Ericsson

Hello everyone and welcome to the presentation of Ericsson's second quarter 2025 results. With me here in the studio today are Borea Elkhom, 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 in 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 risks 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 Birger and to Lars for their introductory comments.

Thanks Daniel and good morning everyone and thanks for joining us today. So we delivered a solid Q2 with organic growth of 2% following the weak development the last few years and three-year high in EBITDA margin as we continue to demonstrate strong execution against both our operational and strategic priorities. Milestones included a fifth quarter in a row of positive EBITDA in cloud software and services. And we continue to have the solid execution in networks with good gross margin. We return to sequential growth in global communication platform following the market exits. And Aduna has now signed up all three operators in Japan. We achieved these results despite the fluid geopolitical and trade environment. And let me give you some key financial and strategic takeaways before Lars dives further into the numbers. So, as I said, organic sales grew by 2%, with growth in market area Americas and in IPR, and despite the temporary investment pause in India. We also saw increasing FX headwinds during the quarter, almost 5 billion kronor year over year. As I mentioned, we saw strong development in our margins. Gross margin came in at 48%, and we delivered an EBITDA margin of 13.2%. And importantly, the margin improvements was broad-based across all segments. And we see here the cost actions we took during the last year, and it's now flowing through the P&L. And we continue, of course, to take actions to improve our cost base, and that should also provide benefits over time. While we expect the overall market environment or macroeconomic environment to remain in fluid or dynamic, we expect the RAND market will broadly be stable for the remainder of the year. For the RAN market to return to long-term growth, it remains clear that the industry needs new monetization opportunities. To that end, we continue to execute on our strategic initiatives to create new use cases for mobile networks. The first major use case is fixed wireless access, now has more than 160 million subscribers. And more interestingly, the net promoter score is often higher than for fiber. So to take full advantage of 5G, operators need to transition to 5G standalone networks, because that will enable differentiated connectivity solutions. And it is now encouraging to see customers with 5G SA coverage, actually offering service innovation like network slices for mission critical applications. In addition to that, we see network APIs as one of the key monetization engines for the industry, as well as for us. So far, revenues are small, but we see great interest in some initial API use cases, such as fraud detection. In the quarter, our joint venture, Aduna, expanded to all three operators in Japan, and with that, we now cover major markets with Aduna. In parallel to executing on our strategic priorities, we're focusing on strengthening Ericsson to succeed across varying market conditions, and that, of course, include discipline on pricing and cost. And this is in this quarter reflected in OPEX coming down from last year as a result of all the cost actions we have taken. And over the last year, we have reduced our total number of employees by about 6% or 6,000 while we had organic growth. And it's good now to see that actually coming through the numbers. And we see opportunities to further reduce costs following the structural actions, like the combination of three market areas into two. But we also see and expect big benefits from the use of AI. And that's one of the reasons why we expect restructuring costs to remain elevated during the year. I think AI could be one of the absolutely most important technologies we've ever seen. And for us, it's a key part in how we design and operate networks. So we're increasing our investments in the area. You might have seen this past quarter that we announced an AI factory consortium here in Sweden that will give us access to the latest chip and compute power. As we look ahead, AI will be a key driver for traffic in the networks. as AI applications move to the edge. And we see that this will require 5G standalone to fully support these new type of use cases. So, for example, we're talking low latency and guaranteed uplink performance. So this, for us, I would say is really a fundamental area. So it's critical that we continue to lead in AI. So before moving on, let me comment quickly on the market development we saw in Q2. In market area Americas, sales increased by 10% year over year, with good growth in North America. And that's, of course, encouraging, as North America is often a front-runner market. Both networks and cloud software and services grew, benefiting from previous contract wins. The strength in North America was partly offset by lower sales in Latin America, where we continue to see intense competition from both eastern and western vendors. Sales in Europe, Middle East and Africa declined by 1% year over year. In Europe, sales actually increased slightly, supported by network modernization. Europe is also a market where we see high competition from all vendors. We're confident in our competitive portfolio and technology leadership, so we remain commercially disciplined as we approach the market. In Southeast Asia, Oceania and India, sales decreased by 22% year over year. This was primarily due to the temporary pause in network investments in India related to specific market uncertainties. But Southeast Asia is also an area where we saw increased competition. Lastly, sales in Northeast Asia declined by 15%. This was due to reduced customer investments in some 5G front-runner markets. But in the quarter, we have made strong progress on our discussions with customers in the Japanese market. In line with this, we also announced, and I think you've seen that, that we will set up an R&D center in Japan. With that, I would like to hand over to Lars to go through the financial details more in detail, the financials more in detail.

All right, thank you, Berger. Let me start by giving some additional points to the group before discussing the segments. Net sales in Q2 totaled 56.1 billion, with organic sales growing 2% year-on-year. Reported sales declined by 6%, with a currency impact of 4.7 billion, driven by the strengthening of the Swedish krona against US dollar and other currencies. IPR revenue increased to 4.9 billion in Q2 from 3.2 billion in Q1, the increase mainly related to previously unlicensed periods. The run rate existing in Q2 or coming out of Q2 is around 13 billion. The adjusted gross margin for Q2 came in at 48% up from 43.9% in Q2 last year. and margin improvements were broad-based across all segments, driven by IPR revenue, favoured product mix and cost reduction initiatives. It's worth noting that gross income had a negative currency impact of 2.4 billion. Compared to Q1, gross margin was slightly lower, mainly due to lower gross margin in networks, which was expected, and which I will cover later. Operating expenses excluding restructuring charges stood at 20 billion, around 3 billion lower than last year. About half of this reduction came from cost initiatives, and the rest is mainly currency. Even with the currency headwind of 1.4 billion, adjusted EBITDA went up by 3.4 billion, reaching 7.4 billion. This improvement was driven by lower operating expenses and higher gross income, bringing the beta margin to 14.2%. On the cash flow side, before M&A, we reported 2.6 billion, which is down compared to last year. And last year's cash flow benefited significantly from reduction in operating working capital, thanks to the completion of large-scale rollout projects and substantially lower inventory levels. So let's move to the segments. In network, sales decreased by 5% year-on-year to $35.7 billion, with a negative currency impact of $3.1 billion. So organic sales increased by 3%. In market area Americas, organic sales showed good growth. Organic sales also grew slightly in the market area Europe, Middle East and Africa. Sales in the other market areas declined, with the most significant drop in India. IPR revenues also increased, supported by the settlement. The network's adjusted gross margin came in at 49.5%, benefiting from IPR licensing revenue, cost reduction initiatives and favorable market mix, partly offset by tariffs. Compared to Q1, margins declined somewhat in Q2, as expected. The positive impact from higher IPR licensing revenue was offset by less favourable market and product mix, and to some extent tariffs. Networks adjusted to beta increased by 1.2 billion to 6.5 billion, despite a negative currency impact of 1.3 billion. The beta margin improved significantly year on year, moving up to 18.2% from 13.9%. This was driven both by increased gross income and the lower operating expenses. Turning to segment cloud and software and services, sales declined by 5% year-on-year to 14.4 billion, which include a negative currency impact of 1 billion. On an organic basis, sales grew by 1% with growth in market area Americas and IPO licensing, partly offset by declines in the other market areas. Adjusted gross margin came in very strong in the quarter at 43.2%. This was a result of a favorable sales mix with a higher share of software and increased IPO revenues, but also the continued focus on delivery performance and commercial discipline. Adjusted EBITDA increased to 1.4 billion with a margin of 9.6%, supported by higher gross income and lower operating expenses. and including a 0.1 billion negative currency impact. In enterprise, sales decreased by 14%, and organic sales were down 6%. Organic sales in enterprise wireless solutions grew by 5%, benefiting from higher product and subscription sales in enterprise networking. And global communications platform declined by 9%, impacted by the decision taken last year to reduce activity in some countries. We expect enterprise sales to stabilize during 2025 on an organic basis, excluding currency movements and the impact of iConnect, which is expected to close during Q3. Adjusted gross margin increased to 54.9%. This was driven by the focus on more profitable market segments in global communications platform and stronger product mix in enterprise wireless solutions. Adjusted the beta was minus 0.5 billion. Turning to free cash flow, which was 2.6 billion before M&A, broadly in line with the previous quarter, and operating cash flow was also similar to Q1 at 4.1 billion. with the benefit of higher earnings broadly offset by changes in other operating net assets. Investing cash outflow was 10.9 billion, reflecting investments in interest-bearing securities. The net cash decreased by 2.6 billion compared to the previous quarter. Dividend payments of 4.8 billion more than offset the positive free cash flow in the quarter. So next I will cover the outlook. Global uncertainty continues with potential for further tariff changes and broader macroeconomic factors like currency and trade flows. This can affect customer behaviors and investment decisions over time. With that in mind, turning then first to sales. we expect networks Q3 to be below three-year average seasonality, and this is mainly reflecting the mechanical impact of the higher IPR licensing revenue in Q2. In cloud software and services, we expect sales growth to be similar to average three-year seasonality in Q3. Both of these indications assume current exchange rates and no tariff changes. Next, networks gross margin. We expect network gross margins to be in the range of 48 to 50% for Q3.