Savers Value Village Q2 2023 Earnings Call Transcript

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Provided by Quartr
July 14, 2023

There are 11 speakers on the call.

Operator

Hello, everyone, and welcome to this call covering Ericsson's Q2 2023. With me today, as usual, I have our President and CEO, Borje Ekholm and our CFO, Karl Melander. As usual, we will start this with a presentation and end with a Q and A session. And then in order to ask questions, you need to join the conference by phone, remember that. Details can be found in today's press release and on our website, erikson.com/investors.

Operator

And please advise that today's conference is recorded. But before handing over to Borje and Karl, I would like to read 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 risks and uncertainties. The actual results may differ materially due to factors mentioned in today's press release and discussed in this conference call.

Operator

We encourage you 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 leave the word to you, Borje. So please, Borje?

Speaker 1

Well, thank you, Peter, and good morning, everyone. Big thank you all for joining us for this 2nd quarter report. I'm happy to present a quarter where we continue to execute Our strategy to build a stronger and more profitable Ericsson for the long term. Based on our strategy and our strong position, we're able to deliver a Solid quarter despite challenging market condition. We see a changed business mix with North America representing one of the lowest shares we've seen in many years.

Speaker 1

But on the other hand, we see India growing very, very fast. Our strategy, as you all know, is focused on 3 priorities. The first one, to bolster our leadership in mobile networks. 2nd is to grow our enterprise business. And thirdly, drive a cultural transformation of the company.

Speaker 1

Mobile networks continues to be the bedrock of Ericsson. With about half of the world's 5 gs traffic outside of China carried Through our radios, we are a leader in the market, and we remain fully focused on continuing to strengthen this leadership position. In parallel, we're using our expertise in advanced cellular networks to expand into the fast growing enterprise market, and that will substantially increase our addressable market, diversify our portfolio and puts us on a higher growth trajectory. In our platform business, we're developing new ways to monetize 5 gs's unique features like speed, latency, etcetera. Operators and enterprises are showing great interest in this area, and it will allow them to differentiate their offerings and start to develop completely new use cases.

Speaker 1

We're also continuing our relentless focus on enhancing our compliance program to make sure that it's fully embedded throughout the company. With that, let me now go through some of the key takeaways from the quarter. As we've said before, 2023 is a choppy year, and Q2 developed much in line With our expectations and what we have said to the market, we continue to execute with discipline and focus. Our overall sales declined by 9%. The decline in networks was partially offset by organic growth in cloud software and services and a 20% organic growth in enterprises.

Speaker 1

The EBITDA margin, excluding restructuring charges, was 5.7%. In networks, India continued its strong development and network rollout. And by delivering a record build out, We now have the leading market share in India as well. As expected, we saw softening in other markets, primarily front running 5 gs markets, and that includes, of course, North America. And that's something that we have discussed with you before as well, where we see the build out pace being moderated, but we also see customer inventory levels being rebalanced.

Speaker 1

And despite this big mix shift between our geographies, we could deliver a networks gross margin of over 39%. In Cloud Software and Services, we continue to execute on our revised strategy to reach profitability, and we are on track to reach at least breakeven for the full year. In Enterprise, we saw a strong growth in Enterprise Wireless Solutions, And we're also happy to see a positive EBITDA in Global Communications Platform. And we saw sales from Vonage current communications APIs offerings to grow by 19%. And you all know the importance of IPR for our or to reach our long term financial targets.

Speaker 1

And of course, that's built upon our strong technology leadership position. And in the quarter, we were able to secure another important 5 gs licensing agreement with a device vendor That puts us well on track to further strengthening our IPR revenue base into 2024. We're also addressing areas that's in our control. So when we are in the market as we are today, that's challenging. We are intensifying our efforts on the cost out initiatives, and we are well on track to reduce our annual run rate by at least SEK11 billion.

Speaker 1

And this will start to positively impact the P and L over the coming quarters, already now in the 3rd quarter, but have full effect during 2024. The overall performance in the quarter is really a testament to the underlying strength and resilience of our business and our ability to adapt and execute in a challenging macro environment. With that, let me hand over to our CFO, Karl Melande, to really go into the numbers. Karl?

Speaker 2

Thank you, Borje, and very good morning to everyone on the call. So as you saw this morning, the results that we published came out according to our expectations and per the guidance that we had issued in connection with the Q1 report. I'll start by having a look at the development in the different Market areas and I'll comment on some of them if we go to the next slide, please. So looking here at the geographies, as Borje said, We saw rapid 5 year rollout in India, it's very clear, and network sales in India doubled year over year. This resulted in an organic growth in our market area called Southeast Asia, Oceania and India by 71% organically year over year.

Speaker 2

And our strong growth in this market area partly offset As we have discussed many times in the North American market, this was as expected and the decline there in North America was 42% year over year organically due to lower CapEx spend as anticipated and also reductions of customer inventory following the very high investment levels in 2021 Services grew 10% in the North American market area driven by 5 gs. In Europe and Latin America, which Actually, it was the largest market area for us in terms of sales in this quarter. We saw a decline in Europe by 6% organically. But in Latin America, we recorded a growth of 3% organically, mainly driven by additional 5 gs deployments in Brazil. And overall, this resulted in a 3% decline for the market area as a whole.

Speaker 2

If we leave this and then Suming on how all of this came together in the Group P and L. So our reported sales in the quarter were SEK 64,400,000,000 kroner. That is a decline by 9% organically due to all the reasons discussed on the previous slide. So I will not repeat that, but let me jump directly to gross margin. Gross margin, excluding restructuring, declined by 390 basis points year over year to 38.3 percent, and this is primarily due to the lower sales and lower gross margin in networks due to this continued change in business mix, combined with large rollout projects, which come with initially lower margins because there's a large portion of service content in those, but they also improve the margins over time.

Speaker 2

In gross margin, we also see positive impact from the Increased IPR revenues. IPR revenue increased by SEK 1,700,000,000 year over year to SEK 3,200,000,000 in the quarter. And this increase was mainly driven by one contract signed in Q4 2022, but also the new licensing contract signed in this quarter that Burri already mentioned. So Our Q2 numbers, I should say, that also include revenue for the past unlicensed quarters in accordance with this new IPR contract. Cloud Software and Services gross margin excluding restructuring was 33.9%.

Speaker 2

This is a slight increase, 40 basis points year over year, supported by higher sales, but also improved delivery performance and the higher IPR revenues helps us well in this segment. And then in Enterprise, gross margin excluding decreased to 46.3 percent from 52.8 percent. And this is really due to the Consolidation of Vonage into Ericsson with a lower gross margin than the remaining part of the Enterprise segment. Further down the P and L, then R and D and SG and A increased year over year. And aside from the FX impact here, which stands for about 25% of the increase.

Speaker 2

This mainly comes from the addition of Vonage, but also further investments in R and D as well as go to market activities in Enterprise Wireless Solutions. So all in all, group EBITDA margin excluding again mainly impacted by lower gross income from networks, but also the increased investments that we undertake in enterprise and the consolidation of Vonage. I can also mention restructuring charges SEK 3,100,000,000 in the quarter. This is mainly for redundancy costs related to the cost reduction activities. We still estimate restructuring costs to amount to SEK 7,000,000,000 for the full year.

Speaker 2

And as a result of this amount of restructuring as well combined with the Other factors in the P and L, we reported a net loss this quarter of SEK600,000,000 compared with net income last year of SEK 4 point 7% in the corresponding quarter. Also want to mention that if we look on the rolling 4 quarter basis, sometimes that's a better metric And then our EBITDA margin was 9.1%. And as you know, the long term target is 15% to 18% EBITDA margin. We can move to the next slide to have a look at cash flow now. So cash flow from operating activities decreased to SEK 2,900,000,000 from SEK 6,300,000,000 negative.

Speaker 2

And this is mainly due, of course, 1, to lower EBIT, but also increase in working capital year over year. And why did working capital increase? Well, it's primarily driven by the business mix shift, the same aspects that impact the P and L, including this very large rollout projects, which have longer order to cash cycles than the front runner 5 gs markets have had. So this is an impact on working capital, but temporary. And also cash flow was impacted by the payment of Fine related to the resolution with the U.

Speaker 2

S. Department of Justice of SEK 2,100,000,000 which was provision in an earlier period, but paid in the Q2. We saw a small reduction of inventory, so that's It's good to see inventory coming down. This is driven both by the components coming down and finished goods as well. And of course this supported cash flow in So result of all of this is a free cash flow before M and A at minus SEK 5,000,000,000.

Speaker 2

To that we can add M and A activities, SEK900,000,000 which was a result of Cradlepoint's acquisition of Ericom, which we have announced earlier. We do that acquisition to strengthen the 5 gs offering in the Cradlepoint or Enterprise Wireless solution portfolio. Rolling 4 quarter basis, I return to that. That's on free cash flow was SEK 6.4 SEK 1,000,000,000 which corresponds to 2.3 percent of net sales, again compared to a long term target of 9% to 12%. And as I believe I mentioned also in the previous quarter, of course, we're not satisfied with where we are in terms of cash generation and this really remains key focus area for us.

Speaker 2

For Q3, we don't expect any significant changes in working capital. But in the second half of twenty twenty three, we do expect Positive free cash flow before M and A with Q4 as a strong cash flow quarter in line with our historical patterns. I can only also mention here that we paid out the 1st dividend installment in the quarter as well amounting So totally SEK 4,600,000,000 and summing that up, closing that net cash position then ended up at SEK 1,900,000,000 while gross cash is at SEK 35,700,000,000. So here, we continue of course to execute on The funding plan we have to refinance the maturities we have in the debt portfolio and add also new sources. And among many Activities in corporate finance, we have launched a commercial paper program in the quarter and we signed an initial facility for US500 $1,000,000,000 for general corporate purposes as well.

Speaker 2

Finally, from me, let's look at the outlook for next quarter, the Q3 2023. Couple of items to pay attention to. First of all, we expect gross margin for Networks to be in the range of 38 to 40% in the Q3 with very similar trends and mix as we saw in Q2. We have less IPR revenue due to catch up revenue in Q2, But on the other hand, some support from cost out. OpEx, and here we exclude Vonage, typically decreases seasonally with €700,000,000 from Q2 to Q3.

Speaker 2

But of course, as usual, we have large variation between quarters. We expect now cost reduction activities to start to have an effect in Q3, but still rather small but increasing over time quarter by quarter going forward. It's going well In terms of executing on cost out, and we are aiming at the run rate saving of at least SEK 11,000,000,000 by end of this year, of which 45% is related to OpEx. For Cloud Software and Services, we expect Q3 EBITDA to be in line with Q2 And we will according to our estimate here and we're committed to that reach at least breakeven for full year 2023. Group EBITDA margin, again excluding restructuring, of course, in Q3 is expected to be in line with or slightly better than Q2.

Speaker 2

Again, similar trends, similar business mix, early benefits of the cost out execution and then followed by a seasonally stronger 4th quarter. Thank you all for that. And with that, I hand it back to you, Burri.

Speaker 1

Thank you, Karl. So our strategy is really working, and we are leveraging our technology leadership in mobile networks as well as taking the critical steps in our ambition to grow in enterprises. As we look ahead, I think it's important to single out that the fundamental driver of network CapEx is really the continued data traffic growth. And we see that 5 gs really continues to grow very fast. We currently forecast 5 gs subscriptions to be about 1 €500,000,000 by end of 2023 and reach €4,600,000,000 by 2028.

Speaker 1

We also see that the data traffic in the network continues to grow, and we also start to see new type of use cases, call it fixed wireless access, but we're also starting to see enterprise use cases. So data traffic is growing. And with the operators' desire to meet the, I would say, the users' expectation for network quality, But adding on cost and energy efficiency, and you know CO2 footprint starts to be more and more important, We see that, that will stimulate further investments. In addition, we see that 3 quarter of all base station sites Outside of China are not yet updated with 5 gs mid band. So this, in combination with the migration to 5 gs stand alone, We'll basically continue to drive the need for investments in 5 gs networks around the world.

Speaker 1

So we are confident that the market will recover, and that's what we have said for several quarters and as a consequence of these factors. Of course, the exact timing of the recovery is will be in the hands of our customers, but we are encouraged by the discussions we've had with several customers where we see a recognition of the need to strengthen capacity in the network. That said, we expect a gradual recovery towards late in 2023 and then improve in 2024. When that happens, Ericsson is really well positioned to benefit. And based on an expected recovery of the mobile network market, we remain focused on reaching the lower end of the 15% to 18% EBITDA margin target in 2024.

Speaker 1

So to sum up, we continue to navigate the current environment with discipline and focus. We're delivering on the cloud software and services turnaround. We do portfolio adjustments. We will enhance the R and D productivity. We see IPR revenue growth, and we will continue to execute on our cost out reduction or cost reductions.

Speaker 1

And of course, in an uncertain market, to really impact what we can impact that's under our control is critical. So we have accelerated our efforts on the cost out like we spoke about last quarter in preparation for a tougher market condition. But we remain ultimately focused on our key strategic priorities to drive technology leadership in mobile networks, Expand or leverage the capabilities we have for cellular networks into expanding in the enterprise space. That increases our addressable market and growth potential and finally, to strengthen our culture. With that, I would really like to thank all the fantastic people in Ericsson who has made this position we've achieved today possible.

Speaker 1

A big thank you to all of you. With that, back

Operator

to you, Peter. Thank you, Borje. So it's now time for the question and answer session. And as a reminder again, to ask a question, you need to press star 1 and 1 on the telephone and wait for your name to be called out. If you are streaming the webcast, please mute the webcast audio whilst asking questions to minimize any kind of sort of audio feedback.

Operator

So our first question now comes from the line of Alexander Petrieck. Good morning, Alexander.

Speaker 3

Yes. Good morning. Good morning to all of you and thank you for taking my question. I'll just have a first one, which is a bit dense and then a very small follow-up, if I may. Sure.

Speaker 3

So my first question is really There's a disconnect between your guidance of 15% EBITA margins in 2024 and the consensus, which is currently at 11.5 Now the jump in EBITA that is implied in your ambition or guidance is almost SEK 20,000,000,000 Sec now, and that's almost double your planned annual cost savings run rate, which is SEK 11,000,000,000 some of which will already be In the 'twenty three numbers already in the base. So I'd just like to understand where exactly is consensus getting it so wrong? Is it the market mix? Do you see much more substantial growth into 2024? Where are we all getting it so badly wrong?

Speaker 3

Thank you so much.

Speaker 1

Maybe I can start. The fundamental premise for our targets for 2024 has been the what we see as a recovery in the market. And you have to factor that in. And that to me is, of course, It's impossible to say exact timing when that will happen, but we're very confident it will happen, and that will provide a basic support for the market. Then our cost out ambition is at least SEK 11,000,000,000.

Speaker 1

So we should be reaching that. That will provide support. In addition, there are a couple of things which I'm not sure is factored in. One is IPR revenues that We see we'll continue to grow into next year. We also see that the fundamental turnaround of our cloud software and services will provide a strong support next year, and we will also see some portfolio adjustments that we have already spoken about before to provide support.

Speaker 1

So yes, we do continue to focus on reaching that target for next year. And we've said we should be in the lower end of that range. We are focused on reaching that, and that's why we're trying to be as aggressive as we can on the items we can control right now.

Operator

You had a second question, Alexander, as well, right?

Speaker 3

Yes. Just a quick follow-up. I do feel that your message for the recovery has slipped by about a quarter. You mentioned before, I think in Q1, we spoke of a gradual recovery in the second half. And now basically, Q3 is very similar To the second, we have a slight improvement in EBITA margins, but not that material.

Speaker 3

And the real recovery is in Q4, so Or then seriously in 2024. So can you tell us which markets are a little bit weaker than you previously thought? Is it a longer slump the U. S. Primarily or anything else?

Speaker 3

Thank

Speaker 1

you. We see overall a softer market that we've said since the end of last year. And of course, it's very hard to predict the exact timing when customers will buy. What we see is the network quality around the world, actually many markets starting to deteriorate. And of course, that provides the basics for the investments.

Speaker 1

Exactly when that's going to happen, I feel that It's really in the hands of the customer. So it's in the hands of their view of capital market, their view of prospects in for increasing revenues, etcetera. So that's a little bit difficult to say. With our current visibility, we believe It's realistic to plan for that to happen later in 2023. Is it later or earlier than we have said before?

Speaker 1

I don't really know. If anything, probably fair to say that it's slightly later. But it's not a dramatic change in outlook that we tried to say already Last year, in the end of last year, we spoke about the slower build out pace that we expected. We spoke about the inventory adjustments our customers are making. Of course, as this quarter continues, there will be less and less of the inventory adjustments.

Speaker 1

So that will provide a support for the market recovery and kind of looking better towards the end of the year. Okay.

Speaker 3

Very clear. Thank you very much.

Operator

Thank you, Alexander. So for that question. So let's go to the next question and we'll see we'll have the next question from Francois Bournier from UBS. Good morning, Francois.

Speaker 4

Good morning. I have two quick ones as well. So the first one is on a follow-up to Alex's question on Maybe the or Borje, what you said on the inventories. So you were impacted by inventories correction and you are still now in Q3. Do you have any estimates of where we are in this inventory correction?

Speaker 4

I mean, in other words, This is a normal level at your customers, where is it now? Do you have any intelligence To provide some color around this?

Speaker 2

Yes. Francois, maybe I'll take that one. Yes. So we as you said, we saw this happening in Q1 as Anticipated and also in Q2. It will continue to some extent in Q3 as well and that's why we talk about a very similar trend and similar market mix And it's part of that story, the inventory reductions.

Speaker 2

But from that point, we also see with the visibility we have now and the customer dialogues that, That will flatten out towards the latter part of the year. And as Borje just said, this will support, of course, the overall recovery and making the second half stronger half than the first half this year.

Speaker 4

Okay. Thank you. And maybe a longer term, Borje, you talked about the 75% of all base stations outside China not yet updated with mid band. And the question is not if like you mentioned, we don't know if it will happen. But I'm questioning more the how it's going to go back up, if you like.

Speaker 4

I mean, are we going to see a strong traction Of upgrade or is it going to be like a very granular phase to upgrade all these The base stations to mid band, especially in the context of current macro environment, lack of maybe you can argue applications. How should we think about this space basically of upgrades that you foresee? Thank you.

Speaker 1

Yes. The first, I think we need to recognize that for a fully built out 5 gs network. There is probably going to be need for more sites than it was in a 4 gs world. So even if we benchmark to the total size of 4 gs base stations, We're probably going to see more sites on 5 gs. And then what we see will happen is ultimately the When you talk about 5 gs from a non stand alone basis, you don't get access to the features that are going to be needed for future digitalization future use cases.

Speaker 1

So if you need the ultra low latency, higher speed capacity on demands, etcetera, You will need to get 5 gs stand alone. And that migration is really only in its early phases. So what we see will happen here is that we will start to get new use cases. It can be generative AI, But it can also be XR, and those will start to drive new type of traffic that will require the 5 gs to be built out. Then it's all about how you monetize that.

Speaker 1

And that's why I want to tie it into the discussion about network APIs. We think that's going to be critical. So when you are going to call up, so you put on your XR devices and you say, okay, now I need super low latency and I can do that through a network API. Then you start to drive a completely new upgrade cycle of the network, you drive new monetization And you drive a new way for us also to create revenues. And that's why we invest quite heavily in the network APIs.

Speaker 1

So you see that this start to come together in order to drive the network upgrades. Then of course, how will that sacked upgrade cycle look like? Well, we do believe it's going to be a gradual build out, that it will be nationwide like is happening in India right now in every country, I think is borderline too unlikely to assume, and I wouldn't do that. But if you look at how you would build out the network, of course, you're going to build it out where you have customers first and then you gradually expand from there. I want to add one more thing, which I think is critical.

Speaker 1

And if you look at fixed wireless access, so look at Net broadband additions in the most developed fixed wireless access market in the world is the U. S. And actually, over the last few quarters, almost All growth in broadband connections comes from fixed wireless access. And that's why we see that this kind of drive for cost efficient rollout and cost efficient deployment of broadband to the citizens of a country. Fixed wireless access will play a big role.

Speaker 1

We see numbers in India being very large and one of the operators talking about EUR 100,000,000 connections there. We see those to be built out as going to drive new revenue streams for the operators as well. So we see this group build out to happen, and it's going to happen, of course, over several years.

Operator

Thank you, Borje. Thank

Speaker 4

you very much.

Operator

Thank you, Francois, for that question. So we are now going to the next question in this Q and A session. So the next question is from Alexander De Waal at the Goldman Sachs. So please, Alexander, good morning.

Speaker 5

Good morning and many thanks for

Speaker 6

the question. I just had a Clarification on market outlook. You're talking today about scope for gradual market recovery this year and improvements next year. Just want to understand the main factors to drive that kind of recovery. I would note, for example, in U.

Speaker 6

S, You talk about 50% decline in the market or at least in revenues, and that's obviously one of the front runners on 5 gs. One would Assume that, that would be followed by other markets that are a bit farther behind also declining. So just want to understand what would drive that improvement into next year? And then I've got a quick follow-up.

Speaker 2

Karl? Hi, Alexander. I think actually Borje talked about a lot of those key drivers for exactly what you're asking about the recovery. I mean we see data traffic growth continuing at very, very high speeds in North America and in other markets as well. That's a key driver of course because for an operator to be able to deliver the customer experience that they need to Investments in the network will be required to cater for this.

Speaker 2

And 5 gs, of course, also happens to be the most cost effective way of delivering those gigabytes through the networks. But then you have the energy side and CO2 side of it as well driving More modern technology to get your energy bill down, not to mention the new applications that are coming on stream and we have seen new XRVR devices launched by several players now. Of course, they will Once they become a bigger part of the ecosystem, of course, will drive very high demands on the network. All these fundamentals are there, and that's what we believe will drive the long term recovery of the market.

Speaker 1

And you also have to add, that's the long term drivers, and those are the fundamental drivers, right? Short term, we also have the inventory adjustments, which is working its way through. The in several markets around the world, you saw Over 'twenty one and 'twenty two, our customers to build up inventory to manage an uncertain supply chain, call it that. And that led them to have excessive inventory, and those have been working its way through the systems over this year. So of course, those will run its course.

Speaker 1

Once they've run its course, Then we're back to the fundamental drivers of the demand for CapEx. And that's why we are Confident that, that will come back. Exact timing is, of course, in the hands of customers and depends on many considerations they have to do. But ultimately, if you're going to deliver customer service, I think you, for example, you would like to have connectivity most of the time. But if you run out in a network where you have capacity constraints, you may see bars on your device, But in reality, you have no data connectivity.

Speaker 1

That's typically when you have when you're starting to run out of capacity or you simply cannot make a phone call. I think in our day and age, we are not going to be happy with that, and we would expect a better service as a user, And that's ultimately what's going to drive the demand.

Operator

Thanks, Borje. You had a second question as well, Alexander.

Speaker 6

Yes. Greatly appreciate the clarification. Thank you so much. Just a quick second one. You talked in your release about the Q4 being seasonally strong from a margin perspective.

Speaker 6

And just wanted to understand all of the factors that sort of feed into that. Obviously, you talk about Iran market, Which is now weaker according to the release, both on a global basis and in North America, which is a very profitable market. But at the same time, you're talking about normal seasonality in Q3 on top line. So that would imply worse than normal seasonality in Q4. So Just wanted to understand what are the factors that sort of give you comfort there.

Speaker 6

You just referenced, for example, The fact that there won't be as much of an adjustment in inventory. But I'm wondering if there are other factors that give you confidence? Thanks.

Speaker 2

That is one for sure, the inventory adjustments where that depletion is coming to an end and normalizing. But we see also a mix effect here in Q4. This So the traditional seasonality we see also it's better mix of business typically in the Q4. It depends on of course how customers what spending patterns customers have and so on, but we always see that improvement in the Q4. It's about how projects are concluded and how we deliver to customers to close the year.

Speaker 2

So we typically see that inventory is one thing and then the normal seasonality of our entire industry. And as long as I've been working here, we've always seen a stronger Q4, many, many years.

Operator

Okay. Thanks, Alex.

Speaker 1

Thank you.

Speaker 5

Thank you

Operator

for the question. Then We'll move further in the queue here. And I'll see I have the next question from Andreas Jugelsohn at Danske Bank. Good morning, Andreas.

Speaker 7

Good morning, everyone. Maybe a slight shift in the questions looking into the enterprise side. If you could explain a little bit more on The reception you have got from this the strategy that you have in this area from your customers, especially in the U. S, but also how to leverage This portfolio outside the U. S, any comment on pipeline?

Speaker 7

And if we can expect this the growth that you have now to continue also For the coming quarters, that would be great. Thanks.

Speaker 1

Maybe we divide it into the 2 components. So Enterprise Wireless Solutions continues to have a good growth rate. Of course, a little bit tougher market conditions due to the general economy, I will say, But we see also very strong development with a strong pipeline of products that we are bringing to the market now. We're still in, I would say, in the early phases of building up our go to market organization there. We will, of course, pace that with sales.

Speaker 1

So it's not about increasing the cost per SEA, but we're still not getting the full efficiency of our sales force on the enterprise side. But we see a very good collaboration with our CSP customers, And they are actually very excited about bringing these type of products to the market as it drives revenues for them as well. But here, we have more work to do. We will and please remember that it's a different business model with a large part of deferred revenues. So we create a recurring business there, will impact the P and L initially, But over time, it will be a highly profitable part.

Speaker 1

I would also say on dedicated networks, We are still early outside of China. There are some use cases, imports, some basic early in manufacturing, but it's still a relatively small market around the world. If you compare it to China, China has by the end of last year, they had more than 6,000 dedicated networks deployed in China. We see in, call it, the Western World, Europe and the U. S, Maybe we have about 1,000, maybe 1500, but it's significantly smaller than it is in China.

Speaker 1

And that, I think, points to the actual opportunity here being much larger than we're servicing now. And of course, this will depend on establishing the use cases and the way we approach the market. So we see that as a good potential for growth going forward, but we're still early on in that. If we look at our platform business in Global Communication Platform, There, we're having a good traction, as you can see, on the communication APIs that we're in the market with today, and that's the old Vonage business growing 19% in 2nd quarter. Of course, that is impacted by the general economic conditions.

Speaker 1

So it has been growing a bit slower than it did 2021 2022, but we still see a fairly good growth rate continuing. What we're very excited about is the network APIs. And we launched the first or launched It's a bit of exaggeration, but we showcased the 1st network APIs at Mobile World Congress together with 3 operators in Spain, Vodafone, Telefonica and Orange. We are continuing dialogue with A number of leading operators on how to establish this network API market. So when we have more development there, we will talk about it.

Speaker 1

But what we see is it's an excitement in the industry. And here, we are shaping the industry landscape by driving the whole adoption of network APIs. And What we see here is that that's the way network resources will be consumed in the future. They will be called up by applications and paid for through a CPaaS platform. So we're very excited about that, but it's Still early in the development.

Speaker 1

So give us a few quarters here, and you will start to see some progress.

Operator

Thanks, Borje.

Speaker 7

Thanks. Maybe a follow-up just on what the Chinese enterprises see in these dedicated networks As a benefit that you are not seeing outside of China? And how can you help the enterprises seeing that benefit?

Speaker 1

Yes. That's a great question, Andreas. As a matter of fact, what we see in China is that there are developing completely new use cases. So what is unique with cellular connectivity and 5 gs in particular is that you get reliable, always available and secure connectivity. And that's critical in an enterprise application.

Speaker 1

So take ring site. What we see is a full deployment of sensors. You can develop a full digital twin of the factory and basically make adjustments in the digital twin and then implement it very quickly and very flexibly. So that's one use case. Another use case That's also gaining traction is the in line inspection.

Speaker 1

So you actually do image processing of in line inspection going much faster than manual and has much higher precision. Then you see more traditional use cases, Connect the self guided vehicles. And as a matter of fact, there are some front running manufacturing sites outside of China where we see deployment of dedicated networks resulting in much higher cycle time, a much reduced cycle time, speed in the manufacturing goes up as well as higher quality levels. So we're starting to see some early signs outside of China, but I will say China is ahead of the new type of applications here.

Operator

Thanks, Perje, and thank you, Andreas, for those two questions. So we'll move further in the Q and A session. And we have the next question from Peter Kurt Nielsen at ABG. Good morning, Peter.

Speaker 8

Good morning, Peter. Thank you very much for taking my questions. My first question relates to the net worth gross margins, please. You've obviously talked spoken extensively about the mix impact and with the decline in North America, growth in India, That's plain for us to see. However, Karl has also as Karl said earlier, the initial phase, the ramp up phase in India, the deployment primarily comes with low margins, which should then gradually improve as you move further in that project.

Speaker 8

So my question is, When will we start to see the underlying margins, gross margins in India improve and contribute, also, let's say, to a better overall gross margin, irrespective of the mix changes we are seeing, I. E, when will gross margins in India improve In this rollout phase. And then my second quick question is just, Icard, could you tell us what the underlying run rate in IPR revenues is now Adjusted for the one off payment in Q2, please? Thank you very much.

Operator

Karl, should you

Speaker 2

Yes. I can start With the IPR piece, so and we say this also, so the IPR expectation for the Q3 is Somewhere between SEK2.5 billion and SEK2.8 billion, and that's the number that we give. And obviously with the new signed contract there, we are on our way towards this substantial growth of the IPR portfolio that we have talked about before, some SEK 12,000,000, SEK 13,000,000,000 as an aim for next year, thanks to these new contracts. So 2.5% to 2.8% next quarter, that's where we aim.

Speaker 8

Thank you.

Speaker 1

And then the gross margin question. The reality is we're going from about 35 ish percent share of North America to about a 25% share of sales and India goes from, I believe for 3% to 16%. 3% to 16%. So it's a big mix shift. And we can still execute with for a gross margin that's above 39% in network.

Speaker 1

So it's there is a big change here in our sales mix. Of course, the details on contracts, we're not going to discuss here, but we are already seeing a strengthening of the gross margin profile, delivering well according to our plans.

Operator

Okay. Are you good with that, Peter Kurth? Okay. Thank you for that question, Peter Kurth. And we'll move to the next question.

Operator

And that question is from Andrew Gardiner at Citi.

Speaker 9

Good morning, guys. Thank you for taking the question. I had another one on your visibility into the recovery that you're calling for later this year and into 2024. Yes, I hear what you're saying in terms of the need for additional deployments, mid band coverage, Networks perhaps deteriorating a bit under the traffic load, all of that sort of makes theoretical sense to me. But I'm just wondering if you're not yet seeing it in terms of firm orders from the customers, by when would you need to in order to see a reasonable recovery in the Q4.

Speaker 9

I know you don't have the longest lead times and you will have inventory on hand, but I suppose I just worry that if we're here in the middle of July and you're still not seeing the firm orders coming in, are we not setting ourselves up For a risk of disappointment come sort of September October, if indeed they haven't arrived. So just what by when would you need to see the customers react and place the orders in order to see that 4Q recovery? Thank you.

Speaker 1

Historically, when we've seen these type of market situations, It's a very short lead time. And that's why it also depends on Software, can we upgrade with only software, etcetera? So it depends a lot about the specific network situation for the customer. That's why it's hard to give you a specific answer. But at least we know from the customer discussions we're having now that a lot of the customers are starting to see deteriorating network performance that actually leads to churn.

Speaker 1

And that's why we're also confident that it will come. I can't predict exactly. And as a matter of fact, that's why we never discuss backlog in our industry because it is a relatively short delivery cycle on those type of contracts where you buy capacity.

Operator

Thanks, Borje. Did you have a follow-up, Ander? No,

Speaker 9

That's fine. Thank you.

Operator

Thank you. Thank you, Anders, for that question. We will then move to the next question, And I would have Daniel Joberg at Handelsbanken. Good morning, Daniel.

Speaker 5

Good morning and good morning, Borje and Karl. And thank you for taking my questions. Two questions, if I may, and starting coming back to the market recovery And the North America again. And would it be fair to assume that this recovery that you anticipate will come back a bit earlier For some of your peers, including your neighbors, in your profit warning today. And is this Of course, obviously, that you have more wins into the urban areas versus the rural areas that might come a bit later.

Speaker 5

Thanks.

Speaker 1

Borje? You know that I think you're better off asking our customers about that. The way I mean, we I think we started to talk about this situation in North America already in the end of last year. So It's developing a bit like we have predicted and actually assumed. And that's why we said also early on that we need to take the cost items and the actions on the cost side.

Speaker 1

So we have tried to Not predict, this is a bit to exaggerate, but at least plan for this type of market situation we're seeing in North America. Then I would also say, of course, they are going to they have built out networks in urban areas first. But I would also say that's where traffic growth is the fastest as well. So how that is going to ultimately pan out, I think that's a bit difficult to predict. But what we see and that's what gives me comfort is that There is a need for network capacity.

Speaker 1

There is also a need to deal with the energy cost challenges that comes out. Simply, you need more modern equipment to lower your energy bills for the operator. You will need more newer equipment to deal with the CO2 challenges and the CO2 commitments. So ultimately, when I put that together, it gives me comfort that it will come back. If you then extrapolate to historic experience, we've seen this happen in the past.

Speaker 1

It's been tough and then a very quick recovery. So we does the future always look like the past? No, it doesn't. But at least when you put All of those factors together, it's a reasonable assumption that we said already in the end of last year that we would see a recovery during the second half, and that's what we think is still a reasonable assessment. Then does it look the same for our competitor Not I mean, I don't know their business mix.

Speaker 1

I don't know their situation. So I'll let them speak for that themselves. But from my point of view, We saw this coming and planned for it.

Speaker 5

Fair enough. I agree there. And a question also, if I may, coming back So the enterprise and you talked about the Open Gateway initiative with your quality on demand that you showcased in Barcelona. Is it how have you come any further in terms of monetization and the revenue models and Both things and the progress there, if you could be a little bit more specific.

Speaker 1

Yes. It's we continue the very deep engagement with a number of with a number of front runner customers around the world. So we work very intensively on that. What is Call it one of the things that needs to happen is we need to have an abstraction layer in the network that basically allows a CPaaS to call up functionalities from the network. And that's it's not a surprise.

Speaker 1

So that's but that's where we have a lot of work to be done, And we continue that work. And that's why when we'll get the first revenues, we I think we have said that we should have a network API more in the market by year end. That still would be my best estimate. Will it be Q4? Hopefully, but it could, of course, slip into early next year.

Speaker 1

But that's the time frame we're working on. And it's a lot of groundwork That needs to happen here before we are at the situation of creating a launch. But we'll hopefully hear again come back and talk much more in detail about this towards the end of the year.

Operator

Thanks, Borje.

Speaker 5

We'll state that. Thank you.

Operator

Thank you, Daniel. So we are actually now moving into the Last question of this Q and A session. And that question is from Sandeep Deshpande at JPMorgan. Good morning, Sandeep.

Speaker 10

Hi. Good morning.

Operator

Good morning.

Speaker 5

Can you hear me?

Operator

We can hear you.

Speaker 10

My question is, Borje, you talked about the buildup into an improvement in sales. And One of the points you made on the buildup of improvement is that there will be need to be further densification of the base stations. Given that we are seeing that the U. S. Telcos are cutting spending at the moment, have you had conversations with them That gives you any confidence that they're going to actually densify their 5 gs cells going forward?

Speaker 10

And then I have one more quick follow-up on the software business.

Speaker 1

I'm not going to go into the details about the customer engagements, But what we see is we are an increasing amount of discussions is on the network quality and the need for network quality. And that is what gives me the comfort that at some point in time here, we will see that recovery coming back. And it's in reality, it's back to consumer satisfaction. The consumer, the user, and we often think about it as a device for a smartphone. But the reality is, In the future, will be many new type of applications, enterprise applications.

Speaker 1

If it is AI use cases, they will all require connectivity and reliable, always available connectivity. So we see quite a lot of use cases here that will drive network traffic. So I think it is here. We're in a phase where, of course, if you're a customer, you're facing uncertainty right now. You're going to adjust accordingly.

Speaker 1

But I'm also convinced that at the end of the day, the end user will need a certain service, And that's what's going to create the market. Is it uncomfortable now? Yes, it is uncertain, right? And I think it's fair to say that. But the reality is connectivity is a need.

Speaker 1

So if you go today to a sporting event, I don't as far as I know, in many parts of the world, I cannot upload a picture because it's simply capacity constraints. So we need to put More capacity in stadiums, more capacity indoors, in shopping malls, in office buildings, etcetera, Those are massive use cases that will be deployed over the coming several years, and they will be needed in order to digitalize society, the enterprise and further digitalize the consumer.

Operator

You had a final sort of software question, Sandeep as well?

Speaker 10

Yes. Just quick follow-up on your software and services business. Where are we now in terms of the restructuring, I mean, you've taken some charges in the first half of the year. You've seen some improvements in terms of the earnings in that business. Have all the actions been taken and the results waiting to be seen?

Speaker 10

Or are there certain more results? I mean, in the certain more actions need to be taken in the second half to reach your goals there.

Speaker 2

Yes, Sandeep, I can say, of course, actions are ongoing. We have exited from some subscale businesses. We talked about that before, took some charges for that earlier. We are focusing on automating service delivery. We are taking out costs as part of the overall cost reduction effort and we have commercial discipline to make sure that The new contracts are well scoped and well priced and all of that is happening of course continuously.

Speaker 2

But we see clearly that breakeven as we've had as a target or commitment for the year is what we'll reach. And we say, as you saw, at least breakeven for 2023. Then, of course, 2024, We expect to see improved profitability coming out of all of these actions that the current leadership there in cloud software for services are undertaking.

Operator

Thank you, Sandeep, and thank you, Karl, and thank you, Borje. So we're coming to the end of this Q and A session. So I would like to thank you all for the good questions. And for those who are going on summer vacation, I wish you a nice vacation, and we'll see each other again during autumn. So thank you, and goodbye.

Speaker 1

Thank you. Thank you.

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Savers Value Village Q2 2023
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