Ericsson

Thank you, Jerry. Good morning, everyone, or good afternoon, everyone, and welcome to this call today, the Q3 report. With me here today, I have our President and CEO, Börje Ekholm, and our CFO, Carl Melander. Before starting, I would like to read the following. During the call today, we will be making forward-looking statements. These statements are based on our current expectations and certain planning assumptions, which are subject to risk and uncertainties. The actual result may differ in material due to factors mentioned in today's press release and discussed in this conference call. We encourage you to read about these risks and uncertainties in our earnings report as well as in our annual report. With that said, I would like to hand over the call to you, Birger. Please, Birger.

Thank you, Peter, and welcome everyone to this call for our third quarter results. We are continuing to execute on our focus strategy and we see increasing evidence that our strategy is working and it's reinforced by the reported performance for the third quarter. We're leading in 5G and that's through our significant investment in R&D that's driving our global technology leadership and really enabling us to provide a cost and performance benefits to our customers. Our investments in technology leadership has also allowed us to continue to gain market share. And it's worth mentioning that most of these gains come from non-Chinese competitors. So we're not winning here due to geopolitical situation. It's all about winning in front of the customer and delivering the best portfolio and cost competitive portfolio they can choose. We're also seeing that we're making progress on winning in China and we have already announced that in the second quarter and that is a result of our increased efforts in R&D. It is very important for us and strategically important for us to be in China and that's because that's a global powerhouse for innovation and technological change and driven by many great entrepreneurs. We see this in many sectors and I'm personally involved in Alibaba and I've seen that innovative power firsthand over many, many years. No doubt China has massive scale, but I think the entrepreneurial spirit we see there is a key driver of their success in the world today. 5G is being built out very fast in China with good coverage. 4G drove the consumer app economy. And China, the US, and the Nordics, they were the first countries to roll out 4G. And that allowed entrepreneurs in those regions actually to innovate on top of the network, building what has become the app economy. So it's no surprise that we see the, call it the consumer app economy today, dominated by Chinese and American companies. Now we're seeing the same thing on 5G. So building out 5G will allow Chinese entrepreneurs as well as American and whoever is first on building the network to innovate in this new space. And I do think here it's actually important for the rest of the world, notably Europe, to take some impressions here from the fast build-out pace we're seeing in China. This will lead to, in a way, new companies being developed by entrepreneurs and innovators. And for us to be part of seeing the emergence of that ecosystem and realizing what will that drive for future requirements in the future will be critical. We see 5G as a huge opportunity for more, call it open and global innovation. And it's built on this requirement of a high performance, secure wireless network infrastructure. And the value of running applications on top of the 5G network will be significantly higher and it will be very similar to what we saw in 4G. So we see in reality 4G was a consumer drive and 5G will now be the backbone for digitalizing the enterprises. And that's what you see us also do. We continue to work with our service provider customers. But we're also going to build a material business for enterprise use cases. And that's to help the service providers drive more revenue growth. And that would ultimately drive more requirements and more benefit for us and network equipment. We already have a couple of offerings, IoT Accelerator being one, dedicated networks. But during the quarter, we announced a strategically important acquisition of Cradlepoint, which will allow us to build a position in wireless WAN as well. We look at some of the highlights in the third quarter specifically. We see 5G deployments around the world gaining pace, and it's now clearly the fastest scaling generation of mobile technology ever. We have 113 commercial contracts, 65 live networks, establishing ourselves as a clear leader in 5G. During the quarter, we had an organic growth of 7% year over year, and that's despite the challenges we get from COVID-19. Gross margin reached 43.2%, excluding restructuring, and its improvements across all business segments. Our operating margin was 15.6%, excluding restructuring costs, one of the highest for a long period of time. Our growth in China is particularly strong and our 5G contracts are following the plan we have discussed earlier. So now the contracts or our business there are contributing to our profits in the third quarter. As I said earlier, strengthening our position in China is critical for our long-term competitiveness. We have over the past few years worked a lot on our cash flow or ability to generate free cash flow. If we look on a rolling four-quarter basis, excluding our payment to DOJ and SEC, our free cash flow before M&A was 17.7 billion Swedish kronor. We have also announced the plans to acquire Cradlepoint earlier in September, and that is one key building block for our enterprise ambitions. And we expect to be able to close that deal in the next coming weeks. So if we look now at the end of the third quarter, the four-quarter rolling margin is 10.4%, which is above our target for 2020. So we feel increasing confidence of our ability to deliver on the financial target for the full year 2020. So let's move into the market overview. We see strong positive growth in Northeast Asia, driven by gains in 5G in China. In Southeast Asia, we also saw good growth, and that's several markets contributing, most notably Australia and Indonesia. We continue to see strong momentum in North America driven by the acceleration in 5G. Of course, the consolidation in the operator market did somewhat lower sales in managed services. as well as the legacy portfolio in digital services partly offset that growth. Europe and Latin America, that's a bit of a mixed picture. There we see good growth in Europe on the back of market share gains. And today you also saw that we announced a five-year strategic partnership with Telia in our whole market that is important given our significant R&D presence in Sweden. But the progress in Europe, that was actually offset by slower sales in Latin America. And that's really driven by uncertainty related to COVID-19 and lower operator revenue leading to lower operator capex. We saw a marginal drop in or marginal reduction in the sales volume in Middle East and Africa. That's also a mixed picture. 5G grew at a good pace in Middle East. But again, economic uncertainty from the pandemic delayed investment decisions in some African markets. But overall, we continue to progress. And if we move over to our segments in more detail, you'll see that networks performed very strongly with organic growth of 13%. That's underpinned by strong growth in China, as well as clearly North America. Operating margin reached 22.7%, driven by a larger share of software sales. We continue to execute on the turnaround plan for digital services, and the team is delivering well on all our plans, which includes the importance of increasing software sales. So the best way to assess the progress on our turnaround plan is to look at the improvements in gross margin. And there we reached 43.5% in the third quarter. At the same time, we're challenged by a legacy portfolio where sales are falling faster than we previously anticipated. In order to combat this, we had increased our investments in the new cloud-native 5G portfolio. And we are seeing good win ratio on our new portfolio. But it's also fair to say it has not yet generated any significant sales, and therefore it can simply not compensate for the fall in the legacy portfolio. On the wins that we have over the last six to nine months, it will not be recognized until 2021 in sales and beyond that, by the way. So whilst we still aim for a break-even in 2021, we recognize that that can be... be a bit of a challenge given where we are today. In managed services, sales were down 9% organically. That's primarily due to lower variable volumes in North America. At the same time, gross margin improved to 20.1%. And investments in R&D continue to drive new solutions and new automations that will actually have the potential to generate a much better margin profile in the future. And finally, in emerging business, we saw growth in sales and gross margin, supported by both volumes as well as cost efficiencies. But the most important part for emerging business this quarter was actually the announcement of cradle point that we expect to close in the coming few weeks. With that, Carl, I give the word to you. Thank you, Birger. And good morning, good afternoon, everyone. So let's dive into the P&L to start with here. Net sales then reached 57.5 billion. This represents an organic and FX-adjusted growth of 7% over Q3 2019. Really driven by networks that grew 13% based on the continued high demand for our 5G portfolio. And in particular, we grew in Northeast Asia with 49% FX-adjusted, as Birger showed earlier. but also North America, Europe and Australia to mention a few growth areas. Growth margin then you see 43.2. This is an improvement of by 540 basis points year over year, excluding restructuring here as well. And of course, encouraging to see that all segments improved year over year with the main contribution coming from networks, but also digital services where we in both cases saw increased software sales. Operating income came out at the 9 billion excluding restructuring charges and this is an improvement by 38% year-over-year if we exclude a couple of items that affect comparability in Q3 2019 and You can see here namely the provision for the SEC DOJ fines, of course, but also positive refined of Social Security cost last year so this 9 billion of operating income leads to an operating margin of 15.6 and where again, networks is the main driver with its 22.7 operating margin, as Börje showed earlier here. Free cash flow before M&A, 3.9 billion versus 4.5, but here we should also remember that we have absorbed in the 3.9 a 2 billion capital injection into the Swedish pension trust. So adjusted for that, we would have been at 5.9 billion. And then looking at the graphs in the bottom to illustrate what Burri mentioned, you see that the adjusted operating margin after, well, looking back four quarters rolling is 10.4, well in line with the financial target for 2020 of more than 10%. So let's have a closer look at gross margin if we take the next one here. And you see that on the rolling four quarter basis, gross margin is now 39.6%. And this means that we are now for the first time, if we look rolling then, above the target range of 37% to 39% for 2020. And we have seen, as you see here, a steady improvement of the gross margin over 10 consecutive quarters now in terms of rolling since the start of 2018. And as we have said many times, the driver behind this is, of course, the investments we make in R&D. And this clearly demonstrates that. the value creation logic that we have adopted since the strategic reorientation back in 2017. That investment in R&D to reach technology leadership creates competitiveness, and it has helped us win deals with technologically very demanding customers, but it also improves the gross margin, as we can see here. So to repeat a little bit, we saw improvement in gross margin in all segments, Software sales supported a higher margin in networks. Digital services also benefited from a higher share of software. And in addition to that, we had in this quarter very limited impact from the critical contracts that we've had impact earlier. For example, in Q3 2019, where we had a negative impact from those. In managed services, we saw continued efficiency gains contributing to better gross margin also there. And lastly, then emerging business and other, we've seen gross margin improving from 20 and a half to 30 and a half percent year over year driven by the new and emerging business part of that segment. And sequentially, you could say the main reason actually for the improvement is China. While Q2 this year was impacted by negative margins and also a rise down in China, as we communicated before, Now China turned out profitable now in Q3 and will improve further. So let's look at SDNA and R&D. And here we see R&D then landed at 9.9. This is an increase by half a billion, mainly following higher investment in networks in 5G. But of course now the numbers also include the acquired antenna business, which was not there a year ago. In digital services, we also transition R&D funds from the legacy to the new portfolio, where we invest to capture the business opportunities that we now see and that we now can capture with our 5G and cloud-native products, not least the 5G core area. In managed services, the strategies continues to be to invest in automation, analytics, AI to sharpen the offerings, So that's about R&D. And then on the FD&A side, you see we came up at 6 billion. And if we compare with last year, we recorded 4.9, but that included the item I mentioned before, a positive refund of social costs in Sweden of 0.9 billion. So if you adjust for this, it increases 0.2 billion year over year. And As we have said earlier, we are investing in digitalization and compliance in our company. And again, of course, we have incorporated the acquired antenna business during the year as well. We move over to cash flow and the financial position. And here in the third quarter, we delivered, as you see, a positive free cash flow before M&A of 3.9. And two items to remember here when we compare with last year. One, again, the $2 billion pension investment. trust capital injection and this by the way completes the 3 billion injection that we have mentioned in previous reports as well. And the second item is again the social security cost refund in Q3 2019 which had a 0.4 billion positive impact on cash flow. So if we adjust for those two items the free cash flow before M&A actually improved by 1.9 billion year-over-year. What you also see here is that net operating assets and liabilities had a negative 4.4 billion in the quarter. And this is partly driven by higher inventories following an active decision we have made to de-risk the supply chain here to create improved resilience when it comes to the component supply. But of course, we continue very high focus on working capital in the companies. So this leads to a cash position that was further strengthened. You can see the number here, 41.5 billion in net cash at the end of third quarter and gross cash now at 78.2 billion, also increased since last year. And as we mentioned earlier, on the rolling four-quarter basis, free cash flow before M&A amounts then to 17.7 billion if you exclude the DOJ SSC fines. And that translates into 7.7% of rolling four-quarter sales. So one could say that the efforts to create a strong cash flow here in the companies is bearing fruit. Okay, I will round off with a few words on the planning assumptions. First of all, again, as usual, please refer to the full report, page five, I believe. But just a few comments. First on the markets that we operate in. Deloro now expects the run market to grow by 8% in 2020, which is an increase from the previous number, 4%. With China then as the main growth engine at 33% growth. And the rest of the world, excluding China, then is flat in 2020. And remember, that includes the 4% growth in North America. Secondly, based on where we stand now, year-to-date and outlooks, We are strengthened in our confidence that we will reach the full year targets for the group. But again, as Bury has mentioned, an individual services due to the weaker sales, but also our added or accelerated R&D investments, we see a risk of further delay in reaching the 2020 target, as mentioned here before. And then some specifics to close off then. First of all, Q4 is... normally our strongest sales quarter. If we look back historically the last three years, the normal seasonality has been plus 70% on top line from Q3 to Q4. Then importantly, I think software sales and the software share of total sales in networks is expected now to be lower in the fourth quarter after a very favorable Q3. And historically also the share of services actually increases in Q4 compared to Q3 as we close off projects. OPEX increase normally Q3 to Q4 and looking at the last three years there's been an increase of 3 billion on average but with large variations between the years. Then finally just please note that cradle point is likely to close now and on closing then we will pay the consideration here to the sellers it's around 1 billion subject to adjustments for working capital and net debt, etc. And we will finance that with cash at hand. And then we will consolidate the cradle point financials in the Ericsson books in the segment Emerging Business and Other with a certain negative impact on the fourth quarter. And with that, thank you. And I hand back to you, Börje. Thanks, Karl. So in summary, we see the third quarter as another solid stepping stone for And we are well positioned now to take the next steps. We're leading in 5G with 113 agreements in place and 65 live networks around the world. We see a clear link between our earnings performance and the financial performance of the company and actually our continued investments in R&D towards technology leadership. We continue to increase our market share. You know, that's a very important part to keep scale in our business, but we're also doing that and maintaining a good cost control. With a strong cash flow that we've been able to generate and a very stable cash flow, we're now in a financially strong position to take the next steps and we can do that in strategic growth investments. And that's where we see a big opportunity going forward is in the enterprise segment. We think that will help drive the demand for network equipment and it will drive demand for or traffic into the operators network. That's going to benefit us. But we also look for standalone opportunities in there with good economics like cradle point acquisition. That we think is a typical example of the type of use cases that we will focus on that both drive traffic as well as a good standalone economics. So with the results we've delivered so far in the year and with Q3, we are confident about our ability to deliver on the group financial targets for the full year 2020. So with that, thank you. Give the word over to Peter.

Thank you, Burya. Then, operators, I would appreciate if you could open up the Q&A session.