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

Good afternoon, everyone or good morning in North America to the second call for the day. And it's actually the second call for the day. So this time, we will do it a bit different. We will focus this session on Q&A. Of course, you will also find the first session that we had this morning is - the recorded session is posted on our website. So you would find that on the website. So what we'll do this time, and this will also be a way for us in the future, in the second call is to have a short introduction by our CEO, Börje Ekholm, and then we will have around 30 minutes of Q&A instead. So focus on that. And that's also based on feedback we have received from investors and analysts throughout the year, to make the second call more efficient. So by that, I would like to have some words before I hand over the word to our CEO, Börje Ekholm; and our CFO, Carl Mellander. During the call today, we'll be making forward-looking statements, and these statements are based on our current expectations and certain planning assumptions which are subject to risks and uncertainties. The actual result may differ material due to factor mentioned in this - in the press - in today's press release and discussed in the conference call. We encourage you read about these risks and uncertainties in our earnings report as well as in our annual report. With that said, I would like to give the word to Börje to have a short opening before we have the Q&A. Börje Ekholm: Thanks, Peter, and welcome to this report for the first quarter. And just to recap and set the stage, we defined the new focused strategy aimed at turning around the company about two years ago. And with the first quarter, we can have another quarter to the record on tracking towards achieving the goals for 2020 and beyond, and it's all based on a strategy of focusing on the service provider and building on a technology leadership and the increased R&D that has gone into that technology leadership. So let me hit on a couple of highlights from the first quarter. The first one is the - with the first quarter, it was actually the third consecutive quarter with growth, sales growth of 7% year-over-year driven by strong delivery in North America where we see operators starting out to roll out commercial 5G service. We had a couple of onetime events during the first quarter. It included the recovery of a previously written off receivable but also divestiture of some Media assets or realized gains from the divestiture of Media assets. Total, SEK 1.6 billion. If we adjust for those events, the underlying operating margin was 7.2%, excluding restructuring costs. You know our strategy has been built on technology leadership, and we have increased our investments in R&D substantially over the past two years. And we have done that in order to make sure our 4G portfolio is competitive but also that we have a way and a path to migrate our customers and operators over to 5G. So investing for leadership in 5G. And our 5G strategy is focusing on working with what I would label to be lead customers in lead markets, and that helps us define our product offering. So we now see several 5G networks being launched around the world, and there we are a key technology provider to them. So we believe we have a very strong offering in RAN and core. And with this product portfolio, we feel that we're in a good position. What we do get also from the installations we have is we get some real-life experience of running 5G traffic. That gives a lot of learnings and a lot of feedback for our offering. And our commitment is really to focus on the in-field performance to make sure that it's fully interoperable, to make sure that it works while it's deployed as we don't think spec sheets matter or lotto road maps matter or - it's all about what we can deliver. We see the U.S. and South Korea to lead as they have launched 5G service, but we also saw Switzerland today make 5G spectrum available earlier in the morning. And Swisscom was very quick at hitting the on button for 5G today, launching a basically level using the commercial frequencies with a commercial equipment to launch a commercial service in Switzerland. So we - that is a - so Switzerland is an early mover in Europe, and you will know Swisscom is a key customers of ours. During the quarter, we've also announced that we will acquire the filter and antenna business of Kathrein, which will build a strong antenna competence in Ericsson critical as we move into 5G. But we can also build new site solutions as we integrate antennas and - into our complete offering. That should lower the cost for the operator. We closed on the divestiture of MediaKind in the end of January. We also - and this we have informed about before, but you all know we have an investigation by the SEC since 2013 and DOJ since 2015 into Ericsson's compliance with Foreign Corrupt Practices Act. And we already told this six months ago, is that we have conducted a lot of internal work on our phone, and we have found breaches with the Code of Business Ethics as well as some shortcomings in internal control. We have passed on all of those observations to the authorities, and we say this is a serious matter. And so we can't give too many details, but we can give an update, and that is that we have just recently begun settlement discussions. These discussions are very early stage and so we can't today estimate how long it will take, and we can't estimate how the resolution of these matters will be. But we can say that we can at least today rule out that we would leave this without any consequences. So there will be consequences, material, financial as well as other measures, that will affect us. But I can also say that we continue to invest very significant resources into - or continue to invest in the resources in building up our ethics and compliance program internally and aligning the whole organization behind that. Our strategy remains in place. Focused strategy is unchanged. We will continue to invest for technology leadership and leverage this portfolio in the market.

Okay. By that introduction from our CEO Börje Ekholm, we will continue with Q&A. And for you - for those of you who have signed in, as I said in the beginning, we will focus now on Q&A in this second call, and there is a recorded version on the first call posted on our website for those who want to listen on that. By that, operator, I would like you to guide us through the Q&A sessions for about 30 minutes.

[Operator Instructions]. Our first question comes from the line of Pierre Ferragu of New Street Research.

I was wondering how you see your growth outlook for the next year or two. From a geographic perspective, if I look at the quarter you reported today, the U.S. had been in the last four years at least 30% in Networks and the rest of the world is kind of stabilizing, maybe up in single digits. And so in - I mean, in Networks. And so my question is do you see the level of spending in the U.S. as something that can be sustained. And do you expect like low single-digit growth across the globe in the next couple of years? Or do you think the U.S. is at a peak and it will come down at some point and you will be like a similar recovery in the rest of the world as well? And then maybe one last piece on the same question which is T-Mobile-Sprint situation. The situation is more uncertain than it has ever been this morning, and I wonder how you factor that into your growth outlook for the next couple of years. Börje Ekholm: If we start with your - as a matter of fact, it's probably safe to start with your second question to - on the merger between T-Mobile and Sprint. We'll have to see how the regulatory process develops. And without getting into that merger discussion, but it's probably been good for the investment climate to have a couple more operators that can invest in a 5G network. So we'll see how that is going to impact once we know how that merger will be decided upon. And it's a little bit - the reality is - the market - we need the frequencies at some point in time anyway. So they will be exploited and somebody will need to build. I think it's a very interesting combination being proposed, but we'll see how that's going to be judged. If we look at the whole market, the Dell'Oro forecast that we referenced is about 3% growth. It's been adjusted upwards. I think that we feel comfortable about that as a global growth. We think that's a fairly good estimate. We would not say anything different. I don't think that that's right. Of course, it's - we would be - if the U.S. continues growing at the current rates for a longer period or keeps the level, it would be - in that sense, it's more likely that the market will grow faster than 3%. Do we see that? Probably not. It's more realistic to think that that's going to taper off a bit and plan for that. But we also see the rest of the world ramping up and getting ready to prepare for the technology shift into 5G. So we kind of see maybe a different geographical mix going forward as the 5G rollout rolls through the world in a way. But it starts with North America, goes into Northeast Asia, Middle East, Australia, probably last in Europe.

Okay, Pierre, you're happy with that?

Yes.

The next question comes from Sandeep Deshpande of JPMorgan.

My first question is actually following on to the earlier one, which is that when we look at the North American sales of Ericsson in the quarter, it is probably at the sort of level you've had in the peak in the past, I mean, in the 4G cycle, for instance. So the question here is, is that clearly, this year looks very strong in North America with the rollouts that we are seeing. But Börje, you just talked about that the other regions will start. But your market dominance in the other regions is not as much as it is in North America. So will we see a change in - substantial change in the growth profile once this North American growth tapers off as such? And I have one quick follow-up. Börje Ekholm: Yes. No, it - the - what you also saw in - what I think is worthwhile to remember here. With 5G, the markets will look different over time. 4G really addressed a consumer market. We believe 5G will actually address also an industrial connectivity or enterprise connectivity. So this will be a different market size going forward, and that will actually help and support our invest - or, call it, our sales as well. So I think it is a little bit difficult to compare with a 4G rollout because that was going after almost literally, call it, 50% to 60%, 70% of the potential market size. Now we're going after that whole 100%. So I think the build-out is going to look different this time. The - so I think there is an opportunity here that we can see surprises on the upside. The second thing is that we are going to see 5G being - it's needed in all markets at some point in time, and the reason is the growth in data traffic. So just the consumer data traffic doubles every 18 months - in an 18-month period. And that we see whether you start at a low level of consumption or at a high level. The demand just increases. So the operators in all markets will need to cope with this at some point in time. And if they don't, you see deteriorating service performance with the customer or you get exploding calls. So this will need to be addressed. And therefore, I think it is a good - a case for us to plan for, which is that we will see the demand for 5G roll across the world where we are going to see in the beginning bigger percentage growth but then over time tapering off in order to build out and densify the network to provide the service to the customer. That we're going to see in several markets happening. And they're not all happening at the same time. Europe is clearly behind, will probably be 1 to 2 years behind. By the way, no surprise, they were 3 to 4 years behind on 4G build-outs, so it's probably going to be - maybe it becomes a little faster than that. But Middle East is early, Northeast Asia early; Australia early, et cetera. So there are a couple of areas that will be building up the market over the coming few years.

Thanks, Börje. I mean one follow-up actually to your own point there on the enterprise market. I mean Ericsson is addressing the enterprise as we understand it through the telcos. Is there no - there'll be - is there no business case to address it directly given that this is a potentially large market for you to address? Börje Ekholm: Yes, the reality is the critical here will be connectivity. This is a connectivity-driven market. And the best position to capture the connectivity will be the operator. They own the spectrum. They have control of the spectrum that was needed. So we believe the best way to enter - to address the enterprise market is actually to help the service provider be successful.

But would you not say that there are some regions in which they're selling local frequencies to companies as well? Börje Ekholm: You'll see here - right now you'll really only see Germany. There are discussions in other parts, but I think actually, say, when you think about this from a national economic point of view, macroeconomic point of view in a country, it probably is more rational to get national build-out and national coverage with good capacity than it is to have enterprise spectrum allocated. Spectrum is a scarce resource in reality. So I do believe the operator here will show to be the best positioned.

The next question is from the line of Richard Kramer at Arete Research.

Börje, we understand that you pursued a strategy of being a price leader in the past year to two years, and I think your main rival has tried to capture a price premium for their own perceived or self-believed lead in RAN technology. It seems that, that competitor now has decided to resume its previous strategy of also trying to be a price leader. How do you see the price competition in the industry going forward from now? And if your principal competitor does take another price aggressive strategy, will that necessitate a further restructuring from Ericsson that set you initially as - at a position to be a price leader? Börje Ekholm: Our sale and our wins over the last year has - it's not been the premise to be a price leader. If we look at the wins where we have gained market share, it's really been leveraging our technology in the portfolio. And again, it's not all about the price up front of the equipment, it's actually the total cost of ownership for the customer. So it's all about helping them where - through technology get the best total cost of ownership. That's what has driven, call it, our market share gain, and that's why you'll also see it in our own gross margin. So I think the starting point that we would be focusing on driving prices, I think, is - has not been the strategy we've pursued.

Okay. You're good with that, Richard?

Okay. That's fine.

The next question comes from the line of Simon Leopold in Raymond James.

I wanted to see if maybe we could double-click on the Chinese 5G market developments. If you could give us your perspectives on how you see the timing of the rollouts and the extent. And I guess historically, we've understood that they make commitments or allotments to the western vendors to have a specific share. Just wondering how you see this playing out in terms of when will they start and how aggressive do you see the ramp. And in the context, I'm a little bit puzzled because of some of the conflicting messages in terms of gigantic numbers of base station targets, yet I think the CEO of China Unicom, has questioned the business case. So just love to hear your perspectives on how the Chinese 5G market develops and your opportunities. Börje Ekholm: It's a great question. The - and one that's very hard to address. I mean what's going on right now is that we see price and the valuations. Our estimate is that they will commence rollouts in the later part of the year. It's very hard to today see the - how large those will be. But they - it's quite - whatever number they decide, they will be large compared to the rest of the world. That we should remember. So it's a - because simply put, China today has 60% of the number of base stations in 4G of the total world market. So it's likely to - no matter what pace they decide, it would be significant. We feel that this is an area where we want to participate. We're investing in the market to be a participant, to get a share. What we ultimately will be awarded will, of course, depend on the competitiveness of our offering, and it's very hard to judge that today.

You good, Simon?

Yes, yes.

The next question is from Stefan Slowinski of Exane BNP Paribas.

Just following up on your guidance and obviously the comments you've made about in the U.S. potentially not seeing the sequential growth you would typically see in Q2. I mean that sounds familiar to what you said about Q4 when we did actually see the sequential growth in the U.S. And also, the strategic projects again in Q1, you had said that, that would weigh on gross margins. It looks like it hasn't, but now you say that will happen in Q2. So I'm just wondering if - are you just being cautious here with your outlook? Or is there a reason why those things didn't transpire in Q4 and Q1 but you think will occur in Q2? Has there been some sort of shift in the business or in projects that has meant that you haven't felt those headwinds in terms of sequential flattening or in terms of pressure on gross margins, but that's going to reverse here in Q2?

You want me to verify that? Carl here. I think when it comes to the U.S., we are running the machinery at very high capacity. And you know the - today, so we had talked about around the tower crews and the availability of people on the ground actually capable of rolling out the networks. And, I mean, that continues. So now when we look into the plans, CapEx plans and our delivery plans, we see that volumes are to be - to flatten out over the remaining quarters of this year. So I think we're fairly confident that, that is the profile that we see. When it comes to strategic contracts, you also know what is in the funnel. And it's true that in Q1 actually, the impact was rather light compared with Q4 definitely. But looking ahead, we see that those contracts will come into play more and more over the coming quarters. So I think those - I mean, all those quarters relevant and should be considered when trying to judge gross margin performance going forward.

Okay. Great. And if I could just ask a quick follow-up. Obviously, one of your competitors has been under a lot of the political pressure globally, and I'm just wondering if you're seeing it having any impact on your business in terms of opportunities or in terms of delays as customers await to see what kind of resolution may or may not come out of those situations. Börje Ekholm: The reality is this has been more creating uncertainty than opportunities. So what I would say is what we see is that today, it's a lot more wait and see on investments as I think the customer - and I fully sympathize with this. If you don't know what's going to happen, you'll rather wait a bit. So I think it has - it's no help. If anything - it's rather slowing down the market if anything.

Okay, Stefan?

Yes. Great.

As I said in the beginning of this call, we have limit this call basically to a Q&A session. We have rather short presentation, but - or in the beginning, so - and we should keep it around 30 minutes. So by that, I would like to open for the last question for this session, please.

And the last question comes from the line of Edward Snyder at Charter Equity Research.

Are you still there?

Can you hear me? Hello?

Yes. We can hear you, yes.

Okay. The strategic contracts are impacting or will impact your gross margins. In the past, you've mentioned that the equipment that you're deploying, especially in North America, is 5G-ready equipment, not so much necessarily 5G operational now, and that it would only acquire software upgrades for most of this equipment to be used for 5G. As far back as 2015, I think you mentioned these flexible radios were deployed. And yet we're hearing about capacity constraints from tower crews. We know that for both millimeter wave and for sub-6, you've got to do MIMO, which is a big hardware upgrade. And yet if there's a software upgrade, you would think you have less impact on gross margin. So I'm a little confused on what exactly we are deploying in a radio network. Is it hardware now? Or - and if it's only software, why the impact to gross margins? Börje Ekholm: The reality is that of course, every frequency will need a new radio. So it's - so that has always - we have always said, right - that's why you said the baseband is software upgradeable. Of course, each radio then on a specific frequency is upgradable to 5G as well, but it's always frequency dependent. And that's why now we're rolling out the new frequency bands where there are no hardware installed. So then there needs to be hardware first. So that's what you'll see.

So is it safe to assume that the rollout that you've been enduring now in North America for a few quarters now is in fact 5G equipment - not necessarily 5G-ready equipment but actually 5G equipment if the base station - or if the radio - if the frequencies on the radios are exclusively for 5G? Börje Ekholm: Yes. But there are - it's not - the - part of it, that's true. Millimeter wave will most likely not be used for anything else but 5G, but the bulk of the business is actually 4G. But that's upgradable into 5G when they get the right frequencies, the right demand, et cetera. So our base business in North America is much more modernizing 4G.

So based on that - I'm sorry for last question. Based on that then, it's safe to assume that a decent portion of this rollout will be for band 71 then? Because that's a lower frequency that's brand new, that can be used - actually is going to be deployed 4G with little bit of 5G capability. Or is that a safe assumption? Börje Ekholm: I don't know which one is band 71. You have to just refresh my memory. I mixed them up.

T-Mobile's nationwide 600 megahertz band. Börje Ekholm: That can be either or. It depends on the customer preference, and you should ask T-Mobile about that.

Okay. Thanks, Ed. By that, we have concluded this call. But before we close it, we will have a closing remarks from Börje. So please, Börje. Börje Ekholm: Okay. So we'll just end by summarizing that the first quarter, we put the - another quarter with growth showing the competitiveness of our portfolio. We see a good 5G momentum in the market. And we see the RAN market as a consequence returning to growth, and that's inevitable because the data traffic grows so fast in the network. We're committed to continuing our strategy of investing in R&D for technology leadership and leveraging that with the customers. We continue also to drive our operational efficiency internally. But now we combine that with investments for disciplined growth. And we see, as you've already seen in our top line, a number of opportunities that we intend to capture. And we are very confident of reaching our financial targets for 2020 of at least 10% operating margin, excluding restructuring in 2020, to 12% operating margin. So with that, I want to thank everyone for participating. Thank you all.

Thank you all. Börje Ekholm: Thank you, and goodbye.

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