Ericsson

Hello, everyone, and welcome to today's presentation of Ericsson's second quarter 2024 results. Today, Boyer Ekholm, our president and CEO, joins us by video, and Lars Sandström, chief financial officer, is here in the studio with me. As usual, we'll have a short presentation followed by Q&A, and in order to ask a question, you'll need to join the conference by phone. Details can be found in today's earnings release and on the Investor Relations website. Please be advised that today's call is being recorded and that today's presentation may include 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 materially due to factors mentioned in today's press release and discussed in the conference call. We encourage you to read about these risks and uncertainties in our earnings report as well as in our annual report. I'll now hand the call over to Burya and Lars for their introductory comments.

Well, thanks, Daniel, and good morning, everyone. First, I'd like to cover some of the key highlights from the quarter before Lars really goes through all the financials in more detail. So in Q2, we continue to work with our customers and focus on leveraging our leading technology, as well as optimizing our business through our strategic initiatives. which of course includes our cost reduction actions that we have taken. All these actions made it possible to deliver a very strong performance, and we saw an expansion of the gross margin, despite a very challenging overall RAN and mobile networks market. So gross margin for the group came in at 43.9%, and this was supported by the proactive actions and our competitive portfolios. It was, of course, positively impacted by a new 5G licensing agreement, and we're now clearly on track to deliver our 12 to 13 billion kronor revenue target for IPR for 2024. Our IPR portfolio clearly illustrates how our technology leadership is creating value. Let me also briefly touch upon the impairment we recorded last week. This relates mainly to Vonage. and reflects lower anticipated market growth rates in Vonage portfolio. However, the strategic rationale for the Vonage acquisition remains, and that is really to create new ways to monetize the network capabilities and the network features. And long-term, we see this to be crucial for the telecom industry. And actually, if we cannot generate the extra revenues from the features of the network it's very hard to justify the future investments in in later generations as well so we believe this is a critical initiative for us and for the industry network apis and the global network platform we're creating remains central to this portfolio and out to this strategy And we continue to see good traction. We had two additional mobile operator partnerships announced in Q2, and we are now at 12 in total. But let's move to the next slide and look at the market development. In Q2, we saw North America returning to growth for the first time, actually, since 2022. This was, of course, driven by the end of the inventory adjustments that we had predominantly last year and into the beginning of this year, but also driven by some larger customers selectively increasing their network investments. We benefited also from the recent and large contract win that we announced late last year, and we started to have some deliveries in Q2, but that will provide further support during H2 this year. But when you look at the rest of the market areas, we see they're all declining. So it's really a challenged market environment. In Europe and Latin America, sales decreased by 3%. And I would highlight here, and it's in contrast to what many on the outside think, we're actually seeing a sharply increased competition from Chinese vendors. That includes both in Europe, but particularly in Latin America. In Southeast Asia, Oceania and India, sales decreased by 44%. This follows the normalization in India compared to the record-paced 5G rollout of last year. And finally, both Northeast Asia, Middle East and Africa saw declining sales due to slowdown in operator investments and an additional macro pressure. With that, I would say it's time for Lars to go through the numbers more in detail.

All right. Thank you, Berger. Let me start by adding a few additional points on the group before discussing the segments in more detail. Organic sales declined by 7% in the quarter, and this was primarily driven by networks. Some of our larger customers in North America did selectively increase their investments, supporting return to sales growth in this key market, but our other markets declined. And as Berger already highlighted, we deliver a good expansion in our adjusted gross margin at 43.9% in Q2. This benefited from our strategic actions on cost, as well as strong IPR revenue. Also, as Berger mentioned, we signed a new IPR contract in the quarter, which includes some retroactive revenue. And reported OPEX was significantly distorted by the Vonage impairment charges in Q2. And in the slide you can see the underlying development. Including the impairment, OPEX was up by 1.2 billion year on year. Savings from our cost actions were balanced by salary increases and higher bonus accruals. And we also increased investments in two areas. in R&D for technology leadership and operational resiliency, and in SG&A to drive operational efficiency in enterprise. We are continuing to take action on costs, including sizing our organization to serve the new level of customer demand, and we recently announced, or recently concluded, the union negotiations in Sweden on planned headcount reductions. Adjusted EBITDA increased to 4.1 billion in the quarter with a margin of 6.8%. With that, let's move to the segments. Next slide, please. In networks, organic sales were down by 11% year on year as customers continued to be cautious with their investments. The largest slowdown was in India following the rapid 5G build-out last year. But as I already mentioned, we did see return to growth in North America with sales up 20%. And there were also a benefit from the new IPR licensing agreement signed in the quarter, which included a retroactive element. We generated a strong adjusted gross margin of 46.1%, with a favorable business mix, IPR licensing revenue, and costs actions all contributing. The adjusted EBITDA increased to 5.3 billion compared to 4.9 last year, and we reached an EBITDA margin of 13.9%. The increase in EBITDA was delivered despite lower sales and despite significant headwinds from salary increases and bonus accrues. This shows the benefit of our cost actions, technology leadership and competitive product portfolio. In segment cloud software and services, we continued to execute on our strategy to strengthening delivery performance and commercial discipline. Organic sales were stable year on year with slight growth in core offset by lower sales in other parts of the portfolio. We delivered an adjusted gross margin of 37.2% and the beta margins continued to improve on a rolling basis. As I already mentioned, our IPR revenues increased to 3.9 billion in the quarter with the new agreement, and we continue to see further growth opportunities with additional 5G agreements and potential to expand into additional licensing areas. The revenue run rate is now at 12 billion, so we are on track to reach a target of 12 to 13 billion for 2024. The timing of growth will vary as we seek to optimize the value of new agreements. In enterprise, sales were broadly stable overall. Sales increased in enterprise wireless solutions, with good customer demand for private cellular network solutions. Sales also increased in technologies and new businesses. Sales in global communications platforms declined, impacted by decisions to reduce activities in some countries, which we talked about last quarter, as well as the low margin customer contract loss from Q4. Adjusted gross margin increased to 51.1%, with improved margins in all business areas. Adjusted EBITDA was a loss of 1.2 billion with higher adjusted gross income offset by higher operating expenses. The operating expenses increase was mainly in global communications platform for two reasons. First, non-cash accounting impact from the discontinuation of capitalization of development expenses. This started already in Q1 and we expect this to have approximately 1 billion negative impact on OPEX this year. And second, increased investments in operations so we can efficiently meet contractual and regulatory requirements. And in addition then, as I already mentioned, we continue to invest in the global network platform for network APIs. Then let's move to the next, please. Turning to free cash flow then, which was 7.6 billion before M&A in the quarter. This strong improvement compared to last year is a result of significant improvement in working capital. This benefited from favorable change in market mix, substantial reduction in inventory levels and lower accounts receivables due to lower sales volume. There was also a benefit from inflow of the 1.9 billion related to the one-time gain we reported in Q1. So net cash increased sequentially by 2.3 billion here to 13.1 billion. Next, I will cover the outlook. So turning first to sales, we have delivered above normal seasonality in Q2, both in networks in cloud software and services by around four percentage points in network and three in cloud software and services. So we have a bit of a higher starting point. We expect to carry this outperformance into the second half. So normal seasonality is a good assumption for Q3 for both segments. And as you know, we will benefit from North America growth, but overall market conditions remain challenging, with our customers remaining to be cautious with their investments. And in enterprise, we expect sales to be further impacted by our decision to reduce operations in some countries. And then turning to profitability, in networks, we expect Q3 gross margins to be in the range of 45 to 47%. And as mentioned before, the total market is in decline. But we will benefit from continued growth in North America. But also on the other hand, we will not have the IPR benefit. Finally, on OPEX, it's worth noting that we won't see the usual seasonality this year because of the changes in facing here. And as we will also start to see further benefits from our cost actions later in the year. With that, I will hand back to you, Berger.