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Earnings Call Transcript 2019-Q1

[Operator]

Welcome to Ericsson's Analyst and Media Conference Call for their first quarter report. To view visual aids for this call, please log on to www.ericsson.com/press or www.ericsson.com/investors. [Operator Instructions] As a reminder, a replay will be available 1 hour after today's conference.Peter Nyquist will now open the call.

[Peter Nyquist, VP & Head of Investor Relations]

Good morning, everyone, and welcome to this first quarter of 2019, the first call for this year -- in this year. With me today I have our CEO Börje Ekholm; and our CFO, Carl Mellander.So some words first. During the call today, we will be making forward-looking statements, and these statements are based on our current expectations and certain planning assumptions, which are subject to risks and uncertainties. The actual result may differ materially due to factor 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, Börje Ekholm. So please, Börje.

[Börje E. Ekholm, President, CEO & Director]

Thanks, Peter, and welcome, everyone, to our report for the first quarter.During 2017 we defined our focus 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 and beyond based on the strategy of focusing on the service provider built on technology leadership. But let me now hit on a couple of highlights for the first quarter.So with the first quarter, we logged the third consecutive quarter with growth. Organic sales growth was 7% year-over-year, driven by a strong showing in North America where operators are starting to roll out commercial 5G service. We had some positive onetime events during the first quarter which -- and they were actually the recovery of written-off forward receivables as well as gains from divestiture of media assets totaling SEK 1.6 billion. 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&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 5G 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 5G 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 to be early in the 5G service. But what I think is interesting is that 5G -- or Switzerland today made 5G spectrum available. And Swisscom could immediately switch on 5G today, based on a commercial license, commercial network and commercial handsets to launch a mobile broadband service on 5G. 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 of Kathrein, which will allow us to build a strong confidence in Ericsson in 5G, which we think will be critical as we move into 5G. 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 MediaKind 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 and 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 the 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't ] 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 in force.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 continue to expand gross margins. In Networks, we saw a continued expanding gross margins and also operating income, basically from gross margin going to 43.2% and operating income to 16.4%. The first quarter was held by IPR deals signed, hardware capacity. But in addition, we had, I would say, a limited impact from strategic contracts.The turnaround of Digital Services continued, I would say mix is normal for the quarter, but the first quarter in 2018 had an unusually high software portion, so that's why gross margin fell. However, operating loss is 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 see 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 iconectiv. And iconectiv is now, with the investments made, now becoming a very attractive and profitable business.Cash flow was a healthy new target area for us. And excluding M&A, it was SEK 4.1 billion 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 data traffic is still doubling every 18 months. So what's happening here in North America is that the service providers are rolling out 4G, but they are also building 5G capacity to cope with that demand. So from a commercial point of view, North America and the U.S. is a lead market for 5G. 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 5G 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 5G services launched in South Korea as well. And we are seeing a number of countries doing 5G 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 the strategic contracts -- or the exits we did on contracts and businesses during 2017 and '18 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 5G. 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 options 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 old macroeconomic situation.The decline in Southeast Asia and Oceania and India is really due to more of a timing due to the some large contracts we had ended in the first quarter of last year. Middle East and Africa, we see very good momentum on 5G 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, Carl.

[Carl Mellander]

Thank you, Börje. 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 4G and 5G investments in North America, not least. But also growth in Northeast Asia, as Börje mentioned, with South Korea as an example having launched 5G as well.And the 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, one can add. We can 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 Börje 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 Dell'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 BSS, for example, here, there was growth in Cloud Core and OSS. And this is fueled by 5G, of course, and virtualization demand among our customers. Our new portfolio, which has to do with that, which is [fiber] adding cloud native, had momentum in the quarter. And we see growth now 6% in that new portfolio on a rolling 12-month 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 1.6 billion, it's an improvement. Still a large loss, obviously, but supported then by sizable cost reductions, both in service delivery as well as in OpEx.And the BSS strategy that we've 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 that 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 significant 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 SEK 1.3 billion, although this includes then the one-off that Börje mentioned, the reversal of an impairment for trade receivables following now with payment. So excluding that then, operating income amounted to SEK 0.5 billion 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 iconectiv where the iconectiv business drives growth here. And up, as you see, 67% in this part of the business. We also launched Industry Connect, Ericsson Industry Connect at Hanover Messa a couple of weeks ago with -- which was well received.The second part, Media Solutions then. You all know we divested a 51% capital gain, SEK 0.7 billion, which is included in the result here, but also some losses from the remaining part of that business and in January. And that's also included in the result, of course.Red Bee Media, finally, also helped by smaller divestments. 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 0.8 billion loss in operating income.If we look at the longer-term gross margin trend, we can see now that, well, during 2016 and '17, we were hovering around 29%, 30% for 6 quarters in a row. Then came -- come one -- first quarter 2018, we made this jump up to 36%, 37%, so 600, 700 basis points up. Now we continued on that journey in the first quarter '19, 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 had lower impact from strategic deals this quarter, we had a 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 the 3 parts here, starting from the left with R&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 partly offsetting this increase in R&D. Our SG&A was flat despite FX headwind. And then, finally, to the right, thanks to recovering certain overdue customer payments, we could reverse an earlier impairment of receivables there. And you see then that the net effect of that was SEK 0.6 billion in the quarter, which can be compared with a slightly negative then in Q1 '18.Cash flow. Börje mentioned it already, SEK 4.1 billion free cash flow excluding M&A, so a strong improvement from Q1 in 2018. And also, just to comment then on the resilience of our company, net cash increased here SEK 0.5 billion or so to SEK 36.1 billion and gross cash to SEK 71.7 billion, no major change in the debt maturity profile this time. And maybe a detail, but still, I want to mention is that since 1st of January, we have implemented IFRS 16, which is the accounting standard around leasing and that has some effects in the P&L and cash flow statements between lines. When it comes to free cash flow, that is impacted positively by SEK 0.6 billion 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, rather flat profile over the year and that -- given that proportion of North America business that will influence the whole group.IPR upgraded to SEK 9 billion on an annual basis, that's the 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 second quarter and onwards.Secondly, the fact that 5G deployments will start, and we expect them to start towards the end of the year, of course had 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 last -- the next bullets here as well, but maybe just to say final 2 comments. We will -- we stick to the previous guidance on restructuring, SEK 3 billion to SEK 5 billion. 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 and '15, the tax rate in average were around 30% to 32%. As we generate more profit, of course, we should start to move in that direction again on the tax. But right now, the percentage is rather high, given the profit distribution.With that, I hand back to you, Börje.

[Börje E. Ekholm, President, CEO & Director]

Thanks, Carl. So before jumping into Q&A, let me end with a couple of remarks.So we see the technology shift to 5G 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&D for technology leadership. Today, commercial 5G 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 launched first.So, for us, it's all about the in-field performance in the network 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 RAN 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&A.

[Peter Nyquist, VP & Head of Investor Relations]

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

[Operator]

[Operator Instructions] Our first question comes from the line of Aleksander Peterc of Societe Generale.

[Aleksander Peterc, Equity Analyst]

I'd just like to start with the patent grabbing, which is really high in the first quarter. If I annualized the SEK 2.5 billion in the quarter, I get to SEK 10 billion and not SEK 9 billion. 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 SEK 2.2 billion? That's what I surmise from what is left for the year to get to SEK 9 billion. 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 if you've done this for better revenue, for IPR revenue, that is due to the weaker Swedish kronor and if the kroner strengthens, will we see a reverse impact here? And then just secondly, on your elements of guidance on gross margin, saying 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 have already known? Are you trying to instill extra caution for the quarters going forward and gross margins here?

[Börje E. Ekholm, President, CEO & Director]

I can take the latter part then -- and Carl can go into the business of IPR. What we're trying to say is our -- we're trying to manage our overall P&L, and we've done that in 2018. We'll continue to do that in 2019. But what we are saying is that we -- this is no secret, we've said this before that we are taking contracts, which can have a challenged profitability initially, but they 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 first quarter. But at the same time, we're not saying that we're falling off a cliff, call it that way. 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 '18. 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?

[Carl Mellander]

Yes absolutely. So, yes, we say that the current contract portfolio annualized run-rate is SEK 9 billion. And as you say then, of course, the Q1 revenue was higher, SEK 2.5 billion. Q1 includes revenue from a new agreement, which we have published or announced earlier. And also, other certain revenue, which is specific to Q1. And we should say that, I mean, revenue from licensing can vary between the quarters for many, 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.

[Aleksander Peterc, Equity Analyst]

And the current year?

[Börje E. Ekholm, President, CEO & Director]

Alex, you're happy with that?

[Aleksander Peterc, Equity Analyst]

Yes. Or just on the currency, does that have an impact on IPR?

[Carl Mellander]

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-denominated as well.

[Operator]

Our next question comes from the line of Achal Sultania of Credit Suisse.

[Achal Sultania, Director]

Just trying to understand. Like, obviously, we've seen the benefits from the U.S. 4G upgrade and 5G 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 5G ramping up in Japan and Korea. Obviously, you've 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 4G upgrades or 5G build-outs or could the profile be a bit different?

[Börje E. Ekholm, President, CEO & Director]

The -- first, I think it's important to remember, 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 see 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. 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&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&D, and now we feel that we have a very strong position.

[Operator]

The next question comes from Daniel Djurberg of Handelsbanken.

[Daniel Djurberg, Research Analyst]

First, just want to ask a question to Börje. I think you just said that it's going to flatten at these levels on the R&D OpEx or is it flattened over time? Just to understand what we should think of the R&D, if it's going to continue to increase slightly and then come down or it will flatten at the current level?

[Börje E. Ekholm, President, CEO & Director]

No, the philosophy or strategy we have on R&D, 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&D organization will be efficient if the level 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 we made significant increase in level, we did that to make sure that we have a competitive product portfolio as we enter technology shift of 5G. And what I'm trying to say now is you shouldn't see that increase to continue, it will level out at that these levels. But you should not expect it to start fluctuating up and down, that I will caution against because we are going to be much more stable in our R&D costs going forward.

[Daniel Djurberg, Research Analyst]

Perfect. And if I just may ask you on what you think about the pricing discipline in the [radio active] network market right now globally. If you see its stability and some positive impact from the ERS [consortium] or if you see a tough pricing condition?

[Börje E. Ekholm, President, CEO & Director]

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.

[Operator]

That question is from Andrew Gardiner.

[Andrew Michael Gardiner, Director]

Just a question again around 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 and into the fourth quarter then again at Mobile World Congress and now this morning that, perhaps, it feels like there's likely a greater impact from these strategic contracts. Do you feel like you've been winning more than you anticipated as we look towards these 5G 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 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?

[Börje E. Ekholm, President, CEO & Director]

I know I tried -- it's -- I understand your difficultly, 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 types 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 tried 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.

[Andrew Michael Gardiner, Director]

Understood. I mean, perhaps to rephrase then. I mean the -- how is the competitive environment now that we're in the thick of the 5G contract process across multiple regions and many operators. How are you finding that, is it better or worse than anticipated?

[Börje E. Ekholm, President, CEO & Director]

We -- this is a competitive industry, we have some super strong competitors, but I would also say we're 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 the lead customers with our leading product portfolio is critical for our future success. So yes, it's competitive, but it's not the 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.

[Operator]

The next question comes from the line of Johanna Ahlqvist of SEB.

[Johanna Ahlqvist, Analyst]

So 2 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 provision. I think your readings for the provision details, it seems like you've taken like SEK 1.6 billion in the quarter, should we still expect SEK 9 billion for the full year?

[Börje E. Ekholm, President, CEO & Director]

If we start with provision for SEC, DOJ, we have no basis for calculating a number. So I don't know even how to put a number, so that's simply the reason why we can't book a provision. If we look at the...

[Carl Mellander]

I guess, the technical term is it cannot be reliably estimated and then you cannot really do the bookkeeping.

[Börje E. Ekholm, President, CEO & Director]

I think we can't book an approximate number in the books.

[Carl Mellander]

Johanna, your second question was on provisions and cash out, correct?

[Johanna Ahlqvist, Analyst]

Yes, exactly. And how much you used of the provision you're taking. I guess the majority of those relate to the BSS contract. I'm just wondering sort of the -- how it looks in the quarter and going forward in 2019.

[Carl Mellander]

Yes. So as you know, end of 2018 we had SEK 16 billion of provisions. And during this quarter, SEK 3 billion was cash out. And another SEK 7 billion then remains to be paid out in 2019.

[Peter Nyquist, VP & Head of Investor Relations]

Operator, we're ready for the next question.

[Operator]

That comes from the line of David Mulholland of UBS.

[David Terence Mulholland, Director and Equity Research Analyst]

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 at a different way. But coming back to the point you made, Börje, on not managing the business by quarter. Obviously, it has created a bit of a channel last year in the sort of 36%, 37% run rate. And 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 look at this over a kind of 12-month run-rate basis, are we still in a trajectory of things heading upwards, because you obviously now are 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 normalized basis, if I can call it that?

[Börje E. Ekholm, President, CEO & Director]

Yes. I think when we run the company, we have to run the company out of providing solution 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&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 are very -- we have a very good product portfolio with the lead customers and we can see that's having a good traction. And thanks to the investments we made in R&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 see it in a very attractive market, we have an attractive product offering and we have a 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.

[David Terence Mulholland, Director and Equity Research Analyst]

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 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?

[Börje E. Ekholm, President, CEO & Director]

It is a little bit hard to foresee. When you saw the build-out of 4G, it took several years, right, and that may be more a 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 Dell'Oro has a market forecast this year of around 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 5G.

[Operator]

Our next question comes from the line of Janardan Menon of Liberum.

[Janardan Nedyam Menon, Technology Analyst]

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 will be great.

[Börje E. Ekholm, President, CEO & Director]

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.

[Janardan Nedyam Menon, Technology Analyst]

But wouldn't rollout services also imply that you will have more hardware sales at the same time because of the -- because it will logically imply that you're also rolling out base stations at the same time?

[Börje E. Ekholm, President, CEO & Director]

But actually, there is a little bit of a different mix. So they start with the equipment and then comes the rollout services, so that's why it looks that way.

[Janardan Nedyam Menon, Technology Analyst]

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?

[Börje E. Ekholm, President, CEO & Director]

It's a lack of deployment capacity.

[Janardan Nedyam Menon, Technology Analyst]

Okay. So if you were to be able to compensate that through training, et cetera, we could see some upside to those expectations as we saw, let's say, in Q4 last year?

[Börje E. Ekholm, President, CEO & Director]

We're one of the few companies investing in new capacity in the market. And it's a -- we'll have to be -- 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 their work environment. The trains -- it's not easy to ramp this substantially, so that's what we're cautioning against being -- thinking this is a quickly solved problem.

[Janardan Nedyam Menon, Technology Analyst]

Got it. And just one last question, sorry to go back to gross margins, but you outlined a few headwinds to gross margins that includes American Services possible IPR 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?

[Börje E. Ekholm, President, CEO & Director]

Yes. The reality is our very competitive product portfolio. And you know that is a -- have 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. You have seen what happened 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.

[Operator]

The next question comes from the line of Fredrik Lithell of Danske Bank.

[Fredrik Lithell, Senior Analyst]

Two questions, if I may. First one, if you could put some color on the Kathrein acquisition where you feel you will now have looked into the assets where they stand in passive antennas and active antennas and how you see the organization. Maybe a little bit more descriptive of how you will sort of work with that going forward when you take it over. And second question is, Börje, 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 is sort of is the 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 4G base stations that are upgradable will make this look different in the 5G era coming years? Just on a more discussion topic here.

[Börje E. Ekholm, President, CEO & Director]

If we look at Kathrein, it hasn't closed yet, close in Q3, so it's -- we're -- it's still antitrust and regulatory approval process ongoing, so we can't comment there too much. But what is important is, actually, the -- Kathrein has launched some new passive antennas during the first 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 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 will 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 5G 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 lesser 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.

[Peter Nyquist, VP & Head of Investor Relations]

We're now ready for the last question, operator.

[Operator]

And our last question comes from the line of Stefan Slowinski of Exane BNP Paribas.

[Stefan Julien Henri Slowinski, Research Analyst]

Just a question on the guidance there, if you will, in terms of sales and seasonality. You say, typically, Q1 and Q2 is 10%. I think you're implying that, perhaps, in North America, we may not see the typical seasonality. Is that true for Q2? Or is that more towards the back-half of the year when it becomes more difficult, that we might not see the typical seasonality in the U.S. market?

[Carl Mellander]

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 reason is really what Börje talked about, that we are running at a high capacity already from Q1 to Q1, and that will continue.

[Stefan Julien Henri Slowinski, Research Analyst]

Is that just U.S. markets?

[Carl Mellander]

Sorry?

[Stefan Julien Henri Slowinski, Research Analyst]

Is that just for the North American markets that you expect less seasonality?

[Carl Mellander]

Yes, that comment is for the U.S. market, that's true. But, of course, I mean, given the proportion of the 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 can say, going forward.

[Stefan Julien Henri Slowinski, Research Analyst]

Okay. And just a follow-up question on Digital Services, there were 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 in 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 that you addressed by year-end?

[Börje E. Ekholm, President, CEO & Director]

Yes, we're happy with the development. Happy is the wrong word, but we're making the progress that we expected. We're not happy with the -- we're losing money, that's what we're trying to fix. So we feel that we are 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 and I don't see any need at all for anything similar. It's much more down now to driving the penetration of our new product portfolio. The cloud native and virtualized solutions, basically, starting to gain traction and we're seeing 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 are still in place, and that we feel very comfortable about achieving.

[Stefan Julien Henri Slowinski, Research Analyst]

Okay, great. And one last one, if I can, which is just on the restructuring charges. You're still guiding for SEK 3 billion to SEK 5 billion for the full year. I think you've only done SEK 200 million to SEK 300 million in the first 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 to come through over the course of the year that will get you within that range?

[Carl Mellander]

I would -- exactly, we keep the SEK 3 billion to SEK 5 billion, that's correct. First quarter was very low. I think, partly, we're early in the year and so on, and more things will happen. And it could include -- I mean, for example, the BSS restructuring that we announced earlier, that's one part of restructuring costs -- charges going forward, there could be other things in facilities and other parts of the business as well. So we stick to the SEK 3 billion to SEK 5 billion for now.

[Börje E. Ekholm, President, CEO & Director]

But we should also say, Carl, 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 we'll 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.

[Carl Mellander]

Absolutely, I agree. And as we said at the Capital Markets Day, we're aiming, long-term, for somewhere around 1% of top-line as a restructuring. But again, it should be seen as a normal part of business going forward.

[Peter Nyquist, VP & Head of Investor Relations]

So before closing the call, we have another call at 1:00, you're welcome to listen into that as well. But before closing the call, maybe, Börje, you have some closing words.

[Börje E. Ekholm, President, CEO & Director]

Yes. Maybe I'll just summarize[ Audio Gap ]into the Easter season, Easter part of the year. We have what we feel is a competitive portfolio of 5G-ready solutions now. Our equipment are today carrying commercial 5G traffic, which basically confirms our strategy to invest with lead customers in lead markets. And our ambition is always to deliver the best infield performance to 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.

[Peter Nyquist, VP & Head of Investor Relations]

Thank you, and goodbye.

[Operator]

That concludes the conference. Thank you all very much for attending. You may now disconnect your lines.