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Ericsson (NASDAQ:ERIC)

Q1 2013 Earnings Call

April 24, 2013 8:00 am ET

Executives

Helena Norrman - Head of Group Function Communications and Senior Vice President

Hans Vestberg - Chief Executive Officer, President and Director

Johan Wibergh - Head of Business Unit Networks and Executive Vice President

Magnus Mandersson - Head of Global Services Business Unit and Executive Vice President

Per Borgklint - Head of Business Unit Support Solutions and Senior Vice President

Jan Frykhammar - Chief Financial Officer, Executive Vice President and Head of Group Function Finance

Analysts

Timothy Long - BMO Capital Markets U.S.

Andrew M. Gardiner - Barclays Capital, Research Division

Simon F. Schafer - Goldman Sachs Group Inc., Research Division

Kai Korschelt - Deutsche Bank AG, Research Division

Matthew Hoffman - Cowen and Company, LLC, Research Division

Sandeep S. Deshpande - JP Morgan Chase & Co, Research Division

Francois Meunier - Morgan Stanley, Research Division

James E. Faucette - Pacific Crest Securities, Inc., Research Division

Richard Kramer - Arete Research Services LLP

Operator

Welcome to the Ericsson's analyst and media conference call for their first quarter report. To view a visual aid for this call, please log on to www.ericsson.com/press or www.ericsson.com/investors. [Operator Instructions] As a reminder, replay will be available 1 hour after today's conference. Helena Norrman will now open the call.

Helena Norrman

Hello, all, and welcome to this conference call for the presentation of Ericsson's first quarter results 2013. I'm here today together with our CEO, Hans Vestberg; CFO, Jan Frykhammar; and the 3 heads of our business segment, Magnus Mandersson for Global Services; Johan Wibergh for Networks; and Per Borgklint for Support Solutions. In a second, they will be making a presentation and then open for Q&A.

But before that, I would like to make the usual reminder, that we, during the call today, will be making forward-looking statements. These statements are based on our current expectations and certain planning assumptions, which are subject to risks and uncertainties. The actual results may differ materially due to factors mentioned in today's press release discussed in this conference call. I also encourage you to read about these risks and uncertainties in our earnings report as well as in our Annual Report. And with that, Hans, why don't you start by taking us through the -- this report?

Hans Vestberg

Thank you, Lena. I will be fairly brief. Some of you probably listened to the press conference, but I will go over the highlights. Just try to summarize the key developments in the quarter, and this has been a quarter with a lot of events. Some, the Mobile World Congress took place in this quarter. The Consumer Electronics Show, as well, and many of us here in the executive team has been touring the world and meeting customers. And a couple of things, what you can highlight is, of course, we see a continuation of, also the focus on how this industry we're developing in our current network society. More and more of the operators are subscribing that mobility and broadband will have a big impact on our society, and not only in the Telecom sector and such for other industries. And I think that is, of course, long-term. Something very fundamental and very important for a company like Ericsson, which are #1 in this field.

If you then look of course when it comes to the data consumption, that is continuing. And our dialogues with our customers it's very much of data and the majority of the data will be video. And of course, that drives the demand for superior performance on the data networks, the mobile networks, everything from the radio access to the Packet Core to the routers and combining that. But it also puts some requirements on new OSS/BSS, and we are engaged in more discussions in that area than before. And I think that our portfolio there is proving to be very relevant.

A couple of other things that were important, especially in Barcelona, a lot of talk about SDN, Software Defined Networks, but also cloud discussions and machine-to-machine as operators are embarking for other industries. I think, we're good solutions in all 3, we are all evolving well in them, we for example in Barcelona our continuation of our cloud strategy, which we think is really good. Based on our current technology, we had already planned this for a couple of years ago with our component-based architecture. So I think this is, for us, important, but we're all there and we're evolving this with our customers.

By that, I can just conclude, after this quarter, as I said so many times before, that the fundamentals for a long-term positive development industry remains.

Let's then dig down in the financial figures. Quick loan sales, 2% growth. This was a quarter with quite a lot of headwind, especially from U.S. dollars and the Japanese yen. That means that we actually have the organic FX adjusted growth of 7%. So that's the second quarter in a row that we are now have growth. I will come back to the regions and we will hear from the segments where they are, but we can see quite a lot of markets having growth at this stage.

High activities when it comes to project. Very much in Europe and in North America, but also in other places. But there is accentuated. You're going to hear Magnus Mandersson talking about network rollout, that or having record high volumes as we are now rolling out a lot of technology all around the world. And I will come back on more of East Asia.

On the profitability, here, of course, there are some things that we are adjusting when we try to explain that we had a gradually improvement in profitability. Again, remember Q1 last year, SEK 7.7 billion in capital gain from our sale of shares to Sony. Sony, from our 50% in Sony Ericsson, that, we sort of believe, is a one-off. So we take that away and compare to where we are today, we have, of course, had a gradual improvement on our profitability year-on-year. Then we had in this quarter, also another one-off that we even press released as we promised, and that was the SEK 1.4 billion in the restructuring in Sweden. But all in all, if we exclude that, we had 6.7% operating margin off their JVs in this quarter, which is clearly a gradual improvement or maybe more than so in the quarter.

And I will then leave it over to Johan Wibergh to talk about Networks.

Johan Wibergh

Thank you, Hans. So then, if we turn to net growth then. Overall, you can say that we are really tracking on our plan as we communicated at the Investor Day in November, and so that feels pretty good. The organic FX adjusted numbers were up 7% year-over-year and then that's driven by mobile broadband in many places, and particularly we have highlighted in the U.S. and Indonesia. As expected, and we had the continued decline of CDMA, down 42% year-over-year, which then meant that we only had SEK 1.3 billion in sales for that in Q1.

If you look on operating income, we are, as I said, we are tracking our plan when it comes to cost reductions, and we have done significant restructuring during Q1, and also then in Sweden in end of March. And which means then that we are on track on the cost savings and we achieved then an operating income of SEK 1.6 billion, which is the same as we had in Q1 2012, but then this quarter, it includes the restructuring cost of SEK 1.3 billion. And that's supported then by both the business mix we have and underlying operating expenses, and we see that the effect of the European organization projects are coming down.

If you then move to the next slide, we're very happy about the momentum that we're seeing with our SSR routing platform. And I've been talking about that now for a few quarters. I mean, I'm very happy to report then that we have 12 new customers that have chosen us now in Q1. 51 totally, and it's many of the leading operators in the world, and it feel's extremely good, and it's used both in fixed and mobile applications. And it's still a limited amount of manual that's coming into our P&L. I think this is a good potential for us going forward, and we are releasing -- a big new software release in Q2 that makes us even more competitive on the fix side for IP EDGE and what's called BNG applications. So I think that's a good opportunity for the future.

LTE is strong. LTE rollout's happening in many places. It's driving uptake of HSPA. And all the mobile broadband is really driven by app coverage. If you remember, those of you who that attended the Investor Day back in November, we talked about app coverage. The need to really bill out more capacity, to have coverage for applications. And for instance, that's what we're also seeing in North America and there's a lot of uptake on volumes and to provide all the coverage for video applications, a lot of buildouts. Which will also highlight then that we have taken -- this is not only driving investments in radio, but also for instance, we have now secured our 100 Evolved Packet Core contract. Evolved Packet Core is when you have 1 core that handles 2G, 3G and 4G.

Also very encouraging is that we see a higher adoption rate for software releases and optional software features. This is due to the high pace of innovation and development in our industry, and there's so much new functionality that are coming out in the software releases. Which means then the customers have a big interest in taking more software releases. And so this -- that's also very encouraging.

On our portfolio then, I feel -- I feel really good about our strong portfolio. And we focus very much on superior performance. And every year, we do a perception measurement with our customers about how they perceive us on technology leadership. And we ended last year, we're having a record high perception and gap widening to competitors on perception on technology leadership. That feels very good. We will continue to focus on operation performance and driving improved profitability, what we can do on the cost side, what we can do on our own pricing, and our modules and continue to take security on the plan as communicated back in November.

And with that, thank you for that. And over to Mr. Magnus Mandersson.

Magnus Mandersson

Thank you very much, Johan. Well, then I will first focus on the positive things that's happening in the service business. We had a quarter where we actually grow quite a lot. Adjusted for currency, 9%, and we had basically 3% growth on Professional Services, very steady. The profitability on 13%, the operating income.

We took 21 new contracts in Managed Services. This should be compared with 9 contracts a year back. We are doing very, very well in both India, as well as Sub-Sahara on this. We're also breaking in the Managed in Russia for first time, and building up capabilities there, which we continue to build on our global success.

You can say then that we have had the very high activity on Network Rollout, up 19% in sales. And here, we can say the activities that's taking place is, of course, in North America, where you can see the sales we have on the Networks, and consequently, how much we're doing there. An enormous need of mobile broadband in almost all customers, and of course, a lot of different activities that has driven a bit on our profitability. You can also say that in the European modernization has ever been as high activity in all the countries where we are present in, and we have even increased the rollout production. So that has hammered our result. We came in on 16% in losses there. I think this is a record-high quarter when it comes to losses and I want to see that this will continue in that pace. However, we have a couple of quarters still left in our modernization in Europe and -- but I think we can see the process masters and tools that we're applying is biting in, and I think we will have this business under control going forward.

You should also remember that we had a very good quarter with the consulting assistance integration. Here, the portfolio around the BSS/OSS is also taking off. We took 8 new contracts in this segment, both on systems integration, as well as transformational business, as well as operations around managed IT -- managed IT stack. But I will say that, all in all, it was a lot of activities, and we see the future is still -- is good and stable on Professional Services and we have a little bit left to do on Network Rollout.

Per Borgklint

Thanks Magnus. Hi, everyone. So Support Solutions. We were declining our revenue by some 3% year-over-year. Over the year, we have continued to focus our portfolio towards our strategic direction, which means OSS/BSS, media and M-commerce, which has hampered our growth. And we also, as you probably have seen, divested IPX during 2012, which means that we are dropping quite significantly in revenue year-over-year. And over quarter 1 last year, we had a very, very strong media sales, driven both by the Olympic games, but also some IPTV deals that came through. During the quarter, now we have also signed the intention to acquire Microsoft's Mediaroom business, and we're intending to close that during the coming quarters, and that will strengthen our capabilities in this area significantly. Operating margin ended at 1%, including then a one-off restructuring charge of SEK 0.1 billion which means that we had an underlying positive operating margin. And we see a continued strengthen in the operating income over the year. And our intention is to continue to focus and strengthen our portfolio towards the areas of strategic choice we made. And we see a very good momentum in BSS, as well as media, as well as OSS and M-commerce in the market right now.

Hans Vestberg

Thank you, Per. Down to the regional updates. I will highlight a couple. We had 8 of the 10 regions growing. If you FX adjust it, you can cluster them a little bit. North America, of course, continuing, as I said in the beginning. It was mentioned by the heads of our business units as well, that continued very well. We had a growth of 23%. We have high activity in the region. We have several projects, of course, ongoing, and one of the larger coverage projects that is ongoing has probably peaked in this quarter. But the most important process to follow are the consumer demand, and the change of tariffs is happening in the market because that will finally drive the investment. And for us, of course, North America is a very important region where we have a very good position.

Then you can say that Southeast Asia and India grew well. 22% in Southeast Asia, Indonesia, important country. India, as well, grew. And then what else we can say is that if we look into Europe, we were growing in Europe well -- as well and that was a second quarter in a row that we're growing in Europe. Very much so that we're all having high activity on European modernization, but we're also doing a lot of service business here, and we are also are working with sort of non-traditional customers like energies companies that has signed the deal with us just recently, with E.ON, for example. So that's those regions.

And then we have the region Northeast Asia, that is down 34%. 3 important countries there. Different reasons why they are declining in sales. Japan, the main reason for the decline in sales year-over-year is the currency. If you then take South Korea, here, it's more that we had a strong quarter -- first quarter last year. More projects than we have today. We are not lost in the market share, something like that. It a little bit lower pace in South Korea at the moment. And then China, basically same comment that we have had for several quarters. We have a structural decline in 2G with one of the customers that is impacting our sales. And we are in sort of a technical trial situation 4G, not decided for either -- for licenses and when it will happen. But -- so that's what's impacting. Latin America is more time delay as the LTE has not been sort of being deployed yet, very much because of the spectrum need to be cleaned and that has not happened. So that's why we have had a little bit slower activity in Latin America.

On the other segment which we usually comment, a very normal and stable development on IPRs in the quarter.

Good. I hand it over to you, Jan Frykhammar.

Jan Frykhammar

Okay. Thank you, Hans. So some highlights. I will keep it brief because I know you want to get into Q&A. So then, just some more highlights on the P&L to begin with. We had a gross margin in the quarter of 32%, that's down somewhat compared to a year ago. We had 33.3% a year ago. Main reasons being the lower Network Rollout margin that we already have commented several times upon. We also had somewhat high restructuring charges compared to a year ago. And then we also had the positive impact of the trend around the European modernization projects offsetting somewhat.

Then on -- we also repeat these 2 very important statement that we made in January around the business mix. We think that the underlying business mix will gradually shift towards more capacity projects during the second half of 2013. And then also, we basically say that the network modernization trend that we have been commenting upon now for I think 2 years, we are on track with earlier communication there as well. But the statement is on the slide, just to make sure that we understand the same thing.

If you then go to the next slide, restructuring charges, SEK 1.8 billion. The majority of that is related to the ongoing reductions in Sweden, but also, we have the global transition transformation program in Global Services. That is also continuing, although somewhat lower pace this quarter than what we typically have. But all in all, SEK 1.8 billion in restructuring charges in the quarter.

Operating expense, then if we adjust for the restructuring charges, but also for comparable unit, is down 6%. And we think we are on track for the programs that we discussed at the Investor Day in November.

We have some negative impact from currency on the P&L as well. And then overall, we had an operating income then, including joint ventures of SEK 2.1 billion.

The underlying operating margin has been commented by Hans already. It's an improvement. But we have to compare apples to apples here. We also make a statement here around hedge accounting. We will then terminate hedge accounting for forecasted transactions, and that will be a gradual impact during the year. The effect will then change from you have, all the time, seen this impact, but you've seen it under other comprehensive income. From now on, you will see the impact on other operating income. But it must be a gradual change during the year. We would also host a phone meeting on the second of May, brief you more about these changes.

And then we had a financial net of minus SEK 400 million, majority here is the normal items, but we also have an impact of the valuation in Venezuela.

On ST-Ericsson, a big, big activity, obviously, in the quarter regarding ST-Ericsson. We made the announcement on March 18. We hosted a briefing for all of you on that. Here on this slide, we have to repeat the same messages. We are on track with this, we have basically the business now divided into 3 different buckets. One being the business that is going to be transferred to Ericsson, meaning the multimode thin modem business. We have the business that will be transferred to ST, and then we have the business that is being restructured. So we are on track, the net liability that we have is SEK 2.8 billion, so we have used some of the restructuring provision that we highlighted for all of you in a month ago. But it's, overall, good progress in the breakup of the JV.

If we take the balance sheet then, typical increase of DSO days in the first quarter. Perhaps, slightly more -- few days more, nothing dramatic. It's due to high business and project activity. We also had an inventory increase of about SEK 1 billion, that's also related to business and project activity. The decline of payables is more related to the big volumes in Q4. Overall, I think on the balance sheet, KPI, there's nothing dramatic here to report really.

If we take the change in gross cash, minus SEK 4.6 billion in the quarter, mainly driven by operating cash flow, then being negative of minus 3, slightly on the weak side. It has to do with the working capital build up here in the quarter. Again, we would like you to assess us in yard shows on full-year performance of operating cash flow, and we have also the very important more than 70% cash conversion target for full year. There is also an accounting change impacting net cash, and that's highlighted in the report. It has to do with special payroll taxes for defined benefit plans in Sweden, that has been reclassified, and therefore, impacts net cash.

So with that, I hand over to Hans.

Hans Vestberg

Thank you, Johan. I will just say that we are continued focus, of course, other strategy execution by doing and moving toward profitable growth. We will also, of course, continue with our cost and efficiency work, and as Johan mentioned, our capital focus. But we also are very focused on keeping our technology leadership and service leadership because that's enabled for us to really continue to be #1 in this industry, and continue to execute on that.

So by that, Helena?

Helena Norrman

Thank you, all. With that, operator, it's time to open up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We now have the first question from Tim Long from BMO Capital Markets.

Timothy Long - BMO Capital Markets U.S.

Just, if I could, on the Services business. It look like the percentage of Network Rollout did come down a little bit from the last few quarters, but we did see kind of the operating margin come in a bit lower. Anything else there? It seemed like normal seasonal revenue decline. Anything else in the profitability? And just remind us when kind of the timing on when those Network Rollouts go down or margins start to go back up for the Network Rollout piece.

Johan Wibergh

Okay. Tim, it's Johan here, I'll take that, that question. So when we look at the impact of the network modernization projects in Europe, the impact in the P&L is shown both under the Network segment as well as Network Rollout. In this quarter, obviously, we had the positive impact on Networks and a somewhat more challenging, negative impact on Network Rollout. That's the fundamental reason. It has nothing to do with the quality and project execution. It's more the commercials that we have discussed before. We are on track there with regards to the time plan that we have given before. So it will be a gradual reduction here due to the network modernization projects. In addition to that, we also had some idling resources awaiting LTE rollouts predominantly in Latin America, that impacted the quarter. That's obviously a timing thing. Will deployment start again in Q2, this will go away, or we will have to look at resizing of the organization. And so, underlying, the most important thing is the network modernization projects, and then we have some more short-term issues related to LTE deployment in Latin America.

Operator

Andrew Gardiner from Barclays is online with a question.

Andrew M. Gardiner - Barclays Capital, Research Division

I was just wondering about the sort of various comments you've made about sort of seeing very high levels of activity. I think we can see that in the numbers quite nearly in North America, but you've also highlighted Europe given the network modernization. But just adding together some of the countries or sort of the way you segment the countries in Europe now, in Northern Europe, Western and Central Europe and Mediterranean, I'm only getting about 6% year-on-year revenue growth, which given that sort of high level of activity, doesn't seem like the strongest of growth. I'm just wondering how you see things sort of longer-term as we come through network modernization and the networks are there and built and we're just adding capacity. I mean, is this as good as it gets in Europe at the moment, or what else is there that could continue to drive some growth here?

Hans Vestberg

Everything is relative, of course. And I think that we actually have had 2 quarters of growth in Europe. And if you look in our Slide 31 in our report, you can see that EU is growing with some 3% in this quarter, if you cluster the EU countries. And then, of course on, top of that, we have an impact on the currency. So I would say that given where everybody talks about Europe and it’s -- the local macroeconomic challenges, I think our sales team in Europe has done a great job. They are in the midst of modernization. They are coming in with a service portfolio that is -- that is probably today more than 50% in the region. And they're also doing business with maybe not-so-traditional customer class, energy companies, et cetera. I think it shows innovation and a lot of drive. As I said also on the press conference, if we were asking about macroeconomics, I'm basically saying that we have not seen any change, we are not seeing any deterioration. It's basically same as we saw in the third quarter, in the fourth quarter, coming into this quarter. So we can all have different expectations, but I think that we are seeing 2 consecutive quarters and I think that the team in Europe for Ericsson has done a great job where we see some of our competitors are declining quite dramatically.

Andrew M. Gardiner - Barclays Capital, Research Division

Yes, I would agree with that. I mean, I suppose my question is more looking further forward. If this is such a very high level of activity at the moment, as you quoted in saying in a number of areas, can that -- is that sustainable?

Hans Vestberg

I think that -- remember now, the European modernization is in high-volume but on a lower value. One need to remember that. That's why we also -- we have invested in Europe. And as I said from the beginning, that would cost us because that's when the biggest competitive situation is taking place because we are redefining all the market shares. So the activity is high, but the values are low. And of course, over time, if we perform well and seeing that the quality is up in the Networks, which is our trademark, and as Johan has talked about, we have a great opportunity to see that we can increase that with capacity over time, we can sell services like optimization, tuning, et cetera, as well as helping them with efficiency like Managed Services. I'm going into IP, so basically used the whole portfolio on that installed base. And I think that Jan Frykhammar talked quite a lot about that on Investor Day, how our business model is done and I don't think that has changed for -- since then, nor the last 5 years. So my direct answer is, of course, if we do it well, and the sentiment in Europe is there or improved, of course, we should be able to actually capture that growth in Europe going forward. But right now, we are focused on executing on this modernization. As I said, they will gradually decline during the year of 2013.

Operator

Simon Schafer from Goldman Sachs is online with a question.

Simon F. Schafer - Goldman Sachs Group Inc., Research Division

Great. I just want to follow-up on the Latin America issue in rollout services. Just wondering whether you could maybe quantify how much of that impact was so just so I get a sense as to if that's really gearing up into the next quarter, how the run rate is looking in that segment. That will be helpful.

Hans Vestberg

Yes, 2 comments. One, this is not something that is -- are normal or something like that. I mean, the service organization are constantly working. We -- the managed organization worldwide is over 60,000 employees and services. So of course, sometimes, you're idling, et cetera. So we are adjusting our resource base all the time. That is something that's normal. Why we disclosed this was that it was a significant amount. If not, we would've never brought it up. But this is a daily work we have and we will adjust it accordingly. If we don't see business coming in, we adjust it. And that's a subset of suppliers that we are -- have engaged, that is supplying to us and our own employees, and that we work with all the time. So we are not quantifying the number, but again, we wouldn't have brought it up if we didn't think it was important. On the other hand, this is normal business in services, to work with this type of inefficiency that we sometimes find in a service business.

Simon F. Schafer - Goldman Sachs Group Inc., Research Division

Got it. And my follow-up question would just be on the cash flow. I understand that Q1, number one, is very seasonal, and obviously you had a strong unit quarter in Q4. But as we look out into the remainder of the year, when should we look for you to recuperate some of that incremental cash outflow in the first quarter to make your cash conversion goal for the full year? Do we have to wait for a very back-end loaded fourth quarter to see that happen, or is there anything else to it?

Jan Frykhammar

Thank you for that question. No, I think that we obviously -- typically, we -- I mean, our ambition is, of course, to have a more evenly distributed operating cash flow through the year. That's clear. But I think that -- I think for sure, when you think about the fact that we had a strong Q4, Q1 suffers a bit from that. I still think that we have a good opportunity to reach our full year ambitions. We will obviously work hard on recover this as soon as possible, rest assured.

Operator

Kai Korschelt from Deutsche Bank is online with a question.

Kai Korschelt - Deutsche Bank AG, Research Division

I just had one on the expectation of improving mix. I seem to remember that your exportation centers mostly on the sort of carrier spending behavior in Europe. But I'm also wondering, with regards to the U.S., obviously some of the LTE coverage rollouts are probably nearing an end for some of the larger carriers and the networks are filling up quite quickly. So I'm just wondering then, when, or if you would expect that positive mix shift in the U.S. also to start benefiting you? Because my understanding is currently, it’s still pretty much all in coverage space?

Hans Vestberg

Thank you. I think that we have not said anything about the different carriers spendings going forward there. What we have said that we have had a phase right now of a lot of coverage project, deploying a lot of technology all around the world. And with the current visibility from our customers that we're working closely with, and with the current visibility on macroeconomics, we believe that we will see a gradual shift in the second quarter that we will have a little bit less of coverage projects and a little bit more on capacity. So that is more how we see the market, being close to the market, rather than them saying it's a CapEx sheet for any regions, that we have not indicated. The thing that we have talked about when it comes to infrastructure and CapEx is what we did at the Investor Day, where we talked about our outlook for network equipment, for services and OSS/BSS, for the timeframe of '12 to '15, and they talked about CAGRs in the different areas. So it's more that we have always different phases of coverage and capacity, and that's why with the current visibility, we believe it's going to be a gradual shift in the second half.

Kai Korschelt - Deutsche Bank AG, Research Division

Okay. And then maybe a follow-up. Just on TD-LTE in China, obviously, you're currently suffering from the 2G declines there, probably not benefiting from the LTE deployments yet. Any sense for when that may start to benefit your revenue lines?

Hans Vestberg

No, I don't have that. There's technical evaluation right now that we have no knowledge that we can communicate to the market when the license will come out, nor when we expect it will be released on that. So we are working closely with the customers, the customers in China on trials -- technology trials on TD-LTE at the moment. But when that will be converted to commercial contracts and volumes, that, we cannot predict at this moment.

Operator

Matthew Hoffman from Cowen is online with a question.

Matthew Hoffman - Cowen and Company, LLC, Research Division

Another question on the gross margins, you've seen a couple of quarters now where the gross margins have added up. But can we yet connect the dots with SSR, with the gross margin trends? And can you maybe give us some color on the overall mobile core mix on the Networks side?

Hans Vestberg

I think that -- I kind of thought, and Johan will pitch in, I think that Johan said that so far, even though we're having a great success on SSR, we cannot really translate that to any significant business volume in the sense of the network segment which is very big. But maybe, you can get a little bit more color to the Packet Core and all of that, Johan.

Johan Wibergh

Sure. Thank you. So I mean, we have 2 pieces of -- types of equipment in core. We have circuit switch core and you have Packet Core, for data then. Circuit switch core has been declining since, I think, probably 2008 was one of the best years when there were Olympics in Beijing. And since then, that has been declining significantly. That has had a significant impact on our profitability and top line. And that is -- that was expected. I mean there's only so many voice calls you can make at one point in time in the world. And we will see them and we are starting to see them shift to the next generation of the packet switch core, that's called a VoLTE. It would be used for doing voice over LTE networks. That will start having some of the positive income in 2014, with probably 2015 being a more important year for that. And as you said, and at the same time then, we have a Packet Core which has been a strong area for Ericsson. We have around 40% worldwide market share on that. And in that area, we have introduced SSR. And SSR itself has had a very limited impact on our P&L so far. We have been extremely successful in getting contracts, but there is a significant time from contract signature until we have the products into the network, and you get the corresponding capacity growth. So far, it's a very limited impact. You should see gradually somewhat of an impact. But of course, Packet Core amount is still small compared to the overall rate of the business, but it will start helping in coming quarters.

Matthew Hoffman - Cowen and Company, LLC, Research Division

Great. Good. And I'd like to follow-up on the TD-LTE question you took a minute ago. You answered, Hans, about the overall market opportunities for TD-LTE and some uncertainty there. But can you step-up to a higher level and just discuss your competitiveness on TD-LTE? Do you expect that if the opportunity does show up, that it's a place where you can win?

Johan Wibergh

So let me that question also then, it's Johan here. So I mean, first of all, we feel extremely competitive on the whole LTE space. It doesn't really matter if it's FDD or TDD. And it's important to understand that a significant portion of our products are the same, whether it's FDD or TDD. I call this technique constructive is that you have a big piece of the software, and hardware is the same, and then just a piece in the radio that is different. So technically, we feel extremely competitive, and I mean, we are the only vendor in the world that have a converged FDD and TDD network launched in commercial operations. If you then look on TD-LTE, for me, it's not really a technical question. Our technical trials in China going extremely good. For me, everything is just the matter about commercial attractiveness on the deals and how you make good money out of this, good business out of this, and nothing else really. And we have yet to see then the big deployments to come up in TD-LTE. And we have built our products. So what we see then is that you have a base station where you have support many frequencies, and these frequencies can then either be FDD or TDD. They will support load-balancing, they will support carrier aggregation. And you will see that in many countries then coming up, that the operators will combine different spectrum to provide a really good and competitive solution. And so, we have taken this into consideration when we constructed the products and we feel really, really good about this. And for me I'm not really concerned about whether we get the small or big market share in China. That doesn't really will affect our competitiveness on what we do on TD-LTE. For me, it's only a business decision about this, what can we get and what type of deal we can get out of China.

Operator

Sandeep Deshpande from JPMorgan is online with a question.

Sandeep S. Deshpande - JP Morgan Chase & Co, Research Division

My question is regarding, overall, I mean you talked about TD-LTE and I mean that you think that you're competitive in TD-LTE. Can you talk to -- I mean, how you see -- I mean, are your share evolving in China, because I mean, clearly in China, GSM has been fairly weak. And do you see having a significant share within the -- I mean, within TD-LTE in China, or is that still being negotiated with the customers? And I have one small follow-up.

Hans Vestberg

On the China, I think, first of all, on the first statement, yes, we see, of course, that our share in China came down in 2012 because of that spending 2G came down and the TD and CDMA business, we are not involved in. So structurally that meant that we came down in China on market share. On TD-LTE, there has not been defined any market shares yet on the larger volumes. And as you once heard, we will be there where they are doing the trials. We think we're a very competitive portfolio, and we will be there to see that we can maintain our market share. But let's see how it turns out, both with commercials and so, and the technical evaluation and it's too early to talk about the end of them right now.

Sandeep S. Deshpande - JP Morgan Chase & Co, Research Division

Okay. Jan, maybe one question for you. Year-on-year, when you look at your network margin, it has -- if you exclude the restructuring in Q1, the margin has improved. Could you comment on where the delta is? I mean, is this mainly the roll off of some level of a European modernization? Or is it mix? Or is it something else which has caused that approximately 350 basis point a move in the network margin?

Jan Frykhammar

Okay. Sandeep. The part of it has to do with the execution of the modernization projects in Europe. Part of it has to do with an overall improved margin on the radio, and that has to do both with more -- both with the commercial management or price management, as well as focus on the cost side, which Johan mentioned. So it's a little bit of everything. It's been so that the Networks business, as Johan said as well, is very radio-centric right now, and the new core, if I may so, is still an opportunity ahead of us.

Operator

Francois Meunier from Morgan Stanley is online with a question.

Francois Meunier - Morgan Stanley, Research Division

It's about Professional Services. Actually, there's been quite a bit of a slowdown in year-on-year growth, especially this quarter. But it sounds like you've got a good pipeline of deals coming through. So when do you expect growth to pick up then? And do you expect [indiscernible] to benefit from Alcatel-Lucent kind of withdrawing a bit from this market?

Hans Vestberg

[indiscernible] I think that first of all, we outlined at the Investor Day that we believe that services will have a growth per year, between the year of '12 to '15 between 5% to 7%. And, of course, our goal is always to be better than markets. But let's see what the market becomes, but that's what we had. This quarter, we're growing a little bit less than Professional Services, but growing too much from one quarter to another, I think, is not relevant. And as Magnus explained as well, we had a very good activity level on Managed Services in the quarter. If you looked at the earnings report, we took 21 deals, and last year, we had 9 deals in the first quarter, so of course, that is fueling of course some of our understanding how the Professional Service markets will go forward. But again, we have a good positioning and finally, it's going to be defined by our customer buying services in these times. But I think we have a competitive portfolio that is very relevant right now.

Francois Meunier - Morgan Stanley, Research Division

Okay. Hans. Actually a good follow-on question about the competitive landscape and how do you see it evolving at the moment? In particular, we've seen software companies like Oracle buying Acme Packet off the [indiscernible]. Do you see those guys becoming more aggressive in your field?

Hans Vestberg

I think it's a very good question. I mean, if I look over a little bit of a timeframe here, maybe 5 years or something like that, it's clear that the traditional equipment vendors, they are sort of narrowing down their portfolios. So we meet them very much, of course, in the traditional areas, like Networks. There, we'll meet them. On the other hand, Magnus' area and Par's area when it comes to services, here we meet, how to say? There are different type of competitors. Although we would meet the Accentures of the world, the HPs and IBMs of the world, we will meet in this field. And as you rightfully said, then when you come into the OSS/BSS, media and, here we would meet traditional software companies type, Oracle, Amdocs, et cetera. So of course, as we are evolving as a company, we are meeting different type of competition, that's why it so important for us to execute on our strategy because we don't believe that anyone has the same assets as we have, so they address the same pieces we have. If you go back 10 years ago, you can basically set Ericsson together with the 5 competitors, and we would have exactly the same portfolio. That is not happening anymore. So that's why I'm talking so much about what we need to execute and what assets we have because there's different competitors right now in different areas.

Operator

James Faucette from Pacific Crest is online with a question.

James E. Faucette - Pacific Crest Securities, Inc., Research Division

I wanted to ask about underlying traffic growth. Clearly, as you look to transition from network coverage to capacity, traffic growth will be an important driver for your business. We've seen some statistics from the CTIA in the U.S. indicating that cellular traffic growth is slowing or growing at a slower rate here in the U.S. And similarly, Cisco, a few months ago, put out some forecast that showed that they had reduced their growth forecast a little bit. So just wondering what you're seeing in terms of traffic growth from your perspective, and how we should think about the longevity of continued capacity additions?

Jan Frykhammar

Yes, when it comes to traffic growth, we published our Ericsson Mobility Report October last year, which we had -- we kept, basically, our outlook for data growth with some 12x up to 2018. I think that at this point, coming very close to that. They we're very far away from that before, so that's an interesting remark. And secondly, we don't comment on quarters, how it goes. But again, we are following because it's an important indicator of -- and of course when you come up on higher absolute value, the percentage will go down how much you're growing. That's for sure. So again, what we look at, the penetration on smartphones, the penetration of new data tariffs, how operators well doing changes from voice tariffs to data tariffs, how successful on that. That is driving, finally, how it will be investment in smart mobile broadband networks, as well as OSS/BSS and the request for services that they're attached to.

Helena Norrman

We have time for one more question please.

Operator

Richard Kramer from Arete Research is online with a question.

Richard Kramer - Arete Research Services LLP

I just like to go back to a couple of things, sort of phrases you mentioned in the call. First, maybe for Magnus, Hans used the word sort of normal daily work in describing Network Rollouts and the capacity there. But we've now had 9 quarters in a row of losses in Network Rollout. And I guess the question is, is there something that needs to change in the way you're managing that business? Or has this just become a sort of cost of winning contracts and taking them on and taking the transformations on? And then a question for Jan. Johan unmentioned gradual impact of the SSR and higher adoption of software, and Hans just mentioned some of the shifts in modernization that should be gradual, but Jan, are you still expecting gross margins to fall over the course of the year? Or will some of this adoption of software and the SSR and lower modernization allow gross margins to rise over the course of the year?

Magnus Mandersson

Okay. Let me first answer your question. So in 2009, we introduced our RBS 6000 multi-standard radio and where you basically put everything in 1 box. Consequently, you have a full modernization on electronics, you have full modernization on powers, you have full modernization on antennas, you have full modernization on everything that's on site, on cables, and et cetera. We have, over the past 9 quarters, as you pointed out, changed out old 2G and 3G equipment, done a lot of cables, reinforced foundations to steel-in towers, put new equipment in place. And then of course, not enjoyed yet, fully, the capacity model where we put in general elements into the radios. That will happen. I look very, very promising on this as we're visiting the sites, and we're getting good reports, what we are doing on the European modernization. So I think structurally, it will last for a while more. But will it be better? Absolutely.

Jan Frykhammar

So Richard, on the gross margin then, there are 3 main factors impacting the gross margin. The first one being the share of the services business as of a total picture. Second thing is the business mix, whether it's coverage or capacity or a normal mix. And then it's the European modernization. If I come down, you have to come back to the fact that in the first quarter, we still have a lot of coverage project, and it's very radio and Network Rollout-centric and as you can see in the numbers. Then let's see how the gross margin evolves throughout the year. A very important indicator is, of course, to look at the business mix and the gradual shift towards more capacity projects, but also please don’t forget the share of services in that mix. So it's for your own assessment, Richard.

Helena Norrman

Okay, with that, we have come to the end of this conference call. So I want to say thank you, all, for joining, and talk to you next time.

Operator

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

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