Q3 2019 Earnings Call
Ericsson's unless some media conference call. So that's sort of course reports.
Visual AIDS in the school pleased to welcome to Www Dot Ericsson talks come forward Slash right, Oh, Www Dot Ericsson Dot com fourth slash investors.
Ladies and gents him what do you would like to asked a question. Please press zero warm mono pushed some fun and if he likes a decline from the pollen process. Please press <unk>.
As a reminder, replay will be available one hour all nice conference.
Peter Nyquist, we'll now open the call.
Thank you Mark and welcome everybody to these Q3 earnings call.
With me here in the room, I haven't really <unk>, president and CEO called minimum that she financial officer.
I'd like to federal state and first during the call today, we've been making forward looking statements. These statements are based on our current expectation I felt in planning assumptions.
We just started to risks and uncertainties the extra <unk> may differ materially due to factors mentioned in today's press.
And discussed in this conference call.
We can sure to read about these risks and uncertainties in Oneq school or does your book.
No and report.
Leading the word to boy, we have like to say that this call is a focus on the consumer Onyx and later this afternoon, we would have an investor update and then we'll take more acumen A's on the long term strategic issues.
But that I would like to live there what do you bought it.
Thanks, Peter and welcome to one of you for this quarter for the third quarter.
And of course, we appreciate the all of you have the time to join us.
So in the third quarter, we continued to execute on our focus strategy that we define the laid out in 2017.
The execution during the third quarter shows that we do what we said, we will do and execute towards building a stronger eric's on longer term.
A key part of our strategy is tweens creates investments in R&D, you put technology and cost leadership.
We see good momentum in our business based on a strong portfolio under good cost per se. So.
Another key part of our focus strategy was to strengthen our footprint.
And we see good progress here with several wins.
We're disciplined and how we pay contracts and we target opportunities, where we have a clear technology advantage. However, these contracts or margin balloon dilute due in the short term.
But the good thing is here. We're also starting to see some of the earlier contracts, we have taken to gain footprint.
To become margin contribute to then I'm actually helping us drive margins. So the impact during the third quarter net operating leverage was about 80 basis points from these type of contracts.
But the important these here to remember that we would try to manage are we in mind. It's the it's a strategic contracts within our overall profitability and we can still deliver a healthy gross margin.
Yeah, we see pass the rollout of Fiveg than we already are anticipated driven by the pioneers in North America Northeast Asia.
During the third quarter. We also recorded a previous son of a U.S. The 1.2 billion yen were 11.5 billion Swedish krona as the estimated cost 40 solving the situation would that secede. The O.J. of course, we are a ashamed of our historical performance.
Income from the shows had all know we're now investing significant resources to strengthen our future compliance program.
Over the last two years, we've focused on improving our cash generation capability or capacity.
During the third quarter, our free cash flow before M&A was 5.5 billion and we now have the net cash position over 37 billion kroner.
The Geo political.
Uncertainty has continued during the quarter.
And as always uncertainties never good for investments. So we see really know a impact in our order books Yep Buddy Penn is there anything with the uncertainty among our customers.
And actually it's the delaying investment decisions in certain parts of the rug.
If we move into some of the numbers for poor 29, and for Q3, Twentynine Dean a rather strong cash flow as we said the 5.5 billion during the quarter before M&A.
Organic growth was 3%.
Underlying margin a when we adjust for the previous Cimpress the C.D.O.J.M. underground time.
Refund of social security calls was 11.4%.
And that improved both year over year in quarter over quarter.
Networks had a good gross margin and a absorbing the dilution from strategic on track.
And in digital services, so we see improved results.
When we laid out our strategy and 2017, a we did not to target. The the fastest policy will turn around the digital services instead, the our priority was to be the strong.
You need for us and longer term and creates a strong product portfolio, a and thereby we define the ambition to reach low single digit margins in 2020 .
And what we see now is that the business the underlying business continues to improve and where we're getting closer to breakeven.
Wristed carrying costs for the 45 previously identified create great big contracts, but we resolving them one by one but what is very encouraging I'm makes us coal and put a bit about the targets for 2020 is the is the strong development in the underlying portfolio or underlying base.
Yes.
Maybe the most encouraging thing WIDIA with digital services. He is this strong growth that we see in our new growth portfolio, a two to actually combat the declining legacy portfolio.
We feel managed services to.
To be after a bit of a bump in Q2 to be back on on where it should be delivering a good done improved margin.
Yeah in emerging business, we see a good growth, especially in our I O T offering where we have also decided to drop it down to to be the stronger business longer term.
Short summary of the market area sales then.
Yeah, we see very good growth.
In the regions with early Fiveg launches, that's really a the U.S. and northeast Asia.
In Europe , we saw growth in that works and digital services, a while Latin America. So declines following a strong 2018, a tough comparable.
In Southeast Asia, and we'll see I know in India, we still declining sales due to lower sales of our legacy product in digital services.
In Middle Eastern Africa, we saw actually growth because strong investments in fourg as well as fiveg in key markets, but we were also have had a headwind from a contract exits in managed services.
So with that over to your card.
Thank you everybody up [noise].
I will start by mentioning two items affecting comparability in the third quarter, though it's important to understand that the underlying business.
And first the food SSC, the or Jay related cost probably some the cost there is estimated at 1.2 billion us dollars.
But at the same as an hour or near communicate some.
And when we apply the exact extend trayport listened to close sometime this translated into the Swedish krona model about 11.5 billion.
Secondly, it's the refund of social security costs related to pensions in Sweden, and this amounts to point 9 billion.
Both of these are booked on segment emerging business, another and for the only reason of keeping them easy to attract a foreign external stakeholders.
When we adjust for this a one off items, we arrive at than operating income then of 6.5 billion through this growing up.
Or an operating margin of 11.4.
And you also through here about the adjusted operating income for segment emerging business and how that is a negative 0.8 billion.
Let's have a look at the fourth segments, starting with networks networks grew by 4% currency adjusted to 39.3 billion.
Again, driven by North America, mainly Gulf Party was flat year over year and down 7.8% sequentially.
Exclude if we exclude an item affecting compatibility and a.
Second quarter, we'll come back to that later, so we did not decline of seven point they.
Percentage points, we have absorbed the margin impact any mentor provisions related to the so called strategic contracts.
Both operating income and operating margin here to increase year over year.
And if we drilled down into this a bit more than the underlying margin is stable year over year as in the third quarter 12 to 18.
We had a burden that margin by some evaluation for customer financing and also from impairment losses <unk> trade receivables.
So as you can see or in the girl their operating margin this quarter exceeded the 22 of the target to range 18.4%.
Who moved to digital services.
Sales grew by 5% FX adjusted to 9.9 billion.
And as Barry said, a good momentum in the five do readying cloud native portfolio and geographically, how we're talking North America and northeast they shop.
And again were happy to see the growth in the new product portfolio, 19%, if we look at and rolling four quarter basis.
Gross margin improved both year over year end quarter over quarter from increased software shot of sales and also continued cost reductions.
On operating income level, which will significantly reduce losses, Vietnam by now down to minus point 5 billion versus negative 1.4 billion a year ago and minus 1.3 last quarter and this was done in spite of absorbing and I get that impact over the remainder of the 40.
Five critical contracts that redefined Ray Ali I have also been them.
So.
Now we have addressed 29 of the 45 contract.
As you know we target to have 75% totals 45 completed by the end of this year.
Yeah, I also want to mention about the BFS, Scott did execution, which we have communicate that about earlier is progressing well and here. We have recorded several new DSS wins in the quarter as well.
So all in all I would say [noise] gives me the turnaround here than they did and so this is on track for the 20 to 20 low single digit margin target.
But again, please bear in mind as we have said many times before that that the impact of the remainder of these 45 complex will continue to vary between quarters us they are addressed.
Managed services delivered rattling the quarter and operating margin above the 2020 targets.
Target range.
And he had we declined topline if we adjust for FX, but this is mainly following the planned exits from contracts that we have talked about.
Gross margin improved also here following continued efficiency gains, but the world. So thanks to higher portion old.
What we think we'll add on sales meeting edition of the business generates it under existing contracts.
And looking at operating income we also have increased both year over year end quarter over quarter following the higher gross margin.
I would say it's also relevant for he has managed services to look at the year to date operating margin, which is 6.9% help from 5.4.
The corresponding period last year and that we have to exclude the positive effect on a certain provision reversal or would they had in the first quarter.
And this again in line with a ton to trying to target range here in managed services, we continue to invest in R&D for automation machine learning artificial intelligence.
Obviously to continue develop this business into a competitive and venue value generating park both Ericsson.
In segment the emerging business another sales were 1.6 billion.
Which is an organic decline of 7% and operating income here was impacted by some nonrecurring items that we talked about before.
When we exclude this it's minus point 8 billion compared to 1 billion and negative in Q3 18.
Looking at the different parts, we have they emerging business, including Iconectiv and a here, though you mentioned already but it's I think this it's worth repeating this is good but we see our I have to business growing almost twice the.
Pace in the market and we have now for an off dolphin enterprises onboard and through our platform via telecom operators.
And then we have had been media stable business our breakeven.
Working hard to improve and the media solutions of course divested <unk> now generating a negative 0.3 operating income.
And when it comes to gross margin. They I hear you see the long term development. So we could say up the gross margin has established.
Published its out of SASSA at the high level in line with a target.
For 2020 .
And I think I have mentioned most of the effect of stuff. So we can move on.
Yeah, Let me say a few words about the networks gross margin and the Socal strategic contracts in the form on this margin bridge here.
Some of the contracts that we decide to take they do come with lower initial margins. However, with federal selected for for value creation long term.
And the product offering and cost structure, we have now east more competitive and this is an enabler for us to capture these opportunities without jeopardizing the targets for 2020 .
But we have us up the negative impact on the gross margin useful to a 0.8 percentage points hearing in the third quarter and then the dilutive impact can vary between quarters of course, but this is about to building for the long term.
So you said the underlying margins Q2 was four to 2.3.
If you make an adjustment for an IPO our settlement that.
Compared that to be the Q3 number 41 point to seek and you get the point that Delta.
Including this margin impact and the amount of provisions, but also offset by.
Operational leverage.
Opex and quickly add starting from the left admit R&D slightly up.
And we have seen reductions now continuously in the digital services as well as emerging business, that's mainly related to the divestment from India time.
And reinvesting networks as well as managed services as Youre, well aware SDN aim to meet them.
And stable underlying NAV as you can say we compensate for.
The negative currency effect by continued cost savings.
And than we have the impairment losses on trade receivables.
They continue to vary between caucus he was supposed to do this quarter.
Thanks to good that collection efforts in that in our company.
Free cash flow 5.5, a secure number here free cash flow before M&A.
We.
So if I'm outflow from permission here 2.2 billion in this this quarter.
Looking at the future in Q4, we expect the.
The majority of the FCC DJ related cost to be paid out but this is of course on struck them. This is with the current information, but let's see how the discussions that play out in reality.
Depth to highlight dose of the year today free cash flow, which is 11.8 billion compared with Rmbone 0.2 same period loss yes.
A lot of these has to do with working capital management that mostly a good cash collection.
In the quarter and the whole year.
Planning assumptions here again piece good look at the food report for for all the planning assumptions.
I don't go through the details here and there are a few additions and changes here. So I just suggest that you have a look in the report where you can find all of that and with that I hand back to brilliant.
Thanks Carl.
So our focus strategy impacts stays firm.
We are excited about the opportunities to expand the market Oh, we dollar Fiveg technology as we enter the enterprise space and many more advanced consumer applications.
We continue to invest in R&D for technology and cost leadership.
Our investments are of course focused on Fiveg, but also cloud native portfolio on a guy.
Yeah, we continue to seek to expand our footprint in a disciplined way we're building on a strong portfolio and the good uncompetitive cost structure.
But nevertheless, the more dense camby owed the contracts can be dilutive to margins in the short term, but they are shortly creating value long term and strengthening our market position.
But we can take those within the targets we have to move out really as previously communicated.
And our focus strategy is aimed towards building a stronger eric's on longer term thinking in terms of five to 10 years out a and we feel we are doing what we said, we would do and delivering on that.
So we may are very comfortable about our targets near term for 2020 on 2020 too as some sort of intermediate checkpoints on their way through a longer term stronger Ericsson.
With that back to you Peter.
Thank you Barry if and on the topic of Investor update. This afternoon. We will then focus depth session more on the strategic question you will get.
Run through with both billion call, we need to us around what we're going to study above politics, and the stuff that at that point. So we will focus they came in a session on the Q3 earnings.
With that operate does that leave it open up for the Kunaev.
Please.
Thank you.
Ladies and gentlemen at this time and we'll be well we will begin the question answer session. If you'd like to ask a question. Please press zero warm on your push buttons fine.
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As always please limit yourself to one question time I'm. Please keep your questions on a per what level do you told inflation audit report generics is investor relation and meeting with our screens teams will be happy to take additional questions discuss further details. If you also the coal.
Our first question comes from the line all standing on Youtube and to have spoken. Please go ahead to your line is excellent.
Hi, dynamic very much. Thank you very much for taking my question on.
Actually my sense is only for a question would be to color thing on the netbook side, you had the inventory provisions in the core.
Welcome this eight basis point gross margin.
Impact and photos.
How much of this eight came from there.
Total commission on how much much most from strategic contract.
Hi, Tony I'll call. It out we we don't going to that level of detail here, but we said we talk about the then the impact there on the 80 basis points.
Let me know trying to break it up into a smaller component soda.
The thing I have one more question on perhaps to Maria.
And just to get your view on.
Development, though.
Right.
At some great Theres quite a large topic just talk about.
Now I.
I was thinking if so.
So for us impacted your.
I started to pounds for notebooks segments.
Long term.
What's your thinking from Ireland.
Yeah, we have them.
No and you'll see from our new announcements we have for example join do overall in the alliance already in the beginning of the year.
So we believe the open that Sunday open architecture, as who will of course, Abby important part of the market going forward.
So we see that that's a a so not showed extension and in that area that we are actually going to participate in so so we are working to position our status as a.
As a strong compared to the in India.
As soon as an open provider or provide to have an open solution.
No question, then exactly how thats going to impact on when that will impact would be introduced et cetera that seem to be it's unclear.
You know solutions of course can be done for for D.
We're ready today, but about them.
So far it we havent really see is seen dot on Fiveg. So we'll continue to work on our path and it's going to be an important part of our business going forward as well.
But as you see we.
We continue to.
Have a guidance over strong networks going forward. So we believe we have a a good position well and so here.
Perfect. Thank you very much and good luck in Q4, we go back in Q.
Thanks, Frank with you later down the donated I guess.
Thanks Al.
Thank you Alan next question comes from the line all Alexandre Petrak, Oh, so should teach and while it's gonna have to your monocyte.
Good morning, I guess he has good morning, good morning whatsoever.
I've just have a few questions one is simple and housekeeping when you say the there's a 0.8% impact on gross margins.
From competitive price contract is facts quarter on quarter or year on year.
And then the second question would be on the impact of Kathryn.
How should we model sales gross profits and up but operating profit contribution we didn't networks here I think you eluded to about 2 billion second being the sales level dilution model for the full year, but I'd like to have a little more detail on backs and then lastly on guidance. Some so you'll be the midpoints I'd say about by about 9%.
Is it correct to assume a bit about half of that is down to FX changes since your last update about a year ago and also is that on inorganic contribution of cost three in that I don't think was module team that initial.
Kind of syndication you gave a year ago. Thank you.
So that I thought then yeah first of all that 0.8, if the sequential that people on the networks margin. If you adjust for a one specific nonrecurring item in the regarding yeah, and I guess that that amount in Q2.
When it comes to a top line, what we have Sadara Larry.
It's about.
270 million Euro and topline and 28 thing.
And so that's about the level, we have talked about.
No.
And.
Sorry, I'm reading on the long line, it's actually around to London.
20 million Euro exactly so while it is for that.
Recently, we have the sought to negative impacts on cuts line in Q4 and also in the in 2020 too and it has to do with.
Changing the portfolio and modernizing the portfolio that and that the whole shift that we are going to do.
Of course overtime. This acquisition is going to be accretive.
Clearly, but there's some short term hit from that.
But it's important to this did put it in the context of 2020 . That's why we did receive comfortable with our target Sunday remain firmly in place. So so of course.
As Carl said, we expect to see it beat the headwind from constrained in 2020 , but we need to modernize the portfolio and make sure to invest in a in our intent on technology and Thats a strategic investment we're making.
So so that but we can manage stopped within an hour.
Targets.
And I guess, you thought Christmas around the midpoint on the 2020 took down right.
Yes, Okay now I can take that <unk> a lot.
It's a divided between the FX impact, but also good market momentum and thirdly, then the nicotine acquisition I mean to give you a rough idea.
Fix is probably around the.
It's a 9 billion of that market. Another 9 million I think thats fine say too.
Yes. Thank you. Thank you very much perfect. Thanks.
We opened for next left him.
And keep our next question comes from the line all Sandeep just on the Oh Geez JP Morgan, there's gonna have to online.
Running so yeah.
Hi, Good morning, I have couple of questions. Firstly, I forgot regarding the United States. I mean, you have mentioned on the all release that do not people buy Spain caused some issues maybe can you elaborate on what do you think that's when you do will be a normal seasonality in the fourth quarter and then secondly.
I look at I mean, you've talked about DSS and the boss when do you think DSS adoption in the U.S., where the stock. Thank you.
It picked up the last question. Please you meant did yes or.
No.
I'm expecting shedding.
Yep.
Okay I'll take that if you look into you as well.
Saying is that.
There are a bit uncertainty as it relates into a potential merger thus beaten now.
And and we think that these going to impact their spending levels in the second or during the fourth quarter.
So of course that we'd be.
You know Oh, no really seasonality effect in Q4 than we previously the Norman.
As a consequence of this so I.
It's hard for us to be much more specific but but we want to say that are rewarded.
It should they expect to know where seasonality is a normal then we'll know were lower seasonality effect than normal.
No were and then come back to your question about the dynamic spectrum shouting. This is a important technology.
Rig taking steps forward when it will be introduced do you know that that depends on the ones plans with our customers. So we're not gonna called meant on details, but it will of course be be announced as if this deployed.
Okay sounds.
Okay. Thank you.
Thank you.
Next question please.
Keith strong at which smart apps Charles equity Research. Please go ahead. Your line is open money yet.
Hi, This is Jack Egan on for Ed Snyder.
Thank you for taking my quite yet so operators. Good morning, so operators such as Verizon British Telecom backing off extra monthly charges for five you service suggests ARPU is our remaining flat is there a specific reason why they haven't haven't risen yet is that due to an effective marketing or reduced capex.
Just trying to get an idea of expectations for commercial uptake for fiveg. Thanks.
You know they appear if you look out that it's also I think to be able to charge a premium a unique also concede that other aspects like how much coverage for example, you have.
For the service right. So when you look at a good part so there was but we see early movers actually get the price premium four or five d., but it's typically leading to a broader coverage abroad. The use of spectrum so to say.
So so and so far in the U.S. you know, it's a being about this is happening it's happening very quickly on is building out quickly.
Coverages milk.
It's not deep yet a and I think that limits your ability to charge a premium.
But you know if we learn from the history. We've seen the first movers always be able to extract the price premium and we see the same thing in five you would expect the same thing in Fiveg.
Okay deck yeah.
Okay. Yes. Thank you for that for my follow up for sub six base stations with 64 on tonnage I can we get a general cost point for these are they twice as expensive as 10 times as expensive I really just looking for a ballpark estimate thank you.
Yes, it would love that but youre going to get that Galleria.
Okay. No problem. Thank you. Thanks, Jack will move into the next question. Please.
Thank you. Our next question comes from the line or actual Sultani Credit Suisse. Please go ahead, you along and so.
Good morning show Hi, Peter Good morning, everyone, I'm, just going back to the U.S., a market and maybe quoting as well.
Obviously, we've seen a continued strength in both these markets as Fiveg leaders.
You've obviously been commenting for the last few quarters that we have to be careful or some of these markets may stock speaking.
We still haven't seen that Q3 was another quarter of growth from a very high base. So what has been the surprise element for you a when trying to predict the demand coming out of the U.S. and telco equity and operator says it is it fourg catch up spending is it a is it.
So fiveg rollouts.
Or is it a.
Densification part just trying to understand like up where are we missing something which is going on in the U.S. in Korea.
You know, it's not the to the gave the.
Very clear answer, but if you look back two years ago.
A with the expectation solve of Fiveg introductions, we would have said more like a 2020 event.
Since then it's been actually accelerated by more than 12 months. So you see a much faster rate of introduction of fiveg than than expected.
We're also continued to see a very high increase India data consumption.
Among the users. So we'll do it you what youre seeing is actually a need to invest in the network to a two actually gave there.
And you said the quality needed. So you see operators invest in both for GE as well as Fiveg.
And yes, we do you know you could those heads should we have expected this to some extent we should have.
But but the reality is it's happening even faster than we expected just a few months ago.
So the demand here is strong and when we look out.
Early launch markets for Fiveg, we see a very sharply increase of data consumption among the fiveg users which indicates that.
Fiveg, yet again shows that you'll read USIO device in a different way when you get to better service.
So we look at.
You know compare that for example to Europe , where we typically have a.
Have a week get coverage and weaker networks in essence as some more of an average <unk>.
Compared to northeast Asia, and the U.S. and we see much though a data consumption as well.
So so I think the reality here, it's a better network drives new new new type of behaviors that actually also drives investment needs and drives our business and that's why it's important I think that the the operators also are a bit to charge a premium for fiveg, because if we needed to create new type.
Couple of usage use cases.
So okay.
It's a it's a multitude of factors, but but it's actually back to the demand for.
You know, it's a it's almost a.
You are feeding that data consumption Beast anyway, and then the consumer continues to love.
Consuming data.
And maybe just a follow up on in Japan.
Have you started seeing a the fiveg prep bug getting done in Japan or are you still is more like a 2020 event and how is your relationship with all the three major operates I know, you've announced a or softbank and <unk>, but what's the progress with the third operator in Japan.
Tom So what you can supply.
And the new relationship. Thank you.
You know the India, Japan is a these data preparing to upgrade the networks and low and five d. So are there in that the that face us.
So that the you know it's a it's more of a 2020 event as you called it.
We see good progress a in the market and of course, our ambition is to be stronger in five did than we've been before.
So that would include working together as we have said before with the with Fujitsu and approaching the market that way as well so we feel quite positive about the situation Japan.
Thank you Barry.
Thank you actually Oh, no ready for the next question. Please.
Hi, Keith apps from Milano static Mulholland Oh, Yes. Please go ahead, Sir your line is.
Hi, Good morning, Dan just on China, I think your commentary just getting.
Increasingly over the last few quarters confidence around your ability to take market share into into Tony Tony I, just wonder if you could update as to where you are on how it has business been awarded yet that you've seen when do you expect that to happen and it's not all suu in terms of impacting your piano something that's around.
They're going to kick in Q4. This year are really a 2020 story.
Yeah. It's a it's you know the our ambition it's clear we wont to be is stronger in the in China than we MPG than we were in Fourg.
And our Fourg spend for Fourg market in China.
It's really more than 60% of the global markets. So I'd say, it's clearly very important we have no reason to believe fiveg, we'd be less than that so we tried to position ourselves for gaining share.
We feel we're making progress, we're making investments to do that.
Yeah, Steve We don't know no rewards have been made we we have really no way of knowing potential market shares and we don't really know price levels either.
But we expect that to be awarded India.
In the near term and the next few months, but Oh, we will see and we will update you based on what we achieved.
And then just one quick follow up on cutthroat nothing that the commentary, you're making around potential margin impact, but I wasn't dilutive margin impact is that I should just to Q4 issue because whenever you announced that you said it would have a positive impact to your profitability targets for 2020.
I will three I've said this study we will have a near term dilute the impact we closing as much later than we expected.
So it clearly carry into 2020 .
So that these say, it's going to its going to provide the headwind in 2020 , but the reality is that it's Steve fitting into the overall guidance. So you do you know you can quantify debate than say that yeah, it's going to have an impact, but but not though not that much.
Thanks Raj.
Thanks, David.
Next question please.
Thank you. Our next question comes from Milan, Oh, she'll come fast, but that's not the up. Please go ahead. Your line is sorry.
Good morning Yoga.
Yes. Good morning, Thank you and congratulations on the report a couple of questions. If I may one related to the operating expenses. So you had some.
Good improvements there a you know after adjusting for for the social.
Security benefits repayment that such a rights and you're saying that it's driven by ethics and seasonality.
Still youre, you're increasing I'm pleased by a you know I saw some people. So could you gave us a bit of a you know understanding you know it's only affects on seasonality will do we have a you know structural improvement from here on and how are you thinking about the opus going forward into Q4 and 2020 that's number one number.
Number one number two is Ah you had quite a big uplift on digital services sales in the northeast stage and point that Japan could you give us.
A flavor since they are kind of pre fiveg, a invest money what what type of investment. This is.
Yes. It is that a you know fourg packet core capacity increases because fiveg isn't there yet or what do we see thank you.
If you start with increases on the <unk> number of employees, it's really in our service delivery organization as we win contracts or you know we need to stop accordingly.
So so that you should see in.
In conjunction right. So you see it you'll see a topline growth and you will see some increase in.
In in service delivery staff.
On a on the IRS DNA and you know that you see and I think Karla said the doors. So in in a way we have currency headwind so efficient structural efficiency gains were making already underway counts sitting out the headwind from from currency. So you would you do see a.
Continuous improvement there so we're a bit actually to take costs out in as DNA and grow topline.
So the recent operating leverage on operating efficiency gain in there.
Then on the question about Japan, you know they booked we see and we have seen that in other markets before the recent need also to upgrade your.
You know the whole network, including the core.
Orchestration et cetera, and all of that has to be down before you can launch fiveg. So you see this is a natural spending cycle going on in Japan as well.
Okay. Thank you.
Thank you.
Next question please.
The next question comes from Milan off you handle increased Oh ASCP. Please go ahead to an honest Simon.
Hi, good money on off.
Good morning, and thank you two questions. If I may the first one relates to <unk>.
Revenues.
For nine data for the full year.
Let's see if I do the math correctly in place that land. That's that's 1.8 in Q4 I'm just wondering if there any reason why the passenger revenue a should decrease in Q4 versus the 2.4, obviously now in Q3 and then my second question relates to the U.S. market. If you can comment anything or how you expect.
2020 to develop into your west I know.
Guided previously filler for more savvy, a heavy type of revenue sand.
Oh, so how do you see the mix all clients I would expect the two major telcos in India U.S.. Our are very big part of your Capex now and if you expect that add to changing 2020 . Thank you.
But I can think the IPO question first of all [noise].
So I on the <unk>, it's when we talk about 9 billion that this really that contract baseline a annualized.
Yeah, I think we can expect the Q4 more or less in line with Q3.
That would bring a bit higher than denying them for this year because of some effects on what and well performing contracts. He had another one off so that would bring you to about 9.5.
Thank you.
And.
In this market on I guess was second question.
They intend to tempted.
Yeah, you know its.
It when you look I do it.
We have seen a great growth in the U.S. doing 2019.
We don't see that the the U.S. market is in that sense structurally slowing down and that's because he is driven by the end user its end users consumption of data that drives the need for building network capacity.
So so we don't see the U.S. market necessarily to two in that sense slowed down because the end market is actually growing.
In addition, we will have clarity on there on the merger what's going to happen. So we think that ought to couple of the speaking you pay broken markup on the out their hand, you know it's.
When you have these high development you have to at least be prepared to absorb some negative surprise us. So we're just trying to position ourselves.
On the aldehydes, we have out the global markets that we see it will so that could contribute positively northeast Asia. For example, so when we put together the guide us for granted know the targets for 2020 .
We kind of we've had its 230 to 40, it's a realistic number on the older one and that's where we're sticking to and then we can absorb some.
Short term fluctuations in certain markets compensated by others.
Okay.
Okay. Thank you.
Then we will continue to the next question.
Thank you and that comes from the line all I'm at constant Donnie I see two great. Please go ahead. Your line is like.
Good morning on on the touching Donnie from Citi and thanks for taking my question.
Firstly find me I guess I Didnt. If you can help me on this but as we look to lets Q4.
You have talked obviously about the revenue line and how we should think in terms of probably below seasonality instead any steel rod assistance, who can provide us as we think in terms of the cross margin.
In terms of feed the impact of strategic contracts or any of that puts and takes around the cross margin. If you can has this and then I have a formula.
Mm.
I can take that so you sold on the the impact of 'em. The focal started the contract in Q3.
That's a fairly limited 80 basis points I think we can we don't see any dramatic impact those going forward either more dramatic.
But it or is there and for the reasons. We have explained we take some of these contracts when they all value accretive long.
Longer term to being the stronger footprint.
And this of course in line with stuff to do but somewhat and they get it impact that that would say contained and then limited.
So I think that's that's the thing to keep the Taco for for gross margin into Q4 and on you mentioned also kept train in the play planning assumptions, so certain they get to the impact from that short term. We also mentioned that.
Finally, the 0.5 cent on digital services are.
You know that the 45 contracts that we haven't identified.
May have an impact in individual quarters summed up the impact can vary from from quarter to quarter of course, but again just to repeat what we are on track that on the recovery towards the low single digit module for next year.
And just to clarify in terms of the mix self networks test, there's nothing that we need to be up there in terms of the mix.
I guess Q4 potentially tends to be a highest self their quotas. So.
Fair to assume product mix would be positive in network.
No I wouldn't assume any the specific positive changes into Q4 I wouldn't model. Okay. Thank you and as a far analytics, yes piece.
And as a follow up if I may ask is Ted could you give us a sense for your own perspective of how the standalone versus non standalone.
Deployment is shaping up across your conversations that top brita, how do you feel that extend this positioned I understand that I've seen releases down the pipeline TGP, but the sense of your perspective on standalone versus non Standalone would be has thank you.
It varies a bit by market, but we see the initial deployments being.
No standalone, but we're seeing also.
As deemed transpose standalone, increasing so and we feel that we're well positioned in both and it depends a bit about the appropriate to prioritize them, how they were going to build out the network.
But we see we see.
We see hours has to be well position here in the early phases, So oh standalone as well.
And is there any clarity at on timeline. So it's too early to comment on that.
To be totally you know when when China under one says it will.
Most likely be as standalone than the we would see held out develops right.
Thank you very much.
Thank you I mean it.
And would open for the mix festivities.
Thank you and that's from and Chicago I sat Barclays. Please go ahead you on <unk>.
I wonder.
Hi, Good morning, guys. Thanks for taking the question I just another one on China. Please.
Compared to the way you and not as an industry. We're talking earlier in the yeah. The the contract awards have sort of been delayed and continue to be delayed is you're getting any visibility from the operators around why that delaying it I think we can speculate on it but I'd be interested in the in the feedback youre hearing as to why this process.
Seems to be tracking.
Also in the.
In the report this morning, Youre, saying, you do expect deliveries to China to start in the near term.
Is that for Q, you getting any indication it could be that quickly or is it really 2020 event and then just in terms of thinking about the margin impact from that is that a are you taking into account China. When you talk about the near term impact a strategic contracts or would that be additional to that still thank you.
You know it's it.
It's easy to make predictions in self taught to be right.
I think that holds to China as well so we can speculate debate and the and I think.
We don't really know we know there are changes into market you know to operate this decides to show the network et cetera, and I think those discussions while they're ongoing leads to certain delays and that's not not to be surprised.
And where to where we're not talking a particularly long delay we're talking rather minds right then and so it's not it's not a whole lot.
So we see a state of China, starting it may or may well be early next year or it could be late this year, we all know they don't know.
But we're trying to invest to gain market share and trying to be stronger in the market. That's our ambition.
That's not changed.
We don't know the price level, yet so it's a bit hard to forecast.
But.
If you look historically, you've typically had the tough margin in the beginning of the contract.
As you roll out and then the you you may you catch up over the contract period, what we say is that were committed to the.
The targets would give them for 2020 . So you can see that it's incorporated in there.
And and of course it it can be dilute the but we should be able to handle doubt in the targets. We have we see no reason to change dose.
Okay. Thanks, and then just another one sort of related to the strategic contracts now that we're off to a few quarters. So beyond when you guys first started talking about it.
Can you give any sense to us all of a sort of the breadth of these contract is it is a small number but that particularly important and therefore, you've been more aggressive and when you're starting to see that impact or is it much broader across the fiveg discussions that youre, having and therefore you're seeing.
Little bit you're being a bit more aggressive in price on on a broad range of contracts. It can you help us sort of between those two ends of the spectrum. Thank you.
You know the first time, we mentioned it was actually trend to 17, when we said Oh, we're focused strategy builds upon gaining footprint.
So so yeah, it's a hey, we're delivering we're doing what we said yeah, we would do.
What we see as there is some of the early wins, we had already in in 18 actually are now contributing to.
Our gross margin. So so the reality is we see the mall did all gaining a footprint actually works in real contracts.
Why do we define them us a strategic rally was the overall sound solved.
You know builds upon a technology advantage to gain a increased footprint.
Dose, we defined as a strategic maybe that was their own wording, but that's what we booked we call them.
We're not the bread engineers were not great as marketing.
And the reality is where we're trying to.
To Ted to say that these are contracts, where we have a unique technology advantage to try to gain the footprint and they are associated with some early course, none there that's typically cost for for changing a equipments for example.
And and its service related cost typically we're taking those are over their PNM then we see some short term headwinds.
From them, but we also see that.
We create the stronger business for Ericsson five to 10 years out.
So so you know it's not it's nothing new in this it's actually it's two and a half years old.
Andrew you're happy with that thank you guys.
Thank you.
So we moved to the next question please.
Thank you that's from a line of such an off a minimum of Liberum. Please go ahead, Sir your line is type.
Hi, good morning, Hi.
Good morning, Thanks for taking the question I just wanted to go back to the the strength that you saw in the digital services revenue.
And you said that.
It's came from North America, North Asian, and responsible previous question you said, it's a normal course of business as operators are preparing.
For a full changes.
Okay. So can we take this as an inflection point in the digital services revenue trend and do you have a good pipeline out of business of this nature coming in these cloud native products at which which will sustain the girls that you're seeing in Q3 into into Q4 as well as potentially.
And to 2020.
Oh could it be quite volatile as we go through the next few quarters.
No well have to just take a step back when you look at our business. It. It has an element of volatility because contracts tend to be rather large and that's why they it's very hard to predict and it's almost inappropriate to predict which quarter that we would never be accurate on.
But but the reality is what we're doing is we're building a cloud native portfolio.
With a modern architecture or that we are seeing gaining momentum with customers. So we have a number of important wins.
Up to date, but though they are also continuing so so you know if you look.
Longer term, we should be able to grow this a part of our business quite substantially benefiting from the technology advantage, we are creating right now.
Understood and just going back to North America. You know previously you had talked about setting a sort of constraints in terms of a dollar crew and things like that I, we know well beyond that though you've trained up your people and you have enough resources on the ground to deal with contracts as they come through.
You know there be at this tower crews are still one of the main shortages in the U.S.
<unk> and you know there, but there are all solve their problems in the U.S. Roger can ramp up fast because of.
Permitting process. It still takes quite some time to get permits depends on on which Joe greff. It depends on local count. This etcetera. So there are restrictions.
In other areas as well, but tower crews are important and it actually slows down ramp up.
Understood. Thank you very Atlanta, Thank you.
Take the next question please.
That's for homes to sounds Salinsky Exxon BNP Paribas. Please go ahead your line is open.
Great, Thanks, saying and good morning, I say honey I, just two quick ones first for Karl I guess on restructuring you only have I think 500 million kroner of restructuring in the first nine months of the year.
I think for one person sales for the full year, which would imply significant restructuring charges in Q4.
Do you expect.
Some sort of needs for that in the fourth quarter, that's different from what you've seen the first three quarters or is that just kind of a cautious guidance. There on the restructuring side and then secondly, I'm for Batya on the geopolitical risks that you flagged today.
And the macro risks are these related to the security discussions that we've been hearing about for well over a year now with the market or is this sort of new more macroeconomic risks snap or you're seeing delaying some projects and is there any geography in particular, the would called out where you're seeing maybe an increase in there was a potential delay.
Please thank you.
No I'd I wouldn't say, we're not flagging a delay in the market in that general sounds, but where we're right, they're saying that everyone seems to assume that the geopolitical uncertainty around the end the call. It the security discussions will be beneficial and it would make life easier for us you.
You know that we don't see if any deane, we see a drive the being snow littered with certain customers. So it's not that we're trying to toward and or anything or flag in anyway.
But it's more more more combating that that notion that life is easy on the walk into park because we you know it's a very competitive market. We still see you know compared to those being aggressive on price levels et cetera. So you know it's.
It that's more then the norm at the business as usual kind of Prepaids as a don't don't read anything more into it but then it's fair to say that the you know what goes on this is something in a way its a.
It's a political national security.
Mixing into one thing where you know I don't think we can.
I have any view or shouldn't have any view, we can only focus on one thing which is.
Working with a customer and make sure they get the best solutions make sure they get the best.
Rate to operate their network, providing the best quality service to that end customers and if we do that win win business and I think that's what you see us do during Q3 and you'll see notes due for the last year and a half as well. So our focus is clearly on winning business a and we win business based on our own merits.
Then on the restructuring car like that it takes that I can take that high Stephane. So of course, we're always working on on efficiencies and cost out, but we are able to limit the the cost to do that there's structuring cost on the and we also have growth absorbing a headcount to up.
The moment, so there's less filled restructuring cost on for those reasons and.
You're right that we have invested or spent quite a low amount. So far this year that would be somewhere in Q4, and we aim now for about 1% both of the on that says that this isotope them.
And that's you will remember this is also our long term ambition that we talked about a year ago in the at the capital markets day about 1% both have not fats and we're looking out for that already now in 29 to.
Okay.
Thank you very much.
Operating railton foot locker craft test, we're getting closer to driver. So please.
Did less.
I missed in particular.
Thank you. The last question comes from the line offer to actually tell a tons cutback. Please go ahead. Sir your line is like I Frederick Hi, Thank you for taking my last question. Much has been also but my body. If you could just clarify your earlier comment on how we should view a the potential in Q4 and ons on on the sequential growth.
With expectations on and walk so you have seen the late this year. It's your sequential growth normal based sort of what we should should base. It on so on the second one is if you have talked about sort of mix shifts throughout the year here you know in North America product and service mix shift and then also your graphic a mix shift if you could sort of up.
Based on on on those cold months, if they still stand or if they have all or more muted right now and then the old if they are pushed so just clarifying about thank you.
Well, let me say is that the normal seasonality is about 18% Q3. The Q4 over the last two years report see a bit less seasonality this year.
And that's because of the uncertainty Oh this.
I don't I know what would be announced merger in North America without going into customer names.
Oh, sorry, we see that to leave mid spend to beat them. They admit that seasonality. So so we should see but we expect to see less seasonality that's basically what we've guided.
I think the mix question is of course, an important.
But but I also want to say, we see you know given the their work we've done on cost efficiency.
And and adjusting our cost structure and we leverage here both.
Of course product costs, a hardware cost, but the old so.
Hey, I and automation to limit to gain efficiencies in service delivery, we see less exposure to the mix.
Then we have in the past.
Because we were I think overall, our business, it's a bit tight turned a bit leaner.
Having said that you know there the guidance we've said this pretty much steel there.
As you said.
Okay. Thank you okay. Thank you so before handing over to but at least closing remote system to remind you of the investor update we have at three o'clock CENTRIA T in time.
We can spend more I said in beginning more and strategic long term topics.
By that I would like to hand over to closing them up to you buy a piece.
So thanks, everyone for listening in a real are very excited about the opportunities we see in front of us for our technology and we see the market for fiveg being much bigger than we've seen for Fourg and we see five GE as we and create new applications both for consumers.
But most importantly for enterprise, we see a much larger market potential for five did than we've seen for poor d. and we are determined to capture dot the growth potential first by investing in R&D for technology and cost leadership, but also to make sure we have a strong footprint in the market.
As we expand into Fiveg.
And we the third quarter results you know, we continue to see progress on executing on our focused strategy to be a stronger company five to 10 years out so with that thank you and thanks for listening in.
Thank you.
This now concludes our conference call. Thank you all for attending you may now disconnect your lines.
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