Ericsson

Hi everyone, and welcome to the fourth quarter and full year result of Ericsson 2022. Before starting, I just want to say that we have some issues with the streaming of this conference call, so we are focusing on the audio right now. So everyone joining on audio, you will be able to listen in now, but we might have some issues with the streaming. With that said, I will also welcome our CEO, Börje Ekholm, and our CFO, Carl Melander. As usual, we will have a presentation and then we will have a question and answer session. In order to ask questions, you will need to join the conference by audio, as I said. And the details for that is to be found on our press release or on ericsson.com. But before handing over to Börje and Carl, I would like to read the following. 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 uncertainties. The actual results made different material due to factors mentioned in today's press release and discussed in this conference call. We would like to encourage you to read about these risks and uncertainties in the earnings report itself, as well as in the annual report. With that said, I would like to hand over to our CEO, Börje Kohn.

So please, Börje. Thank you, Peter, and good morning, everyone, and thank you all for joining us. So today we're excited to present another quarter of good progress towards our strategic and financial goals that we have outlined to you at our Capital Market Day about a month ago. From a financial perspective, 2022 was one of our best years in the company's history. With our fourth quarter results, we're on track to deliver on our long-term EBITDA target of 15-18% by 2024. Target achievement is supported by cost savings, growth in our IPR revenues, Portfolio changes, and that includes, of course, reaching break-even on cloud software and services, but also to exit some loss-making businesses. And we are executing on these initiatives. We made significant progress despite macroeconomic headwinds during the quarter. I am truly excited about Ericsson's future as we continue to execute on our strategy and with full confidence in our long-term development. As we also said during our Capital Markets Day last month, we expect and plan for overall mobile networks market to be flattish in the next few years. And Deloro now predicts a slight growth outside of China. But as we also said during the Capital Markets Day, we expect 2023 to be rather choppy with near-term uncertainties and macroeconomic headwinds that will likely impact operator CapEx. So, as expected, during Q4, we've seen some operators slowing the pace of network investments, and that includes frontrunner customers in many markets. We expect operators to continue to sweat assets in response to the macroeconomic headwinds. In addition, we expect operators to adjust inventory levels as supply situation eases. These trends started to impact networks in Q4 and as we expected, it impacted sales in North America. We expect and plan for these trends to continue during the first half of 2023. And after that, we believe the inventory adjustment cycle is starting to get through and development normalizes again. But in addition to this, longer term, growth in data will drive network investments and data growth remains at very high levels. And that will return mobile networks market into more of the flattish development that we're predicting over a number of years. Looking ahead, it's important to remember that we're still in the early stages of the 5G rollout. and actually of the cycle of widespread enterprise digitalization. To address the near-term outlook, we're taking several actions. Most notably, we're taking cost savings initiatives that we expect to take full effect by the end of 2023 and with the impact starting to show during Q2 of 2023. In cloud software and services, we're executing on our revised strategy And of course there are seasonality in that business, but we expect to see and plan for break even of operating profit for full year of 2023. And with gradual improvements in profitability thereafter towards much more attractive levels. We as a company are at the epicenter of a very powerful trend. And that's really that anything that can go wireless will go wireless. And we are investing to retain our leadership in 5G. But we're also working to shape the future industry structure and how the industry will expose, monetize and consume advanced network features that 5G networks can provide. And this will allow us to transform into a platform company. Going forward, our enterprise business will be a major driver of our long-term growth and profitability. I would already now like to thank all my colleagues for their efforts at delivering on our long-term plans and create long-term stakeholder value. Our achievements would not be possible without them. But let me now go through some highlights for 2022. With our fourth quarter result and what we have executed on during the quarter, we're on track to deliver on our long-term EBITDA target of 15-18% by 2024. As we conclude the year, we have established a clear leadership position in mobile networks and we've taken important steps towards building a high-growth enterprise business. Based on technology leadership, we have increased our market share in RAN from about 33% in 2017 to 39% excluding mainland China. And we've established a global leadership position in 5G core. Our strategy is extending our leadership in mobile networks and expand into the enterprise segment with the objective to maximize value across all stakeholders. The Vonage acquisition, which we completed during last year, gives us the foundation to transform Ericsson into a platform company and executing on this strategy remains a top priority for us. In 2022, organic sales grew by 3%, driven by a 4% increase in networks and 16% in enterprises. EBIT margin excluding restructuring charges was 10.1%. However, if we exclude Vonage and the previously announced charges during the year, EBIT margin was 12.9%, reaching our 2022 target of 12-14%, as we said and we committed to when we announced the Vonage acquisition. We remain fully committed to continue building a culture of accountability and integrity, and we continue to invest heavily in those areas. We recognize that we can only be a true industry leader if we're both technology leader, but also a leader in how we conduct our business. As you saw during the quarter, we took the decision to extend our monitorship. This is the right decision to take to ensure that integrity is fully embedded into our culture. I'm convinced that a best-in-class compliance program will give our company a competitive advantage and establish us as a true industry leader. Let me go through some key events during the quarter. In December, we announced the signing of a multi-year IPR agreement. This contract is of strategic importance to our 5G licensing program. This positive outcome positions us well to capture further 5G license agreements. And that's, of course, among previously unlicensed handset manufacturers, but it's also in new areas such as consumer electronics and IoT. Based on this, we expect significant IPR revenue growth over the coming 18 to 24 months, as we said at our Capital Markets Day. Group organic sales grew by 1% year over year, of which IPR revenues contributed by 5 percentage points. And we saw an EBITDA of 9.3 billion, corresponding to a margin of 10.8%. During the quarter, we had a strong focus on breaking the curve on the inventory development and we executed on that and we were able to significantly lower our inventory levels. This contributed to a cash flow before M&A of 16.9 billion kronor. In the quarter, our networks business grew in India on the back of significant market share gains. As we said at Q3, as well as our Capital Markets Day, the growth from share gains in several markets could not fully compensate for reduced operator spending and inventory reduction in other markets, including North America. As is always the case, and we have said in the past, market share gains results in higher service revenues from large rollout or higher share of service revenues as a result of large rollout contracts. These contracts are profit accretive, however they are initially margin dilutive. And of course, these contracts are important for us and we took them consciously because they're strengthening our strategic market position and build the scale to be competitive long term. Gross margin came in at 44.6%, which is mainly due to the change in business mix. And we expect gross margin to be 40 to 42% in Q1 of this year due to the changing business mix. In cloud software and services, we saw sales growth in North America, mainly from 5G core contracts. But this was offset or was more than offset by declines in other market areas. The performance in this segment has clearly not been satisfactory historically. And at our Capital Markets Day, we introduced an updated and revised strategy to turn the segment around, which included priorities to limit subscale software development, accelerating automation to lower deployment and maintenance costs, and changing focus from market share gains to profitability, as well as realizing cost synergies from combining the two prior segments. So in the quarter we started to execute on this strategy and that included to exit some subscale businesses and we're confident that the business is on path to reaching operating profit break-even for the full year of 2023. In parallel, in our core mobile infrastructure business we're continuing to execute on our enterprise strategy. This is organized around two pillars, each leveraging our strength in mobile networks. First, enterprise wireless solutions focused on capturing the multi-billion dollar enterprise market opportunity for 5G. I need to get some water. So first of all, Enterprise Wireless Solutions. So enterprise wireless solutions, it's focused on capturing the multi-billion dollar enterprise market opportunity for 5G optimized networking and security solutions. And the second pillar is the global communication platform business where we will be able to monetize 5G in new ways by transforming how network features such as speed, latency are globally exposed, consumed and paid for. During Q4, sales in the enterprise segment represented 8% of total sales. Enterprise is a growth engine for Ericsson, and we continue to fine-tune our portfolio to maximize profitability. And this included an agreement to divest our loss-making IoT business. After this divestiture, our emerging technology area is expected to be profitable. We are investing in building up a strong go-to-market organization for enterprises. And we're investing to broaden our product offerings as well as bringing network APIs to the markets. These investments are a foundation for profitable growth after 2023, but they will weigh clearly on profits in the coming year. In the quarter, we also announced a 2.3 billion kroner provision related to a potential resolution with the US authorities regarding the previously announced Deferred Prosecution Agreement breaches or breach notices. The provision also includes costs associated with the extension of the compliance monitorship that we announced in December. While we're now in a position to make a sufficiently reliable estimate of the financial penalty, we have not yet reached a resolution with the DOJ and discussions are ongoing. Separately, and with respect to the past matters described in the company's 2019 Iraq investigation report, we continue to thoroughly investigate the facts in full cooperation with the DOJ and the SEC to determine if there is any merit to the allegations. But it's not appropriate for me to comment further as this is an ongoing investigation at this point in time. We continue to focus on building a culture of ethics and integrity throughout our business and our company. And that includes the board and remains a top priority for Ericsson. I will now share a little more detail about the development in our market areas. So this high-level summary slide highlights how sales increased significantly in market areas in Southeast Asia, Oceania and India. In Europe and Latin America, sales remained stable. We saw a decline in other market areas as operator capex were reduced due to macroeconomic pressures, but also from operator slowdown of rollout plans. And in addition, we've seen supply chain easings that enable some operators to optimize their inventories. Digging a little bit deeper into this, I'd like to highlight a couple of things. As you can see, in market areas Southeast Asia, Oceania and India, sales increased by 21%. Of course, as you're aware, this was primarily driven by 5G market share gains in India, which of course we're extremely happy with. We did, though, experience a slowdown of investment in certain other countries in Southeast Asia, which negatively impacted sales. In market area Northeast Asia, sales declined after the elevated 5G investment levels we've seen for the first three quarters of the year. In market area North America, we saw a 7% decline year over year. And as stated in our Q3 report, as well as at our Capital Markets Day, we have during the year seen accelerated CapEx investments increase. but we've also seen customers holding relatively large inventories. During Q4, our operator customers guided around reducing the capex investments. This is further compounded by their need to optimize inventories as supply constraints actually eases. Market area adder primarily includes IPR revenues, IPR licensing revenues and a major part of our segment enterprises. And growth here was mainly driven by the acquisition of Vonage, impacting the quarter by 4.1 billion kronor and the retroactive part of the IPR licensing revenues for unlicensed periods. With that, I'd like to give the word to Carl, our CFO.

Thank you, Börje. And I'm glad your voice recovered as well. I'll try to do the same here. So good morning, everyone, and thank you for joining the call. I wanted to start by coming back to some of the one-offs that we have recorded in the quarter. First of all, of course, we landed this major IPR agreement, which meant retractive revenue from the expiry of that agreement, which was in early January 2022. And all of that revenue was recorded in the fourth quarter, which brought IPR as a total up to 6 billion of revenue in Q4. Second of all, we agreed with a buyer or acquirer to divest our IoT business. And we took a related charge there of one billion Swedish kronor in the quarter related to that. And that impacts the enterprise segment. Then in cloud software and services, we decided also per the strategy that we have in turning around this business, we decided to exit certain subscale businesses. And here we also recorded a charge in the fourth quarter amounting to 0.8 billion Swedish kronor. And then finally, also as Buri mentioned last week, we announced that we were now in a position to reliably estimate the financial penalty from the DOJ regarding DPA breaches. And hence, we made a provision then amounting to 2.3 billion in the quarter for that, including the extended monitorship costs. I also wanted to reiterate around what we see happening in the market and the market shift. So in the Q3 report, the call back then, but also even more at this Capital Markets Day in New York in December, We discussed this mixed shift that we expected to start in the fourth quarter, but also continue into the first half of 2023. And we really see, and I'm reiterating a bit what Burj had explained, but I think it's a valid point here that some CSPs, especially frontrunner markets, are now taking down their capex, in some cases from record levels previously, and some are also adjusting down their inventory levels. At the same time, of course, we ramp up in other markets where we have gained significant market share, which often comes with a large services share in big rollout projects. And altogether, we expected this to impact both top line, but also gross margin in the networks. And this came through as anticipated in the Q4 numbers. But with this overall intro, I'd like to dive into the numbers a bit more then for the quarter to start with and then a bit later into the full year. But in Q4, we reached sales of 86 billion, which is actually the highest sales for Ericsson in a single quarter ever. And the organic growth here, as you see, is 1%, supported by catch-up IPR revenue, which drove growth by about 5 percentage points, if you look at the total IPR revenue. And we saw Southeast Asia, Asia-Oceania and India grow. And you saw the market area slide that Bury presented before. This is a result of those market share gains that we talked about. Europe and Latin America flat and the other three market areas declined, notably than North America as expected. Gross income, excluding restructuring charges, grew by 4.6 billion year-over-year to 35.7 billion. Of course, supported also again by the IPR revenue growth to 6 billion from 2.4 in Q4 last year, but also the addition of Vonage into the Ericsson family. But the margin then, gross margin, of course, again, excluding restructuring charges, while supported by IPR, declined still by 200 basis points down to 41.5% year over year, primarily due to the business mix shift that we talk about in the networks, but also related to this previously announced charges for contract portfolio exits in cloud software and services. R&D increased. You know that investment in technology leadership is absolutely key for Ericsson. Increased to 13.2. The FX effect year over year is approximately 45% of that increase. So quite big impact from FX. But other than FX, the increase is really a result of the decision or decisions we make to invest in our 5G portfolio and offering across the company, but also includes investments in enterprise wireless solutions as well to enhance the offering there and bring 5G into that, not least, but also the addition of Vonage, of course. Other operating income, just to highlight that, was negative 2.8 billion. And there is where you find provisions and charges related to DOJ monitorship and IoT. So all in all, EBITDA then, again, excluding restructuring charges, declined by 27% to 9.3 billion Swedish kronor. That corresponds to a margin of 10.8%. Again, as a result of the charges of around in total 4 billion. but also increased expenses then, not least in the enterprise side, which in turn comes from bringing Vonage full quarter into our business. Obviously, they were not part of Ericsson Q4 2021. So from that overall view on the group, let's look at the segments. Here we can start with networks where Q4 organic sales grew by 1%. Supported by IPR, of course, again. And the double digits growth that we saw in market area, Southeast Asia, Oceania and India. Gross incoming networks, excluding restructuring, increased, primarily driven by retroactive IPR licensing revenue. And the gross margin then, a similar pattern as on the group level, of course, decreased to, in this case, 44.6%. Caused by, again, this business mix shift that we talk about and that we had anticipated and mentioned at the CMD, not least. EBIT came out at 12.5 billion. This is an EBIT margin of 21.4. Then moving over to cloud software and services. Organically, we grew by 2% here. North America grew, as Börje said, while sales in other market areas were down. And that has mainly to do with the timing of project milestones and similar, but also some contract descoping in the managed services part of that business. Gross income increased following the higher sales volume. But again, of course, negatively impacted by the charges that we have talked about several times already. EBIT in cloud software and services, 0.7 billion. Stable EBIT margin of 3.4%. Again, impacted by one-off charges. Finally then, enterprise on the right side here. The total share of total Ericsson sales at enterprise stands for now is 8% in the quarter. We saw a strong growth here in several parts of this business. Organically, we grew by 15%. Of course, reported much more to 65%, but that obviously has to do with the addition of Vonage contributing with 4.1 billion in sales in the quarter. Gross income increased by 2.1 billion to 2.9 billion in total. And that's again driven mainly by the one-inch acquisition. That leads to a beta level in enterprise, including restructuring of negative 1.7 billion Swedish kronor. You can compare that with 0.6 the previous year, mainly due to the charges related to the IoT divestment that we talked about, but also growing investments in R&D and SG&A, not least in enterprise wireless solutions. That's about a quarter. And now if we zoom out and look at the 2022 full year numbers instead. Sales of 271.5 billion, which is up close to 40 billion year over year. If we look at the reported numbers, not considering currency in this case. But if we do adjust for comparable units and currency, growth was 3% year over year for the full year. Gross margin, excluding restructuring, declined to 41.8%. Impacted again by the same items. I will not repeat all of those again. And here you can also see the R&D expense increases about 5.3 billion in increased R&D. And one third of that is FX movement related. In networks where we add investment is really in the cloud run area, but also in what we call Ericsson Silicon or our ASICs. Also enterprise saw an increase in R&D. So EBIT margin here, as you can see, you can see the numbers here, but excluding the one-offs and the non-organics of the Vonage acquisition, we came out at 12.9% in EBIT margin. Again, within the range for 2022, the target range that we had put up earlier of 12 to 14%. Gross margin is a metric that many follow in our industry. And let's look at that here. You can see the gross margin development from Q1 2020. And we decided to start this graph there. But of course, earlier we have shown also development from 2016, 2017, when gross margins were at 30%. And we remember that time as well. Now we have surpassed 40% since some time. And now on a rolling four-quarter basis, gross margin is 41.8%. So the improvement you can see in the blue line here from 2020 is really driven by the investments in technology, leadership and competitiveness. And as you know, the improvement you see there in the blue line is really also accompanied by market share gains over the same period. Now we see a certain decline in gross margin and it comes as a result of inflationary pressure and this business mix shift that we talk about in the networks. And specifically in the fourth quarter, and I mentioned this already, we saw that this shift, as expected, impacted our gross margin. When it comes to inflation, I would say that We have managed well to offset that in the quarter with commercial initiatives like product substitution. And of course, without inflation, you could say that this operational leverage coming out of technology leadership as well would have contributed to a stronger gross margin. But in this quarter now, we have managed to offset that inflation. So aside from those effects that I talked about, of course, we again have this one-off charges that we should not forget when we look at this to better understand the underlying business. And the one-off charges here affecting gross margin amounted to 0.6 percentage points on group level. So from there, let's move into how our earnings have converted into cash flow. And of course, as you know, free cash flow before M&A is a key metric for us. We came out at 16.9 billion in the quarter and 22.2 billion for the full year, which is... 8.2% of net sales. As you know, we have a long term target of 9 to 12% of net sales. So we came in just below that range now for the full year 2022. But there I think we should remember that this was a year with significant global challenges when it comes to supply chain. And of course, that has impacted our working capital. And I think it's in this context we should see the year-over-year development of free cash flow. 2021 was a very strong cash flow quarter for us, where free cash flow before M&A reached even 14% of net sales. So that creates a bit of a tough comparison when we look at 2022. But we can also see this over the two years and then in average we have generated free cash flow of 27 billion between the two years on average per year. So what happened in the quarter was that now as the supply chain situation globally is easing up, we were able to reduce the inventory just as we said would happen. Exactly that happened as well. So that's good both in component but also in project inventory. And so this improvement in inventory, together with very strong cash collection, including the collection from the IPR licensee, where we have the new agreement, delivered a positive contribution from working capital and therefore generated a strong free cash flow in the quarter. I can add also that, of course, there is an impact from currency between quarters and over the years. But if we look at reported numbers, this cash flow of 16.9 is actually the highest that we have delivered at least during the last seven years in Ericsson's history. We continue with the focus on working capital, of course. It's a big, important drive in our company, and we continue that with full force. I said before, though, the large rollout projects that we are happy to have won tend to build up working capital, initially at least, and that's normal and expected. as an effect of winning a business of that nature. So that we believe will continue. However, the inventory side should still continue down. So on the back of this strong cash flow then, we managed to increase the net cash position by 10 billion. Now it's a bit more than 23 billion of net cash. And this is after having paid out, of course, the second dividend installment of 4.2 billion. Gross cash now 56.2 billion. And then the proposed dividend from the board of directors at 2 kronor 70 öre per share corresponds to a total amount of 9 billion. And it's proposed to be paid out in two installments just like previous years as well. Now, before I hand back to you, Börje, I just wanted to present a couple of the key data points for the future. So my last piece for today here covering the outlook for the first quarter and also the full year 2023 to some extent. But first some specific comments regarding first quarter then starting with top line. We look at average seasonality for networks and the cloud software services. For networks, this is minus 23% on average, historical numbers. And for cloud software and services, this is minus 35%. I'm talking now about the delta, the difference between Q4 and Q1. And for networks then, we expect that the seasonal decline, Q4 to Q1, will be more pronounced in Q1, even when adjusting then for the retractive EPR licensing revenue in Q4. And for cloud software and services, we expect a normal seasonality to play out in the first quarter when adjusting for the retroactive IPR again. So next, when it comes to gross margin for networks, we are specific now in the guidance for the first quarter, where we say that given this change in business mix resulting from market share gains and what we have explained now, and earlier, we expect to see a range of gross margin in networks between 40 and 42 percent in the first quarter. And then when it comes to operating expenses in Q1, there is a typical decrease in our company if you look at historic averages. by 3.3 billion Swedish kronor from Q4 to Q1. I believe this is a good indication also this time. And just so I have said that, of course, there might be large variations between quarters. Then amortization of intangibles expected to be around 0.9 billion per quarter for the Ericsson Group in 2023, of which 0.8 billion in the enterprise segment. And lastly, for Q1, we expect EBITDA for the group to be somewhat lower than EBITDA last year, same period, but then with an improvement during the rest of the year as a result of declining margins in networks that we guide for due to the changing business mix. So that concludes this part and I hand back to you, Börje.

Thank you, Carl. So to sum up, we took several important steps during the quarter in achieving our strategic and financial goals during the last quarter. And in a choppy world, I would say we focus on managing what we can manage. And this includes, of course, saving costs of 9 billion kroner that will have full effect by year-end of 2023. And we expect to start seeing the reduced costs to come through during the second quarter of 2023. We're also executing on the plan for cloud software and services that will allow us to improve profitability and reach break-even for the full year 2023. We see great traction in our expansion into enterprise and will continue to invest in broadening our product portfolio and build a strong enterprise go-to-market organization. These investments will create a strong platform for profitable growth going forward while weighing of course on the costs in 2023. And we expect to be able to showcase what we can do with the global communication platform during the coming quarters. So I encourage you to stay tuned for Barcelona this year. Our basic premise for our business is basically that anything that can go wireless will go wireless. I'm truly excited about Ericsson's future as we continue to execute on our strategy. As we go forward, the investments in and growth from our enterprise business will be a major driver of Ericsson's long-term growth and profitability. And we remain committed to reaching the lower end of our long-term EBITDA target of 15-18% by 2024. I would like to thank everyone, each and every one of our customers, partners and employees. This has truly been a team effort. Thank you. Finally, I would like to welcome all of you to our annual general meeting at the end of March. And as you have seen and Carl described, the board is suggesting a dividend of 2 kroner and 70 öre per share. split in two parts as it was the past year. And with that, I would like to conclude this part of the presentation and hand back to you, Peter.

Thanks, Börje. As we're a little bit late, I will give you actually five minutes extra for Q&A, so we'll have some. So it's now then time for the Q&A session. And as a reminder, when you ask a question, you need to press star one at your phone. And one, and you will wait for your name to be announced. If you are on the streaming, please mute the webcast audio while asking the question to minimize any sort of audio feedback and disturbance. So let's look here who we have on the first part of the question. I would like to welcome Andrew Gardner as the first question. Hi, Andrew from Citi.

Good morning, Peter. Thanks very much to you all for taking the question. Really, my question comes down to the unusual approach you're now taking, or at least unusual for you guys, in terms of giving near-term guidance, being quite quantified in terms of what you're telling us in one queue for margins in particular. I think to many of us on the call, that's going to be quite appreciated. It's been a long time, decades, since Ericsson has done that. And, hopefully, it helps us find a floor in terms of our estimate revisions here, given the near-term challenges. But, of course, for that to be a floor, the estimates need to be conservative enough. I'm just hoping you can give us a better sense as to how much you have risk-adjusted those 1Q targets, you know, so, you know, worst-case-type modeling to give us conviction that this, indeed, is, hopefully, the final cut in terms of the estimates. Can you give us some color around how you set those near-term targets? Thank you.

Should I stop? No, but thanks for the question, Andrew. I would say we wouldn't express it in this way if we didn't have the confidence about it. And as we provide a range also 40 to 42, we think that different scenarios can be covered in there. And with the visibility we have now, on customer demand, on project rollouts, on our own cost situation, et cetera, in cost of sales. We deem that this is the level where we expect to land in the quarter. So we have confidence.

I think that's, you know, we recognize, Andrew, the repeated questions about near-term guidance. So we felt... this may be the right thing to do. So we took that step. So it was really to help. But we've been, I would say, as Carl described, trying to be providing you with the best estimates we can do. At the same time, there are, of course, always developments. But this is based on an assumption of... the inventory adjustments in networks. And I think that's important to remember. We're taking a rather conservative look on that. What we feel is conservative today. So I feel very good about the estimates that we're providing.

Thanks, Borja. Thanks, Andrew.

OK, that's helpful. And perhaps just... Yeah, sure. Yeah, if I could just have a quick specific follow-up. In terms of the first quarter EBITR guidance of it to be, quote, somewhat below last year, just so that we're getting the reference point correct, I mean, you are referring to the 5 billion kroner of EBITR reported in Q1-22. Are there any sort of one-offs or things that we should be aware of, or is it just below 5 billion is what you're guiding to?

Yes, that's correct. Nothing specific around one-offs or anything like that to comment on.

Thank you. Thanks, Andrew. That was the first question. So we are now ready to go ahead with the second question. And that is from Alexander Petrek from Société Générale. Hello, Alexander.

Yes, hello, good morning. Thank you for taking my question. I hope you can hear me well.

Yes.

Yeah, great. Yeah, so I'd just like to come back a little bit on Marge's, again, following up on our conscious question earlier. So can you give us a sense of whether... margins will bottom out in the first quarter of the year, that 40% to 42% range, or should we model, broadly speaking, a similar range for the second quarter because you said that these pressures will persist and then we'll see an improvement? And then just broadly speaking, do you think that networks can longer-term return to a 44% to 46% growth margin range? which you saw in previous quarters, was that an artificially high level of growth margins as a result of a particularly favorable business mix, which is not expected to prevail in the longer term, just in broad terms. Thank you very much.

Yeah, I can start on that. As we have said, the first half is really where we'll see the sizable inventory adjustments that are impacting primarily front-runner markets and their front-runner markets around the world. So we think that those effects are going to be there for the first two quarters. And from there, you'll start to see an improved... market environment during the second part. And the reason why we believe the market will improve is actually the underlying traffic growth. So that gives us the comfort. And this is what we've seen, by the way, in previous swings you've had in CapEx. So when you've had those big adjustments, operators can sweat assets for a couple of quarters but it cannot be done for much more because simply traffic grows fast underneath so so that's why we're what we are seeing is a gradual improvement in the second part of the year um so that's the way we try to model it yeah

Thank you very much. And just a quick follow-up. Can I just ask you, can you give us an annual run rate of IPR now, or a quarterly run rate now that your main deals have been renegotiated? Could you provide us with an estimate at this stage? Thank you.

Yeah, so current portfolio is around 9 billion. As you know, we ended up with 10.4 now during 2022. What we have also said, as you know, and we expanded on that at Capital Markets Day, is that we expect IPR to grow significantly. There are more device players in the ecosystem that are currently unlicensed, especially for 5G. And so we're targeting those now on the back of the large agreement that we have just signed. But there's also other growth opportunity there, consumer electronics, IoT, as we have mentioned before. So we believe that we cannot talk exactly about the timing because this is about negotiations, obviously, with the licenses, but we expect it to grow over time.

Thanks, Carl. Thank you very much. Thank you, Alexander. So we are now ready to go further in the Q&A queue. So the next question I have here is from Andreas Johelsson at Danske. Hi, Andreas.

Hi, and good morning. A question on Vonage, please. If you could elaborate a little bit how the business model is actually working. Is it a subscription-based model? Is it license-based models for getting sort of access to the APIs? Or how does that work, really? Thanks.

Well, if you look at the current model in Vonage, you have both a subscription-based model, that's the UCAS-ECAS solutions, but you also have a transaction model on the CPaaS. Over time, as we launch now the new part, I call it the network APIs, there are still more work to be done on the business model. So right now the focus is to make sure that we technically solve the issues and that we can actually... present those type of network APIs on the CPaaS platform. And that's why I said you'll see announcements during the year and hopefully we can start to display also the business model that we intend to see there. But so far, we need to continue the work. we're doing together with our operator partners to be able to launch those APIs and show them to the market. So stay tuned for announcements on that, Andreas. Perfect.

Thanks. Thanks, Andreas. Thanks for that question. So we will move further with the next question. And I have the next question from Sebastian Szabowicz from Kepler-Chevreux. Hello, Sebastian.

yeah yeah hello everyone and thanks for taking my question i've got uh one question on the on the mix because deloro and also the run market in the u.s declining in the mid single digit range in the coming years so the scale effect will play negatively there but do you see any room for any capacitive great cycles building up in some advanced markets and including the U.S. So how do you see your mix shifting in the coming years with the capacity of grades and maybe some rollouts in emerging markets? And the second one is on the run market specifically, it is gradually slowing and a little bit declining right now. Have you seen a change in the competitive landscape or the pricing conditions in the run market today or not so far? Thank you.

If we start with the overall RAND market, and as we said at the Capital Markets Day, we expect a flattish, call it mobile network market, as well as RAND market over the next few years. That has not changed. And I would say Deloro is now forecasting a slight growth outside of China and a slight decline if you include China. Then we see this inventory adjustment happening now that I think we have to expect to work its way through the system when everyone normalizes inventories. We do the same thing. That's why we also are able to reduce inventory. So you see this in the supply chain. I think those will, as we see it now, work its way through the next few quarters, one, two quarters, so Q1, Q2. Then after that, what will drive the cycle in the U.S., but it applies also to other front-runner markets, it's two things in reality. One is the underlying traffic growth that we're seeing already. That continues at very healthy levels, so We expect to see a, call it normalization, of the RAN market also in front runner markets. And that's why you reach the overall flattish market. The other part, which I think is very interesting, is new applications. We're starting to see some come through. First use case probably is fixed wireless access. And fixed wireless access today may be used in midband, but over time that's probably going to migrate over to millimeter wave and provide also support for the market. So when you look at this... shifts that we are seeing you will see these type of individual years have negative or positive numbers but over time we expect this more flattish market so that will start to help the mix again as you move forward beyond 2023. Pricing environment, we are in a competitive industry. This is why we're focused on leading on technology. And when we lead on technology, we help our customers both improve performance in the network, but also lower the OPEX. And what we see is that we can win those deals at attractive prices. gross margins and that's why you see us even though we're fairly substantially changing the business mix in the company achieving compared to historic levels a very attractive gross margin. So I feel quite good about our competitive position and that's ultimately the driver of the gross margin you can realize.

Thanks, Börje. Thanks, Sebastian. Thank you. We will then move to the last question of this session today. And the last question I have from Terence Tu at Morgan Stanley. Hello, Terence.

Yeah, thank you. Good morning, everyone. A question on networks as well, please, and just around the strong growth in India. Can you just give us maybe a flavor of the margin profile in India versus the other regions and maybe give us an idea of how profitability should evolve as revenue starts to pick up in the region? And then a real quick follow-up just on a topic that we haven't asked on the course so far is just around the provision you made for the DOJ I'm just wondering, are there any updates on the investigations being conducted by the other authorities? And shall we expect maybe a single settlement that covers all of the investigations in the future? Thank you.

If we start with the provision, yes, we set aside the provision for the breach notices. And that was because we could... as we say, provide a reliable estimate of the financial consequences. Besides that, we have, as you know, not reached any agreement with them or with anybody else. So that's why at this point in time, there are ongoing investigations and discussions. So we cannot update you in any shape and form right now. India. India. We will not comment on individual markets. our margin profiles there. But what I can say is that when you look at the guidance we've given for Q1 on gross margin in networks, and you can there see that we expect a decline in the US, quite substantial, as well as a growth in new market share contracts. That is not only India, it's other market share contracts as well. And you still see a longer term healthy gross margin. If you compare to what we had five years ago, it's still a very healthy gross margin. So, you know, we have factored in a lot of those swings. But the most important one here when we talk about mix is actually that when we take a market share gain, the contract by nature changes. has a lot more service content than a normal continuous business. And when that happens, we have lower margin. They're all positive margins, but it will dilute gross margin. But that's all factored into the 40% to 42% gross margin.

Thanks, Börje. Thank you very much. Thanks, Terence. That was our last question. I see that I still have some questions in the queue. IR is clearly open for you to call in and ask questions to us. Karl Melander will be in London on Tuesday, meeting some of you, both the sell side and the buy side, so that's another opportunity. And as Börje said, we have the event in Barcelona coming up, and I know that a lot of you are traveling down there as well. to meet with us. So those are opportunities near term to meet management. With that said, I would like to conclude this call and thank you all for dialing in and asking questions. Thank you.

Thank you.