Ericsson

Hello and bonjour everyone and welcome to today's presentation of Ericsson second quarter result 2022. Together here in the studio I have our CFO Carl Melander and our CEO Börje Ekholm. As usual we will start this session with a presentation of around 20 minutes and then we will have the Q&A session. More details around that you will be able to find on our webpage ericsson.com slash investor. I will start with this first. 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 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 start with giving the word to you, Börje. Please, Börje.

Thank you, Peter. And good morning, everyone, and welcome to today's presentation. And a big thank you for joining us, of course. I'm pleased to present another quarter where we continue to see a strong business performance. We are growing, driven by the global rollout of 5G networks, as well as market share gains. Today, we have a 39% RAN market share, and that's of course excluding mainland China, and that's up from 33% in 2017. Today, 50% of the world's 5G traffic outside of China is carried over Ericsson Radio networks, and 80% of the top 20 operators in the world are using our 5G core. Fundamental to our strategy is technology leadership, and since 2017, we have increased our investments in R&D significantly, and we're committed to continuing this journey of innovation. This includes investments in our mobile infrastructure business, but also developing a leading offering in the enterprise space. In the quarter, we announced some changes to our structure, and that will allow us to speed up and accelerate the execution of our strategy. With 5G, anything that can go wireless will go wireless. This puts Ericsson in a very good position as 5G is rolled out and transform every sector of the society. So now let me go through some of the key takeaways from the quarter. We see good business momentum and our underlying business is developing well. We continue to drive improvements through the introduction of new innovative solutions and continues to improve our underlying operation. In the quarter, we saw organic sales growth of 5% with gross income reaching 26.3 billion kroner. This is driven by strong 5G momentum in North America as well as in Europe. Our EBITDA margin for rolling four quarters were 14%. That's tracking close to our long-term target of a margin of 15 to 18%. And that's a target we're committed to reaching in the next two to three years while we establish also Ericsson on a stronger long-term growth trajectory. This is a testament to the hard work and commitment from our colleagues across the company who has continued to deliver to our customers in spite of a very challenging supply situation and a big thank you to our team out in the world. You all know the global supply chain situation remains really challenging and inflationary pressures are significant. We're investing, and we have been investing actually dating back several years, to de-risk our supply chain to build resiliency. This has included creating a more flexible manufacturing footprint, but we have also invested in building buffer inventories. And this of course leads to a larger inventory situation in the company. Ensuring supply in a difficult supply environment is associated with extra costs. However, we see this as a key driver of our ability to actually expand the footprint and strengthen our scale. And from a long-term perspective, we believe this is critical. I remain convinced that actually lost sales cost more from a long-term perspective than carrying a bit of extra inventory short term or for a few quarters. That's basically like an insurance premium for the future. So this ability to deliver... Despite the very challenging supply situation, we believe it's critical to establish a stronger footprint and thus a bigger scale which will drive our long-term profitability. To handle these extra costs, of course, we're going to see compensation as contracts expire. But we believe that the key drivers to combat the cost increases will be to continuously launch new innovative products and solutions with new features as well as lower costs. And that's what we have used the last few years to turn around the company, and we continue to use that in order to actually combat the cost inflation. And we have continued to do that during the quarter. The gross margin came in at 42.2%, excluding restructuring, and that's lower than what it was last year, 43.4%. The decline in gross margin is largely attributed to lower IPR revenues in the quarter. That means we've been able to mitigate a large part of the cost inflation with a continuous improvement of the business as well as product substitution. IPR revenues are affected by several expiring patent license agreements and that we are renegotiating and also some other 5G license negotiations. And we're confident in our strong 5G patent portfolio and we will seek to optimize the return from that portfolio. And here... We believe we're in a strong position to negotiate, of course, good future license deals. So we will seek the right deal rather than or that will lead maybe to slippage in time because it's more important for us to have the right deal than do it fast. Gross income improved by 2.4 billion kroner and EBIT by 1.5 compared to Q2 last year. We also continue to engage with the US authorities, the DOJ as well as SEC, in relation to the 2019 Iraq investigation and the DPA breaches. At this point in time, we cannot assess how these matters will be resolved. We remain however fully committed to cooperating with the authorities as this process goes on. We also continue to increase our investments in ethics and compliance. Actually, a large part of the increase in our SG&A during the quarter is attributed to investments in ethics and compliance. We further need to make sure that we have integrity in all decision making in the company as well as that we have a prudent approach to risk taking and risk measurements in the company. And we believe that all of those investments that we do in changing the culture as well as our processes and procedures will make Ericsson a stronger and more resilient company in the future. Let me now turn to the customer and market side of our business, where we continue to see strong traction across the business with organic growth in four out of five market areas. Our strong momentum in North America continues, where sales were up 12% year over year, FX adjusted, of course, and that's driven by continued high demand for 5G solutions in networks. And the US customers continue to be at the forefront of 5G deployment and the introduction of new use cases. Overall sales in Southeast Asia, Oceania and India increased by 6%. This was driven by networks and digital services where we saw market share gains. Sales in Northeast Asia had a small decline of 1% year over year. That was mainly due to the timing of 5G rollouts. In Middle East and Africa, sales increased by 8% year over year. That's predominantly driven by Africa, with 4G rollouts as well as software upgrades in digital services. Overall, we continue to see a very encouraging momentum in the market. And finally, in Europe and Latin America, sales increased by 4% year over year. And that is thanks to growth in Europe while Latin America was stable. Overall, we continue to see very good momentum on market share gains in Europe, with networks showing double-digit growth, despite sales being affected, of course, by the invasion of Ukraine. And Russia impacted sales by 1.2 or lost sales by 1.2 billion kroner during the quarter. So let me now move over to our strategy, and that's based on leadership in mobile networks, as well as a focused expansion into enterprise. In the quarter, we took a key step to accelerate our strategy execution by introducing a new group structure. On the mobile network side, we've introduced a new segment, cloud software and services, by merging digital services and managed services. This will allow us to capitalize on the convergence of cloud software and services and grow our core mobile infrastructure business. And we, of course, remain very committed to turn around the business as quickly as possible in that segment in order to support us reaching the long-term group targets. On the enterprise side, we formed a new segment where we have one business area called Enterprise Wireless Solutions, which is the combination of Cradlepoint and dedicated networks. Cradlepoint continues to strengthen its position on the market and shows building growth in excess of 40% this past quarter. The enterprise segment will also include the global network platform, which we believe will drive a paradigm shift in the industry. And that's because the network will be a horizontal platform whose capabilities will be exposed, consumed, and paid for through global network APIs. The global developer community can therefore start to innovate on top of the network and really leverage all the capabilities of the network. This will be very important in establishing 5G as the strongest innovation platform the history has ever seen. We believe this will inspire innovation, but most importantly, it will actually give our customers, the service providers, another avenue to monetize the network investments. And here we're working very closely with front-runner customers, and we see a very strong response from our customers supporting the introduction of the global network platform. The intended acquisition of Vonage is an important building block to execute on the global network platform, and we are working to secure approval and close the transaction before the end of July. Our strategy builds on technology leadership, and we continue to invest in R&D so we can launch new and innovative products in the future as well. Of course, this includes investments both in our mobile networks business as well as in enterprise. And we will spare no resources in strengthening our position in those areas. Now, let me give the word over to our CFO, Carl Melander.

Thank you, Burje. Excellent. And good morning, everyone. Thanks for taking the time. And first of all, I wanted to say that this then will be the last quarter we report according to the existing current structure of segments. and from the quarter three report then we will report in the new structure with with the four segments networks cloud software and services enterprise and other and we will provide a restate also for uh from first quarter 20 21 until second quarter 22 and also the full year 2020 in this new structure and we will do that in September well in time for the Q3 reports. So if we look at the numbers then and starting with net sales, the set sales amounted to 62.5 billion with organic growth in four out of the five market areas. so organic growth of five percent despite then a couple of items that burger touched on the suspended business volume in russia that's 1.2 billion in top line drop due to that and also the ipr revenue which is 0.9 billion lower year over year So this growth was really driven by the 5G deployment in two of the largest market areas. We have, of course, North America growing 12%, as you saw, and Europe and Latin America growing 4% organically as well, especially driven by Europe. We continue to win market shares, not least in Europe, and now we see the fruit of that in top-line growth. So reported sales grew by 14%, and clearly we have quite a strong FX tailwind here due to the weakened Swedish krona. So IPR, we talked about it a bit. It was 1.4 billion in the quarter, decreased by 0.9, as said. And it can be noted that this is in line with the guidance that we had provided in the Q1 report for Q2, when we said... that we would end up between 1 and 1.5 billion in the quarter. We came out at 1.4. And the same guidance now we maintain also for the third quarter. That's important to say. Of course, the actual outcome will depend on timing and terms and conditions of any new agreements. Gross margin then, excluding restructuring, came out at 42.2%. And I'll drill more into gross margin in a moment so we can continue talking about the R&D expenses. It amounted to 11.5%. That's an increase with $1 billion. of which around 40% relates to FX movements. But we have increased R&D in mainly networks, two areas to mention, the Ericsson Silicon, which is the next generation A6, but also in Cloud RAN. And of course, the Silicon piece is to enable really industry-leading radio performance energy savings, not least. And the Cloud Run has to do with more flexible deployment options for our customers. We will continue with this, increase R&D for value-creating purposes. SG&A also increased 0.9 to 7.9 billion. A portion of that has also to do with FX, of course, but other than that, it's related to legal and compliance costs and expenses that we have. So EBIT then, excluding restructuring charges, was 7.4 billion in the quarter. That's a year-over-year improvement of 1.5, and that corresponds then to an EBIT margin of 11.8%. That in itself is a year-over-year improvement of 1.2 percentage points. And then further down the P&L net income, I should mention also 4.7 billion in the quarter versus 3.9 as a result, of course, of the improved EBIT. And I would say despite a more negative finance net, driven by FX hedge results. And then free cash flow, we drilled a bit more into it in a minute, but it came out as you see here, 4.4 billion versus 4.1 a year ago, despite then a significant buildup of inventory to secure deliveries to customers as Börje outlined earlier. EBITDA is the key metric now for profitability going forward, given the long-term target we have of 15 to 18, and excluding restructuring that on a rolling four-quarter basis came out at 14.1%. But let's have a look at gross margin and drill into that a bit more here. And you can see again the more longer-term perspective on gross margin. We think this is more valuable and meaningful. and you can see now on a rolling four-quarter basis gross margin excluding restructuring is at 43 percent and basically the improvement you see here since the beginning of 2020 this is the the rolling line is the blue line here is really driven by the investments in innovation in r d that we have done since we started in 2017 and that of course, has enabled better product offering, better features, etc. This is what we continue to do as well now in the inflationary environment. So we see how this has had a positive effect on the gross margin over time, despite increasing at the same time the market share, which sometimes can have a slightly dilutive effect on margin. So a big reason here for the year-over-year comparison on gross margin is the IPR revenue, of course, where we had a catch-up effect in Q2 last year from the IPR side. This is really explaining the biggest part of the change in gross margin. Secondly, we did see increased costs for component and logistics. And that's also clear in these proactive investments that we make in supply chain resiliency networks. Clearly the right thing to do because we are able to deliver to customers, which you see in the top line development. And most of that impact we are able to offset by other factors. We had a large software contract we talked about in Q1, but of course also, and this is important, the underlying improvements in our business as well, which is a continuous aspect we work on. So all in all, you could say we were able to absorb a lot of the cost pressure with higher sales on the one hand, if you look at the absolute margin number. And of course, our whole strategy is to continue to improve margins every day, every month, every quarter and into the long term via project substitution and other means. Okay, digital services then, gross margin came out at 39.9%. affected by initial deployment costs for some of the cloud-native 5G core contracts that we have. We have talked about that before as well. And also here, a lower share of IPR. We are encouraged, though, in digital services by the win rate of 5G core contracts. Managed services then, gross margin increased by four percentage points to 23%, mainly driven by two things. One is the network optimization business, which grew. And the other one is the so-called variable sales in managed services, both of which contributed to the good gross margin improvement here. And on managed services, because this is now the last time managed services will be reported in this structure, at least, it's a good thing to note that rolling four quarter EBIT margin was 9.5. So that is within the range that we set up for 2022, 9 to 11 percent, basically two quarters ahead of plan. And as we mentioned earlier, then next quarter, we will report according to the new structure with digital services, many services combined in segment cloud software and services. And that we will follow up in a transparent way going forward as well. Lastly then, emerging business and other, gross margin was 35.8%. Certain year-over-year decline, and that relates to cradle point, but mainly accounting-wise, because last quarter two in 2021, we had a positive one-off effect, which had to do with the final quarter. PPA, purchase price allocation from that acquisition. So in essence, in the actual business, cradle point performs really well with the growth that you mentioned, over 40%, and a gross margin which is well above group average. I will now move over to cash flow real quick before I hand back to Börje. So free cash flow before M&A, 4.4 billion versus 4.1 billion a year ago. Mainly driven by the EBIT improvements, of course, but if we look at the working capital development, And I can tell you and repeat that we focus a lot on cash flow in Ericsson. And the fact that we were able to deliver the 4.4 here, in spite of what we're talking about, the proactive investment in supply chain, reflects, I think, very well on the team's effort here to generate cash flow. And you can see that in the operating net assets here, it's a certain increase due to inventory, but to a large extent offset by very strong customer collections as well. So as we say in the report, based on the current visibility, we expect the inventory levels to gradually reduce during the rest of the year towards the end. So all in all, this leads to a solid cash position ahead of the Vonnitz acquisition. Gross cash now at a bit more than 100 billion and net cash at 70 billion. And final comment here is that when we look at free cash flow before M&A on a rolling four-quarter basis, which I think is important, then we are hitting our long-term target because it comes out at a bit more than 29 billion. Swedish kronor, which is 12% of net sales. And as you know, our long-term target when it comes to cash generation is 9% to 12%. We are at 12% now. With that, I hand back to our CEO, Mr. Burgekon.