Ericsson

Hello, everyone, and welcome to the presentation of Ericsson's third quarter 2024 results. With me here in the studio today, Buru Ekholm, our president and CEO, and our CFO, Lars Sandström. 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 this 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 Buria and Lars for their introductory comments.

Thank you, Daniel. Good morning, everyone, and welcome to this earnings call for third quarter. So we delivered a solid Q3 marked by a period of intense focus on strategic and operational execution. But let me start by commenting on our strategy, which aims at building the networks of the future, which will deliver differentiated performance through programmable networks. So these programmable networks will enable applications that can be monetized in new ways where differentiated performance matters. This means creating new use cases for mobile technology, expanding beyond the best effort consumer mobile broadband. And that would include new use cases as enterprise and mission critical. And this will also enable our operator customers to add new revenue streams beyond the current best effort consumer broadband offerings. I think this is crucial for the industry's long-term growth. Many analysts predict a slow market over the next few years, but this is largely only taking the consumer mobile broadband business into consideration. However, we see a significant untapped market opportunity in new use cases that are often overlooked as they today require differentiated performance and have largely not generated revenues to date. So our strategy is focused on leveraging these opportunities to drive growth in the mobile networks market. And we're increasingly seeing momentum with many customers around the world on high-performance programmable networks. And I would say that's very encouraging. Of course, the contract we signed last year with AT&T was the first proof point. And it also created the initial groundwork for the accelerating interest that we're seeing now. But the interest in differentiated performance has also increased following our announcement of the JV with 12 global CSPs to aggregate and sell network APIs. And I think this is a critical step for the industry to realize the benefits of the full capabilities of 5G. But I'll come back to these strategic steps in a little bit more of details. But let me first touch briefly upon the Q3 results. So we continue to see a very challenged market development. The market is ultimately decided by our customers. So in that context, it's critical that we focus on what we can impact. And that's really how we run our business. So we saw in Q3 organic sales declined by 1%. That's less than it was the quarter before, so you can gradually see an improvement in our development. And that was really a strong performance in North America that helped in the quarter. Of course, we had negative developments in most other geographies. When we look at gross margin, we delivered a solid performance coming in at 46.3%, reflecting significant momentum from our 39.2 in Q3 last year. This is driven by, of course, the market mix shift with North America coming in strong, higher IPR sales. But I would also say key contributor is how we continuously optimize our business. And these are efforts that we started to implement recently. a few years back and it takes some time to get it through and now in Q3 we start to see the results of this and we see it in lower scrap levels, better inventory levels, better efficiency in how we run the company. So with these improvements, of course, driving higher gross income, EBITDA grew to 7.8 billion compared to 4.7 last year. But I think another good indicator is, of course, the free cash flow, which came in at 12.9 billion. I would say, in summary, these results show a strong underlying business we have, as well as the effects from the strategic actions that we've been taking. Lars will go through these numbers shortly in much greater detail. But let me first comment briefly on the market development. So in Q3, the global RAN market remained challenged, as we have said. However, we continue to leverage our technology leadership and we've seen contract wins in India and Vietnam, among others. North America continued to be very strong and grew by 55% year over year, driven by and helped by strong deliveries related to our recent AT&T contract win. That's now coming into a delivery phase. But we also see selective network investments by other large customers. In Europe and Latin America, sales increased slightly and grew by 1% as growth in Europe was partially offset by decline in Latin America, where we had some footprint losses. In Southeast Asia, Oceania and India, sales decreased by 43% following a normalization and following, I would say, even an expected normalization in India compared to the record-paced 5G rollout of last year. And finally, trends in Northeast Asia, Middle East and Africa weakened during the quarter due to a significant slowdown in customer investments. Let me comment some more on the recent strategic steps we've been taking in our enterprise business. As I said, our strategy aims at creating additional use cases and monetization for the networks. And we're pursuing multiple opportunities that will open the network for new revenue streams. And think about them here as fixed wireless access, mission critical, but also of enterprise applications. we see enterprise as a key opportunity as they will require high performance and differentiated connectivity to fully digitalize. And despite the near-term pressure on our enterprise sales, which we're working proactively to address, we remain focused on strengthening Ericsson for the long term. In Q3, we've taken some key steps to execute on this part of the strategy. Maybe just as a short step back, we also agreed the sale of iConnective during Q3, which is subject to regulatory approval now. And the reason for that divestiture is it will allow us to streamline the business, focus on the core opportunities at hand, and really maximize the strategic positioning of our portfolio. But I would also say one of the most important announcements for the creation of our enterprise area was the JV that we announced together with some of the largest operators in the world to aggregate and sell network APIs. And here Vonage will play a key role. We see network APIs as one of the best opportunities to enable additional network monetization, as it will basically open up the network and its unique features to innovation in a completely new way. So, for example here, think about increased security in financial transaction or 3D positioning in a logistics chain. These are just two examples, but there are going to be a number of new potential use cases for network APIs. We're going to see some early and followed by many more over time. But in order to scale the network APIs, it's really critical to solve the supply side or the availability of network API. And if we look pre the JV, so in the current shape, each developer in the world would have to integrate and contract with hundreds of individual CSPs around the world. And that's, of course, that's not even practical and it's not going to be economical. And when it's neither practical nor economical, it will basically not happen. So with the JV, we actually remove a key hurdle in order to speed up the pace of digitalization and to accelerate the growth of network APIs globally. Because this will allow the global developer community access to network features similar to the way they access communication APIs today. So now it will be much easier for the developers to use and start to leverage and implement the network APIs and the capabilities that only the network can allow. So from a strategic point of view, I think this is a critical step for us to take. You know, in the history... A developer actually needed to be a network engineer as well. They needed to understand how a network works, what it can do, and how it can be accessed. That's not needed anymore. Now it becomes much easier to use, very simple access. It's easy to use, easy to consume, and easy to pay for network API. We think this is a massive opportunity. External estimates say the API market could be a $10 to $30 billion opportunity in a few years out. I think it's still too early to properly size the opportunity, but it's encouraging to see the growing momentum and the growing interest. And we're starting to see in some front-runner markets an emerging interest for the network API. So this is a market that's shaping up, and we have the opportunity to shape that. But we can also see there are many opportunities here to drive enterprise digitalization in new ways where we can leverage the capabilities of the mobile network. And that will allow our operator customers to basically a new type of market for enterprise digitalization that's outside of the consumer mobile broadband market. And that's for sure going to be multiples of the network API market in totality. But now let me also comment very quickly on the strategic steps we've taken in enterprise wireless solutions. In this area, we're developing easy-to-use solutions so enterprise can capitalize on the security, efficiency and flexibility of using cellular connectivity instead of Wi-Fi. These dedicated networks are transitioning now from what I would call a POC or proof of concept market to commercial scale deployments. And over time, this will help reaccelerate the growth in enterprise wireless solutions. You know also that we recently launched our new and latest Enterprise 5G portfolio, which has a simplified and scalable architecture compared to the previous one, so it will offer attractive total cost of ownership for enterprises. Other examples include our neutral host solution, enable one company to allow one or more operators to serve their customers through a single indoor network, enabling full indoor connectivity. And there are many use cases here to provide that indoor connectivity, which I think will be critical. With that, let me move over to Lars to go through the numbers in some greater detail.

All right. Thank you. All right. Let me start by giving you some additional points on the group before discussing the segments more in detail. Net sales amounted to 61.8 billion and organic sales were flattish. Very strong growth in North America for the second quarter in a row, with some customers selectively increasing investments. Also slight growth in Europe, but other markets declined. The largest decline was in India, where the investment levels are normalizing after a peak in 2023. IPR licensing revenues increased to 3.5 billion from 2.8 billion in the third quarter last year. And this was the third quarter in a row that a new 5G IPR agreement was signed. And the current run rate is around 12 billion coming out of Q3. And the expected IPR revenue is expected to reach at least 13 billion for 2024. And there are further growth opportunities with additional 5G agreements and the potential to expand into additional licensing areas as well. And as a reminder, the IPR revenue is reported in networks and cloud software and services. As I already mentioned, adjusted gross margin was 46.3% in Q3, an increase from 39.2% last year. Margins improved with favorable market mix, focus on commercial discipline, cost-out activities, and higher IPR licensing revenues, and also the improved usage and the whole supply chain here. That was also a one-off contribution from a customer settlement here in the quarter. Reported OPEX was up by 1 billion compared to last year, mainly because of restructuring costs, which increased by 800 million. The cost-out activities continue to deliver savings that are largely offsetting salary increases and higher bonus provisions. For R&D investments, they are continuing, and this is to maintain technology leadership and further improve operational resilience. On SG&A, costs decreased slightly overall, but increased in enterprise, with investments to secure operational effectiveness. Adjusted EBITDA increased to 7.8 billion, with a margin of 12.6%, marking a significant expansion year on year. On cash flow, this was strong at 2.9 billion. The improvements came from improved profitability, but also lower working capital, resulting from strong focus on inventory and supply chain management in combination with a favorable market mix. With that, let's move to the financial trends. While market conditions have clearly been challenging over time, the sales stabilizing in Q3 is, I think, encouraging. The gross margin trend proves that the focus on growing the patent portfolio, the improved utilization of supply chain and the cost out activities are paying off. The market mix was also more favorable in Q2 and Q3 this year. And with the lower top line, EBITDA has also been challenged in 2024, but also here there is favorable development in Q3. So let's then see on the segments here. In networks, organic sales were flattish with a slight decline of minus 1% year on year. North America grew 80% from very low levels last year with increased investments by some customers and of course also rollout activities. But in other markets, customers continue to be cautious with their investments. The largest slowdown was in India following the rapid 5G build-out last year. And the network adjusted gross margin was 48.7% with the favorable business mix, cost actions and operational leverage in the supply chain all contributing to the margin. IPR revenues and non-recurring settlements with the customer also contributed to the gross margin improvement here in the quarter. Networks adjusted EBITDA increased to 8.1 billion from 5.2 last year and EBITDA margin was 20.3% and 16% on a rolling four quarters basis. In segment cloud software and services, organic sales were fairly flat with a year-on-year decline of minus 1%, mainly impacted by lower service sales. Adjusted gross margin was 38.7%, improving somewhat from last year. And here the strategy execution with focus on commercial discipline and accelerated automation is paying off. There was also a small benefit from IPO revenues and the customer settlement also here. EBITDA margin was 2.9% and 3.6, rolling four quarters. In enterprise sales declined by 3% and sales in global communications platform declined as expected, impacted by the decision to reduce some activities in some markets and focus on more profitable market segments. Enterprise wireless solutions, here we grew about 7%, with somewhat slower growth in wireless WAN. And as Barry mentioned, the first enterprise 5G neutral host solution was launched in the quarter. Adjusted gross margin increased to 52.4%, with improved margins across the business in enterprise. The adjusted beta loss was 0.8 billion, impacted by higher operating expenses, mainly in global communications platform. And this is for two reasons. First, a non-cash impact from a lower rate of capitalization of R&D expenses that we started in Q1 this year, and this impact OPEX for the full year of around 1 billion. And secondly, investments for operational effectiveness that we do. And also worth mentioning, I think, is that, as Boje mentioned here, the investments in the global network platform for network APIs also continue. The focus on improving the financial performance in the current portfolio continues at the same time as we also invest for the future here. Then turning to free cash flow for the group, which was 12.9 billion before M&A in the quarter. The increase compared to last year is mainly working capital improvement and comes from strong focus on inventory and supply chain management all the way out to our customers. And of course, there was a strong contribution from EBITA and the favorable market mix here. That resulted in net cash that increased sequentially by 12.4 billion to 25.5 billion And return on capital employed in Q3 was 14.9%. Then let's look at the outlook. First, on sales. For networks, Q3 delivered above seasonal pattern here. So the starting point is a bit high. So given the strong Q3, Q4 is expected to be below average seasonality. On cloud software and services, here we declined sequentially by 1% between Q2 and Q3. And Q4 is also expected to be below average due to timing of project deliveries. And in enterprise, sales is expected to be further impacted in Q4 by the decision to focus on profitable markets and products. And then next, turning to profitability. Here in Q3, networks gross margin benefited from retroactive IPR licensing and the customer settlement in Q3. So for Q4, the gross margin expected to be in the range of 47% to 49%. And then finally, restructuring is expected to be around 4 billion for the full year. With that, I hand back to you, Berger.