Peter Nyquist - Vice President, Investor Relations Börje Ekholm - President, Chief Executive Officer, Director Carl Mellander - Senior Vice President, Finance & Common Functions

Pierre Ferragu - Bernstein Edward Snyder - Charter Equity Research Gareth Jenkins - UBS Tim Long - BMO Capital Markets Simon Leopold - Raymond James Douglas Smith - Agency Partners Terrence Anthony - BNP Paribas Johannes Schaller - Deutsche Bank Richard Kramer - Arete Research Achal Sultania - Credit Suisse

Welcome to the Ericsson's Analyst and Media Conference Call for the 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 up the call.

Thank you and welcome all to this second call for today. With me here today, I have our CEO, Börje Ekholm and our CFO, Carl Mellander. So during the call today, we 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 start off this call by inviting Börje Ekholm to begin. Please Börje. Börje Ekholm: Thank you Peter. Welcome everyone and thank you all for joining. So let me start with of the starting point. We see our company performance to be unsatisfactory, clearly highlighting the need for the new focus strategy we laid out a few weeks ago. The quarter was very challenging overall and very tough but it's also a mixed picture. We see networks delivering a solid result despite declining sales but we also see accelerated losses in our IT, cloud and media businesses and here we need to take additional actions. The strategy we launched, a more focused strategy with the objective to regain technology and market leadership resulting in an improved profitability. We see here that we basically need to focus our portfolio on areas where we can and must win. We will also intensify the focus on our cost structure in order to make us more efficient and lean. This will include simplifying the way we work internally as well as making portfolio choices. We also see that we need to selectively increase our investments in some of the core areas to make sure we have the competitive products we need to win in the market, again a few years out. And we expect our strategy and we still behind that. We should see significant improvements already during next year, but we also have this ambition to double our operating, call it underlying operating margin, beyond 2018. Looking at the first quarter, we see sales down about 16%, if we adjust for foreign exchange. We also have significant adjustments that we will go through in more detail of SEK13.4 billion during the quarter in line with the announcement we made in the end of March. It includes restructuring charges, asset write-downs as a consequence of the new strategy as well as provisions and adjustments relating to certain customer projects. Our cash flow was worse or slightly better than last year, but still negative SEK1.5 billion. And we also see that our cost and efficiency program is not yielding the necessary result, given the profitability outlook as well as our market outlook. If we look in the different segments, we see networks falling by 18%. It's due to lower mobile broadband investments, but it's also due to the reduced scope in the managed services contract in North America and lower IPR revenues. We also had a falling, as you all know, into Q4 of last year of some hardware deliveries, which also impacted Q1 sales volume. The operating margin was, however, 12% or we made little more than SEK4 billion in this area despite lower IPR revenues. We think that is a very solid performance. We also see that historically we have lost market share for the last several years and we have seen that kind of stabilize during the last few quarters, which is due to our Ericsson Radio System platform which clearly is a competitive platform in the market. IT and cloud is down 7%. That's really our services side there growing but what we see here is lower legacy product sales and we do not see our new products being able to offset that decline. So the decline in legacy products are happening quicker than we anticipated and have seen before. Our operating margin also here fell due to lower sales, of course, but also a falling service margin. Here, our performance is not satisfactory. We need to do a number of actions that we are undertaking those already as a consequence of the strategic announcement. It's really to accelerate product introductions to get our new product to catch on faster, streamline the service organization as well as tightening scope on contracts as much as we can. And we expect to see improvements here during 2018. For our media business, we also see here sales down more than 20%, partly explained by lower IPR revenues, but the big part here is actually the legacy product portfolio also falling faster than we have been able to grow our new products. And that has resulted in, as you can see, a big loss of over SEK1 billion, which is due to lower gross margin in sales. And this unit, we are basically looking at this from two product parts. One is the product and one is our broadcast services and we are exploring strategic opportunities for this business. With that, I am going to give the word over to Carl Mellander, our CFO.

Thank you Börje. So very important to consider when looking at this first quarter report, this difference between the underlying business which we just talked about here now and the one-off items, the extraordinary items and here I would like to go through a little bit more what those extraordinary items are. And as you see here, they fall into three categories. First of all, restructuring charges, of course, of SEK1.7 billion. This is business as usual. And you know we have indicated a total of between SEK6 billion and SEK8 billion for the full year, which also is in line with the amount we had in restructuring during 2016. The second category is write-downs. This is as a direct consequence of some of the strategic decisions that we have made and which we communicated at end of March. So here we are talking about some specific assets capitalized development and intangible assets that we have taken an impairment on following those strategic decisions around focused portfolio. The third category is around provisions and adjustments and for customer contracts and this can be broken down into several different components as well. First of all, we have, as you can see, a hit from net sales by SEK1.4 billion and this relates then to certain settlements with customers, but also revaluation of discounts in certain customer contracts where volume has decreased. And secondly, we have had to reassess the value of our trade receivables in connection with some customers on contracts and taken an impairment there or have set provision, I should say. And then finally then, part of SEK8.4 billion also provisions in connection with some specific projects. And those projects are mainly in the IT and cloud space. We have discussed them before also saying that those are complex undertakings. And then here we have seen during first quarter some negative development which has made it necessary for us to make provisions for cost where we don't see that we will be able to recover those cost with future revenues. So all-in-all, as SEK13.4 billion in the quarter in extraordinary items. And as you can see then, the underlying business, excluding all of those items and that on the gross margin of 30.5% and an operating income of SEK1.1 billion. Finally on this picture, we talk about tax impact and we are mainly talking about provisions here. So by definition it's an estimate of future impact, but we estimate the cash impact to be SEK5.8 billion and this will come over several years, depending on how specifics in those contract and projects develop. We move on to look at the geographical sales split and here we have used the new split of the company in terms of geography, the market area structure. So as you can see here, South East Asia, Oceania and India grew slightly by 1% and that growth really comes from South East Asia where the growth continues in mobile broadband investments, while India is showing challenged market with consolidations coming up, but also challenging pricing situation on the market for operators at the moment. North East Asia flat year-over-year. As you can see, Mainland China declined somewhat but we do see the growth now coming in Japan and Korea, offsetting China. In general, I would say China is a relatively stable market from what we see. North America also stable as a market. We see downturn in our own sales year-over-year. And this is mainly to do with the managed service contract which we have talked about repeatedly the last couple of quarters as well. Europe and Latin America, different story. Here sales is really down by 16% year-over-year. And of course, we do see slowdown in Latin America in general and not least in Mexico while Brazil is compensating somewhat for that. But overall, Latin America is down with the challenge macroeconomics. When it comes to Europe, the level is continuously low when it comes to CapEx investment by operators and this is also reflected in our downturn. Finally Middle East and Africa, challenged macroeconomics and this is the impacting us indirectly of course via the investment budgets of our customers. If we move on to look at gross margin and the delta here, what explains it year-over-year is really first of all the IPR licensing revenue piece and Börje mentioned it already that and as many of you will remember, Q1 2016 we had couple of one-off items in IPR licensing revenues and that these were not repeated now. So with a total volume in IPR of SEK2 billion on the topline that fell short compared with last year's quarter one by SEK1.8 billion and this, of course, has an impact on gross margin. Networks, fairly stable. If anything, a little bit positive while both IT and cloud and media then caused the gross margin overall to come down for the reasons explained here on the slide. And we can move to the next one. Looking at the gross margin on a sequential basis instead and we see that we actually improved gross margin from fourth quarter and the part which is positive here to start with is in the network segment side as well where the share of capacity business as well as the share of IPR business increased. And frankly, the absolute the mounds are down but of course, when we look at gross margin percentage this has a positives impact because the share was higher. IT and cloud, again reduced margins in those large transformation projects that we talk about and IT managed services as well while media in the comparison was flat sequentially. Operating income then, if we look at this bridge, again comparing with Q1. Last year, IPR took its toll on the operating income as well, of course, with shrinking volume and the gross margin decline that I just described and we also had negative impact on the operating income. Expenses, I will come back to in a second because that's contributed slightly then to the bottom line in this quarter. Cost savings, as Börje already said in his the intro here, we are not satisfied with our cost structure and we need to do more. That's quite clear. We have the ongoing program, which is not yielding the sufficient results if we look at the current market situation as well as our position of the company. So here we will focus more, do more on structural actions. And of course now that we have stopped the specific timing on the SEK53 billion in OpEx, it's very important to note this does not mean that we put less effort on cost reductions, because this is of course key to our competitiveness going forward and we aim to surpass this ambition over time while of course the cost level can temporarily increase as we invest in certain of the areas to regain leadership. Gross cash position then, you can see the operating cash flow in the breakdown there, of course also very impacted between net income and operating assets from the extraordinary items but it washes out on the total. And you can see restructuring cash out in the quarter was SEK1.6 billion. Investing, capital investments are coming down on CapEx now as we are closing or completing the ICT Center buildout. And then you see that the effect of the EUR1 billion raised through two Euro bonds is coming into the cash flow here as well and that's a SEK10.9 billion net effect that you can see. But overall, net cash decreased by SEK2.9 billion in the quarter. A few words on reporting then. We are going to change the external reporting latest Q1 2018 to reflect our internal organization. What we do now as a small first step is to rename the media segments to other. And we will also go from the 10 regions that we have reported on before to five market areas to reflect how we are now as going forward in Ericsson. We will of course provide you with the restated numbers as well in advance as well. Finally then, these are the planning assumptions that we have included in the report, some of which are repetitions from earlier but we want to put them here so you know how we see the outlook. And first of all, we expect then that the trends that we see currently in the industry but also in the business mix, in our case in mobile broadband we will prevail during the year. We stick to our previous estimate of minus 2% to minus 6% decline in the RAN equipment market in dollar terms. We reiterate the fact that the rescoped managed services contract will have an impact on sales. And then we have a new item which you will also find in the report and that's the fact that now with our strategy regarding managed services and NRO which includes certain streamlining and addressing low performing contract, we expect that the topline effect of that will be up to SEK10 billion by 2019. We repeat when it comes to the IPR business that the baseline on the contract portfolio as it stands is around SEK7 billion. And finally then that the restructuring charges for the year will be SEK6 billion to SEK8 billion, as I said before. This is what we see now based on the visibility we have today. So with that, thanks a lot and back to you, Börje. Börje Ekholm: Thanks Carl. So just to wrap up before we get into Q&A. What we see now is, as we said, we had a tough quarter, a challenging quarter. We put though our new strategy in place which includes much more focus on areas where we can and must win. We are also allocating more resources to increase the pace of innovation and new business development. Our new strategy or focus strategy, the purpose of that is of course to reestablish and revitalize our technology and market leadership but it should lead also to restoring profitability. And we are big believers in first we have to stability then we need profitability and from there on we can grow. So our near-term priority is to restore profitability. We are going to take significant actions internally and we are doing that with simplifying our organizational structure under a new leadership team and we expect to see significant improvements in profitability already in 2018 from the actions we take now and they should start to come through during next year. We also see with our focus strategy we are on the path towards doubling the 2016 operating margin when we are beyond 2018. With that, I give the word over to Peter for any questions.

Yes. Thank you Börje. So operator, we are now ready for the Q&A session. So please.

[Operator Instructions]. Our first question comes from the line of Pierre Ferragu. Please go ahead. Your line is now open.

Hi Pierre.

Hi. Thank you for taking my question. Börje, I would like to come to the areas for which you are considering strategic options. So I had in mind that media of course and [indiscernible] as well maybe IT and routing. And so when we look at the new reporting structure that you have given over recent months, it looks like these areas, after they are losing all of this money, like SEK8 billion to SEK10 billion, in what area I have estimated. And so my question was, what do you really mean by strategic options? What are the options you have at hand? Of course, I can imagine unit you find a buyer but I would assume like a risk, if you don't find a buyer for some of these activities is real, so if you don't find a buyer, are these activities that you would shut down as well? Would you consider that option? What I am trying to see is whether over time, we should consider these activities are not going to be part of Ericsson anymore? Börje Ekholm: I understand you want to backstop in reality.

Exactly. Börje Ekholm: What we have said and that's what we are doing, we are focusing our efforts on three parts in the company which is networks, managed services and digital services. That's where we are going to focus our investments in order to make sure that we win those areas. That includes investing in our current product portfolio for 4G and LTE, of course in networks. It includes investing in our solutions for digital services. And it includes investing in automation and basically getting the benefits from more use of technology in our managed services. That's our core focus. Then we had said, we will explore strategic options for our IT cloud infrastructure hardware business, which is just a portion of what we do in there. Then we are looking at alternatives which basically have the purpose to make our solutions more attractive for our customers. At the end of the day, that's really what matters. We have also said, we are pursuing strategic opportunities for the media business, which of course includes all different options, partnerships, divestitures, et cetera. But the reality here is, we are focusing on making sure we maximize the value at the same time. We think we have great products going into the market within the media business and we already see traction on those. But we think, in order to gain the critical scale to actually succeed in a very fragmented and evolving media marketplace, we need to look at different opportunities to do so. And that's what we are doing right now.

Okay. That's very clear. Thank you.

Okay. Pierre, thanks. Next question please.

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

Hello Ed.

Thank you very much. A couple of questions. You said you expect, well you had some write-offs in the IT group, some strategic realignments there that increased your cost. I am just curious, is that realization that the products won't make traction in the market, you just thought that you are in a technical difficulties, you basically said you weren't going to be able to get the cost structure there? I am just trying to get a feeling for what happened in the IT structure that caused such a big write-off? Börje Ekholm: You want to take it?

When it comes to the write-offs and the provisions, if you talk about that, then really related to some specific customers commitment and contract that we have where we have had negative development in those contracts. And therefore estimating then the future business plans of those contracts, we see that we do have excess cost compared with what we will be able to invoice the customer and get paid for. So this is really the issued. Very complex project and we have now, given these recent negative events, taken new view on that to estimate the cost overruns and hence the provisions.

All right. I am just trying to get to, was the change in terms of the contract by the customer or of the contract or was it just realizing you weren't going to be able to deliver on what the original trends were at the cost that you originally thought you could?

I think when it comes to scoping, we have learnt a lot during the journey here and some of those projects I think we can say could have been scoped in a better way. I think what we are trying to say is really that these are very complex projects in multiyear implementation phase and the multiyear, when they are up and running at the customer premises or customer solutions more than premises. So when we have done the scoping, to some extent we could have done it better. And that's what we are working on improving for the future. It's not that we are not capable of delivering the solutions. We just think it's going to get slightly more expensive than we expected before on a couple of these projects.

So it's not like less than a change in the market or a eroding market profile and more just learning curve on how do these projects and how to scope them better?

That's correct.

Okay Ed?

Yes, sir.

You good with that?

I think he has one more question.

You have one more question.

Yes. One more real quick. We are reliving, to some extent, the microcosm we went through that we went through from the 2G to 3G transition way back when you had a scope of the industry was too large to support the demand profile and we went through that big wave of consolidation. It sounds to be similar here in that 5G or even 4G is not keeping up demand wise with the base of suppliers that have here. To what extent do you see, I know there are trials going on 5G, any in change or any hope in terms of pickup of demand for the new systems that would probably be some of the pressure on your sales force or your sales line? Or are we looking at a longer slog before we can wither see a pickup in revenue or a decline in competitive base of suppliers until we get to some sort of rationalization in the market?

Well, that's a few billion dollar question you are asking there. The reality is, the way I at least look at it is, the LTE technology will live for a very long period of time and you can look at the demand for data to the handsets or to the terminal, its growing still is a very high rate. That will, for a long period of time, be provided by the LTE generation. So it's really important that we continue to invest in technology for 4G. Then I think the 5G is starting to take some definition and some shape and we are starting to see field trials. Big commercial deployments are still going to be a few years out. But I do think that we should think differently about market where 4G really was a human communication channel, 5G will be increasingly utilizing machines. So it's going to be a different market when that comes. And I think that's what we should prepare ourselves for. So reality is, we still see a pretty good 4G market that will then later be complemented by 5G.

Thank you.

Okay. Thank you Ed. Next question please.

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

Hi Gareth.

Yes. Thanks guys. Thanks for taking the question. Just two quick ones, if I could. One, I wondered if you could just talk about what's changed in the market since the start of the year, if anything, versus expectations? I think you touched on pricing in India and M&A there and also obviously Mexico and Brazil. But I wonder if you could just what widen that out in terms of whether you have seen any other changes since the start of the year? And then secondly, I just wondered what systems you are now putting in place? And I am talking about process and internal systems to Ericsson to avoid some of the visibility issues that we have seen in the past? Is it more around price warrants or what kind of internal systems and prices and checks and balances have you installed? Thank you. Börje Ekholm: If you look at the market, you know I think Carl outlined what we see. We don't see a whole lot more than that. I mean it is a very competitive environment and it's a tough market. We have said already in our strategic forecast which has not changed that the market this year would fall to 6% in USD terms for equipment. We still think that's a reasonable estimate. And then after this year it will start to level out. So nothing has changed in that. So I think that's kind of what we see. We wouldn't say anything else. We are so geographically diverse, so we will always have some regions which are weaker or stronger than others. And of course it is challenging in parts of the world like Mexico and India, et cetera and those we are seeing as well. If we look at the way we run the pricing, it has a big element actually of price control in the way we run already. So that's not a big difference. Where we are changing, it's more on scoping of big transformation projects to implement and streamline our service delivery so we at least mitigate the risks in them as much as we can. Did I miss any question? You talked about a system to avoid previous situation that we have right there, Gareth?

Yes. Thanks. Börje Ekholm: And that's what I saying that this is about on the project scoping that we are trying to get the processes in line in order to make sure we mitigate the risks of scope issues. So it's all about learning and process within the company.

Could you elaborate on that? Is that regular meetings between services and products? Is it having software systems in place to work through? Börje Ekholm: This is why we actually changed the organization where we have moved product and services together now. And it was really in IT and cloud area. So we have merged our product organization with service delivery in order to get the tighter process to manage the scope better.

Okay. Thank you.

Thanks Gareth. Next question please.

Our next question comes from the line of Tim Long from BMO Capital Markets. Please go ahead. Your line is now open.

Hi Tim.

Hi. How are you doing? A few part here just talking about getting the longer term margin outlook. Just give us a little color on how you think the gross margin and the OpEx split will look in getting to those numbers? And then just curious about the revenue backdrop also to get to that? It sounds like you are assuming some stabilization in 2018 and probably beyond. Could you talk a little bit about how you think the gap is filled before we get the real 5G build going? So what do you think it is following this year that will help the industry recover a little bit? Is it just pure capacity upgrades or maybe it is early 5G that would be helpful? Thank you.

Carl here. I maybe at least the first part when you talk about the margin development going forward. I mean what we do say now is that the actions we are taking now, following the focus strategy will give clearly improved profitability by 2017. Sorry, by 2018. I am sorry. And that we will double then profitability going forward. So of course it's around continues improvements in networks. We talked about some of the factors here earlier including Ericsson Radio System, but also services streamlining. Of course, when it comes to IT and cloud, many actions to improve also the situation there in terms of scoping on new contracts and managing the existing complex contracts that we have. And exact numbers of gross margin, we are not really talking about in the report. But so I think I leave it at that. That's a clear improvement by 2018 through to the actions we are taking. When it comes to cost then, we have, as we said, stopped the specific guidance on the SEK53 billion in OpEx. And yes, we are aiming for better numbers but temporarily then, as we said, we might also increase the R&D piece of that numbers in order to invest in some of the areas where we need to regain the leadership. So that's I think as much as I can say.

Great. Thanks Carl. Are you happy with that, Tim?

Yes. Just curious on the revenue side. What do you think for the industry will help things stabilize?

I think we haven't changed really our strategic forecast from November where we said 2018 total equipment purchases in U.S. dollars would stabilize. Nothing has changed in that outlook.

Okay. Thank you.

Thanks Tim. Next question, operator.

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

Hi Simon.

Thank you for taking my question. Morning or afternoon. I wanted to see if you could elaborate a little bit on IT and cloud? Maybe some more specifics would be helpful? And what I am really trying to get at is how to think about the revenue and profitability trends for the balance of this year? And maybe part of it is that I am a bit lost by the pro forma or the gross income being significantly negative, even on somewhat similar revenue year-over-year, although down slightly. So I think on a little bit loss on the GAAP but ultimately I am trying to get at better understanding of the trends. Thank you.

Again, the trend for the rest of the year we are not really guiding on. But we say that especially in the IT and by 2018, we will see effects of the actions that we are taking now. So I think that's really and we have described what the actions are that we are taking as well. So the impact will be visible in 2018. Börje Ekholm: And I think the challenge here is also that we see that we need to and that's what we said on the cost side, we are going to see some increased investments also to make sure that we accelerate our new products and bringing them to the market faster and that we will also probably have some cost for changing the structure in there. And that's what we see right now and we haven't really guided any more specifically than that.

Well, I guess what I am worried about is that if we make assumptions that are based on our prior models and sort of ignore this March quarter and maintain assumptions is a risk of disappointing investors in future quarters. If we make adjustments that are too extreme then it sort of throws the credibility of what the estimates are. So if there is anything incremental you can give us in terms of how to think about it differently versus what we may have been thinking last quarter? Börje Ekholm: Let me describe what in reality has happened, which is that this legacy product portfolio in IT and cloud has fallen faster than any time before. So call it an accelerated reduction in there and we have not been able to compensate that with our new product portfolio. And at the same time, you see an increasing volume of services, which is due to large IT transformation projects and they are growing as a portion of the business area. In addition, those services have had a compressed margin in Q1, more so than before. And I think that's really what has happened and we have said that we will not guide on the detail quarters going forward. But there you have really the cause behind the deviation in Q1.

Okay. Thank you very much.

Thanks Simon. Next question please.

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

Hi. Thanks. I just wanted to revisit this issue of the customer provisions and is it in your analysis that this sales incentives were inappropriate and they rewarded winning short-term contract but not long-term projects? Or is it in your analysis more than engineering issue about being able to deliver what the salesmen promised? Börje Ekholm: I think it's fair to say that we do have a number of very large IT transformation or digital transformation projects at our customers. And here this is a new market. So it's an element of, call it, not knowing exactly what demands you would put on a new system. So we label it as where we have to improve the scoping. So it's more our own ability to scope these projects well enough when they are in areas that are not we nor anybody else have done before. And that's really why this is, call it, a step-by-step learning experience where we have taken of course, here you can accuse us of having taken some projects with now we have to provide against. But they are really done because we are entering a new area where it takes some time to build the experience base internally to scope them well enough. Sales incentive or anything like that, is rather when you enter uncharted territories, by definition you don't know all the facts.

So do you imagine this is an industrywide problem, just inability to scope correctly? Börje Ekholm: I don't know. But I can only judge from ourselves. I think we have taken the steps now to learn from our past experiences in order to make sure that we are better at it going forward.

Okay. Thanks. A quick clarification, would I be reading it right when you say strategically you are looking for Ericsson to be somewhat a smaller company, but a much more profitable company. Is that a good way to put it? Börje Ekholm: What we have said is that we will manage ourselves out of unprofitable projects or contracts within managed services and NRO. We have also said that we are pursuing strategic opportunities for some parts of the company. So your assumption, I think could basically be confirmed with that, right.

Okay. Thank you.

Thanks Douglas. Next question please operator.

Our next question comes from the line of Terrence Anthony from BNP Paribas. Please go ahead. Your line is now open.

Hi. Thanks for taking the question. Just had two quick questions. Do you think you can hold on to your investment grade rating given the cash outflow for the provisions to increased costs from your added investments, the restructuring which isn't paying off and the cash generation remains weak and on top of that you have got the DoJ investigation overhang? And the second question is again in terms of your contracts, do you anticipate any further provisions as some of your other customer try to renegotiate them? Börje Ekholm: You want it? Shall I take it? When it comes to investment grade rating, of course it's important for us and the Board has also stated that earlier that investment grade rating is something as being important. Of course, we can't really speculate what the rating agencies will do but we are in close contact with them, of course, to deal with it. So let's see. For us, it's important to remain investment grade. When it comes to further provision, I would say, by definition what we have visibility on now is what we have taken action on in the quarter. So all the provisions we have done is based on our assessment of the current situation and this is all we have visibility on now. Of course, as in any project business, you don't know if this has inherent risks to it, of course this type of business. But we don't have any more visibility into that at the moment.

Okay. Just one quick follow-up. Would you be willing to raise equity to defend investment grade rating? Börje Ekholm: Now you are asking a very hypothetical question. I think the rating is of course important. We believe we have a plan in place that puts us in a solid financial position to deliver on that. That's really what we are focused on.

Okay. Thank you. Börje Ekholm: Thank you. Next question please.

Our next question comes from the line of Johannes Schaller from Deutsche Bank. Please go ahead sir. Your line is now open.

Yes. Thanks gentlemen for taking my questions. Two, if I could. Firstly on IT and cloud, I think it's clear that you have a lot of strategic options here, but if we assume you would not find a buyer or a strategic partner for that business, but you would have to keep operating that business as it is right now, can you outline little bit more what your strategy would be in that case? I think it would be very helpful for us to understand the plan here a bit better. And then secondly, Börje, I think when you came out with the new strategic plan, you said the R&D budget would be more or less the same going forward, but it would be allocated in a different way. You seem to be indicating an increase in R&D now over the next quarter. So maybe you could help us understand a bit better what has changed over the last weeks in your thinking about this? Thank you. ` Börje Ekholm: If we start with the first question, we have laid out a strategy four weeks ago and we are focus on implementing that. That includes pursuing some strategic options or alternative for parts of the business. We haven't really focused on, assume for a moment we do not achieve that, what we are focused on is executing on it instead. And so were not, let me not go into any hypothetical questions basically. So here we don't have any reason to not believe we can deliver on the strategy. If we look at what we see and this may have been poorly expressed a few weeks ago but the reality is we saw already at that time more of a shift in the costs. So I don't think we are we would materially need to increase R&D. But we saw that we may need to shift into R&D. But where we see that we need to invest more right now, it's actually in the introduction of new products and to drive acceleration of our new product portfolio in IT and cloud. And that's really where we see the need for more investments.

Understood. So maybe just a clarification on your, first on to IT and cloud. So should we take from that, that you are not really thinking too much about running this business on kind of Ericsson alone basis, but really strategic priorities would be for a partnership or some sort of other transaction? Börje Ekholm: That's correct.

Understood. Thank you. Börje Ekholm: Next question please.

Our next question comes from the line of Achal Sultania from Credit Suisse. Please go ahead. Your line is now open.

Hi Achal.

Hi Peter. Good afternoon. So a couple of clarification questions from the morning's call. I think if I look at the U.S. trends, I think revenues were down 10%. Can you give us a sense of whether the RAN part of the business in the U.S. was actually flat? I am just trying to get a sense whether the trends in the U.S. are actually improving versus last year?

Yes. Hi Achal. Carl here. Yes, RAN market and sales flat. The main explanation for the 10% drop in sales in North America is really this managed services contract that we were talking about before.

Okay. And then just, you basically in one of your comments in the press release you talked about SEK10 billion headwind coming from low margin contracts that you have in managed services and network rollout. What should be assume for, as in this is from a base of 2016? Or this is from a base of 2017? This SEK10 billion impact?

Well, you should look at it, of course, from a 2016 number. And what we are saying here is that it's in order to give you some guidance on what the size of the business we are trying to change the terms of or possibly manage ourselves out of. And that's up to SEK10 billion. So it is to give you some sort of qualification to it.

Okay. But basically of that SEK10 billion, it's safe to assume that almost half of that would be this one large U.S. customer in that case?

No. That's already resolved, right. That already not part of it. It was not part of Q4 either.

Okay. No. I am sorry. I am still confused. Because I think the large U.S. customer you had, that contract expired I think in Q3 last year. So should we a 2016 base to measure this SEK10 billion headwind? Or should we use 2017 base?

Well, let's think about this, how to explain it. But of the contract volume, we had at the end of last year, we see that about SEK10 billion of them in NRO and managed services, we are in the process of renegotiating or changing the terms of. Is that clear?

Yes. Okay. That makes sense. Thank you.

Thank you. Operator, we are now open for the last question please.

And the last question will come from the line of Richard Kramer from Arete Research. Please go ahead. Your line is now open.

Hi Richard.

Hi. Thanks. Two quick ones, just to sort of follow-up on some of the points that have been raised. I guess, Börje, for you the key question is, do you believe you have or are potentially continuingly losing business because of all the uncertainty and what's clearly extensive pending restructuring you have still to do in the business? And again in this sense, I am not sure if we should read this current announcement as an incremental or further need for restructuring? Or is this just sort of more urgency behind the plan that you laid out in late March? And Carl equally, can you tell us the SEK5.8 billion that you mentioned, is that the only cash component of restructuring we are likely to see over the next few years, because it seems that between the provisions and restructuring you have announced that we would have expected a good bit more? Thanks. Börje Ekholm: Okay. If I start with mine, as a matter of fact we believe we have over the last five years actually experienced a loss of market share. What we are seeing now is we think that has flattened out during the last few quarters, partly due to the Ericsson Radio System, partly due to the other competitive product offerings we have. So we don't believe we have lost market share. But I think our numbers for the first quarter really shows the need to keep a very high pace at the restructuring we are doing and the bigger sense of urgency in the company.

Okay. So on the second question Richard, Carl here. The SEK5.8 billion refers to the SEK8.4 relating to the customer contracts. So to estimate the cash component but when it comes to normal restructuring charges, yes, of course it would be significantly higher and we estimate, as you saw that charge to the P&L fixed rate and the cash impact is rather similar to that.

And just to be clear, are you telling us that we shouldn't expect further, given the tone of this report and certainly Börje, the comments you made about IT and cloud in the first quarter and the legacy business there, isn't it prudent for all of us to expect further restructuring coming to resolve your dissatisfaction with the level of profitability over the course of the year beyond what you have announced in March? Börje Ekholm: No. That's, in a way when we did the announcement in March on the fixed rate, you remember we raised the, what we think will be the normal restructuring at the time to SEK6 billion to SEK8 billion and that's in reflection of what we see we need to do on IT and cloud. That has not changed in the last three weeks.

Okay. Thanks.

Thanks Richard. By that, we are closing the Q&A session and maybe Börje you want to have closing remarks. Börje Ekholm: I want to say, it's been a tough quarter but I would also highlight that our network business, which is three quarters of our sales have been very stable, performed well and we have a clearly profitability issues in IT and cloud and media where we are taking actions in order to mitigate those and improve the profitability significantly for next year, but then establishing a new base beyond 2018. With that, thank you.

Thank you Börje. And I thank you all for today.

Thank you.