Ericsson

Hello everyone and welcome to this Ericsson's third quarter 2023 result. With me today I have here in Kista our CFO Carl Melander and direct from New York I have our CEO Börje Ekholm. Last week, Thursday, we pre-announced our Q3 numbers as we announced the impairment of goodwill attributed to our acquisition of Vonage. Today, however, we will not only give you more details around the Q3 report and expectations going forward. We will actually also spend some time talking about our GMP strategy. So we'll start with Börje summarizing Q3 and then we'll talk more about the GMP strategy and then Carl will return back and give more details around the Q3 result and expectations going forward. As usual, we will end the presentation with a Q&A session. In order to ask those questions, you need to join the conference by telephone. Details can be found at today's press release or at our website ericsson.com slash investors. Please be advised that today's conference is being recorded. But before handing over to Börje and Carl, I would like to say the following. During today's presentation, we will make 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 may differ in material due to factors mentioned in today's press release and discussed in this conference call. We encourage you all to read about these risks and uncertainties in the earnings report as well as in the annual report. With that said, I would like to hand over the word to Börje. So please, Börje.

Okay, thanks, Peter. First of all, welcome to our report presentation for the third quarter, and thanks everyone for joining us. As Peter mentioned, we will spend some more time now on GMP in this presentation, but first let me hit on some key takeaways. So Q3 was in line with our previously indicated expectations with a bit softer top line in North America than we expected, but with better margins in the rest of the business. Despite the uncertain macroeconomic backdrop, we continue to execute against our three key priorities, strengthen our leadership in mobile networks built upon technology leadership, grow our enterprise business and drive a continued cultural transformation. We're encouraged by the progress we're making and it's truly a testament to the strength of our team, our strategy and the excellence of our products and our ability to execute. I would like to use this presentation to describe why we are excited about what we're creating with GMP and the value we believe it will deliver to our shareholders. Carl will take you through the more financials in detail and outlook in greater detail. So in common with the rest of the industry, rising interest rates and changing demand trends have been headwinds to Vonage's current core business. And the impairment we took last week is simply a consequence of this. And Vonage itself remains key to our expansion into enterprise and to the transformation of our business we believe this is a massive opportunity that can redefine our industry by providing a new source of revenues to the whole industry but first let me touch on the market environment over the last two decades we've seen that investments in the mobile infrastructure have had built-in cycles and in aggregate it's been overall flattish. We believe this pattern will continue. We don't believe the peak levels of 2022 will return, but we do believe that investments will normalize from current levels. And the reason for this recovery is that data traffic continues to grow and thus more capacity will be needed as well as modernizations of the networks will be needed. So it's important to note that while data traffic continues to grow at a very high rate, this implies a market normalization, not an incremental market growth. So the reason for a flattish market for mobile infrastructure is really that the operator service revenues have only had very limited growth. And this is something we actually also see reflected in the operator's market multiples. So to achieve growth in our core infrastructure market, we need a catalyst to increase service revenue growth for the operators. And we need that by addressing new monetization opportunities. And this is what we've been driving with our global network platform and more on that later on. We remain committed to our long-term EBITDA margin target of 15-18%, and we aim to get there as soon as possible. However, given that our customers are cautious on investments in a current uncertain market environment, we will not give guidance beyond Q4 of this year. We have started to see more positive discussions with operators about network investments, but it's clearly too early to call this a turning point. We are, though, confident that the recovery will come, but the timing is really in our customers' hands. And given that, we think it's prudent to plan for current market conditions to prevail into 2024. Therefore, that provides the basis for how we manage our business with a focus on cost control as well as operational efficiency. And with the actions we'll take, when the market recovers, we will actually see significant operating leverage in the business. So now let me move over to comment on what we're building with Vonage. As you've heard us say before, we're on the journey to fundamentally reimagine our business. While this takes time, we remain confident in our long-term plans and trajectory – and believe that Ericsson has a very exciting future ahead of us. Our enterprise strategy and positive outlook on the global network platform remains unchanged. Positive interactions with customers have further strengthened our belief in the area. From a strategic lens, Vonage is developing how we saw it and how we envisioned it. So with Vonage, we're developing a platform business and have extended our growth trajectory in new and existing markets, adding to our total return profile for our shareholders. None of this would be possible without the acquisition. This quarter, we were also proud to announce that Vonage was recognized as a leader in 2023 Gartner Magic Quadrant for CPaaS. But let me take a step back now and expand on our strategy for this area a bit more. So in the coming five to 10 years, we will see an acceleration of major trends such as electrification, the green revolution, resilient supply chain, increased efficiency, productivity and automation. These trends will not progress unless we fully leverage the mobile first, cloud first and AI first world. Making this future a reality will require ubiquitous high performance, differentiated networks and a broad ecosystem of businesses and developers who can innovate and build upon the network's powerful capabilities. That's what we are doing through our strategy, making networks fully programmable and globally available with open interfaces and open APIs that enable continuous business growth and innovation. This includes our investments into Cloud Run. And in doing all this, we can drive a much needed transformation of the telecom industry. The global network platform is a vital part in exposing the capabilities of the mobile network to the full ecosystem around us, including the developers. And at the heart of all this is 5G. With 5G, we have a technology that is 10 times more powerful than previous generations and actually has a potential to revolutionize society. While the previous generation of mobile technology digitalized the consumer and gave rise to the app economy, it was based on best effort connectivity. However, best effort connectivity is no longer good enough. Rapidly digitalizing enterprises need more than consumers. They need predictable and reliable connectivity with predetermined SLAs. and 5G was actually designed to do just this. With advanced capabilities such as speed, ultra-low latency, and the ability to offer differentiated quality of service, 5G is a critical tool for transforming industries and consumers. To seize on this potential, we must redefine how the telecom industry delivers and captures value. A few years back, we tested speed on demand with a push of a button and saw very strong interest from application developers. But we also realized to commercialize this, it would require all developers to individually contract with operators around the world. And that was something that simply is not doable if we want to commercialize it. What was needed was instead an easy way to expose these advanced network capabilities, in this case speed on demand, along with a strong developer community that actually can use the features to drive the next wave of innovation. And this is the underlying reason why we acquired Vonage. Vonage actually provides us with both the platform technology, CPaaS, and the developer community of today 1.4 million developers. We need to make our vision a reality. Vonage is actually critical to our journey to build a platform business. We recently took an important step toward this strategy and launched a global network platform. which combines the power of Vonage and network APIs, enabling mobile networks and applications to talk to each other. This platform makes it easy to expose, consume and pay for advanced network capabilities. Last month, we announced a historic milestone in the network API journey together with Deutsche Telekom. So powered by the global network platform, DT is able to offer a globally scalable one-stop shop for both communication APIs, such as voice, SMS, two-factor authentication, and enhanced security, as well as network APIs, location, device status, and quality on demand. Through the global network platform, we're creating a new market for exposing 5G capabilities. An opportunity that we believe or analysts estimate to be about $20 billion by 2028. And we aim to capture a sizable part of the market as we are the frontrunner today. We expect the first revenues from network APIs during 2023, although limited in scale. There is a change in the market now when we are discussing network APIs with all our customers today, and all of them see this as a major opportunity to monetize the network and the investments in 5G. With network as a platform, every contributor in the ecosystem adds value to the whole, basically creating a flywheel of exponential growth and innovation. It starts with the network's APIs that allow developers and enterprises to create enhanced services. These solutions, combined with performance-based business models, offer CSPs new ways to monetize their network. This attracts more CSPs to join the platform which fuels network enhancements in order to meet growing demand for more advanced capabilities. and in turn supports demand for our core business in mobile networks. We also start to see the interest from the developer community increasing as a function of network APIs, further reinforcing the flywheel. Wireless networks are truly transformative with its flexibility, broad and global availability, and cost efficiency. We believe that by exposing them in an easy, scalable way, developers and businesses worldwide can use and build meaningful applications, making wireless networks the center of enterprise digitalization and transformation. What excites me is that this is just the beginning of an extraordinary opportunity for our industry. This will truly transform the telecom industry. This is an entirely new opportunity that we're creating and developing together with leading CSPs. The winners will be the ones who scale their platform first. The time is now to seize on this opportunity, and we are very excited about our position. But now over to Carl for a review of the numbers for Q3.

Thank you, Börje. And very good morning to everyone. Thanks for joining us here. As you saw already last week, our Q3 results are in line with the guidance we issued back in the Q2 report. But I want to address some of the key items around the financials in the quarter. Before commenting on the underlying result, I just want to refer again to the impairment related to Vonage Goodwill that we announced also last week. And just to add to what Boreal already mentioned, This impairment of 31.9 billion Swedish kronor corresponds to 50% of the total amount of goodwill and other intangible assets attributed to Vonage. And the total goodwill in the group now post this impairment amounts to 56.7 billion. And I can also mention that we have done rigorous impairment testing of all of that, and that did not indicate any other impairment needs other than Vonage. Now, turning to the underlying business results. And first of all, if we have a look at the market and our top line then, I would say much of the market development, the financial development we saw in the first and the second quarter continued into the third quarter. And as Bury outlined before, the telecom market outlook remains uncertain, but is expected to recover to more normalized levels over time. And we base this on the fundamentals. I mean, the operators need to continue to invest, to manage data traffic growth, cost, energy usage, network quality for their customer experience. But what we've seen of the sales mix shift in networks, particularly that we have discussed many times, where sales decrease in North America and increase in India with large rollout projects, that continued in a similar manner in the third quarter. And I would say we have worked a lot on our resiliency to limit the sensitivity to geographical mix changes. But of course, we see an impact on group numbers from this mix change, both on sales, gross margin, EBITDA and cash flow. So on top line and group organic sales declined by 10%. And I would say primarily driven by a 60% drop in North America in the networks business. where we continue to see operators adjust inventory. We've talked about this many times, but also slower deployment pace. I think it's important, though, to note that Q3 last year in 2022 was an absolute record quarter in North America with very large volumes of radios shipped and deployed. So that year-over-year comparison is very tough. But nevertheless, a 60% drop. The drop then in North America was partly offset by continued rollout in India, which continued at full speed, incredible speed. And our sales quadrupled actually year over year to almost 10 billion Swedish kronor in the quarter. And we are talking here about large rollout projects and therefore working capital builds up. And that's quite significant. We'll come back to that in a minute. We also saw that some front-runner customers on 5G resumed investments. This is a bit of a second wave of 5G investments. It's encouraging, but I would say it's too early to see this as a trend. Nevertheless, a positive sign. We closed another IPR licensing agreement in the quarter. That's been announced earlier that positions as well to land additional agreements with previously unlicensed vendors. And IPR now net sales landed at 2.8 billion in the quarter. We are on track to reach the levels that we have discussed before for the longer term. So that was top line. Secondly, gross margin, and we came in at 39.2%, excluding restructuring. Networks, I want to highlight again, which achieved 39.9% gross margin, which was very much in the upper part of the range that we had guided for, 38 to 40%. And, of course, it again is the market mix that we talk about that continue to impact gross margin in networks. But, however, I think this is important, actually. Achieving 39.9% gross margin is a strong proof point because it demonstrates the resiliency of our company. It's a sign of how the business transformation that we've been on to over the years now has made us less sensitive to these swings between geographies. Third point regarding EBITDA margin. We exceeded the previously mentioned expectations due to early positive effects of the cost-out ambitions. So for the group, we came in at 7.3%. That's a decline, of course, versus last year's 11.3%. Again, driven by the gross income in networks. Cloud software and services delivered actually well in the quarter. Beta was 0.4 billion Swedish kronor. And here we continue to execute on the turnaround strategy that we launched actually at the CMD last year. We're talking about strict commercial discipline, improved software sales, accelerated service delivery automation as some of the key pillars there. But given the nature of the cloud software and service business, results will fluctuate between individual quarters. So to assess how this business performs over time, my recommendation is to look more at the four-quarter rolling basis. And if you do that, you will see a positive EBITA number. You find all those numbers in the back end of the report. And you can compare this positive number with the four quarters one year earlier. where we had an EBITDA loss of over 1 billion Swedish kronor. So we are clearly on track, moving in the right direction. I would say, as you know, we have discussed a break-even target, or at least break-even for full year 2023. We'll come back to guidance a bit more later, but this quarter is, of course, a good stepping stone towards that ambition as well. On the enterprise side, we are impacted by a weaker market, such as macroeconomic headwinds, just like other participants in this ecosystem. But it's encouraging, though, to see that the global communications platform, and as you will remember, that's where Vonage resides, delivered a positive EBITDA also in the third quarter. Fourth point, free cash flow before M&A came in at 0.5 billion negative. And this we have also explained many times that this is really a result of this same business mix shift, which includes big rollout projects with a longer order to cash flow. cycle. And maybe I should explain that, expand a little bit more on this. In North America and some of the other early markets, customers largely manage the installment of equipment themselves. So payment terms are mainly related to timing of delivery, hardware and software, rather than completion of sites and installment of equipment. But most of the large rollout projects, on the other hand, like in India, Contras are rather project-based, meaning that we have been assigned to build and install large-scale networks. And that leads, of course, to higher working capital in relation to sales volumes. But we expect this situation to taper off next year as the pace of these large rollouts will decrease. And when that happens, we expect working capital to reduce. And then gradually over time, we... will and should return to our long-term free cash flow targets, as you know, 9% to 12% of that sales. Finally, and as my fifth point on this slide, I wanted to highlight that we deliver on the cost out efforts. Year to date, we have achieved run rate savings of 10.5 billion, of which 1.9 has impacted the P&L in the third quarter. It's about 1.2 in cost of sales, 0.7 in OPEX. The savings are primarily visible in the mobile networks business, less in enterprise, because in enterprise we continue to increase investments for value creation in that business, both when it comes to the product, meaning competitiveness, but also go to market. We booked provisions for restructuring so far in the year, amounting to 5 billion, of which 0.9 in Q3, and that's all in line with the cost of plans. So now with this track record, we're slightly ahead of our internal plans for cost out. And as such, we have raised the ambition now by 1 billion to 12 billion Swedish kronor of run rate savings until the end of the year. And we will continue to take additional and decisive cost out action as needed over time. So we can move to the outlook for Q4. We are guiding basically for four key parameters. We expect a gross margin in networks to land within the range of 39 to 41% in Q4. So up from the guidance we had for Q3. Top line seasonality between Q3 and Q4 in networks will be somewhat less than normal. And this is mainly actually due to a specific factor, and that's the fact that India is expected to be sequentially flat Q3 to Q4. In cloud software and services, EBITDA is expected to reach at least break-even for the full year, as we have said before, but with a lower sales top-line seasonality than normal between Q3 and Q4. And again, important here to know that given the characteristics of this business, we don't expect a linear result development quarter after quarter. Results will vary between quarters depending on software deliveries, project acceptance and so on. And then looking at group EBITDA margin for fourth quarter, we expect to reach around 10%. We see similar market trends from Q3 continuing in Q4, but we will see increased support from the cost-out program. And here on the slide, you see a few other planning assumptions related to OPEX, amortization, restructuring. But as usual, please refer to the report for the full set of planning assumptions then. So with that, thank you, and I would like to hand back the word to Börje.