terms of maybe forward-looking discussions with your clients in regions, are there any signs yet of may be the intention to potentially spend more because it is a big part of your revenue. And then the second one was just a quick follow-up Börje on the – I appreciate you need some time to formulate a new strategy, but I am just wondering roughly what sort of timeline should we think about, when you might communicate any updates to the markets? Thank you.

So Kai, it’s Jan here. I will start with your first question here. I think the way to think about the fact that there is, obviously uncertainties as well as opportunities in certain countries. I think the way to think about this is really that we still believe that the forecast that we talked about in November when we met in New York that this were between minus 2% to minus 6% in U.S. dollar is still valid. I think that’s the best way to explain that, I think at least that’s how we think about it. So if we feel like that we need to update that, we will do that once we have sufficient information, but I think for now we believe that that is still the valid range. Börje? Börje Ekholm: On the last one Kai, I think the way to think about this is not we are making a statue that’s going to sit and we will unveil on a specific date, but you will gradually see us instead implement and focus our efforts as we move forward. And this is a gradual event, therefore and something is going to happen continuously. So I think you should more see what we do over time and see it from there, but it is important to take the time now to get a shared view internally and that will take some time before you really see the actions.

Okay. Thank you.

Thank you, Kai. And we are ready for the next question, please operator.

Our next question comes from the line of Gareth Jenkins from UBS. Please go ahead. Your line is open.

Thanks. I have one follow-up and one question. The follow-up was just on that last question for Börje, it was more what your initial impression is coming into Ericsson from the outside are in regard to cultural changes that need to be made, is it speeded decision making process or things that you have been impressed with or maybe less impressed with in terms of business processes relative to some of your other investments historically? And then I have a question. Thank you. Börje Ekholm: Thank you for the question. Yes, coming into the company, I have been associated with Ericsson for a long time. And I think the really positive thing is the level of competence we have in the company. We have great capabilities in our members of the team Ericsson. And actually, there is something that’s even more important, it’s called passion. If it’s possible to have blue blood flooding in your veins, that’s what you feel when you get into this company and that makes me really happy and proud. So that is the foundation of what we can be on going forward. What you can say that, I think we need to be better at. There are a couple of things. You indicated one. I think agility, speed or flexibility is important we are too slow. We can change there. We need to be having more accountability, clearer accountability internally. That is something that can change. So there are a number of tweaks we can do in the way we operate and the way we work that will make us more competitive and that’s something that we, of course will start implementing as soon as possible. And then if you look and there is not a coincidence, we talk about profitability before growth. We may have been too geared on the top line and we want to shift our focus a little further down the P&L statement.

Great. Thank you. Can I ask one financial question, which is I think your provisions were quite high in the quarter, can I assume that, that’s all restructuring and there is nothing in there for any bribery and corruption provisioning at this stage? Thank you.

Thank you, Gareth. We will move to the next question, please operator.

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

Thank you very much for letting me on. I actually have one question for Börje, I mean when we look at Ericsson today versus I mean you have been with the company for a while on the Board of Directors, I mean what has really changed in terms of the restructuring, which has already been announced, I mean restructuring costs or the operating expenses that are going to go down to SEK53 billion, which I mean is in line with what you had in operating expenses 2009, 2010 time horizon, but your gross margin is substantially lower. And so I mean given that a lot of the cuts have already happened, how will the mix be changed, I mean what are your initial thoughts on changing the mix to take that gross margin up because I mean Ericsson doesn’t have a lot of manufacturing facilities to shutdown or any of those easy fixes to change the mix. And then I have a follow-on question for Jan, Jan do you think that Japan has – have you seen some improvements there, do you think that the spending cycle is starting there and when does the 5G spending cycle start in Japan based on what your conversation with customers are? Thanks. Börje Ekholm: So I should start. Thank you for the question. This is why we need to look at prioritize our investments going forward. We are rightsizing the company size now. We are getting into an efficiency situation. You have also seen that we talked about improving gross margins. We are taking all of those steps and that’s something we will continue to do. Of course we are reviewing other – further opportunities for efficiency improvements. But I do believe we are going to have a good size. But as every company, we need to just look and review that we are doing enough and that we cannot do more. But the real benefit or the real gain come out of prioritizing our investments going forward by investing in areas where we can win and where we can see attractive margins for the future. That will gradually change the mix. So it’s right as you say, that’s really where the change of the game can come from, not from cutting yourself to success. I don’t believe so.

Thank you.

Okay. Sandeep on Japan, I think, when we think – we have had as an industry, I think, a CapEx level in Japan that’s been on the kind of almost minus 40%, minus 45% on a yearly basis for the last, let’s say, 2 years. So, it’s been a challenging market, where CapEx has really been reduced. We are not betting on any significant increases from the levels we have today, but we think that the CapEx has stabilized. That’s not the same thing as saying that the investments on 5G RAN has commenced. I think that’s probably an ‘18 event or so. But I think what is important is that when you think about the wider 5G markets that involves very much core and virtualization of applications and so forth that has commenced. So we are running projects with all our customers around virtualization of applications and so forth. And in that context, they are preparing themselves obviously for a 5G-ready core, if one may say that.

You are happy with that, Sandeep?

Yes, thank you.

Thank you, Sandeep. Next question please operator.

Our next question comes from the line of Jess Lubert from Wells Fargo Securities. Please go ahead. Your line is open.

Yes. Hi, good morning. Two questions. First, I was hoping you could help us understand how much currency positively impacted the Q4 results. And if current exchange rates were to prevail, to what extent should we expect your business to outperform the industry growth rates presented at the Analyst Day?

Okay. Yes, it’s Jan here. If you look at the top line impact, I mean that the major currency in terms of FX we have is U.S. dollars or U.S. dollar-linked currencies, you can say. And typically, top line in a given quarter is between 40% and 45% U.S. dollars and we also do – we do monthly – our monthly closings, we always do on the FX the month before the closing rates. So in this particular case, we obviously had the P&L effect on the closing rate of end of November. Those rates are disclosed on a monthly basis at the IR webpage. We had approximately SEK2.5 billion of FX year-over-year quarterly impact. The big impacts on bottom line from an FX point of view, you can say, that the big impact – the impact you can say is on transaction exposure meaning exports from Sweden then, which then impacts margin in a positive way, that’s mainly U.S. dollars, where we are long in U.S. dollars. Euro doesn’t really matter because we are basically having zero transaction exposure there. And all of those things are actually disclosed in the annual report every year. And I think it’s good to look back to those when you make those assessments. But at the moment, obviously, FX has been impacted mainly by the U.S. dollar development against SEK and then its transaction exposure that has the big impact, especially towards the U.S. dollar you can say. The rest, read in the annual report, please.

There is a second question, I think.

Yes. So the second question, I was hoping you could update us on the Cisco partnership, how that’s performing from an engagement and/or revenue perspective? And how you are feeling about the ability to achieve the $1 billion of incremental sales over the next few years? Börje Ekholm: Yes, we can. This is Börje here. We have entered into this partnership a little bit more than a year ago and you can – we have made progress. We see the number of what it’s called service engineers, right. Service engineers, certified engineers being 2,500, up from about below 100 at least when we started. So that is a major progress. We are also seeing that we take orders. We have won a couple of fairly sizable projects together. So, there are positive momentum in the partnership. At the same time, that’s always the case. I think now we have been there for a year. We always need to assess how can we make it stronger and more successful and that’s something we will, of course, continuously do.

And I think also the added comment I can make on the $1 billion ambition then that was really a business driven ambition that we set together with Cisco in order to create business momentum. And I think it can serve the purpose to create business momentum than, let’s say, if we deliver $1 billion or not in ‘18 or ‘19, but the main purpose is again to get business momentum going.

Hey, Jess.

Thanks, guys.

Okay. Open for next question please.

Our next question comes from the line of Edward Schneider from Charter Equity Research. Please go ahead. Your line is open.

Thanks a lot. You had pulled forward from Q1 like you mentioned SEK2.5 billion into Q4. Is that going to be replaced in Q1 to those customers still pulling in orders from say the second quarter or was it pretty much the end of the year? And we can expect it to be moved from what normally would be seasonality in Q1. And then in general, what is the impact – you mentioned you have got 15% of your own radio networks in the radio systems going to hopefully 50% in 2017. In general, what’s the impact of that on the margin profile, specifically gross margins of the network business? Thanks.

First one, Carl here, now the SEK2.5 billion basically we can see as gone from Q1. That’s how we see it. So, they were pulled into the fourth quarter. And basically, if you look back over a 5-year period, there is normal. Typical seasonality is minus 22% from Q4 to Q1 in top line. And from that then you should also consider this SEK2.5 billion as a negative. I think on the margin impact on the Ericsson Radio System, I think that I am not going to give you the details yet on that, but I think the first important thing with Ericsson Radio System is obviously that it brings significant reduction on total cost of ownership towards our customers, which makes the platform together with the related services more competitive. And it’s also a platform that is prepared then for 5G, high-band radios that will come later. And so it is, from that point of view, a very important product substitution. Of course, it also brings with it a possibility for us to do design-to-cost and design-to-service. And that is obviously why we say that this is one of the key important projects. Of course, we are trying to make sure that this also means that we have an improved gross margin from the business and we see some early signs of that in the business, but I think we want to deliver consistently before we start to talk about that as a positive. I think that’s wise to do, but of course, we have that ambition.

Yes, thank you. But one more question, if I could touch on 5G for a moment, it looks like a lot of the preliminary work, Verizon and a few other carriers have done, especially in the higher frequencies, have got them convinced that this isn’t really going to work well, if at all, for mobile system for all the reasons, I am sure you are aware of in the smart antenna aspect of it and it looks like a lot of the initial work is being done now on fixed broadband access to the home, some of the trials, etcetera. Does that change your calculus, especially given the radio aspect of it, I mean, in terms of the total volumes available or even needed if you switch the topology from more of a cellular mobile application to a fixed broadband application, it has the impact, I would think your view long-term what 5G would do for your radio networks revenue line. Have you had discussions with them? What’s your impression of this? Is it too early to really tell to see how the other developments going on that could change that calculus? Thanks.

I think that the used case that is most discussed at the moment, especially in North America is exactly what you referred to. So, to replace fiber-to-the-home with a wireless used case and of course, that will mean that there will be also lower band solutions and more cells – small cells and so forth. And I think what is important is, of course that when we talk about Ericsson Radio System, that’s a new hardware platform with both baseband and radios. It will be run on the same software both for 4G and 5G, that’s important. And I think that’s what we are doing now together with customers around the world. We are really taking their use cases down to real business cases. And of course some of these use cases will require different building block and so forth, right. So I think that that’s really what we are doing. And of course for us and also our customers, it’s important to take a few bets on a few business cases and then start to build relevant solutions on those. And some of the use cases will require perhaps more small cells. Some of the use cases will require only a mega radio on high band and so forth. It depends a little bit on the use case. So from that point of view, I think it’s a little bit too early, but that’s also why we have more than 25 different MOUs working with customers on different use cases and trials to learn.

If I could, I apologize maybe slip one more in real quick. You mentioned small cells, I don’t know, it maybe a little bit early, maybe or not, involve what you just said, but if you saw in December, Global Start [ph] got authorization from the SEC to convert the 2.4 gigahertz band or a section of it to terrestrial cellular and given the power levels, they are looking at the small cell, I know that there has been a lot of talk about small cells over the years, it really hasn’t panned out, but it would seem to be a lot of that has to do with the technology issue and where you are trying to put it and not having a clear band and I am sure you guys are intimately aware of all that, it sounds like from the first blush that this might in fact be an area where small cells could flourish, given they have the license to this, not just in the U.S. but internationally, have you looked at that yet, does that changed the calculus for the small cell, especially with regard to 5G because you don’t have the frequency problem and it sounds like it would work well.

Well, I agree with you that we have been talking about small cells for many years, but we have also been a company that has been quite realistic around the potential for small cells as you remember. I think the approach that we would take to be clear, is that we want to make sure that we have radios across all relevant frequencies, but also make sure that we have the same – around those radios on the same softwares or spectrum efficiency and so forth. And some of the use cases will be requiring smaller radios and also the small cells the way we have defined it, which means that you have a capacity booster as part of a macro step. So I think that 5G, depending on the use cases, may mean certain different building blocks and I think that’s also why eventually we can actually get a good return on the small cell portfolio we have. But again, this is too early to speculate in, I think. But we have that portfolios, anyone that wants buy small cells, please, we have a great portfolio today.

Okay, thank you. We have to continue this and I think we have open up for the last question for this session, so please.

Our last question for today comes from the line of Achal Sultania from Credit Suisse. Please go ahead sir. Your line is open.

Hello Achal.

Hi Peter. Hi guys. Two questions if I may. First on the services side, so I think this was always considered to be a much more resilient business and I think we have seen 3 years in a row that business services revenue in organic terms is now down year-on-year. And we obviously like understand Sprint contract has been scoped down, I think there was some press around some contract in Italy, which has also gone to competition, like what exactly are the trends that you are seeing in services, like is there more pressure from your customers around renegotiation of some of these large 5-year, 7-year contracts or the scope of those contracts are changing a lot as we move towards 5G, just trying to understand what exactly is changing in the services business?

I think Achal, you are being a little bit unfair to the business that has been delivering, at least on professional services, very good incomes for many years. I think that – but I also at the same time, I agree with you that the top line in organic terms has been coming down and that’s mainly related to the network allowed business that was really big a few years ago at the back end of modernization projects in Europe, big 4G deployments in North America and so forth. And I think also what is important is, of course that when you sign up a customer – when you sign up the customer for 5-year or 7-year managed service contract or 5-year, 7-year IP transformation contract and so forth, I mean these are long-term undertakings. And of course, at some point, sometimes customers decide for a different business strategy and that’s perfectly fine. But you also have to all the time make sure that you stay relevant. But I think we have invested for staying relevant. This particular year, we have had some challenges obviously with the startup of some of these big IT transformation projects. I think the main focus going forward is obviously to make sure that those projects was from a services point of view becomes better from an earnings point of view. And also when it comes to managed services that we take the next step in the evolution in managed services. So we go from one to many service delivery models to automations models. And that is what we see one of the key investment areas that we are making. So it hasn’t happened so much in the market. It’s obviously so that some of the big contracts or the contract you referred to has obviously – it is a big contract so it has impact, other than that, no major structural changes.

Okay, that’s helpful. And maybe a second question on the gross margin structure, I think just coming back to the same point, I think this was asked previously, your guidance is that second half gross margins this year would be better than the full year ‘16 and now obviously that means slightly better than 30%, I am just trying to understand, there is still a big gap between what the gross margins that the competition does, be it Nokia or Huawei, so what are the things beyond the current cost cutting plan that is under your control that will allow gross margins to expand, like I understand like maybe mix can improve, maybe top line trends can improve, but I think those are some of the things, which are 100% not in your control, so just curious what are the things under your control beyond the current cost cutting plan that could help gross margins go up?

Okay. Well, I think we can make the list like 25 items. That’s why we are excited about opportunities. But I think one of the key things that we always have to work on is, of course to be at the forefront of technological development linking that to services and products because then you can be early out and be first in some of the advanced markets. I think that’s one key aspect of what you are asking. The second aspect is of course that you have to make sure that you bring value also in these complex transformations. They are multi-year but the good thing with multiyear transformations, whether it’s on managed services or on IT is that you actually have time to improve also on the learning curve over time. So there are several aspects beyond your cost cutting. I think that we will spend a lot of time to continue to focus on differentiation for relevance. And so a margin improvement plan is not only about cost cutting, it’s equally much about being first with when technology is changing, but also being very innovative when it comes to new service delivery models and so forth. And those are some aspects. I think when we communicate externally, of course we tend to talk about OpEx and cost of sales and fuel cost cuts, but internally our focus is on – broader than that.

Thanks Achal. Before handing over for the closing remarks from Börje, I would like to invite you all to Mobile World Congress in Barcelona between the 27 February and 2 March, to our booth and we will have a program for the sell side and the buy side during those days. So please Börje. Börje Ekholm: Thank you. And I just wanted to end with the notion that we are working on prioritizing our investments going forward into areas where we see the greatest potential for us to strengthen our company. In the near-term, we will focus on improving our profitability to get a stable development in the company and from there on, we can invest in growth. With that, thank you everyone for participating.

Thank you.