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.