Telefonaktiebolaget LM Ericsson

STO:ERIC B

Earnings Call Transcript 2017-Q4

[Helena Norrman]

So good morning. Let's see if I have sound. I have sound. We're getting ready to start. So welcome to our last guests here in Kista this morning for this presentation of Ericsson's fourth quarter and full year report. So a warm welcome to those of you that have made your way to Ericsson headquarters this morning. And also, a warm welcome to those of you that are joining over the webcast. So this morning, we will start with a presentation from CEO, Borje Ekholm, followed by CFO, Carl Mellander, and then we're going to open for a Q&A.So with that, Borje, please?

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

Thank you, Helena. Well, I will already now apologize a little bit because my -- I'm standing here with a bit of a flu. So stay away. I think that's the safest advice I can give right now, unless you want to feel the same way as I do, and I don't recommend that.But anyhow, I wanted to talk a little bit about the business environment before stepping into more specifically about our performance. So if we start with the general business environment, we actually see quite a lot of traction on 5G happening. If we go back a year, 5G was really only a buzzword. Today, we see that gaining increasing traction primarily in North America as well as, I would say, Northeast Asia, so China, Korea, Japan, et cetera. And we see the operators starting to prepare the network for 5G. So 5G, yes, we don't plan on any significant revenues in our own forecast for 2020, but we see that gaining increasing momentum in the market and carriers starting to really prepare their network and start to invest for 5G.We also see the RAN market has continued to be difficult during 2017 like the forecasts have projected. It's been said to decline by about 8% during '17, so that would mean almost 20% down over the last few years. We see that, though, bottoming out now and probably a slight decline during '18 and then starting to increase, and we even see that to gradually increase over the next 5 years.We've also seen an increasing momentum during the year in North America, where, again, carriers are preparing for 5G and really investing. At the same time, we see lower LTE volumes in China.If we look on our own business, we see increasing traction on our 4G portfolio as well as 5G portfolio, and we have announced a number of wins during the fourth quarter. You all know and when you followed us that it's quite long lead times before they're visible in our numbers, but it also shows that our investments in R&D is paying off in increasing volumes in the business.We see that we have good momentum in our emerging business. We have good momentum in our Networks. But where we struggle is clearly in our Digital Services, and you will see that we come back to that. But at the same time, I would say we have reached a couple of milestones in our Digital Services, where we're able now to have a stable product road map as well as stability in our project.So if we look at the full year, it was a tough year, no question, and you see on the operating income why I say that. We have focused on executing on our new strategy, our focused strategy, which includes strengthening R&D and taking costs out at the same time. So during the second half of the year, we have reduced our workforce, internal and external, by about 15,000, of which 10,000 during the fourth quarter. And these are net numbers because we have, at the same time, increased the number of employees within our R&D units. Sales have declined with about 10% adjusted for FX. And as I said before, we see good earnings in Networks. We see good gross margin development in Managed Services, but of course, significant losses in Digital Services. And I would say they are not -- they are expected but unacceptable. So we clearly need to focus on turning Digital Services around. And we will there increase the speed of execution on the costs side within Digital Services. I think one thing that's important we focused on this year is to make sure we have a good cash flow and a solid financial situation. And here, we have a good free cash flow last year of more than SEK 5 billion, which exceeded our dividend paid. So we have strengthened the balance sheet during last year, so we have net cash of about SEK 35 billion today. That has had extra focus. There are -- I would also say, we have not sold as much receivables as we normally do, so we view the cash flow as a very strong result of a good focus in the business on the working capital.If we look at our Capital Markets Day, we set out a forecast or, call it, plan or ambition for 2020. We see that is still holding true. No changes. And we are starting to execute on the building blocks to achieve our objective in 2020. The first here is we're getting stability on projects and products within Digital Services. We have completed our review of Media, and I'll come back to that later on. We are working through nonstrategic contracts within our Managed Services. And we are taking out costs in Managed Services, which has led to an improving gross margin. And we have reduced cost quite dramatically during 2017 by reducing the workforce with 17,000 employees during the year, or employees and internal and external workforce, I should say. We have actually substituted part of the external workforce with internal employees, so there is a bigger reduction in external workforce.We have also invested for the future, strengthening R&D, positioning ourselves to capture an increasing market share in 4G. That we have done in China. Of course, that has a negative impact on the result in Q4, as we said before, but it positions us well for 5G. And we have continued to increase penetration of Ericsson Radio System, which is a very competitive radio platform in the business and helps the earnings in Networks.We are making a couple of changes to the organization that we announced today as well. First one is that we are increasing our focus on our emerging business within -- primarily today, within, I would say, IoT and Media and content distribution. Here, we're appointing a new head of that unit, called Asa Tamsons, and she will also join the executive leadership team of Ericsson.We have also decided to simplify the group structure by rolling sustainability, our sustainability and public affairs into other units. That will also happen here as of tomorrow.Then, we're in Digital Services. We have the first year now focused on getting the right strategy in place, software-led strategy, creating stability in product road maps as well as projects, and we've done that successfully. Now we need to increase our focus on getting costs out, and that's where we are putting Jan Karlsson in place to run this unit, focused on accelerating our execution of the cost plans.If we look at Q4, we see sales being down about 7% year-over-year for FX adjusted. Gross margin improved on the back of a strong Networks performance, however, balanced with a weaker Digital Services than last year. We should remember when we look at the operating income, yes, it is weaker than last year. Part of the delta from last year is due to the capitalization effects of SEK 2.2 billion. We are also increasing investments in R&D while taking out costs in G&A. And we will go through more in details of the cost out. But in G&A, we have, during the fourth quarter, reduced costs by SEK 400 million. So we are taking out costs. And as I said before, a strong cash flow during the quarter, and that despite selling significantly less receivables than a normal year.If we look at market areas, it's a broad-based decline, as you can see. Single out a few things. One is the falling volume in Northeast Asia is due to reduced LTE investments in Mainland China. But I'm also happy to say that the growth in North America is coming back on the back of network expansions and capacity need in North America as data growth is very -- still very, very strong.Networks. Sales fell with 9% year-over-year FX adjusted. That's really lower volumes in China. At the same time, we're gaining market share in China. So it's a counterbalancing, but the market share gain cannot offset the falling investment volumes. It's also a tough comparison because Q4 2016 had, I would say, pulled in deliveries. Customers demanded deliveries in the late 2016 from the beginning of the year, so it was a very aggressive fourth quarter of '16.Gross margin improved really on the back of better hardware margins, but also service margins, and that's coming out of cost out. So we can see that the cost out that we're taking in service delivery is helping the margins here in Networks. And we can also see that the investments we're making in R&D allows us to capture better gross margin in Networks.Operating margin, still a healthy 11.5%. But here, again, there is a big effect from the change in capitalization from last year. So to a large extent, the worsening performance comes out of that.Ericsson Radio Systems was 71% of the deliveries during the fourth quarter, which is, of course, a good number. And you can always ask, when do we run out of increasing Ericsson Radio System? Yes, at some point in time that becomes a less meaningful number. But it's still a important tracker to see the attractiveness of our radio platform.Digital Services. Sales fell, FX adjusted, by 3%. And what I would say here is the gross margin, though, has a much bigger fall. And why is that? Well, what's happening here is we need to spend more resources in delivering some of the large digital transformation projects, so that means that the service margin within Digital Services is much lower during the fourth quarter than before. And here, it's clearly an area where we need to intensify our cost-out activities as well as migrating work from high-cost countries into low-cost countries.Part of the worsening performance in Digital Services comes again from the capitalization impact of R&D. But the encouraging part is we're seeing stability in product road maps, and we're delivering products more on time now than before. We have a couple of, 45, to name them, contracts that we're working through, which includes contract in the old Industry & Society. It includes some nonstrategic consulting projects that we are working through, which actually has a significant negative impact on our earnings within Digital Services. Here, we're working through to get through these contracts, and we hope to do 1/2 of them during next year.Managed Services. Sales fell by 3% during the quarter. That, I would say is, to a large extent, due to renegotiation of the contracts, what we have called the 42 troubled contracts or nonstrategic contracts. We see here, though, gross margin improving, gross margin improving year-over-year, but also sequentially. And that is an effect of renegotiated contracts and cost out. So we see again the cost activities, or the cost-out actions we're taking shows up in gross margin in Managed Services as well. We do not see improved operating income. And the reason for that is we have seasonality in our operating expenses, so there are some temporary costs that have been in Q4 that have impacted the cost level negatively. And therefore, we see a sequentially increasing loss during the fourth quarter.We've done little more than 1/2 of the 42 contracts now. We should see this improvement of SEK 0.5 billion on these contracts gradually come through during next year.Other, which includes then our Media as well as Emerging business. Here, we're seeing, to a large extent, the improved gross margin here is from the cost out we've done within our Media business, which has, in effect, given a gross margin expansion. We see also very good traction in our Emerging business, with strong growth in IoT as well as our UDN. So here, we are continuing to invest in this part. And, yes, it's some new businesses, but we believe they're fundamental for the value of Ericsson to our customers.We have also concluded the Media review. We're doing 2 things. One is for Media Solutions, we will bring in a partner. Here, our ambition has been to get capital from the outside because we think the Media Solutions is strategic for our customers. So we see the Media business as very important to us as well as to our customers. And therefore, we have wanted to retain a large ownership stake on our own, and we were able to complete that during the quarter, and we ended up owning 49% of the Media Solutions going forward.For Red Bee, we have looked at different options, including divestiture. But all the offers we have received have not been at a level where it reflect the fair value of the business, so we have decided to keep Red Bee, that's former Broadcast Media Solutions, Media services. The reason why we have the flexibility on Red Bee is that the focus we've had on taking costs out during the year has resulted in dramatically reduced losses. So today, the loss going forward is rather small on the totality, so we feel we're better off developing that business and reap the benefits on our own.With that, I'm going to give the word to Mr. Mellander.

[Carl Mellander]

Thank you, Borje. Thank you so much. I take this then. Okay, good morning, everybody. So Borje has now talked about the adjusted result of the quarter, but we also have a fair share of one-off items, impairments and adjustments, and I want to walk through that so it's clear what the reported result actually includes.So as you can see here then, the reported loss is SEK 19.8 billion in the quarter. But we have 3 distinct adjustment aspects that I want to address then. The first one being restructuring costs ended up at SEK 2.4 billion in the quarter. This is a cost related to our cost programs, so this is normal business as usual during this year, and we will continue to have between SEK 5 billion and SEK 7 billion estimated restructuring charges also 2018.The middle column is about the asset write-down. And this is in accordance with what we communicated and first in December that we would go through the goodwill impairment test. And then we announced in mid-January the amounts, the result of this. And this is in line with that, with a minor adjustment, which has to do with foreign exchange result of making those impairments.And then provisions and adjustments. This is part of what we talked about together with the Q2 report when we said that we had additional risks in contracts and in projects amounting to between SEK 3 billion and SEK 5 billion and that we were going to work through that over the coming 12-month period. Now this quarter, we took SEK 3.2 billion out of that range, and that brings the total to SEK 5.5 billion, so a little bit more than we had estimated back in July. The important message here now is that we have gone through now and concluded this review of our contracts, so our business of risks in the balance sheet, and we can today say that now we have concluded it. And today, we don't see any more need for impairments, write-downs or provisions. So this is it now for when it comes to this review that we have done during 2017.If we look at gross margins then, and Borje has talked about some of the specifics here also. But as you can see, the Networks, again, actually improving the gross margin quite strongly year-over-year. We also have good contribution from both Managed Services as -- and other, as Borje talked about, other than being fueled by both of the 2 Media assets, which have improved during the quarter year-over-year. Digital Services, however, offsetting most of that gain in gross margin. Capitalization impact and in the gross margin side is SEK 0.6 billion year-over-year. That's about 1 percentage point on gross margin.When it comes to operating income, looking at this bridge then, you can see that volume and what we call nonoperational items, and there, again, we include capitalization effects and similar stand for most of the decrease in the operating margin. While the underlying, the true underlying gross margin is actually improving. When it comes to the cost side, then R&D has increased and that is exactly as we have communicated in the strategy because we are investing, adding resources in R&D. SG&A has come down in accordance with the cost program, with some SEK 400 million. We'll look into that a little bit more in a second. And then some other effects, bringing us then to the adjusted operating income for the -- for this quarter. Of course, our 2020 target of over 10% in operating margin still remains very firm. If we drill down into the cost side, looking at R&D to the left. First of all, we have to understand the R&D number. We have to normalize for the capitalization effects, and you can see that on your left here. Then what has happened during the quarter is reduction in R&D and savings, efficiencies in Digital Services. But at the same time, Networks has increased R&D, and this is exactly according to plan. On the SG&A on the other hand, the decrease adjusted, as you can see,is SEK 400 million year-over-year. SEK 400 million is also the amount we -- of cost savings in SG&A that has been realized in the P&L, so we see that coming through the result now in the SG&A. We have some other effects. For example, the FX rate was actually beneficial here in the SG&A. A bit more on the cost program. You're all aware of the SEK 10 billion cost program that we have launched and with a split 30-70 between G&A and cost of sales. Today, we can report that we have achieved SEK 6 billion out of that SEK 10 billion in annualized run rate savings. Of course, still the effect in the P&L today is rather limited because there is a time delay here. But we do report -- and SEK 400 million saving, as I mentioned, in SG&A. And we see it coming through also in improved gross margins, both in -- as Borje was saying as well, both in Networks, Managed Services and segment Other, so we see the effect of it. But basically, we will increase the visibility of these savings coming into 2018 now in the first -- during the first half. You can see some headcount numbers here. So in these selected areas that are in the program, we have reduced 14,300 during this period. Again, the Group net reduction second half is 15,000 people. The cash situation is strong and stronger. It has become stronger during the quarter. The operating cash flow at SEK 11 billion, contributing quite a lot when it comes to working capital improvements. In investing, we have reduced our CapEx spending, partly because the GIC program is getting completed or has completed, also because we sold, as we have announced, 1 of the 3 Global ICT centers, the one in Canada. On the financing side, we have arranged 2 credits during the quarter with the Swedish Export Credit and Nordic Investment Bank respectively, that has to do with our 5G R&D. And all of this has then improved our gross cash position quite substantially during the quarter to SEK 67.7 billion and with net cash just below SEK 35 billion. So with this level, we feel confident about the strength of the balance sheet, our ability to execute on the strategy now.Here's a little bit more detail on the free cash flow. As Borje said, SEK 10 billion in the quarter and SEK 5 billion for the full year. And a couple of aspects there. One, the cash flow has been much more even during 2017 than 2016, that's a clear improvement. Less volatility. And the other one is that the absolute level is clearly better than 2016 as well, and that comes out of the focus that Borje was talking about here earlier. On the right side, you can see the debt maturity profile, this is also relevant then for our resilience and balance sheet strength. And as you can see, we have no debt maturing at all in 2018 and 2019. So again, this contributes to the resilience of our company. And next topic here, which I think will be important to follow going forward, is the foreign exchange and the dollar development. Our sales is to 45% denominated in U.S. dollars, not all in the U.S. because we also have dollar contracts in certain other countries. But overall, it's 45%. So of course, movements in the U.S. dollar does affect Ericsson and the result. And here in the banner, you can see then the rule of thumb that can be used, that 10% change in the U.S. dollar/SEK rate means about 5% impact on top line and 1 percentage point on the bottom line. We also have updated the planning assumptions for Q1 and 2018 going forward. I won't go through all of it, but one thing is that the earlier estimates for the RAN market development remain unchanged. So we are talking about minus 2% now for 2018; minus 1%, '19; and flat in 2020. We have not changed any of that. We see good momentum in North America, but lower investments in China. Keep outlook for the currency, that's really what we say on the net sales line here. When it comes to cost of sales, we will see more effect, more impact of the cost program as we come into 2018, that's clear. But please pay attention to the seasonality there, not least in OpEx. Restructuring charges I mentioned, SEK 5 billion to SEK 7 billion is the estimate currently. And then 1 segment-specific assumption around Digital Services there, the actions we're taking executing and on the plan will be visible second half of 2018 in the gross margin. We also supply here a table to be very clear on the capitalization effect so that there should be no doubt what we estimate there going forward as well. All of this, of course, based on the current visibility and the FX rates that we have at the moment.So with that, I hand back to my CEO, Mr. Borje Ekholm.

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

Thanks, Carl. Now so just to wrap up, and this is, by the way, a 5G prototype on the picture, so you can all see how that looks like. But maybe you'll have a chance to look later on, I don't know. But anyhow, as Carl said, we have completed the review of, call it, the commercial risks and the balance sheet, and we see no additional need to any more impairments or provisions in -- after that review. So it was the last SEK 5.5 billion and the adjustment to goodwill that we took this quarter. We see strong free cash flow this past year. We have put a lot of focus on the operating capital of the business, and we've made a lot of structural improvements on inventory but also on collection. We see a overall challenging performance for the company, of course, and that's no doubt about that. But we see a continued solid performance of Networks. And here, we see a significant improvement in gross margin as a result of, of course, our investments in hardware and development, but also taking costs out in service delivery. And we also see continued increased investments in R&D within our Networks portfolio. Our focus going forward, need to speed up and accelerate the improvement program and turnaround program in Digital Services. The losses as they are today were in a way expected but not acceptable. And clearly, we need to show that we get the financial situation in Digital Services under control. It will take a while before we see the improvements come through in the financial statements. The reason for that is, of course, that we have long lead time in projects, so we need to work through our backlog before that's visible in the performance. But we also see the stability in projects, the stability in product road maps have created a foundation to a successful turnaround of Digital Services. So we view 2017 as a very challenged year, a very tough year, but we have created a foundation from which we can achieve our objectives set out at the Capital Markets Day for 2020. With that, I just want to thank you for coming and give the word over to Helena.

[Helena Norrman]

Yes. Let's go to some Q&A. So Carl, if you also come back, so we will -- we have some microphones. So [ Rik ], if we start from the second row to the left and we work our way from there.

[Johanna Ahlqvist, Analyst]

Johanna Ahlqvist from SEB. Two questions, if I may. First of all, if you could elaborate a bit how you foresee OpEx developing in 2018? You have a net effect of both efforts in R&D and also some savings. So what do you foresee on OpEx '18? And also, if you can comment on the tax, given the U.S. tax is a bit lower nowadays.

[Carl Mellander]

Exactly. Should I start with the tax situation then? So yes, we reevaluated our tax assets related to the U.S. now in this quarter. So that's a SEK 1 billion change of the tax asset, and that's a function exactly of the lowered corporate income tax then from 35% to 21%. Long term, it should be positive, of course, for Ericsson with a lower tax regime. But there are a couple of other aspects to keep track of as well, other elements in the tax code there. So we're studying this closely. We are not prepared to give any specific numbers on it yet. But overall, I would say it's positive for us.

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

OpEx.

[Carl Mellander]

On the OpEx side, yes, so we will see more result coming into SG&A through the cost program. We had SEK 400 million in Q4 visible in the P&L, and that will, of course, increase over time as more and more actions actually translate into proper realized cost savings. On the R&D side, we continue with a high investment level for the year. And this is part of the entire strategy, mainly in Networks then, to invest in technology leadership, so that will continue. Between the quarters, watch out for the seasonality because it swings quite a lot, as you saw between the quarters, Q4 being very high.

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

But it's also worth to say that it messes it up a bit with the capitalization of R&D swinging. So please, keep track of that as well. That's why we tried to provide very detailed guidance on that.

[Daniel Djurberg, Research Analyst]

Daniel Djurberg, Handelsbanken Capital Markets. A question on the solid progress in gross margin, adjusted gross margin in Networks of [ 430 ] basis points year-over-year, I think, despite the project you have seen in China that should be isolated for Q4. So -- but still we see new wins, Deutsche Telekom and Vodafone U.K. and so on. If you could comment a little bit about the -- any color on the outlook on the gross margin for Networks would be great.

[Carl Mellander]

I'll take it. Okay, sure. No, we feel comfortable, confident about the Networks' performance now. As you see, as you mentioned, a strong improvement of gross margin. Looking into 2018, we see that the contract that we talked about earlier in China, related to some market share gains, will not have any material impact going forward. We think North America is a strong engine, a lot of positive signals there. So with further cost out, further penetration of the Ericsson Radio System there is, of course, upside potential in the gross margin. And as you know, the 2020 target that we laid out at the Capital Markets Day remain completely unchanged.

[Daniel Djurberg, Research Analyst]

Okay. Just one more question, if I may, on Media Solutions. You are doing a not a joint venture but you've taken minority share, 49%. And the financial terms is confidential, unfortunately, but can you say something about how much of your cash injection that you will need to do or the payment that would need to be your cash injection for this?

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

We are not going to inject any capital.

[Daniel Djurberg, Research Analyst]

Okay, that's great. And also, hope to secure this will not become a new SG Ericsson, so to say. I understand it's not a joint venture, but...

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

No, the governance is very different, and that's why we've -- we actually wanted to -- with -- this cannot, of course, be debated, right? We actually think it's very attractive asset. So we wanted to maximize our ownership stake, but at the same time, not provide any capital. So that's why we ended up in this solution, but it was purely for economic reasons to try to maximize our return. And we see also quite a lot of important traction with key customers in this unit. So we actually think this is attractive to hold onto. And what Angel and his team has done on the cost side this year is just phenomenal. So we feel very comfortable with this setup and actually think it's very good for us.

[Helena Norrman]

Yes, Fredrik?

[Fredrik Lithell, Research Analyst]

Yes, two questions. Fredrik Lithell, Danske Bank. The Chinese market is dropping off a little bit, has been in high-investment mode for the last 4, 5 years. Do you see that the U.S. market showing some good signs is able to counterbalance that? Or you think that the Chinese market is dropping off with a larger magnitude, say, you're 2% down, at risk is really the main question here.

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

If you start at the end of the consumer, the data growth in a way continues at almost an accelerating pace. So the consumption of data is really -- I mean, that's the driver of network investments ultimately, and we see that continuing at a very high pace. But what we at the same time see, we are a little bit between 2 technologies. So we are between 4G and 5G. So it's somehow a little bit hard to predict. We -- the outside consultants that we have used here for the minus 2%, I think is a reasonable estimate. I think there are some upsides in part of the world, but there are some risks in other part. And I would say, most of that, that it's down, comes from China. So if you would summarize it that way. So is the risk on the upside or the downside? I think this is a reasonably balanced estimate actually from what we see from customers.

[Fredrik Lithell, Research Analyst]

Another question, if I may. Part of your strategy is to turn Digital Services around. And just 6 months into that, your Head of Digital Services is leaving or is replaced, or whatever that is. And at the same time, Media was sort of on the divestment list, more or less. And now you keep part of one of it and you keep the whole of the other part. So is this setting your strategy implementation back in time? Or is it sort of something you had in your expectations as well?

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

No, I think we -- if we step back a little bit and take Media Solutions, there, we always wanted to maximize our ownership stake without providing more capital actually because it's strategically so important for our customers. And there is a big overlap in customers between us and the Media Solutions. So I would say the strategic logic for Ericsson of investing in Media remains the same as it did before. So that I view as kind of a natural. That's -- this is actually where we wanted to end up, to be candid. On Red Bee, of course, I would have preferred to get a higher bid. We didn't. And we think the bids did just not reflect the value of the business, so we're not going to give it away. That's just not the way we should run this company. Then on Digital Services, what we said when we created Digital Services was that we need to, first of all, create stability. And Ulf has done a really good job in creating stability on products, a quality R&D function. So we've got a stability there, and we've got stability in customer projects. So that has created a foundation for the next step. And I think that was the expectation we would anyway be at right now. That's why we say, yes, it's an expected result. It's not acceptable, but it's expected. And why did we need to focus on stability first? Well, at the end of the day, it's our customers. This is critical piece of their infrastructure. So if we don't deliver and don't perform, their network is going to suffer. So we could not afford that, so we needed to get stability. Now Ulf elects to lead. And instead, we put Jan in to focus on the execution on the cost side, which is the next step in the turnaround.

[Unknown Analyst]

[indiscernible]. Borje, when we met in Lund last year at the Ericsson Garage opening, you -- we talked about the R&D expansion in Lund and other places, and now you say, for this year, you'll continue to invest in R&D. Could you elaborate a bit more in -- about what that means?

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

We are increasing -- we're recruiting people for our R&D clearly. I don't remember now. We've increased by 500 roughly during the second half of the year. So we are intensifying our investments here. And why do we do that? Well, we believe we can capture bigger gross margin by investing in technology, and that's what we're trying to do. And that's what we see in a very solid Networks performance. So that is a long-term investment that we're making and we will continue to do. We see also -- again, we need to make sure that we are well positioned for 5G. 5G will come, we can debate when in certain parts of the world, but it's quite clear that the race is heating up in North America as well as Northeast Asia. And here, we just need to invest to make sure we are a leader in that game. And we're -- we feel that we're very well positioned for that.

[Helena Norrman]

So yes, we can take one more question, and then we're going to start to wrap up, I think.

[Unknown Analyst]

Carl, a quick [ data ] question for you. IFRS 15 is starting up from now actually, so -- and you write about it in the report. Should we expect that the sort of seasonal effects would be enhanced, i.e., that you will have less or maybe revenues coming in Q1 from those type of contracts and maybe coming later in the year? Is that how we should sort of see it?

[Carl Mellander]

Net-net, I suggest we take that in more detail actually in another forum. But there might be some seasonal effects between the quarters, that's true. But it's also a spillover effect from previous periods. So I need a little bit more time to explain that factor, if that's okay.

[Unknown Analyst]

A detailed one, again. On patent, the guidance you said of SEK 7 billion for 2018. Is it anything besides FX that makes a decline from the SEK 7.8 billion, I think, you had this year?

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

No. You can.

[Carl Mellander]

No. No it's -- sorry. [Foreign Language]. So FX is a big part of it, definitely. And then we have 1 contract we renegotiated during the year, yes? So the SEK 7 billion is really the expectation based on current rates and the contract portfolio we have.

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

Yes, but only on existing contracts.

[Carl Mellander]

On existing, yes.

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

Yes, that's why -- so the reality is, we sign new contracts during a year as well. So that's the exiting value of the contract portfolio.

[Unknown Analyst]

And a very last one, if I may.

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

Go ahead. Time to shout.

[Helena Norrman]

Go ahead.

[Unknown Analyst]

On working capital, you have a very strong working capital finishing this year. So do you foresee those working capital improvements being the same magnitude? Is that possible also for 2018?

[Carl Mellander]

We work very hard on working capital improvements for sure. I don't want to commit to anything specific other than our long-term target is 100 working capital days, and we're still on the move towards that. But we spend a lot of effort and take some additional actions then on working capital to continuously improve.

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

No, we need to sharpen the focus on working capital. So working capital, we have increased focus this year. So the rate of improvement, I don't think you would see, of course, we do the low-hanging fruits first, right? But the focus on working capital is really important, and it comes through in payment terms and how contracts -- or specified T&Cs on contracts, et cetera. We have a lot more work to do here, but at least we're taking some steps.

[Helena Norrman]

So with that comment on increased focus on working capital, I think we've come to the end of the Q&A. So we say thank you for joining this morning. We have a conference call again at 2 Central European Time. Please join us.

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

Thank you.

[Carl Mellander]

Thank you. Thanks.