Earnings Call: Q1 2019

Apr 17, 2019

Welcome to Ericsson's Analyst and Media Conference Call for their First Quarter Reports. To view visual aids for this call, please log on to www.erickson.com/pressorwww. Erixson.com/investors. As a reminder, a replay will be available 1 hour after today's conference. Peter Nyquist will now open the call. Good morning, everyone, and welcome to this Q1 of 2019, the first call for this year in this year. With me today, I have our CEO, Borje Ekholm and our CFO, Karl Melander. So some words first. During the call today, we will be making forward looking statements, risks and uncertainties. The actual result may differ materially due to the fact that we mentioned in today's press release and discussed in this conference call. We encourage you all to read about these risks and uncertainties in our earnings report as well as in our annual report. By those words, I would like to hand over the word to our CEO, Barry Ekholm. So please, Barry? Thanks, Peter, and welcome, everyone, to our report for the Q1. During 2017, we defined our focused strategy aimed at turning around the company, and we can now add another quarter to the record of putting us on track to achieve our goals for 2020 beyond based on a strategy of focusing on the service provider built on technology leadership. But let me now hit on a couple of highlights for the Q1. So with the Q1, we logged the 3rd consecutive quarter with growth. Organic sales growth was 7 percent year over year, driven by a strong showing in North America, where operators are starting to roll out commercial 5 gs service. We had some positive onetime events during the Q1, which and they were actually the recovery of written off overdue receivables as well as gains from divestiture of media assets totaling SEK 1,600,000,000 But if we adjust for those, the underlying operating margin was 7.2% excluding restructuring costs. Our strategy has been built on technology leadership, and we have increased our investments in R and D substantially over the last 2 years. Our focus has been to work with lead customers in lead markets to define the best solutions and to lead with the best solutions in field. And we are now seeing that we're launching 5 gs networks around the world, and we are participating in all those networks. We have a very strong product offering in the RAN but also the core. And of course, as we participate in the early launches with lead customers, we are building a lot of real life experience from running 5 gs traffic. And I would say here spec sheets and roadmaps don't really matter. We are focusing on delivering in field performance and the best network experience. We clearly see the U. S. And South Korea to have launched a bit early in the 5 gs service. But what I think is interesting is that 5 gs or Switzerland today made 5 gs spectrum available. And Swisscom could immediately switch on 5 gs today based on a commercial license, commercial network and commercial handsets to launch a mobile broadband service on 5 gs. So we see here that spectrum availability is key. And when it is available, technology is there to capture the market. During the quarter, we also announced that we will acquire the filter and antenna business, Okatrain, which will allow us to build a strong competence in Ericsson in 5 gs, which we think will be critical as we move into 5 gs. But in addition, it will allow us also to better integrate antennas in our site solutions to lower the cost for the operator. We expect this transaction to close in Q3. We also closed on the divestiture of Media Kind in the end of January. We had some significant costs for that transaction that was booked during Q1, which impacted segment, emerging business and other negatively. We also as you know, we've been under investigation by the SEC and DOJ since 2013 2015, respectively, with our compliance to the Foreign Corrupt Practices Act. And we have already said that we have found certain facts that show that we have internal breaches of our code of business ethics as well as internal control. These are all information that we have passed on to the authorities. This is, of course, a very serious matter. Unfortunately, it is also an ongoing matter, so we can't comment really any more than that. But what we can say is that we have now and very recently begun settlement discussions. These discussions are still at a very early stage, and we can't estimate how long it will take, and we can't estimate what the settlement will be. But what we can say is that we today, we don't see we can rule out basically that there will be no consequences. And that's what we're trying to say today. What we continue to do is, of course, we continue to invest in building up our compliance internal compliance programs and ethics programs. And our dedication to completing that remains fully enforced. So our strategy basically remains in place. We continue to invest for technology leadership and leverage this portfolio in the market with the lead customers in lead markets. If we then go quickly to some highlights on numbers. Organic growth, as I already said, was 7% and reported 13%. We continued to expand gross margins. In Networks, we saw continued expanding gross margins and also operating income, basically from gross margin going to 43 0.2% and operating income to 16.4%. The Q1 was helped by IPR deals signed, hardware capacity. But in addition, we had, I would say, limited impact from strategic contracts. The turnaround of digital services continued. I would say mix is normal for the quarter, but the Q1 in 2018 had an unusually high software portion. So that's why gross margin fell. However, operating losses contracted basically on the back of reduced cost levels. And with the efforts we are doing and the measures we're taking, we are on track to low single digit margins in 2020. But what I think is more important is actually with the new portfolio we have, we feel that we have very good momentum in the market with a fairly large number of wins during the quarter. So we feel increasingly confident about the recovery plan we put in place. Managed services continued to improve, and operating margin was now above 8%, 8.6% adjusted for the recovery of the receivable. Emerging business improved primarily thanks to Iconnective. And Iconnective is now, with investments made, now becoming a very attractive and profitable business. Cash flow was has been a target area for us. And excluding M and A, it was SEK 4,100,000,000 during the quarter. And I would also note here that we continue to reduce the sale of receivables. If we then look at market areas, we see the big growth engine was, of course, North America. And here, I think it is important to look at this from a more total point of view. The first one is that the reality is data traffic is still doubling every 18 months. So what's happening here in North America is that the service providers are rolling out 4 gs, but they are also building 5 gs capacity to cope with that demand. So from a commercial point of view, North America and the U. S. Is a lead market for 5 gs. And that's what we see is helping us to drive the large increase. The other market area where we have early demand or early 5 gs launches is Northeast Asia. So it's not a surprise that you see also that market area contributing to growth. And you know already that 5 gs service is launched in South Korea as well. And we are seeing a number of countries doing 5 gs trials, including China and Japan. So we see a large share of that technology shift that's ongoing now is happening in North America, Northeast Asia. The other regions contracted a bit. If we start with Europe and Latin America, as a matter of fact, the decline is due to these strategic contracts or the exits we did on contracts and businesses during 2017 2018 that are now providing a headwind. So if we exclude that, we see actually that they have been able to come back to growth as well, which is thanks to the wins we have from a number of contracts that we have published. But what we also see is Europe is slower in adopting 5 gs. We see that to be largely due to the spectrum uncertainty and its uncertainty of availability as well as cost where the regulator are basically trying to maximize the revenues from spectrum auctions instead of considering the macroeconomic benefits from building out a telecom network. We're also seeing a what I would label it, a less attractive investment climate with a large number of operators. I mean, in Europe, we have more than 200 operators. Think of China. You think 3 operators, India, 3 operators, North America going from 4 to 3. So here, I think Europe suffers a bit from basically kind of the whole macroeconomic situation. The decline in Southeast Asia, Oceania and India is really due to more of a timing due to some large contracts we had ended in the Q1 of last year. Middle East, Africa, we see very good momentum on 5 gs in Middle East, but our sales are down driven by the sanctions in one country. With that, I'm going to give the word over to our CFO, Karl. Thank you, Borje. Then we will look at the segments, and I will start with Networks, where sales grew by 10%, adjusted for FX then. And this is fueled by 4 gs and 5 gs investments in North America, not least, but also growth in Northeast Asia, as Roy mentioned, with South Korea as an example having launched 5 gs as well. Gross margin improved 43.2%, now supported by hardware capacity and higher IPR revenue. And this is, of course, following new licensing deals that we have communicated in the quarter as well. Operating margin now at 16.4%, within the 2020 target range on Q and A. We should also mention that now the transition to the Ericsson radio system that we have talked about in each quarterly report is now completed. And other than that, I think Borje mentioned the fact that we are planning the integration of the antenna filter business from Kathrein. I will come back to planning assumptions a little bit later, but already now I can say that the RAN equipment market estimate projected by Del Oro is now 3%, which is up from 2% earlier. And we concur with this estimate as well for the market development. Let's continue with Digital Services, where FX adjusted sales were stable in the quarter. And while we saw a decline in DSS, for example, here, there was growth in CloudCore and OSS, and this is fueled by 5 gs, of course, and virtualization demands among our customers. Our new portfolio, which has to do then, which is 5 gs Red and Cloud Native, had momentum in the quarter, and we see growth now 6% in that new portfolio on a rolling 12 months basis. So that's encouraging in itself. Underlying gross margin was stable sequentially, declined though against a very tough comparable in Q1 2018. So the operating income loss here was SEK 1,600,000,000. It's an improvement, still a large loss, obviously, but supported by sizable cost reductions, both in service delivery as well as in OpEx. And the BSS strategy that we talked about last quarterly report as well is progressing on track. And overall, to summarize, I would say, with the turnaround action that we are taking in digital services, we target, of course, to materially reduce these losses during the year, and we are tracking towards the profit targets of 2020. In Managed Services, sales down 5%, FX adjusted, but this is a result then of our contract exits that we have talked about. So this is according to plan. We see a significantly improved gross margin, thanks to those contract exits but also other efficiencies in managed services. And then as a consequence, operating income improved now to EUR 1,300,000,000 although this includes then the one off that Torje mentioned, the reversal of an impairment for trade receivables following our payment. So excluding that, then operating income amounted to SEK 500,000,000 or 8.6%. From a strategy execution point of view, we launched Ericsson Operations Engine during the Mobile World Congress in Barcelona, and that's really the next paving the way, you could say, for the next generation managed services as well. Emerging Business and Other, we break this down just like last quarter into 3 parts. First one being emerging business and iConnective where the iConnective business drives growth here and up as you see here 67% in this part of the business. We also launched Industry Connect, Ericsson Industry Connect at Hannover Messe a couple of weeks ago with which was well received. The second part, Media Solutions then, you all know we divested the 51% capital gain, SEK 700,000,000, which is included in the result here, but also some losses from the remaining part of that business then in January. And that's also included in the result, of course. Red Media, finally, also helped by a smaller divestment. And overall, as you see then, Segment, Emerging Business and Other delivered a breakeven result. But then again, please note the one offs here, which are this time positive in the form of capital gains from divestments. So excluding those, we are at SEK 0.8000000000 loss in operating income. If we look at the longer term gross margin trend, we can see now that well, during 2016 2017, we were hovering around 29%, 30% for 6 quarters in a row. Then come 1 Q1 2018, we made this jump up to 36%, 37%, so 600, 700 basis points up. Now we continued on that journey in the Q1 2019 up to 38.5%. And we have mentioned the key reasons already, I think, but just to point to some of the elements here. One, hardware capacity sales were high, higher IPR revenues, improvement in managed services from the contract exits and other efficiencies and then the fact that we have lower impact from strategic deals this quarter. We had the larger impact in Q4. And as we say in the planning assumptions, the impact of such strategic deals will happen over the coming quarters, and that will weigh on the margins in the networks especially. Operating expenses, not so dramatic this time. We continue to show OpEx in these three parts here, starting from the left with R and D, where we continue to increase the investment in networks. This will flatten out over time. We also see reductions in digital services as well as emerging business and partly offsetting this increase in R and D. Our SG and A was flat despite FX headwind. And then finally, to the right, thanks to recovering certain overdue customer payments, we could reverse earlier impairment of receivables there. And you see that the net effect of that was SEK 0.6 1,000,000,000 in the quarter, which can be compared with a slightly negative than in Q1 2018. Cash flow. Burry mentioned it already, SEK 4,100,000,000 free cash flow excluding M and A. So a strong improvement from Q1 in 2018. And also just to comment then on the resilience of our company, net cash increase here, dollars 500,000,000 or so to $36,100,000,000 and gross cash to EUR 71,700,000,000 no major change in the debt maturity profile this time. And maybe a detail, but still I want to mention it that since 1st January, we have implemented IFRS 16, which is the accounting standard around leasing, and that has some effects in the P and L and cash flow statements between lines. When it comes to free cash flow, that is impacted positively by SEK 600,000,000 from IFRS 16 accounting. And finally, the planning assumptions. And please refer to the report where you can see the full wording on planning assumptions. RAN equipment market, I already mentioned, up from 2% to 3% for the full year 2019. And then we talk about some aspects here, which are factors to be aware of. When it comes to sales then, we see less than normal seasonality in this year. And it has to do with North America, where we are running on a high level already from Q4 into Q1, and we expect seasonality to be less there, a rather flat profile over the year. And that given the proportion of North American business, that will influence the whole group. IPR upgraded to SEK 9,000,000,000 on an annual basis as a baseline following recent contracts. And when it comes to gross margin then, please be aware of what we say in the planning assumptions here, including limited or the impact of strategic contracts, which will start to impact gross margin from Q2 and onwards. Secondly, the fact that 5 gs deployments will start, and we expect them to start towards the end of the year, of course, have a bigger impact in 2020. And the third important point is that when we look at the mix in North America, the share of services will increase, and that also has a negative potential gross margin impact. I think you will read the next bullets here as well. But maybe just to say final two comments, we will we stick to the previous guidance on restructuring, SEK 3,000,000,000 to SEK 5,000,000,000. And when it comes to tax rates, it was high in the quarter at 44%. And this is a result of what we forecast for the full year in terms of profit and geographical distribution of those profits. And it is so that with the relatively lower profits that we see still, the percentage of tax will be higher. As you know, if we look historically between 2011 2015, the tax rates in average were around 30% to 32%. As we generate more profit, of course, we should start to move in that direction again on tax. But right now, the percentage is rather high given the profit distribution. With that, I hand back to you, Borje. Thanks, Karl. So before jumping into Q and A, let me end with a couple of remarks. So we see the technology shift to 5 gs is increasingly gaining momentum, and the RAN market is returning to growth. And we see this as basically it's inevitable given that the consumption of data continues to grow at a very high pace and networks increasingly becoming loaded around the world. We remain committed to our to continue to execute on our strategy to invest in R and D for technology leadership. Today, commercial 5 gs is launched in the U. S. And South Korea, and we're in those networks. And our focus is simply to lead by working and to lead in the technology by working with the customers that launch first. So for us, it's all about the infield performance in the networks with full interoperability and full mobility. So we are continuing to pursue market opportunities to strengthen our position where we can build upon our leading portfolio across Rand and Core. We will, of course, continue to drive efficiencies that we have done over the last 2 years, But we're also going to invest for disciplined growth. And our objective is to build a stronger Ericsson 5 years out. We are today increasingly confident about reaching our financial targets for 2020 of at least 10% operating margin ex restructuring and 2022 of at least 12% operating margin. So with that, I think we can go into Q and A. Thank you, Borje. So operator, we are now ready for the Q and A session. So please, you can open As always, please limit yourselves to 1 question at a time and keep your questions at a broad level. Detailed information is provided in the reports and Ericsson's Investor Relations and Media Relations teams will be happy to take additional questions and discuss further details with you after the call. Our first question comes from the line of Alexandre Petriuk of Societe Generale. Please go ahead. Your line is open. Yes, good morning. Good morning. Good morning to all. Thanks for the question. I'd just like to start with the patent revenue, which is really high in the Q1. And if I annualize the €2,500,000,000 in the quarter, I get to €10,000,000,000 and not €9,000,000,000 So I presume there is some one off in what you are printing here. So could you tell us what is the underlying quarterly run rate? Is it more like €2,200,000,000 That's what I summarized from what is left for the year to get to €9,000,000,000 And so on that basis, would you maybe like to comment also on how currency is influencing this? What is the part of your patent increase so increased guidance for patent revenue, for IPR revenue That is due to the weaker Swedish krona. And if the krona strengthens, will we see a reverse impact here? And then just secondly, on your elements of guidance on gross margins, I think you see quite a lot of negatives there. You have a decent print here, but there are quite a lot of flags for the remainder of the year of lower seasonality and then gross margin pressure in various areas. So how much of that is incremental versus what we had already known? Are you trying to instill extra caution for the quarters going forward on gross margins here? I can take the latter part and Karl can go into the details on IPR. What we're trying to say is our we're trying to manage our overall P and L, and we've done that in 2018, and 18. We'll continue to do that in 2019. But what we are saying is that we and this is no secret. We've said this before that we are taking contracts which can have a challenge profitability initially, but that are long term attractive. So we see that those are going to come and impacting earnings more in the rest of the year than during the Q1. But at the same time, we're not saying that we're falling off a cliff, call it that. We're rather saying that we have a very solid business. Most of the time, we actually absorb those like we did in Q4 of 2018. But it is a strategic imperative for us to strengthen our market position based on the technology leading portfolio, and we're going to continue to do that. Then if we answer on the IPR and licensing. Yes, absolutely. So yes, we say that the current contract portfolio annualized run rate is SEK 9,000,000,000 And as you say then, of course, the Q1 revenue was higher at 2.5 percent. Q1 includes revenue from new agreements, which we have published or announced earlier, and also other certain revenue which is specific to Q1. And we should see that I mean revenue from licensing can vary between the quarters for many reasons, up and down a little bit. But 9% should be seen as the number when you look at an annualized based on the current portfolio, the annualized revenue number there. And the currency Felix, you're happy with that? Yes. Just on the currency, does that have an impact? Yes. I mean, as in all the business, we are I mean, around 50% of our total revenue, as you know, is in U. S. Dollar. Of course, currency has an impact, and a large portion of the IPR business is dollar dominated as well. So yes. Okay. Thanks. Okay. Thanks, Alex. We will continue to the next question. So operator, please. Thank you. Our next question comes from the line of Achal Sultania of Credit Suisse. Please go ahead. Your line is open. Good morning, Achal. Hi. Good morning, Peter. Hi. Good morning, everyone. Just trying to understand, like obviously, we've seen the benefits from the U. S. 4 gs upgrades and 5 gs ramp. It's benefited significantly both top line and margins. Just trying to understand what is going to be the business profile when we see this 5 gs ramping up in Japan and Korea? Obviously, you flagged China as a headwind by the end of the year. But can you talk about what is happening in Japan and Korea? Specifically, is the business similar to what you are doing in the U. S. In terms of 4 gs upgrades or 5 gs build outs? Or could the profile be a bit different? Thank you. First, I think it's important to remember, we get a lot of focus on the margin in North America, and I would caution against that. We have a global business. We have many markets with very similar margin profiles. So it's nothing is unique in North America. What we see though is a very strong demand to build out the network and build out capacity in the network. We believe we are going to similar developments in other markets that go through the technology shift. So that is going to happen. The other thing which is important to remember, we are saying that in North America, we will see an increasing shift towards service revenues. That is, by itself, going to impact margins though. So it's really what as we move towards the year, we are going to see some pressure in the business as we move into a more service heavy mix. But besides that, it's an important market. If we look at Northeast Asia then, as I said, I don't foresee that they will dramatically look different in the demand profile. We'll start also by building out capacity and building out the networks. And we see, of course, that to be important for us to participate in. That's why we also continue to invest very heavily in R and D. We it's going to flatten out at these levels, but it was important to position us to actually capture this market opportunity by investing heavily in R and D. And now we feel that we have a very strong position. Okay. Thank you. Thank you, Charles. So operator, next question please. Thank you. The next question comes from Daniel Ljorbay of Handelsbanken. First, just want to ask the question to Barry. I think you just said that it's going to flatten at these levels on the R and D OpEx. Or is it flatten over time? Just to understand what we should think of the R and D, if it's going to continue to increase slightly and then come down or it will flatten at the current level? No. The philosophy or strategy we have on R and D, it's I want to just come back to this because that's really what's guiding the way we operate, is that I don't believe an R and D organization will be efficient if the levels fluctuate too much. I think we've had a little bit of too much fluctuation in the past going up and down, And that impacts the productivity and the output. So what we are trying to do is to we made a significant increase in level. We did that to make sure that we have a competitive product portfolio as we enter a technology shift of 5 gs. And what I'm trying to say now is you shouldn't see that increase or continue with more level out at these levels. But you should not expect it to start fluctuating up and down. That I would caution against because we are going to be much more stable in our R and D cost going forward. Perfect. And if I just may ask you on what you think about the pricing discipline in the radio access network market right now globally? If you see it, decent stability, have some positive impact from the ERS historically or if you see tough pricing conditions? No. I would say this is a competitive market, and it continues to be that. And so it's really not a major change. So I wouldn't change any of those assumptions. Perfect. Thank you. And good luck to you, too. Thanks, Daniel. Operator, we will continue with the next question, please. Thank you. And that question is from Andrew Gardiner of Barclays. Please go ahead. Your line is open. Good morning, Andrew. Good morning, Peter. Good morning, Paul, and Karl. Just A question again around sort of the comments on strategic contracts and gross margin and how you're planning for this. It feels to me like from when you started talking about it last year, then into the Q4, then again at Mobile World Congress and now this morning that there's perhaps it feels like there's likely a greater impact from these strategic contracts. Do you feel that you've been winning more than you anticipated as we look towards these 5 gs contracts? Or is competition a bit greater than you thought and therefore the potential impact in the near term is greater? I'm just trying to understand sort of the magnitude of what you're seeing here and whether we should be thinking of it as basis points of impact on gross margin as we look through the year or rather, perhaps, 4 percentage points? I know I'm trying it's I understand your difficulty, let's put it that way. But what we are trying to say is really that they may come certain quarters and it could impact an individual quarter more than the over time, we should absorb these type of things in the regular business, right? And that's what we have tried to do so far. And we took some substantial costs in Q4, which actually did impact negatively, but we try to manage it within the regular business. We're going to continue to do that, but there can be fluctuations between quarters. That's more the point I want you to get. So because I don't want to run the company based on quarterly earnings. We want to run the company based on building a very strong business 5 years out, and then we can have individual quarters fluctuating a bit. But I don't want you to worry about that. I want you to keep the eye on the longer term plan. Understood. I mean perhaps to rephrase then, I mean the how is the competitive environment now that we're in the thick of the 5 gs contract process across multiple regions and many operators? How are you finding that? Is it better or worse than anticipated? This is a competitive industry. We have some super strong competitors. But I would also say we are very comfortable and very well positioned with our product portfolio and solutions. And we see that of the networks launched early, we are there. So our strategy of providing solutions to customers with our leading product portfolio is critical for our future success. So yes, it's competitive, it's not a change in the competitive environment from that we see over the last few quarters. It continues. But if we continue to execute on our strategy, we feel also very comfortable. You happy with that? Thank you, Peter. Yes. We could then continue with the next question, please. Thank you. The next question comes from the line of Johanna Arkhus of SEB. Please go ahead. Your line is open. Good morning, Johanna. Good morning, all. So two questions, if I may. The first one relates to your comments on the DOJ investigation. I'm just wondering why don't you make a provision as of now? And second question relates to provisions. I think you're reading sort of the provision details. It seems like you take in like SEK 1,600,000,000 in the quarter. Should we still expect SEK 9,000,000,000 for the full year? Thank you. If we start with the provision for SEC DoJ, we have no basis for calculating a number. So I don't know even how to put the number. So that's simply the reason why we can't book a provision. If you look at the I guess the technical term is it cannot be reliably estimated and then you cannot really do the bookkeeping either. I think we can't book an approximate number in the books. Okay. Okay. Johanna, your second question was on provisions and cash out, correct? Yes, exactly. And how much you used of the provisions you're taking? I guess, majority of those relates to the BSS contracts. I'm just wondering sort of how it looks in the quarter and going forward in 2019. Yes. So as you know, end of 2018, we had SEK 16,000,000,000 of provisions. And during this quarter, SEK 3,000,000,000 was cash out and another $7,000,000,000 then remains to be paid out in 2019. Perfect. Thank you. Thank you. Thanks, Jara. Operator, we're ready for the next question. Thank you. That comes from the line of David Mulholland of UBS. Please go ahead. Your line is open. Hi. Good morning, guys. Sorry to sound a little bit like a broken record, but if I can come back on the gross margin point and just look at it a different way. But coming back to the point you made, Borjeon, on not managing the business by quarter, obviously, it was created a bit of a channel last year in the sort of 36%, 37% run rate for gross margins last year. You've just jumped out of that a bit this quarter to 39%, but equally calling out some kind of temporary effects there. If you looked at this over a kind of 12 month run rate basis, are we still in a trajectory of things heading upwards because you're obviously not very close or basically at the 2020 target? Or kind of how do you think about the progress you've made and where you are on a kind of I think when we run the company, we have to run the company out of providing solutions for the customers that help them develop their business, improve their revenues and improve their cost performance. That's really the focus of our core business. That's really where we are dedicating the amounts on R and D. Then we, of course, try to make sure that we capture a portion of that value. So if we can provide that service at a lower cost, we make a profit, right? And predicting exactly that profitability level is going to be a little bit hard. But what I can say is that we're very we have a very good product portfolio with the lead customers. And we can see that having a good traction. And thanks to the investments we made in R and D, we can produce them at a relatively low cost. Then exactly what the long term margin will be, let's come back to that in a few years' time because that's not going to be our parameter that we control the business on. I know that's not the answer you wanted. But the reality is when we put out the targets for 2020, we put them out more to give you an indication of where the business ought to be in the plans. But longer term, we think this is we sit in a very attractive market. We have an attractive product offering, and we have a very, very good competitive position, and we feel good about that. So what the long term margin should be, I think I should refrain from commenting on that right now. That's fair. And then just one quick follow-up. In terms of the kind of regional outlook for you, I wonder if you can comment on what visibility you have today because you're obviously calling out some more muted seasonality given the high level that North America is at. What visibility do you have? Is it the next quarter? Is it the next year in terms of how long that can sustain? And what visibility do you have on kind of other regions really ramping and how quickly? Well, it is a little bit hard to foresee. When you saw the build out of 4 gs, it took several years, right? And that may be a more natural benchmark to have in mind. Then the absolute pace will depend much more on how new use cases develop and how new applications develop. So I would say the Del Oro has a market forecast this year of a rand market growth of 3%. That's a reasonable estimate. But the reality is it could well deviate from that depending on how the local markets develop. And what we see in North America may be an indication of how we could look in other parts of the world when they start rolling out 5 gs. Okay, David. Thank you. And then we'll continue to the next question, please. Thank you. Our next question comes from the line of Gennady Menon of Liberum. Please go ahead. Your line is open. Hi, good morning. Thanks for taking the question. Can you just elaborate a little bit more on the increasing proportion of services sales in North America? Is that something that will start from Q2 itself? And what exactly are the drivers of that? You might have said this before, but if you could just refresh my memory, that would be great. No, it's the rollout services that are going to increase. And we're going to see that gradually expand the portion during the rest of the year. But wouldn't rollout services also imply that you will have more hardware sales at the same time because of the because it would automatically imply that you're also rolling out base stations at the same time? But actually, there is a little bit of a different mix. So they start with the equipment and then come to rollout services. So that's why it looks that way. Got it. And when you're talking about a flattish seasonality in the U. S. Through the rest of the year. Is there still an element of lack of deployment capacity which is impacting that? Or is it just the fact that it's at a high level and this is pretty much a level at which operators want to take in capacity? It's a lack of deployment capacity. Okay. So if you were to be able to compensate that through training, etcetera, we could see some upside to those expectations as we saw, say, in Q4 last year? We're one of the few companies investing in new capacity in the market. And it's a we'll have to this includes climbing at very high heights. So we need to be very careful on how we train people. We need to make sure they're safe and secure in the work environment. The it's not easy to ramp this substantially. So that's what we're cautioning against being thinking this is a quickly solved problem. Got it. And just one last question. Sorry to go back to gross margins. But you outlined a few headwinds to gross margins, which includes American Services, possible IPR, the strategic contracts. Would there be any tailwind that you can point out, which could potentially lift or support your gross margins over the next 12 months or so, such as, say, cost reduction in digital services or something like that? Yes. The reality is, our very competitive product portfolio, and that is a has provided a key tailwind for now I think we're into 6, 7 quarters, right? So that's really where we get a lot of margin lift. And you have seen what happens to our gross margin over the last 1.5 years. That helps a lot. And I would still say that the that's what we're longer term driving the business towards. Thanks, Janardan. Thank you. We'll continue with the next question. Thank you. The next question comes from the line of Friedrich Klotzel of Deutsche Bank. Please go ahead. Your line is open. Thank you. Two questions, if I may. First one, if you could put some color on the Kathrein acquisition, where you feel when you now have looked into the assets, organization. Descriptive of how you will sort of work with that going forward when you take it over. The second question is, Barry, on your long term thinking here around the business. Traditionally, we've seen when you have a new generation of wireless, you have a first phase, which is the rollout and then you have a second phase, which sort of is a capacity and they usually have different gross margin profiles, if you like. Do you think that will sort of also be the case going forward? Or is it so that the fact you have a lot of already installed 4 gs base stations that are upgradable will make this look different in the 5 gs era coming years? So just on a more discussion topic here. If we look at Kathrein, it hasn't closed yet, closed in Q3. So it's we're it's still antitrust and regulatory approval process ongoing. So we can't comment too much. But what is important is actually the Catrain has launched some new passive antennas during the 1st part of the year with good traction with customers, and that's really what we wanted to acquire and integrate that into our overall site solutions to provide a better cost structure for the operator. So that's the way we want it. And we see there is no change in that assumption. We can come back and talk much more about Kathrein once it has closed, and I think that would be appropriate to do and update everyone what the strategic value that we see of Kathrein in the Ericsson portfolio. If you look longer term, I would say we're going to see increasing in the 5 gs world, we'll see increasing software revenues. And that's really going to longer term change the margin profile. And we're going to see that in that I mean hardware will be continue to be important for the foreseeable future, but it will be a less part of the value add in the network. So I do think we're going to see a more attractive longer term margin profile, but that has to be seen and play out a bit. Thank you, Frederic. Thank you. Then you're ready for the last question, operator. Thank you. And our last question comes from the line of Stefan Slowinski of Exane BNP Paribas. Please go ahead. Your line is open. Thanks, Irv. Good morning. Good morning. Just a question on the guidance there, if you will, in terms of sales and seasonality. You say typically Q1 to typical seasonality. Is that true for Q2 or is that typical seasonality. Is that true for Q2? Or is that more sort of the back half of the year when the comps get more difficult that we might not see the typical seasonality in the U. S. Markets? We see that the less seasonality, let's call it that, in North America will continue for the remaining quarters of this year, and that's what we believe. And the reasons is really what Burj talked about, that we're running at a high capacity already from Q1 to Q1, but and that will continue. And is that just U. S. Markets? Sorry? Is that just for the North American markets that you expect to see less the commodity? Yes. That comment is for the U. S. Market. That's true. But of course, I mean, given the proportion of U. S. Business in our total portfolio, that has an impact. So we see overall for the group that, that impacts also seasonality for the totality. So seasonality will be less pronounced, you could say, going forward. Okay. And just a follow-up question on digital services. Clearly, some improvements, but still a long way to go there. Can you give any more color in terms of how happy you are in terms of the development there? Obviously, you've exited a big contract at the beginning of the year. You took a provision for that. Do you expect to see any more of those types of large contract exits and provisions? And are you happy that you're on track with the 75% of the 45 contracts to be addressed by year end? Thank you. Yes. We're happy with the wrong word, but we're making the progress that we expected. We're not happy with we're losing money. That's what we're trying to fix. So we feel that we're on track to do that, and we're following the plans that we put in place. We don't see any need for anything major like the one we had last year going forward. That was a key component in addressing our BSS strategy. Now we've done that. We execute on that. Of our new product portfolio, the cloud native and virtualized solutions basically starting to gain traction. And we're seeing a very positive reception in the market. So we are increasingly comfortable about the development we have versus where we expect it to be at this point in time. It's not going to be a we said it would take time to turn it around, and we will see a gradual improvement during the year and our target to be low single digits next year, still in place. And that we feel very comfortable about achieving. Okay. Great. And one last one, if I can, which is just on the restructuring charges. You're still guiding for $3,000,000,000 to $5,000,000,000 for the full year. I think you've only done $200,000,000 or $300,000,000 in 1st quarter. So are you just being cautious in terms of that restructuring guidance for the full year? Or is there more restructuring plan that's expected come through over the course of the year that will get you within that range? Yes, exactly. We keep the 3% to 5%, and that's correct. Q1 was very low. I think partly we're early in the year and so on and more things will happen and could include I mean, for example, the VSS restructuring that we announced earlier, that's one part of restructuring costs to charges going forward. There could be things in facilities and other parts of the business as well. So we stick to the 3% to 5% for now. But we should also say, Karl, I think it's fair that longer term, we don't want to have that excluded from the operating performance. We think longer term the restructuring costs are part of normal business and will include it. We haven't done it for now because it is it's still a lumpiness and it comes and goes a bit. So think of that as over time being a less important number. Absolutely, I agree. And as we said at the Capital Markets Day, business going forward. Okay, Stefan. Thank you very much. Thank you very much. So before closing the call, we have another call at 1 You're welcome to listen in to that as well. But before closing the call, maybe, Bory, you have some closing words. Yes. Maybe I'll just summarize. A couple of things that we're looking into the Easter season, Easter part of the year. We have a what we feel is a competitive portfolio of 5 gs ready solutions now. Our equipment are today carrying commercial 5 gs traffic, which basically confirms our strategy to invest lead customers in lead markets. And our ambition is always to deliver the best in feed performance for our customers and not the best spec sheets. We believe this longer term will create the best and strongest company and the best returns to all our shareholders. So with that, thanks, everyone. Thank you, and goodbye. That concludes the conference. Thank you all very much for attending. You may now disconnect your