Ericsson

Hello everyone and welcome to this second quarter report 2021. Standing here from the studio in Kista. Together with me here in the studio is our president and CEO Börje Ekholm and our CFO Carl Melander. As usually after the presentation, we will have a Q&A session. And this is important. In order to ask questions, you need to sign up via telephone. So details can be found in today's press release and on our website ericsson.com. Today, during today's presentation, we will be making forward-looking statements. These statements are based on our current expectation and certain planning assumptions, which are subject to risk and uncertainties. The actual result may differ materially due to factors mentioned in today's press release and discussed in this conference call. We encourage you to read about this risk and uncertainties in our earnings report as well as in our annual report. With that said, I would like to hand over the word to you, Börje. Please, Börje.

Great. Thank you, Peter. And good morning, everyone, and thanks for joining us at this video conference for the second quarter. we continue to see good momentum in our business, and it's based on the 5G rollouts, but also on market share gains. So we saw organic growth of 8% during the quarter, and we could also strengthen the gross margin for the whole group to 43.4%. But before I step into the Q2 performance, I really want to highlight the efforts by our people to deliver this result during the second quarter, despite the global pandemic that we've been operating with in several of our markets. Today it's also clear that we are a leader in the 5G area. We have a very competitive portfolio and today we power 93 live 5G networks out of a total number of 169 globally. A few years back, we also made a strategic decision to try to deconstrain our supply chain. Again, to be able to deliver to our customers. That means that we have invested in making our supply chain more flexible. And during the quarter, we have had no disturbances on our deliveries and we've been able to keep up with the demand we've seen in the market. I would say the ability to deliver in combination with the significant efforts or investments we've made in the R&D area and combined, of course, with our strong efforts by our people have allowed us to perform well despite a very challenging environment during the second quarter. So let me go through a couple of key highlights on our strategic execution during the second quarter here. We have continued to show great progress in our product portfolio, and it's highlighted by the addition of the 5G mid-band and Massive MIMO support to our Cloud Run portfolio. Cloud Run is a critical element in our product portfolio, as this will enable our customers to evolve their networks towards a cloud-native architecture and open network architecture, leveraging automation and fully autonomous networks. Ericsson has always been and always will be a strong believer in openness in the mobile networks. And we will work in close partnership with our customers to leverage the benefits of the open architecture. We take the same approach to Open RAN solutions and we are actively participating in the standard bodies in Open RAN. We also continue to see great momentum in the US, driven by strong demand for our 5G solutions, and we expect to continue as 5G is rolled out across the nation. And this was further highlighted, of course, by the signing we had this morning of a 71 billion kroner five-year contract with one of the largest operators in the world, and it's Verizon, of course. And this is the largest contract in the history of Ericsson. On the IPR side, we continue to see good momentum in signing up new licensors. And we are, during the quarter, have signed an agreement with Samsung that we believe is a very attractive agreement for us. And it kind of confirms the value of our portfolio. What we have also seen is that that momentum continues with signing up additional contracts here during July. But despite the signing of the Samsung contract that also included revenues that's attributable to the first quarter, we saw a decline in total IPR revenues of about half a billion kroner. We have previously communicated that it is high risk that we would be allocated lower market share in China due to Sweden's decision to not allow Chinese vendors in the Swedish 5G network. And this can lead to a significantly lower market share going forward compared to what we have today, of course. And when we look at the second quarter, we have seen that our sales in mainland China has fallen by about 2.5 billion kroner. And that's a 60 percent reduction compared to Q2 last year. We don't really know the definite outcome of the tenders that's ongoing, but we want to say that it's prudent for you to already now plan for a significant reduction in market share, both in networks as well as digital services. And regarding digital services, we can see that the material loss in market share in China, in mainland China, would lead to a delay in reaching the targets in digital services. We have, in addition, during this quarter, we have taken a write-off of 300 million kroner related to pre-commercial product development for the Chinese market. And this is basically pushing out the ability of us to reach break-even that we predicted before. And I would comment on that we already before took a decision to increase our investments in R&D in order to capture the 5G opportunities that we see in front of us. So now we expect a limited loss in 2022. But it will also be a bit back-end heavy, so you will see a stronger development in the second half as the new portfolios start to generate significant revenues. However, we can also see that based on the strong portfolio we have in digital services and the strong momentum we have in the marketplace, that we are going to, over time, compensate the Chinese volumes with other markets. So we're going to see a path to exceeding the previous targets of 4% to 7% EBIT margin that we said, but it will take a bit longer than we earlier forecasted. Finally, I want to just highlight the work we do on ethics and compliance. We are sparing no efforts in investing in our procedures, ways of working to make sure that we have processes that are fit for purpose. But most importantly, we're investing in creating a culture in the company where we are making sure that this will not happen again, that happened in the past. And this is an area we're strongly committed to as a management team in the company because we believe this is going to be a long-term competitive advantage for us. me now move into the market area performance starting with middle east and africa where sales declined by 10 percent and this is mainly due to lower 5g investments in the middle east and to an uncertain macroeconomic situation in africa of course this is to large extent dependent on the global or the pandemic covet 19 pandemic Despite the lower volumes in mainland China, we saw Northeast Asia growing by 1% adjusting for currencies. This was driven mainly by networks and the continued 5G momentum in other markets in the market area or other countries in the market area. The 5G momentum continued in North America, where sales increased by 11%, and this was driven both in networks as well as digital services. In Europe and Latin America, sales increased by 14%, And if we break this down a bit, we can see that Europe grow 12% on the back of market share gains primarily. And we saw Latin America growing 28%. And that is a bit of a recovery compared to a very difficult second quarter last year that was heavily affected by COVID-19 pandemic. And finally, Southeast Asia, Oceania and India, where sales grew by 14%. That was primarily driven by significant investments in LTE and rollouts in India. However, I want to also say that we are seeing a bit of... of concerns relating to COVID-19 in Southeast Asia, where many countries are heavily affected now, and we've had a very difficult situation in India that's now gradually improving, but we see other countries affected, so we do believe we can see a risk for a slowdown in the general economies in Southeast Asia. If we then move on to business segments, Networks grew organically by 11%, despite the loss of volume in China and lower IPR revenues. This reflects our strong product portfolio and it has allowed significant gains in market share outside of China. We continue to see good momentum as 5G is increasingly rolled out across the world. Gross margin increased to 47.9%, and that's compared to 40.5% last year. Of course, that's supported by strong operational leverage, but also, as you may recall, we took a write-down of pre-commercial product inventory and initial 5G deployment in China in the second quarter of last year. In digital services, we saw double-digit growth in North America and Europe, while we can see that sales declined in the other market areas. For the full segment, sales were stable, and that's despite the reduction in volume in mainland China as well as lower IPR revenues. Gross margin decreased to 37.9% compared to 43.6% last year. That is to a large extent explained by the write-off that we do to pre-commercial inventory in China of 300 million kroner. So that impacted gross margin by almost 4 percentage points. We see overall otherwise a good momentum in the business in digital services, and we're continuing to execute on the plan. But of course, as I said before, the breakeven and reaching a 4% to 7% target gets pushed out because of lower volume in China. Our commitment to developing leading products here stands firm and we're continuing to increase the investments in our R&D despite knowing that it will take a year to two years before we start to see those product developments converted into revenues in the P&L. But that will also allow us to grow outside of mainland China that will over time compensate for the Chinese volumes. Sales in managed services decreased by 2% in the quarter, and that was due to lower sales as a result of the merger between two operators in North America, but also on planned contract exits in Europe. At the same time, we were able to increase gross margin to 19% from 17.2%. Also in managed services, we continue to invest in AI solutions for our customers and that will further strengthen our competitiveness. In emerging business and others, sales grew by 13% and gross margin continued to strengthen. The most important part here is that Cradlepoint is continuing to deliver according to our plans, and we perform well. We have offerings now that can capture a good growth opportunity in the enterprise segment that we forecast to be 20-30% over the coming several years. We're very excited about the opportunities to further grow in that area. With that, I give the word over to Carl Melander, our CFO.

Thank you, Börje. And good morning, everyone from Stockholm. So we can really see that the strategy execution that Börje talked about is visible in our financials. So if we look at the P&L here, you see again that reported sales up to 54.9%. Billion, which is an 8% growth organically, then with growth in four out of five market areas, as we saw just now. This growth is mainly driven by the network's business that grew 11%. So we reached this growth in spite of the decline in China then by 2.5 billion that we mentioned earlier here. IPR revenues ended up at 2.3. That's part of the top line here. It's a decline of 0.5 billion. But of course, the quarter as such is a bit boosted here by the revenue coming out of the recently concluded samsung deal where we have revenues both from q1 and q2 in into q2 um on a four quarter rolling basis if you look at the graph there on the bottom left we are around 232 billion in in the top line now We continue on this picture to look at the gross margin, 43.4%, which is actually a 520 basis points improvement, with strong improvement as we saw right now from Börje in three out of four segments. That's very encouraging. In networks, it deserves to be singled out again. We saw continued operational leverage contributing to the higher margins with a very high gross margin at 47.9%, up from 40.5%. Digital services then reported a decrease in gross margin here as a result of the write-down related to mainland China that Birger mentioned. And excluding that gross margin would have ended up at 41.7%, a more healthy level in the underlying business. And the underlying gross margin deserves to be mentioned, 42.4%, if you look at the four-quarter rolling basis, which is really more relevant as individual quarters can vary up and down. OPEX, 17.4 billion in the quarter. And as you see in the table here, R&D and SG&A amounted to 17.5. And then we have a positive impact of 0.1 billion related to impairments of trade receivables. SG&A, rather stable, as you can see, helped by currency, of course, but also impacted by the investments we make in compliance and security. The R&D side grew by half a billion. It's really coming from the digital services investments we do now in our cloud-native 5G portfolio, as we have planned and communicated around earlier as well. And then we shouldn't forget that cradle point, performing on plan, but of course adding also to the R&D and SG&A expenses. So this results then in an EBIT of 5.8 billion, excluding restructuring up from 4.5 a year ago. This represents then a margin of 10.6, which is then an increase of 240 basis points year over year. Again, the gross margin in networks is the big driver for this improvement on bottom line as well. We have a graph there in the bottom also showing the EBIT margin on a rolling four quarter basis. We are at 13.4, which is then well within the range of the 2022 target, which is between 12 and 14. And I can add also, which is not on the slide here, that the EBITDA target of 15 to 18 percent that we have set up for the long term can now be compared with the actual performance in four quarters, which is 14 percent. So let's have a look at how these profits then translate into cash flow. And you can see here that cash flow from operating activities increased by 0.5 billion. Of course, supported by IPR payments coming into Q2 rather than Q1, but also offset by certain tax payments where last quarter benefited from tax refunds to the tune of 0.7 billion. So here I think the important thing is to talk about this working capital where we really continue to focus on lead times in our company and keeping capital efficiency in our company and specifically the focus on project deliveries and the whole credit to cash cycle now has really enabled us to become more and more capital efficient. while at the same time growing top line and this is of course something we will continue to focus on going forward as well important also to mention when we talk about working capital is the inventory piece where we continue to monitor obviously the component situation and make sure that we have proper resilience so we can deliver on time to our customers which we have done so far So free cash flow thereby, before M&A, came out at 4.1 billion. This also is an increase then by 0.8 billion year over year. And again, looking at the rolling profile here and comparing with long-term targets, we are now delivering free cash flow better. before M&A at 9.6% of sales. And as you know, their long-term target that we have discussed is between 9 and 12. So we are within that range as well. When it comes to our cash position, then net cash increased by 0.7, quarter of a quarter. coming out, of course, of this free cash flow generated in the business, but also impacted or netted out by the dividend, part one, that was paid now, 3.3 billion for the first half of the dividend paid out. So net cash ended up at 43.7. And gross cash, there are a couple of movements there as well. We're now up to 77.1 billion. As you know, we issued a 500 million euro bond, an eight-year unsecured bond in the market during the quarter. We have also utilised a loan commitment from the European Investment Bank during the quarter, about $300 million as well, which also is there to support our R&D in 5G. So as a result of these events or actions regarding the debt portfolio, we have extended now the average maturity in the debt portfolio to four years from 2.2 years a year ago. Lastly, on this picture, I'd like to comment on return on capital employed, an important metric for us also, which amounted to 13.5% now compared with 9.9%. This is an increase, obviously, of around almost 4.0% over a year. Again, a combination of improved profits and capital discipline. I wanted to say a few words about IPR. And this period that we have had has been active when it comes to renewal renegotiations. Of course, we're very pleased with the renewal with Samsung. It's a global multi-year agreement, which confirms, again, the value of our patent portfolio. In addition to that, we signed up with one additional company for another renewal in July. So that falls out of the... Q2 period, but still important to mention here because it will impact the Q3 numbers. So all in all now, our portfolio of licensed contracts amount to 7 billion on an annual basis. And this is the starting point that you can see here in this bridge. And then there are a couple of factors that explain the difference, which is a question we often get. to the 10 billion, which we had in 2020. And I'll go quickly through them. Of course, we're exposed to FX movements here. That's the first bar here. We are impacted by the relative weakness of the US dollar towards the Swedish krona. The other factor, of course, is the upcoming renewals of expired contracts that we are working on, as mentioned. And then the third bucket has to do with the fact that not all of the revenue in IPR is recurring. Some is non-recurring, and this can vary between quarters and from time to time. And then finally, the fourth bucket is lower volumes from one of the licensees affecting the numbers as well. To conclude on this, we do feel confident that the leading position we have in 5G on the patent side will create a foundation for growing the IPR revenue going forward. Now I'm going to round off with a few words on the planning assumptions. First of all, It's encouraging to see now that the Deloro forecast for the market growth has increased dramatically, I would say, from 3% in their January report to 10% now for 2021. And you see here how that breaks down into different regions as well, with North America 12%, Europe 9%, and China 11%. Regarding our own top line, I just want to remind you that the normal seasonality is plus 5% from Q2 to Q3. But again, I want to point out that this varies, of course, with big fluctuations between quarters depending on deployment. Then we talk about the risk of losing a significant market share in China, of course. And under the planning assumptions in the report, you can find the quarterly numbers of sales in China. Over to IPR here, I mentioned already that 7 billion is the annual volume of contracts that we have. And then gross margin again, we're not guiding specifically on that, but just to reiterate that gross margin can vary quite a lot between the quarters. So look rather at the rolling four quarter. Last point, digital services then. Considering the risk in China, And also the fact that, which we've already said earlier, that 2021 is an investment year for digital services. We expect now a similar earnings level in Q3 that we just delivered in Q2, while we expect Q4 to become break-even on an isolated basis for digital services. With that, thank you, and back to you, Borge.