Ericsson

Everyone, and welcome to today's presentation covering the restate related to our new organization setup that will be implemented in our upcoming Q3 report. On this call today is Carl Melander, our CFO, and as usual, we will end with a question and answer session, and we will focus these questions only on two issues related to the restate. and specific and detailed questions on the spreadsheet that you probably have received, we can handle those from the IR department later this afternoon. And in order to ask questions, you will need to join the conference by phone. Details can be found in today's press release and on our website, ericsson.com investors. Please be advised that today's conference is being recorded. During today's presentation, 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 uncertainty. The actual results may differ materially due to factors mentioned in today's press release and discussed in the conference call. We encourage you all 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 word to Carl. So please, Carl.

Thank you, Peter, and good morning or good afternoon, good evening to everyone. Thanks for participating in the call. And as Peter said, the background to what we are publishing today is the reorganization that we executed here in Ericsson on the 1st of July this year. And as a consequence of the reorg, we are also changing the reporting structure now from the Q3 earnings report and onward. So if we look at the slides here, the new segment structure consists of the four segments, networks, cloud software and services, enterprise, and other. The largest segment is networks. and that currently accounts for more than 70% of our revenue in the Ericsson Group. This segment remains unchanged and Fredrik Geidling continues to head up the networks part of our business. The segment cloud software and services is then a merger of the two previous segments, digital services on the one hand and managed services on the other hand. And here we will leverage the investments we do in R&D to increase the cloud native expertise and will build combined offerings for automation and AI for service delivery. The solutions here will help customers automate what is becoming an increasingly complex network for cost advantages and speed to market. And here Mr. Per Narvinger is the head of this segment, cloud software and services. The new segment, enterprise, consists of three business areas, enterprise, wireless solutions, technologies and new businesses, and global communication platform. And we'll come back in a minute to expand on that. But the business area heads here in enterprise will report to our CEO, Maria Colmas, as the segment head for enterprise. And finally, we have the fourth segment called other, which includes media business and one-offs. So what we have published today, and you have seen it most likely, is then the restated financials according to this new structure. And we published and restated full year numbers for 2020 and also quarterly numbers for 2021 and up to the second quarter of 2022. We will report net sales, gross income, gross margins, a beta and a beta margin, EBIT and EBIT margin for these segments. And we will also report profitability excluding restructuring charges. So let's move to the next slide and let's then look at what the segments will consist of. Starting again with segment networks, which is unchanged as I mentioned before. And this is comprised then of radio access networks, transport solutions, site solutions, network rollout and tuning, and also customer support. No change. Secondly then, in segment cloud software and services, we will help operators to succeed in the transition to cloud-native software and automated operations as they all prepare their networks for the future. And we will do so through four main product groups, and I will explain a little bit more in this segment. what is contained in the various parts. So first, it's core network and automation. And here, I can say the background here is that core networks must support an evolution from today's deployment to cloud native environment. And secondly, it must support several deployment options. For example, central and edge deployments are needed to enable low latency and edge computing use cases. Automation is required also to handle the magnitude of tailor-made services, use cases, and network slices that will be introduced. So that's the first one, core network and automation. Second, managed services. And here, as you know, we are continuing with the managed services business. And here, AI and data-driven solutions will exist. now actually benefit from the merger between the two units here from mutual development and evolution of services to create an even more efficient service delivery machinery. Thirdly, service orchestration. And this is about creating a programmable network open for the consumer and enterprise application ecosystems. And a key capability here is secure and automated end-to-end management across multi-cloud, network domains, and even multi-vendor. And to succeed here, service automation is foundational to remove manual tasks in design, ordering, fulfilling, assuring services, et cetera, all to increase efficiency for our customers. And then the fourth part is telecom BSS or business support systems. And here, The background here for BSS is really monetizing new and different services for consumers and across industry verticals as well to serve enterprises. And to do that, the BSS, the business support systems, must be agile and flexible, robust and resilient. And here, of course, digitalization is critical for the customers and as is the journey to cloud BSS. in enabling operators to fully monetize investments in the networks. So this is key also for our customer community. And with that, we can move to the segment enterprise here. So a couple of parts, as I mentioned before. First one is enterprise wireless solutions. That is comprised of the current cradle point business together with dedicated networks. And here we develop solutions for enterprises, and we will create a dedicated go-to-market organization for enterprise customers, including, I should say, leveraging operator relationship that we have. And here George Mulhern is heading enterprise wireless solutions. And George was, as you know, the CEO of Cradlepoint, the company acquired a couple of years ago. Then secondly, in technologies and new businesses, we will continue to focus on developing new business solutions to accelerate growth across Ericsson's core and enterprise businesses with the established incubator model that we have. And here also Townsend is heading up technologies and new businesses. Then the newly acquired company Vonage will be reported here in business area global communication platform. And this is where we combine the communication API business, which is providing key capabilities such as messaging, voice, video, and conversational AI with On the other hand, unified communication and contact center as a service capability. And here, Rory Reed, Vonages CEO, is heading up the business area global communication platform. And so in segment enterprise, we also have a program for the evolution and development of the global network platform that we have talked about. And this is about building a new market based on widespread utilization of advanced APIs in both 5G and 4G communication solutions. And the focus of this program then is to continue to develop the offerings that Vonage has, but also, of course, develop new offerings to create a new value segment for open innovation to help ensure monetization and new value for the full ecosystem. And finally, segment other than, which includes the media businesses and one-offs, and also changes in holdings or evaluations and so on in our Ericsson Ventures portfolio will be reported in other. Next slide, please. So, you have all the numbers in the PDF we've published today, but let me comment some highlights per segment. First of all, as you see, we have a grouping here. We group networks and cloud software services together to form mobile infrastructure business. And next to that, we have the enterprise segment. But again, starting with networks, looking back then on this period, our top line has grown as a result of underlying growth in the RAN market. And on top of that, we have increased market share, especially in Europe, in line with strategy. And our margin has over this period also improved as a result of operational leverage. I can also mention here that we made a provision related to Russia earlier in this segment, but we have moved that into segment other. Other is not visible on the slide, but anyway, since that was a one-off item caused by the invasion of Russia in Ukraine and is really unrelated to the business in networks as such. And lastly, on networks, then the IPR share that goes to networks will continue to be 82%, as before. Moving to cloud software and services, here we have had declining sales in both digital services and managed services. In digital services, the decline is mainly due to lower sales in Northeast Asia, primarily related to mainland China. And in many services, the decline is mainly due to reduced sales in a large contract in North America, and also re-scoping and planned exits primarily in Europe. All of these things we have communicated earlier. And for the full year 2020, we were breakeven on a beta level, including restructuring charges. Since then, the margin has declined due to the higher R&D investment within 5G core. that we decided to do at the same time as sales declined. And lastly, we have the enterprise segment. Again, sales and gross margin improvement has been driven by cradle point. And speaking about cradle point, I wanted to say a few words on cradle point and the accounting treatment here to comply with IFRS principles, which leads to a time gap between billing and revenue recognition. Because in Cradlepoint's business model, or we in Cradlepoint, I should say, we invoice and get paid for 100% of the subscription services for the contract period up front. However, that revenue is then deferred and is recognized during the contract period, which is typically three to five years. And that leads to a gap between invoice sales, so-called billings, on the one hand, and reported net sales. And consequently, this also impacts the timing of recognition of gross profit. Then we have global communication platform, which includes , as mentioned. And yeah, this is not part of the restatement here, of course, since we acquired this business on the 21st of July this year. I just want to say also that going forward in the reporting here, we will be transparent about the performance of the parts of enterprise segment to the extent permitted by the regulatory framework regarding segment reporting. This is the IFRS 8 part, and so we will come back to the final disclosure structure in the Q3 report. One more thing to mention here on slide eight in this presentation pack, which we have published, we cite the numbers from Vonage's official SSE filings. This is for your reference. And obviously, these numbers are all from the period prior to Vonage being acquired by Ericsson. And Vonage has, of course, been reporting per US GAAP. And now that Vonage is part of Ericsson, we will apply IFRS. in the accounting and that impacts accounting treatment in several ways. For example, how lease arrangements are accounted for and how certain cost elements are or rather are not capitalized. And furthermore, the PPA or the purchase price allocation will impact, for example, the valuation of the deferred net sales balances. And we will also have intangible assets here created, which will be amortized over the P&L. Those, of course, impact EBIT, but not EBITA. And these, all of these numbers, of course, will be visible in the Q3 report once we publish that in October. My final slide is around the market area distribution. You see the chart here. This is the sales split year-to-date 2022 by market area. The market area structure is unchanged as compared to before with top-line breakdown into five geographical areas plus market area other. And here it could be good to know that the majority of our enterprise business will be reported in market area other with some exception for sales split. related more to the geographical market area. And also our IPR revenues as well as the media business will be reported in market area other which is really no change since before. And that is it from me for the moment and with that we can open up for Q&A. So back to you Peter.

Yes, thanks, Carl. So it's now time for the question and answer session. And as I said before, we will focus the questions only to issues related to the restate and detailed questions related to the spreadsheet where you would find all the numbers going back in time. We can handle from the IR department later on this afternoon or whenever that's convenient. So with that operator, we will open up for the first question, please.

thank you as a reminder to ask a question you will need to slowly press star one and then one on your telephone and wait for your name to be announced once again it's star one and one on your telephone and wait for your name to be announced please stand by while we compile the q a roaster if you're streaming the webcast please mute the webcast audio while asking a question to minimize any audio feedback thank you we are going to proceed with the first question please stand by

I think we have the first question from .

The first questions come from Daniel from . Please ask a question. Your line is open.

Hello, . Good afternoon. This is on behalf of and . Hi, . Hello. I have a question regarding the amortization that has fallen from 464 million at max in Q3 21 to 158 million in Q2 22. It has been stable at enterprise lifting from 81 to 89 million. Given one match consolidation, what is the guidance for enterprise coming quarters? Thank you.

Yeah, I think as Peter said, some of these specific details, I think the IR team is well positioned to answer. But in general, we will have a significant intangible amount in the balance sheet coming from the vonage acquisition, and we will amortize that over time. The exact amounts will be visible in the Q3 report because we have now, we are in preliminary PPA territory here. So I'm not at a position to give you specific numbers of that right now. When it comes to your question on the historical numbers and how they have fluctuated, I actually think it's better for the IR team to really look into that and come back with a good prepared answer.

We will do that, Jesper.

All right, thank you so much.

Thank you. I think the next question is from Alexander Petrek from Societe Generale.

Yes, the next question comes from Alexander.

Thank you for the question. Yes, hi. Thank you for the question. Can you hear me? Hi, can you hear me all right?

We hear you, Alexander, yeah.

Good, thank you. So I just want to clarify, are you going to continue to disclose or not continue, start disclosing Vonage separately also in terms of earnings at any level? I didn't quite understand the comment there. It's part of enterprise. but then it's bundled also with CreoPoint and all of the startup businesses as well, so we get a clear read on how you're doing on that front.

Yes, our ambition here is to be transparent with that and show specifics, and we'll come back, however, to really the specifics on how we do it and on what level in P&L and so on, and we are looking at Currently, then, as I mentioned, because you see, the IFRS stipulates how segments can and should be reported. And we have to consider that before we finally create the disclosure structure. So we will come back to it in Q3. But our intention and desire is to be transparent with the subparts of enterprise.

Okay. Okay. That's helpful. Thank you. And the second question, I think you mentioned the fact that you're going to have a dedicated go-to-market team, so that probably also means more costs for wireless solutions. Is that how we should understand it? So are you going to see more SG&A in that area as a result?

There is a certain element of investment in SG&A in the go-to-market, yes, of course. But that is part of the plan. already in terms of the cradle point business now in enterprise wireless solutions. And the go-to-market is a combination of resellers and various setups, indirect channels, also partly actually through the operators. So we will set up that whole structure, of course, for maximum sales efficiency and so on globally.

Okay, so that means initially a higher fixed cost base, but hopefully that will drive revenue higher as well. So you expect that to be accretive longer term?

No, exactly, absolutely. So the investment in sales should give, I mean, that's the ambition to fast returns, of course, in terms of sales volume as we expand on cradle points of our very successful portfolio into new markets. So, yes.

This is a far-fetched one, but where would you like to see the enterprise businesses' growth margin when it becomes a little bit more mature because there's a lot of stuff now that's in the startup phase? Where would you think that should land? What kind of business should it be in terms of growth margins?

I think we should come back to that. You see some of the restated numbers here, but then, of course, we will add Vonage into the mix in Q3. So let's come back to that question when we see the first actual, including all of the enterprise components, if that's okay. Okay.

Well understood. Thank you very much. That's very helpful. Thank you.

Thanks. Operator, we're ready for the next question.

Sure. We are going to proceed with the next question. The questions come from the line of Aditya Mitiku from Credit Suisse. We'll ask a question. Your line is open.

Good afternoon, guys. Thank you for taking my questions. Just firstly, I just wanted to clarify, when I look at the sum of digital and managed services, there is a small difference between what is disclosed as CSS and the sum of digital and managed services disclosed previously. Is there a slight change in the reporting structure? Are you moving something out of maybe digital services into enterprise or something like that. Is there any color you can give around this? And then secondly, I just wondered with this new reporting structure, can you give us some color on how this will affect your day-to-day operations in addition to what you've already said on having a dedicated go-to market on the enterprise side?

Well spotted on your first question. It's true we have moved. It's actually a smaller business that we have moved from what used to be digital services into the enterprise segment. It's a mobile money business, mobile financial services business that we have. So that explains that delta. When it comes to a change of the daily work, as you said, I mean, I think in general, of course, Ericsson's move now into enterprise is significant for us we build it to a large extent on on completed acquisitions with cradlepoint cradlepoint has managed their business very successfully and that now continues i would say within ericsson and in combination with the resources of ericsson as well and the same will be true for for one edge which is of course has just come into the group i think for I'm not sure if that is your question, but of course, for many of us who have spent, I mean, in group functions and so on, we are, of course, mainly dedicating time to the mobile infrastructure business so far, and now we are coming into the enterprise segment as well, which sometimes has very different business models. So there's quite a lot of change going on in the whole company, I would say, and as we adjust to this new reality. But it's going very well so far, and everyone here is very excited also about the opportunity within the enterprise space as a second strong growth engine or as a new growth engine for Ericsson's business. I'm not sure if that answered your question, Jacob.

It did on the first bit. Just on the second, I was just trying to understand the rationale behind changing the reporting structure. Is there something operationally changing? It doesn't feel like it, maybe with the exception of a little bit more investment into the go-to-market on the enterprise side. It doesn't feel like a whole lot is going to change. Am I right in my understanding?

But I think what we want to do with the restructure and the reorganization here and the new reporting structure is really to emphasize our strategic move into enterprise and collect the enterprise-related businesses into one segment so that can be followed up and understood. And because it has a different logic than the mobile infrastructure business, we want to separate it out and show it separated, including the growth that we expect there, et cetera. So, I mean, we've had an internal reorganization, which, of course, has brought in a couple of new members of the executive team as well, with Rory Reed and George Mulhern, certainly providing a lot of new perspectives on the enterprise business as well. So, I mean, things are changing, and I think it signals and illustrates, underlines perhaps, the strategic shift that Ericsson is undertaking now with more emphasis on the enterprise side and really wanting to show also to you and the financial community how we perform over time in the enterprise segment.

Understood.

Thank you. Okay. Thank you, Adetayam. We'll move to the next question, please.

As a reminder, ladies and gentlemen, if you have any questions or comments, please press star 1 on your telephone. Thank you. We are going to proceed with the next question. The next questions come from . from Bank of America. Please ask a question. The line is open.

Good afternoon, everyone. Thank you for taking my questions. I've got two quick ones. Maybe related to the new divisional breakdown. So, first of all, thank you. It's very useful. Second, I wanted to ask you if you could give us a rough breakdown in the non-network part of the business of the split between services and revenues because, you know, as As Alex pointed out earlier, those gross margins are probably much closer to a services business, to a software business, yet you've got a lot of software in there. So just trying to understand where we are in that journey from pruning services into higher gross margin software revenues. That's the first question. And second, maybe, Carl, can you just remind us when you might, if at all, need to take an impairment on Vonage. Is that just you do that when you close your books on an annual basis, or do you have a bit more leeway you can review that on a multi-year basis, even when those KPIs are met or not met?

Yeah, so impairment testing is routine. Every quarter, of course, we have to go through all the assets to test the valuation. And we always do that, of course, even more emphasis in the fourth quarter. And obviously, this is reviewed by auditors and so on. Right now, there's no indication of impairment and so on. But again, this we will do every quarter to test the business plan, the expected cash generation versus the value that we sit on in the balance sheet.

Got it. And on the mix, roughly, software services, is that something you can talk about?

Yeah, I mean, I think maybe we can come back to specific numbers and breakdown. But in general, I can say that, I mean, all our businesses are striving for an increased software proportion. And I mean, back down all the way down to back to 2017, one of the strategic changes there was to go for more product-led and less services-led offerings to customers. Doesn't mean that services is not something we pursue or something we want to get out of, but It's a matter of how you lead, not least in what used to be digital services, now cloud software and services. But the demand is going and our offering is going towards more and more software, I would say, in all these businesses. And, of course, that's something that benefits the margins as well.

And I think also overall, Didier, we have talked about being a little bit neutral on the – if you look at the business mix that we – currently also have sufficient margins in the hardware side and improved margins in the services side as well, which I think is important.

Got it. Maybe one quick one, if I squeeze in one final one. At the CMD in December, do you think you could provide us for financial targets, either up margins or gross margins or revenue growth for each division, as you've done in the past, or is it too early to talk about that?

We'll come back to that. There was, I think, a very good reason to break down the target by segment earlier because we were really in this turnaround phase. Let's see if the relevance is here now. But we definitely stick to the 15% to 18% EBITDA target for the long term that we have stated before. Let's see at the CMD if we want to expand on that or break it down.

Okay, brilliant. Thank you very much.

Thank you.

Operator, do we have any other questions?

We have no further questions at this time. Thank you. I hand back the call to you.

Yeah, thank you. And maybe, Carl, if you want to say some final words before we close the call.

No, just thanks a lot for your interest. And great. We are now, of course, looking forward to reporting also in this new structure. Now you have the basics here, the historical numbers to understand more or less where we have been in where we would have been in the new structure historically and of course with q3 you will get a data set that provides actual data from which to draw conclusions and and ask additional questions so looking forward to that that's the next location that we will meet except for one call which will happen on Monday which is really around tutorial, if we call it that, on the Vonage business, where we will explain a bit more what Vonage is all about. And I think the invitation for that has been published as well. Exactly. Back to you, Peter.

No, thank you all. And I will speak to some of you on Monday. And then we have the report coming up on the 20th of October. And then later on, clearly, as was mentioned by Didier, we have the capital market in New York, December 15th. Looking forward to seeing you there, hopefully, as well. Thank you so much. Bye-bye. Bye.

This concludes today's conference call. Thank you for participating.