Ericsson

Hello, everyone, and welcome to the presentation of Ericsson's fourth quarter 2024 results. With me here in the studio today, Borya Ekholm, our president and CEO, and Lars Sandström, our chief financial officer. 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 over the call to Bory and to Lars for their introductory comments.

Well, thank you, Daniel, and welcome everyone. And first of all, of course, thank you for joining us today. So we delivered a solid Q4 results and we made good progress against our strategic priorities in the 2024 overall. Momentum around programmable networks and new ways to monetize them continue to build up. I'd like to start by focusing my comments today really on two key areas. First, the progress against our strategic initiatives. And second, how we position the business to succeed across varying market conditions. Beginning with our strategy that aims to build the networks of the future through programmable networks and open API architectures. This will enable our service provider customers to deliver differentiated performance and new applications and new cases to monetize. The contract, and you remember that we signed with AT&T last year, really paved the way for our newest agreement with Mass Orange, which we signed during the quarter. I would say our agreement with Mass Orange was really the first open programmable network in Europe. It's a key milestone for us and the European telecoms industry. With this agreement, Ericsson and Mass Orange will collaborate to lay the foundation for open programmable infrastructure that will drive technological advances and growth moving forward. it will allow differentiated connectivity. And why is differentiated connectivity so important? Well, if you think about the whole radio stack, and we are serving a massive number of different applications. We're serving anything from mobile broadband, fixed wireless access, mission critical communication, but also AI-driven new applications. We have AR, VR glasses. All of them will require differentiated connectivity. And here, programmable connectivity plays a very important role. That's why that's a key focus for us. But besides that, we also launched a number of enhancements to our portfolio, including more sustainable massive MIMO radio with more than 25% energy savings and new RAN software capabilities that significantly boost performance and programmability. On the enterprise side, The joint venture we announced in September with 12 leading service providers to aggregate and sell network APIs represent a key milestone in redefining the telecom industry by creating the supply of network APIs across several continents. And we continue to see the momentum building for network APIs. And during the fourth quarter, we also announced the name for the new venture, Aduna. And you can expect many more announcements to come in the future here. In Enterprise Wireless Solutions, our strategic ambition is to further build out the go-to-market engine. Last year, we combined the activities under the Ericsson brand and announced a new Enterprise 5G portfolio, including neutral host solutions, to enable full indoor connectivity. Overall, we saw very good traction in the new portfolio in Q4. So as you can see, we are not standing still. We're taking actions to execute on our strategy to ensure that Ericsson remains well positioned for the future, while also laying the foundation to change the overall trajectory of the RAND market. Second, I'd like to provide some comments on the overall RAND market and how we're preparing ourselves for different market conditions. And you've seen that's been critical. In 2024, the overall market continued to be quite challenging and I would say continued to decline during the year. However, today we're starting to see some very positive indications and we have further reasons to believe that the overall market is starting to stabilize. And you saw in Q4, sales returned to growth for the first time in eight quarters, increasing by 2%. We continued strong growth in North America as well as growth in Europe. Growth in data and new applications, that's what's going to drive the market over the medium to long term. But ultimately, and we've said this so many times before, the near-term market recovery is in the hands of our customers. But our confidence in a stabilizing market is growing, driven by positive customer discussions and interactions, and that we see a return to our largest markets, the U.S., as well as Europe. So I think the frontrunner experience we have with the U.S. market can give us comfort that we're starting to see a change in sentiment. But regardless of the market conditions, we need to structurally improve our business through rigorous cost management, of course, but also improving our working capital and the capital we tie up in the business. That will strengthen our cash flow and balance sheet. So for example, during the past few, well, year and years actually, we have taken a lot of actions to structurally take out costs, and you can see the results in our gross margin increasing by more than 500 bps to 44.9%. Market mix, IPR licensing revenue, of course, and the focus on the profitable segments in enterprise all contributed as well. In 2024, total headcount internal and external fell by 9,400 or 8%. So it's just not in our gross margin where we're structurally improving the profitability. We're actually taking OPEX out as well. And as you've all seen, the fourth quarter included significantly higher bonus provisions than last year and clearly above normalized levels during the quarter. So underlying OPEX developed well and fell down or fell. Adjusted EBITDA margin increased by 300 bps to 11%. We're not yet where we want to be here, but we're making progress towards our long-term goal. Going forward, we're going to continue to strengthen our business and focus on operational excellence, and we remain committed to our long-term EBITDA margin target. Over the past 18 months, we have implemented actions to structurally lower our working capital, together with a change in business mix following the completion of the large rollout projects in India that we had in 2023. We generated free cash flow of 40 billion during 2024, and that puts us in a very strong financial position. Turning to capital allocation, our first priority is to invest in R&D to maintain and grow our technology leadership across networks, enterprise solutions and network APIs. Alongside R&D, we prioritize a strong balance sheet and attractive shareholder returns. I would also say that we actually have a very well-positioned portfolio today. So we see possibility to do some smaller add-on, bolt-ons, could be geographic, could be technology-wise. But what we have positions us really well to organically develop the business, and we're very satisfied with where we are. So today you saw the board proposing a dividend of 285 per share corresponding to a total amount of 9.5 billion kronor. I would say this is a testament to the confidence the board has in our strategy as well as the longer term. So as you can see, it was a strong end to the year. But now let me comment more specifically on some of the market developments we saw in Q4. In North America, sales increased by 54%. In networks, sales increased by 70%. Of course, driven by the rollout of our AT&T contract, but also strong year-end hardware demand and significant software traction with other large customers. Sales in Europe and Latin America increased by 2%. The strength in Europe, in particular, benefited from the market share gains and strong deliveries. Sales decreased in all other regions, specifically Latin America, continues to be a market with intense competition and lower customer network investments. In Southeast Asia, Oceania and India, sales decreased primarily due to lower network sales in India after a record year 2023. Sales in Northeast Asia as well as Middle East and Africa also slowed. This was really due to investments levels slowing down following the recent 5G build-out in the front-runner markets, as well as some macro pressures in Africa that we're all aware of. At the same time, we had good customer success in all of these regions in the quarter. So for example, we announced a multi-year contract extension for 4G and 5G RAN with Bharti. We also had a contract win of nationwide 5G deployment for VMPT in Vietnam. With that, I would like to hand over to Lars to go through the financial details.

All right. Thank you, Berger. Let me start by giving you some additional points on the group. before discussing the segments more in detail. Net sales in Q4 amounted to 72.9 billion, and organic sales were up 2%. North America growth was strong for the third quarter in a row, and we also had slight growth in Europe for the second quarter in a row. The other markets declined, particularly India, where investments level have normalized after a peak in 2023. Adjusted gross margin was 46.3% in Q4 and increased from 41.1% in the prior year here. Margin improved with supply chain efficiency, the focus on commercial discipline and a favorable market mix. OPEX in the quarter was 23.8 billion, up by 1.7 billion compared to the prior year, mainly because bonus accruals were above target levels in 2024, having been below in last year. The cost of activities continued to deliver savings. These balanced out salary increases and part of the higher bonuses. Adjusted EBITDA increased to 10.2 billion with a margin of 14.1, marking a significant expansion year on year. Cash flow was strong at 15.8 billion. The improvements came from improved profitability and lower working capital. Let's move on to the results for the full year. Net sales amounted to 247.9 billion and organic sales declined by 5%. Very strong growth in North America was offset by organic sales declines in all the other market areas. The sales decline, which gave a significant volume impact on gross income, was more than offset by an increase in gross margin. Adjusted gross margin was 44.9%, an increase from 39.6% in 2023. Margin improved with a favorable market mix, cost reduction initiatives, including supply chain efficiency, as well as higher IPR licensing revenues and the focus on more profitable market segments in enterprise. The result on gross income was an increase of 7 billion to 111.4 billion. Reported OPEX was up by 15.2 billion compared to the prior year, mainly because of the intangible asset impairment of 14.1 billion. Excluding impairments, total OPEX was 88.4 billion, which is an increase of 1.9 billion. This is mainly because the higher bonus accrual levels compared to 2023. R&D investments continue to maintain technology leadership, for example, to accelerate delivery of some 5G features and to further improve operational resilience. Excluding restructuring, impairments and the discontinuation of capitalization of development expenses in enterprise impacts, R&D increased by around 1 billion in the year. SG&A costs, excluding restructuring and impairments, also increased slightly, primarily in segment enterprise, with investments to improve operational effectiveness. Adjusted EBITDA increased to 27.2 billion, the margin was 11%, marking an almost 3 percentage point expansion year on year. And net income for the full year was 0.4 billion compared to minus 26.1 in 2023. Net income in 2023 was impacted by the impairment of Goodwill of 31.9 billion and in 2024 by a non-cash impairment charge of 15.3 billion. The effective tax rate for 2024 was 28% excluding the impairment charges. Cash flow was very strong at 40 billion. The improvements came from improved profitability and working capital resulting from a favorable market mix, customer payments and efficient supply chain management. I cover this more in detail later. Let's comment on IPR licensing. Q4 marked the fourth quarter in a row that a new IPR agreement was signed. This means at the end of 2024, most of the top 10 smartphone vendors were licensed for 5G. IPR licensing revenues increased to 14 billion in 2024, including retroactive revenue of around 1 billion from just over 11 billion in 2023. We are at a record run rate of 13 billion in recurring IPO revenue going into 2025. There are further growth opportunities with a few additional 5G agreements remaining and the potential to expand in additional licensing areas such as automotive and IoT. With that, let's move to the financial trends. While the market conditions have clearly been challenging, we have been seeing a stabilization of sales in Q4, rolling 12-month sales bottom at Q3 2024. The gross margin trend shows that the focus on growing the patent portfolio, the improved utilization of supply chain and cost actions are paying off. The more favorable market mix has also contributed. We have seen a favorable development of EBITDA, which ended up the year at 27.2 billion, up by 27% compared to the prior year. The lower level of sales in the first three quarters compared to the previous year and increased operating expenses moderated EBITDA margin improvement. Let's move to the segments. In networks, organic sales increased by 5% year-on-year. North America grew 70% from very low levels last year, with contract wins and a strong year-end software demand contributing. Sales in Europe grew slightly. In the other markets, customers continued to be cautious with their investments, and the largest decline was in India, where the investment levels have now normalized after a peak in 2023. Networks adjusted gross margin was 49.1% with a favorable market mix or business mix, cost actions and operational leverage in the supply chain all contributing. IPR revenues increased and benefiting from a further licensing agreement and contributed to the gross margin improvement. Networx adjusted EBITDA increase to 10.1 billion from 7.4 billion in the prior year and adjusted EBITDA margin was 21.6 in Q4 and 17.5% for 24 overall. EBITDA improved due to higher sales and improved gross margins partly offset by higher OPEX affected by the before mentioned higher bonus accruals and investments in R&D. In segment cloud software and services, organic sales were stable, with sales growth in North America offset by sales declines in the other market areas. Adjusted gross margin was 39%, improving from the prior year and benefiting from the delivery performance and higher software sales. The strategy execution with focus on commercial discipline and accelerated automation is paying off. The improvement in gross margin was offset by higher bonus accruals reflecting an above target outcome in 2024, which resulted in a beta margin of 9.3% in Q4 and 3.2% for 2024. In enterprise sales declined by 7%. Enterprise wireless solutions grew by 19% with strong growth in private 5G and neutral host solutions. Sales in global communications platform declined 17% impacted by the decision to reduce activity in some countries and focus on more profitable market and product segments. Adjusted gross margin increased to 54.3%, and adjusted gross income increased by 0.3 billion year-on-year, despite the sales decline. The adjusted EBITDA loss was minus 1.2 billion, with the decrease year-on-year mainly reflecting non-recurring impacts, in part related to the exit of certain businesses, as well as increased investments to improve operational effectiveness. The focus on improving the financial performance in the current portfolio continues at the same time as we also invest for the future. Turning to free cash flow, which was 15.8 billion before M&A in the quarter and 40 billion for the year. We delivered a cash flow margin of 16% to net sales for the year, well above our 9-12% target. The increase in cash flow compared to 2023 is due to the earnings growth and very strong working capital, as I mentioned before. Working capital benefited from the structural actions we have taken to improve supply chain, cash efficiency, and from market mix, particularly between India and the US. On top of this, strong collections and customer prepayments also contributed, and this means working capital is now at historically low levels, and we expect this to partially reverse in 2025. Net cash increased sequentially by 12.3 billion to 37.8 billion. and return on capital employed in 24 was 2.5%. This includes an over 7 percentage point impact from the impairments. Next, I will cover the outlook. Turning first to sales. For networks, Q4 continued the strong trend from Q3, so the 2024 exit rate is high. Despite this, we still expect networks Q1 to be broadly similar to the average three-year seasonality. We expect cloud software and services to be similar as well. In enterprise, sales will continue to be impacted by near-term by the decision to focus on profitable markets and products. And next, turning to profitability and networks gross margin. For Q1, the networks gross margin is expected to be in the range of 47 to 49%, with some initial impact from the timing of swaps in North America, but still benefiting from a positive market mix. And with still significant revenue declines in some markets, restructuring is expected to remain elevated in 2025 as we continue to adjust the operating model and focus on operational excellence. With that, I hand back to you.