Telefonaktiebolaget LM Ericsson (publ) Q4 2024 Earnings Call Transcript

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January 24, 2025
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Daniel Morris
Head Of Investor Relations at Ericsson

Hello, everyone, and welcome to the presentation of Ericsson's 4th Quarter 2024 Results. With me here in the studio today are Borje Ekholm, our President and CEO and Lars Sandstrom, our Chief Financial Officer. As usual, we'll have a short presentation followed by Q and 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.

Daniel Morris
Head Of Investor Relations at Ericsson

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 Borje and to Lars for their introductory comments.

Börje Ekholm
President, CEO & Member of The Board at Ericsson

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 2 key areas: 1st, the progress against our strategic initiatives and second, how we position the business to succeed across varying market conditions.

Börje Ekholm
President, CEO & Member of The Board at Ericsson

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, that we signed with AT and T last year, really paved the way for our newest agreement with Maas Orange, which we signed during the quarter. I would say our agreement with Mass Orange was really the 1st open programmable network in Europe. It's a key milestone for us and the European telecoms industry.

Börje Ekholm
President, CEO & Member of The Board at Ericsson

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 glass or AI driven new applications.

Börje Ekholm
President, CEO & Member of The Board at Ericsson

We have ARVR 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.

Börje Ekholm
President, CEO & Member of The Board at Ericsson

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 Q4, 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.

Börje Ekholm
President, CEO & Member of The Board at Ericsson

Last year, we combined the activities under the Ericsson brand and announced a new enterprise 5 gs 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. 2nd, I'd like to provide some, call it, comments on the overall RAN market and how we're preparing ourselves for different market conditions.

Börje Ekholm
President, CEO & Member of The Board at Ericsson

And you've seen that's been critical. In 2024, the overall market continued to be quite challenging and I would say continue to decline during the year. However, today, we are 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 8 quarters, increasing by 2%. We continued strong growth in North America as well as growth in Europe.

Börje Ekholm
President, CEO & Member of The Board at Ericsson

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.

Börje Ekholm
President, CEO & Member of The Board at Ericsson

So I think the front runner 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.

Börje Ekholm
President, CEO & Member of The Board at Ericsson

So for example, during the past few well, year 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 a 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.

Börje Ekholm
President, CEO & Member of The Board at Ericsson

We're actually taking OpEx out as well. And as you've all seen, the 4th 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.

Börje Ekholm
President, CEO & Member of The Board at Ericsson

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 SEK 40,000,000,000 during 2024, and that puts us in a very strong financial position. Turning to capital allocation. Our first priority is to invest in R and D to maintain and grow our technology leadership across networks, enterprise solutions and network APIs.

Börje Ekholm
President, CEO & Member of The Board at Ericsson

Alongside R and 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 SEK 2.85 per share, corresponding to a total amount of SEK 9,500,000,000.

Börje Ekholm
President, CEO & Member of The Board at Ericsson

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 and T contract, but also strong year end hardware demand and significant software traction with other large customers.

Börje Ekholm
President, CEO & Member of The Board at Ericsson

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.

Börje Ekholm
President, CEO & Member of The Board at Ericsson

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 5 gs build out in the front runner markets as well as some macro pressures from 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 multiyear contract extension for 4 gs and 5 gs RAN with Barti. We also had a contract win on nationwide 5 gs deployment for VMPT in Vietnam.

Börje Ekholm
President, CEO & Member of The Board at Ericsson

With that, I would like to hand over to Lars to go through the financial details.

Lars Sandström
SVP, CFO & Head of Group Function Finance at Ericsson

All right. Thank you, Berje. 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 SEK 72,900,000,000 and organic sales were up 2%. North America growth was strong for the Q3 in a row, and we also had slight growth in Europe for the Q2 in a row.

Lars Sandström
SVP, CFO & Head of Group Function Finance at Ericsson

The other markets declined, particularly India, where investments level have normalized after a peak in 2023. Adjusted gross margin was 46.3% in Q4, an increase from 41.1% percent 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 SEK 23,800,000,000 up by SEK 1,700,000,000 compared to the prior year, mainly because bonus accruals were above target levels in 2024 having been below in last year. The cost out activities continued to deliver savings.

Lars Sandström
SVP, CFO & Head of Group Function Finance at Ericsson

These balanced out salary increases and part of the higher bonuses. Adjusted EBITDA increased to SEK10.2 billion with a margin of SEK14.1 billion, marking a significant expansion year on year. Cash flow was strong at SEK 15,800,000,000. The improvements came from improved profitability and lower working capital. Let's move on to the results for the full year.

Lars Sandström
SVP, CFO & Head of Group Function Finance at Ericsson

Net sales amounted to SEK 247,900,000,000 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 a focus on more profitable market segments in enterprise.

Lars Sandström
SVP, CFO & Head of Group Function Finance at Ericsson

The result on gross income was an increase of SEK7 1,000,000,000 to SEK111.4 billion. Reported OpEx was up by SEK15.2 billion compared to the prior year, mainly because of the intangible asset impairment of SEK14.1 billion. Excluding impairments, total OpEx was SEK 88,400,000,000 which is an increase of SEK 1,900,000,000. This is mainly because the higher bonus accrual levels compared to 2023. R and D investments continue to maintain technology leadership, for example, to accelerate delivery of some 5 gs features and to further improve operational resilience.

Lars Sandström
SVP, CFO & Head of Group Function Finance at Ericsson

Excluding restructuring, impairments and the discontinuation of capitalization of development expenses in enterprise impacts, R and D increased by around SEK 1,000,000,000 in the year. SG and A costs, excluding restructuring and impairments, also increased slightly primarily in segment enterprise with investments to improve operational effectiveness. Adjusted EBITDA increased to SEK 27,200,000,000. The margin was 11%, marking an almost 3 percentage point expansion year on year. And net income for the full year was SEK 400,000,000 compared to minus SEK 26,100,000,000 in 2023.

Lars Sandström
SVP, CFO & Head of Group Function Finance at Ericsson

Net income in 2023 was impacted by the impairment of goodwill of SEK 31,900,000,000 and in SEK 24,000,000 by a non cash impairment charge of SEK 15,300,000,000. The effective tax rate for 2024 was 28 percent excluding the impairment charges. Cash flow was very strong at SEK 40,000,000,000. The improvements came from improved profitability and working capital resulting from a favorable market mix, customer payments and efficient supply chain management. I'll cover this more in detail later.

Lars Sandström
SVP, CFO & Head of Group Function Finance at Ericsson

Let's comment on IPR licensing. Q4 marked the 4th 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 5 gs. IPI licensing revenues increased to SEK14 1,000,000,000 in 2024, including retroactive revenue of around SEK1 1,000,000,000 from just over SEK11 1,000,000,000 in 2023. We are at a record run rate of SEK13 1,000,000,000 in recurring IPO revenue going into 2025.

Lars Sandström
SVP, CFO & Head of Group Function Finance at Ericsson

There are further growth opportunities with a few additional 5 gs 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 bottomed at Q3 'twenty four. 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. More favorable market mix has also contributed.

Lars Sandström
SVP, CFO & Head of Group Function Finance at Ericsson

We have seen a favorable development of EBITA, which ended up the year at SEK 27,200,000,000 up by 27% compared to the prior year. The lower level of sales in the 1st 3 quarters compared to the previous year and increased operating expenses moderated EBITA 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.

Lars Sandström
SVP, CFO & Head of Group Function Finance at Ericsson

Sales in Europe grew slightly. In the other markets, customers continue to be cautious with their investments, and the largest decline was in India, where the investments level have now normalized after a peak in 'twenty three. Networks adjusted gross margin was 49.1 percent 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. Networks adjusted EBITDA increased to SEK10.1 billion from SEK7.4 billion in the prior year, and adjusted EBITDA margin was SEK21.6 billion in Q4 and 17.5% for 2024 overall.

Lars Sandström
SVP, CFO & Head of Group Function Finance at Ericsson

EBITA improved due to higher sales and improved gross margins, partly offset by higher OpEx affected by the before mentioned higher bonds accruals and investments in R and 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 accelerate 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 an EBITDA margin of 9.3% in Q4 and 3.2% for 2024.

Lars Sandström
SVP, CFO & Head of Group Function Finance at Ericsson

In enterprise, sales declined by 7%. Enterprise wireless solutions grew by 19% with strong growth in private 5 gs 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 percent, and adjusted gross income increased by SEK0.3 billion year on year despite the sales decline. The adjusted EBITDA loss was minus SEK1.2 billion with a decrease year on year, mainly reflecting nonrecurring impacts, in part related to the exit of certain businesses as well as increased investments to improve operational effectiveness.

Lars Sandström
SVP, CFO & Head of Group Function Finance at Ericsson

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 SEK 15,800,000,000 before M and A in the quarter and SEK40 billion for the year. We delivered a cash flow margin of 16% to net sales for the year, well above our 9% to 12% target. The increase in cash flow compared to SEK23 billion 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 U.

Lars Sandström
SVP, CFO & Head of Group Function Finance at Ericsson

S. 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 SEK12.3 billion to SEK37.8 billion. And return on capital employed in 2024 was 2.5%.

Lars Sandström
SVP, CFO & Head of Group Function Finance at Ericsson

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 3 year seasonality.

Lars Sandström
SVP, CFO & Head of Group Function Finance at Ericsson

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 operating model and focus on operational excellence.

Lars Sandström
SVP, CFO & Head of Group Function Finance at Ericsson

With that, I hand back to you, Wehr.

Börje Ekholm
President, CEO & Member of The Board at Ericsson

Thank you, Lars. So the global RAN market continued to be challenged in 2024, but I would say we were well prepared for this as we took actions early to adjust our business for a more realistic levels of demand. North America returned to growth in Q2, and we saw a stronger end of the year broadly as our networks revenue returned to growth in Q4. Looking ahead, we see further signs of the RAN market stabilizing. Our recent customer discussions indicate an accelerating interest around our programmable networks.

Börje Ekholm
President, CEO & Member of The Board at Ericsson

And in many markets, there is a need to invest to keep network performance at a competitive level. It's encouraging, but we recognize that the exact timing of the investments that will be made, of course, those decisions are in the hands of our customers. We will continue to execute on our strategy to capitalize on the evolving market dynamics. This strategy is focused on building the industry's best performing programmable networks that enable differentiated services and increased monetization opportunities for our mobile operator customers through new use cases, including exposing network capabilities through network APIs. In addition, we remain focused on the things we can impact, and that's, of course, how we run our business, including cost and working capital management, and naturally strengthening our product portfolio as well.

Börje Ekholm
President, CEO & Member of The Board at Ericsson

This way, we ensure Ericsson continues to be well positioned to create value for its stakeholders when the market fully recovers. Our goal is to make Ericsson a more profitable company based on the leading position in mobile infrastructure and to develop new use cases and monetization opportunities. This will change the trajectory of Ericsson, but also the telecom market that I would say the last decades have actually flattened out. And by changing these dynamics, we're into a situation where we'll see further investments in the network. So to sum up, in 2024, we took several critical steps in our strategy, and we'll continue doing so in 2025.

Börje Ekholm
President, CEO & Member of The Board at Ericsson

So on that note, I actually want to thank all my colleagues in the company for all their hard work. Thank you, team. With that, I think it's time for Q and A, Daniel.

Daniel Morris
Head Of Investor Relations at Ericsson

Super. Thanks, Borje. We'll move on to the Q and A now.

Operator

And can

Daniel Morris
Head Of Investor Relations at Ericsson

we ask that if you're streaming the webcast, please can you mute the audio on the webcast while asking a question to minimize any feedback there? And as usual, can I request one question per participant, please, so we have time to hear from as many of you as possible today? Operator, if I can ask you to open the line, please. Super. So our first question this morning is going to come from Andrew Gardiner at Citi.

Daniel Morris
Head Of Investor Relations at Ericsson

Andrew, please go ahead.

Andrew Gardiner
Andrew Gardiner
Head of European Technology, Equity Research at Citigroup

Thank you, Daniel. Can you hear me?

Daniel Morris
Head Of Investor Relations at Ericsson

We do, yes, clearly.

Andrew Gardiner
Andrew Gardiner
Head of European Technology, Equity Research at Citigroup

Good morning, guys. Thanks very much for taking the call. I had one on the dynamics in the North American market. If I go back to the commentary you were making at the time of Q3, you had a good result then, but you were expecting the sequential trend into 4Q was perhaps going to be a little softer seasonally off that stronger 3Q. As it turns out, this morning you're showing us very good trends in the U.

Andrew Gardiner
Andrew Gardiner
Head of European Technology, Equity Research at Citigroup

S, in particular, you're obviously highlighting the share gains. Lars, you briefly just mentioned swap outs as well. So I was interested in a bit more detail in terms of what's happening in the market, What indeed drove that upside relative to your earlier expectations? Was it more share gain under the new contract? Was it sort of the broader market coming back, inventory replenishment?

Andrew Gardiner
Andrew Gardiner
Head of European Technology, Equity Research at Citigroup

A little bit around that would be really helpful.

Börje Ekholm
President, CEO & Member of The Board at Ericsson

I can take that. Thanks, Andrew, for the question. It's a good question. And what we have seen and that's why you see us talk more optimistically and confidently about the market starting to recover. We actually have seen the investment levels coming up in North America.

Börje Ekholm
President, CEO & Member of The Board at Ericsson

Part of it is, of course, to replenish from a very low inventory level that we've seen in the industry. And part of it is, of course, driven by, call it, the traffic growth and the need for connectivity. So I feel that we saw a little bit broader base of purchases in Q4 than we may be expected when Q4 began.

Daniel Morris
Head Of Investor Relations at Ericsson

Thank you, Andrew. Moving to the next question, please. The next question is going to come from the line of Francois Bouvignet from UBS. Francois, your line should now be open. Please go ahead.

François Boulanger
François Boulanger
Head of Europe Tech Hardware & Semiconductor at UBS Group

Hi. Thank you very much for taking my question. I have a question maybe more on the geopolitical side of things. We have seen, of course, Trump getting into elections and talking about the tariff potential. And I was wondering, given your high exposure to North America, where your production is globally?

François Boulanger
François Boulanger
Head of Europe Tech Hardware & Semiconductor at UBS Group

Because when I look at your annual report on 20 F, I know you don't manufacture yourself, but you have like a significant portion of your revenue that's still in house on the testing and assembly, which seems to be in China, but correct me if I'm wrong. And I mean, outsourcing is through EMS, which I assume is mostly in Asia. So it seems that mostly your supply chain is coming from Asia. And I was wondering how should we factor the potential of tariffs over time in your business? So if you can help on that and how does it change your strategy maybe doing more in local North America?

François Boulanger
François Boulanger
Head of Europe Tech Hardware & Semiconductor at UBS Group

That would be very helpful. Thank you.

Lars Sandström
SVP, CFO & Head of Group Function Finance at Ericsson

Good. I can start. If you look at our supply chain, as you mentioned, we have production today in North America, so where we are made in America for America. We have in Latin America, we have in Europe, we have in Asia, we have in India. So we have pretty broad based production capacity that we are utilizing.

Lars Sandström
SVP, CFO & Head of Group Function Finance at Ericsson

And we have the opportunity to move production between the different sites, both in our internal, but also with the external manufacturing sites that we have. So that is it's not something that we do easily. It depends a little bit on the product mix, etcetera, of course. But we have this opportunity to work with the supply chain depending on what kind of decisions that we will see ahead of us. Having said that, of course, tariffs could have an impact going into 2025.

Lars Sandström
SVP, CFO & Head of Group Function Finance at Ericsson

But I think we're all waiting a little bit to what is going to happen there. But we are working on that continuously, trying to balance and utilize the system we have.

Börje Ekholm
President, CEO & Member of The Board at Ericsson

And as you know, we built a factory in the U. S, I would just add that we commissioned it, I think, 2019 or 2020, it's a few years ago, in reality, preparing for a different geopolitical situation. And I think the whole world is moving from a cost optimized supply chain to a resilience. You need to factor in resilience in the supply chain. And that's why we built up the U.

Börje Ekholm
President, CEO & Member of The Board at Ericsson

S. Factory. And we're increasing the we're investing to increase that capacity in North America as well. And then we'll all have to see, just like Lars said, how will this look in reality and then adjust as much as possible. So I think we just have to see with that question.

Lars Sandström
SVP, CFO & Head of Group Function Finance at Ericsson

I think also worth mentioning on tariff, it's we normally, it's not a general tariffs. It can be different. There can be exemptions, etcetera. And we have seen that in the past where critical products for a market has been exempted from tariffs, etcetera. So it's too early to say what's going to happen.

Lars Sandström
SVP, CFO & Head of Group Function Finance at Ericsson

But of course, we are working following this closely.

François Boulanger
François Boulanger
Head of Europe Tech Hardware & Semiconductor at UBS Group

Okay. Thank you. Can I have a follow-up or should I go to the queue?

Daniel Morris
Head Of Investor Relations at Ericsson

If it's very brief, we can take it.

François Boulanger
François Boulanger
Head of Europe Tech Hardware & Semiconductor at UBS Group

Yes. I mean, just on the software dynamics side, you ended the year with a good software mix. Based on your comments, I was just wondering if you think going to continue in 2025 or early 2025? That's it. Thank you.

Lars Sandström
SVP, CFO & Head of Group Function Finance at Ericsson

I think when it comes to single quarter, especially the Q4, we tend to have a higher

Börje Ekholm
President, CEO & Member of The Board at Ericsson

But

Börje Ekholm
President, CEO & Member of The Board at Ericsson

But I think we should add there, the industry I mean, if you think what's actually happening, when we horizontalize the network, which as you know, that's what we have been working on, that's the whole basis for the contract win in the U. S. As well as in Europe. It's an increasing amount of software that structurally is going to come. Then Q4 is, as Lars said, but structurally, we are going to go into a situation of more software as opposed to hardware.

Daniel Morris
Head Of Investor Relations at Ericsson

Thanks, Birje. We're moving now to the next question. So Simon Granath from ABG. Your line should now be open. Do you hear us, Simon?

Simon Granath
Partner & Equity Research Analyst at ABG Sundal Collier

Yes, I do. Good morning, and thank you for the presentation. I'd like to expand a bit on the traffic growth here because you do acknowledge in your latest mobility report that it's continuously decelerating here. And one could potentially argue that this is waiting on the demand for your products. Nonetheless, data traffic is still growing, and you do also expect this to continue.

Simon Granath
Partner & Equity Research Analyst at ABG Sundal Collier

But is it fair to assume that this shift is making you put even greater emphasis on margins over the longer term, particularly if this trend continues?

Börje Ekholm
President, CEO & Member of The Board at Ericsson

Thanks, Simon. So it's a very good question. Data traffic Data traffic growth will be what's underlying the demand for our products. Once you build out coverage, it's truly only data traffic growth. And it's right, as you say, it is gradually declining a bit, and that's fair.

Börje Ekholm
President, CEO & Member of The Board at Ericsson

I would say, though, what we are expecting to see and that actually is a different question a bit. But when you start to think about future applications, so far, we come from a world where it's been mobile broadband to the consumer. That's been demanding one type of traffic. What we see now in the future is actually a wide range of applications coming up. It's anything from ARVR glasses, But I would single out one trend that's actually going to be very big for the traffic and start to impact network investments, and it's the whole AI.

Börje Ekholm
President, CEO & Member of The Board at Ericsson

So far, AI has been mostly on the training side, and that's fine. But we're starting to see that coming into applications in enterprises. I'm sure they're going to be consumer applications. They may well be more voice controlled. So you're using voice as the as quality operating system.

Börje Ekholm
President, CEO & Member of The Board at Ericsson

In that world, we see also a changing requirement on the network. So the network needs to be prepared for the AI traffic. It's going to require more uplinks, it's going to require different performance of the network. That actually, I think, may be more important in the next few years as a traffic definition. So yes, overall traffic is probably going to continue to taper down.

Börje Ekholm
President, CEO & Member of The Board at Ericsson

But I think the demands coming from the new applications that run on top will actually materially impact the way you need to invest in the network. That also needs, of course, to impact the way you get monetized for the network. And that's why I think we're very excited about where we are on the demand for network equipment, but also the ability to monetize that through network APIs. I think they all are starting to come together, making us a critical component in the in how AI will be deployed. So I think we should when we think about the future, there is actually one I mean, if you only look at consumer mobile broadband, you can get a bit negative.

Börje Ekholm
President, CEO & Member of The Board at Ericsson

But I actually think we need to look at the other side, which is starting to happen on a very different pace. I wouldn't rule out that's actually what we see starting to happen in North America, why we actually get the demand picking up there because the data traffic is per se growing at about the same rate as before, but the nature of the traffic is starting to change. And I think that's what should bring us excitement. On the focus anyway, I think we need to have a very strong focus on operational excellence. And for me, that if we focus on operational excellence, we can actually say, okay, if the additional exciting data traffic growth takes 12 months, 24 months or 36 months to be meaningful, at least we have a very solid core business.

Börje Ekholm
President, CEO & Member of The Board at Ericsson

So the focus on the margin is actually something we're not going to drop. So we need to have that as well, but the other part is equally important.

Operator

Thanks for the question.

Simon Granath
Partner & Equity Research Analyst at ABG Sundal Collier

Thank you

Simon Granath
Partner & Equity Research Analyst at ABG Sundal Collier

so much. May I have a small follow-up?

Daniel Morris
Head Of Investor Relations at Ericsson

Simon, I think we better just move on just because we have quite a long queue, but thank you for the question. Feel free to join for a follow-up at the back of the queue. If we can move on now to the next question, Sebastian Stavovitz from Kepler Cheuvreux. Your line is now open, Sebastian.

Sébastien Sztabowicz
Head of IT Hardware & Semis Sector Research at Kepler Cheuvreux

Yes. Hello, everyone, and thanks for taking my question. One question regarding the mix for the coming quarters. How do you see the mix evolving? And specifically attached to that, do you see any kind of opportunity linked to 5 gs advance going forward?

Sébastien Sztabowicz
Head of IT Hardware & Semis Sector Research at Kepler Cheuvreux

It seems the U. S. Operators are potentially preparing for more rollout of 5 gs advance. Is this something that could positively affect your mix in the coming quarters? Thank you.

Lars Sandström
SVP, CFO & Head of Group Function Finance at Ericsson

If I start with the mix from a geographical perspective, we will we have had quite a good growth in the U. S, as you know, in North America. The growth rate as such will come down as we more come into stabilized rollout, etcetera, still a bit of support. But of course, with the very high growth rate you have seen in the past quarters, we will come down. And then if there are then coming stabilizing in the market, some recovery in some regions, that could have somewhat of a negative market mix, but also on the rollout mix as such within North America.

Lars Sandström
SVP, CFO & Head of Group Function Finance at Ericsson

So that is what we are trying to highlight here. And I think when it comes to the 5 gs Advanced rollout, I think I'll leave that one.

Börje Ekholm
President, CEO & Member of The Board at Ericsson

Yes. I think it's a very good question. We're starting to see some traction on 5 gs Advanced. So we're in very good discussions. So I think that's the next step that's going to again give you the high performance networks you're going to need for the future type of traffic.

Börje Ekholm
President, CEO & Member of The Board at Ericsson

So we're quite excited about that. But it's I would say if it impacts the next few quarters, I think that's too much to say. But we're rather encouraged by the traction we see.

Sébastien Sztabowicz
Head of IT Hardware & Semis Sector Research at Kepler Cheuvreux

Okay. Thank you.

Daniel Morris
Head Of Investor Relations at Ericsson

Thanks for the question, Sebastian. Moving on to the next question, please. Next question is coming from Daniel Djerberg at Handelsbanken. Daniel, please go ahead.

Daniel Djurberg
Senior Equity Analyst - Technology at Handelsbanken Capital Markets

Thank you, Daniel, and good morning. Yes, a question on capital allocation, obviously, also board question. But the net cash increase of SEK 12,300,000,000. You have a gross cash of SEK 76,000,000 of the Q3, net SEK 38,000,000,000. And then you will have Iconnective adding some SEK 10,000,000,000, SEK 11,000,000,000 to this.

Daniel Djurberg
Senior Equity Analyst - Technology at Handelsbanken Capital Markets

And you proposed SEK 9,400,000,000 in dividends. Hence, you will have a huge cash pile also after that dividend. So the comment on the question is really how you think of the capital allocation, the cash you need for the operation and the potential for any extra dividend, buyback or so or if you expect to do another quite lofty acquisition or anything else that we should bear in mind?

Lars Sandström
SVP, CFO & Head of Group Function Finance at Ericsson

When it comes to capital allocation, I think, as you know, our focus is first priority is to ensure solid R and D, so we can continue. We are long term. We are in technology leadership, and we need to ensure that we continue to invest to maintain our technology leadership. So that is key for us. Yes, we are coming out with a good net cash position, but you can also argue it's coming back to more historical levels.

Lars Sandström
SVP, CFO & Head of Group Function Finance at Ericsson

When it comes to M and A, I think what we are looking at is where possibility could be is when it comes to bolt ons within the product portfolio or some if there are geographical expansion, etcetera, but not any major investments in that area. And then going forward, we have the board has proposed an increase of dividend to show gradual improvements in the or increases in the dividend capacity. And then going forward, I think that will probably be a question more coming into the coming years when it comes to further dividend or allocation to the shareholders.

Börje Ekholm
President, CEO & Member of The Board at Ericsson

And I think, Daniel, I also want to take maybe another tack on this. And as I said, we I think we can organically develop our portfolio. We have a strong position on the mobile network side. And what we have in the enterprise side, actually, we think we have a very solid base to develop that from. So we're very comfortable with our starting position.

Börje Ekholm
President, CEO & Member of The Board at Ericsson

That means that we may add some geographic coverage, could add technology components in there. But I also say that we to think that we would do a bigger acquisition, we're not going to do that for the very simple reason. We need to deliver on the ones we've done. So I think we need to show that we can create the value for the shareholders and strengthening the company with the investments we've done. So we have a lot of work to do that before I would even remotely think about that question.

Börje Ekholm
President, CEO & Member of The Board at Ericsson

So that's not part of the way we work. What we are focusing on the we're, of course, always in the M and A market, but it's going to be the smaller add on bolt ons, geographic expansions. That's what we will be focusing on.

Daniel Morris
Head Of Investor Relations at Ericsson

Thanks for the question, Daniel. Next question is from Jacob Bluestone at Exane BNP. Jacob, your line is open.

Jakob Bluestone
Research Analyst at BNP Paribas

Thanks, Daniel. Hopefully, you can hear me okay. I appreciate you haven't guided specifically for 2025, and I presume that sort of reflects some of the sort of broader geopolitical uncertainties. But I was just hoping you could maybe give us a little bit of sort of qualitative color around some of the puts and takes for revenues and margins. You've obviously mentioned potential risks around tariffs and sort of market growth.

Jakob Bluestone
Research Analyst at BNP Paribas

Are there any other things that we should bear in mind for revenues? For example, the fact that you had a number of 1 offs in 2024. And then at the margin level, can you maybe just help us understand, do you see your margins and sort of broader cost control? Does that you had your big cost savings in 2024 as you sort of cut back as revenues were under pressure. Does some of that go into reverse?

Jakob Bluestone
Research Analyst at BNP Paribas

Or could we start to see some margin pressure coming as you start paying people more bonuses again? Maybe some of the mix is a little bit different as places like India start to grow again. So just sort of interested on anything you can say qualitatively on 2025? Thank you.

Lars Sandström
SVP, CFO & Head of Group Function Finance at Ericsson

When you start on top line, then I can walk down the margins and costs.

Börje Ekholm
President, CEO & Member of The Board at Ericsson

Yes. I think what we see, we come out of a period where 2023, 2024, I think we had, call it, almost 2 years of continuously falling sales. What we see is a much more stabilizing outlook. So that trend of falling sales feels like we it's always dangerous to say that everything has changed, But at least we get more comfortable in the outlook of the stabilizing and actually returning to some more historic patterns. So I feel on the sales side, at least what we can see is a more positive outlook than we've seen the quarters before.

Börje Ekholm
President, CEO & Member of The Board at Ericsson

So in that sense, we've gotten more positive. And what's further giving that reason for positivism is actually that the U. S. Is returning to stronger growth. The number don't focus on the quarter or year over year increase in North America because that's from a very depressed level in the year before.

Börje Ekholm
President, CEO & Member of The Board at Ericsson

But think about it much more as we're seeing a broader based recovery in North America. It's not only one contract. It's actually broader. And when we start to see that with the front runner characteristics of the North American market, they were the first to really deploy 5 gs, then the other markets came. It gives us the comfort that the market outlook is stabilizing as it's leaving the last few quarters.

Börje Ekholm
President, CEO & Member of The Board at Ericsson

So we see that to be a solid indication that we are in a good spot. Then globally, what we have done, I would say, over the past few years is actually to reduce the sensitivity to geographic mix. So we have much less exposure to different regions growing differently. What may actually impact more on margins is the amount of rollouts. If we have a large amount of rollouts, it actually puts a bit of pressure on the margins, And that's more important.

Börje Ekholm
President, CEO & Member of The Board at Ericsson

And when you think about the future, we're probably going to see the AT and T contract move into more of rollouts and swapouts that we saw in India the year before, etcetera. That may be, call it, impacting more than necessarily the sales mix. But if you look, the U. S. Used to be or has almost always in our industry being a front market coming back to growth and a broad based growth.

Börje Ekholm
President, CEO & Member of The Board at Ericsson

We see Europe coming back to a bit of growth. It's going to be a bit choppy. It always varies by quarter, but at least it's getting more positive. We see Asia in the same way. So the market is shaping up to be relatively it's improving and stabilizing.

Lars Sandström
SVP, CFO & Head of Group Function Finance at Ericsson

Yes. And we are still in a downward trend in outside of U. S. And Europe. And when that will we see, as we mentioned, Africa where they have they are pretty hard hit by geopolitics and the difficulties they see, so and the competition in Latin America.

Lars Sandström
SVP, CFO & Head of Group Function Finance at Ericsson

So it is hard to see where are they where is the trajectory turning there, so to say. And when it comes to margins, I think you mentioned it, there will be a bit of mix on the margins. So that could be some pressure, not substantial, but holding us back somewhat. And on the cost side, I think coming out of the year here in 2024, little somewhat elevated bonus levels. But going back a couple of years, you could argue that 2023 was really a low year compared to the historical average.

Lars Sandström
SVP, CFO & Head of Group Function Finance at Ericsson

So going looking into 2025 for OpEx, that should be similar levels because we have an underlying cost inflation hurting OpEx and of course cost of goods sold as well. But we are continuously working with the cost reductions. And as I meant we mentioned there in the outlook on the restructuring, we will they will be maintained on a higher level to mitigate some of this cost inflation pressure that we still see.

Daniel Morris
Head Of Investor Relations at Ericsson

The next question is coming from the line of Andreas Jolson at Carnegie. Andreas, please go ahead.

Andrea Johnson
Program Officer at Carnegie Corporation

Good morning, everyone. Just like to go back to Daniel's question on capital allocation, if I may, and this is just so we understand everything, everyone. As Daniel said, you have a strong cash position. You will have proceeds. You will have free cash flow also for 2025, I guess, given that you see a stabilizing outlook.

Andrea Johnson
Program Officer at Carnegie Corporation

And just from a philosophical way, what is the arguments for a company like Ericsson to have to have a net cash position? I understand you have had it historically as well, but what is the reasoning behind that, if I may?

Andrea Johnson
Program Officer at Carnegie Corporation

Thanks.

Lars Sandström
SVP, CFO & Head of Group Function Finance at Ericsson

I think it is our firm commitment to really ensure that we have capacity to do the investments in R and D over time. I think that it has been the leading guiding star for the company for quite some years. And I think we also have if we go long back into history, felt that that has been hurting our ability to invest in when having not the right cash position. So I'd say so I think that is call it a bit of conservatism on that end.

Lars Sandström
SVP, CFO & Head of Group Function Finance at Ericsson

But I think coming through 2025 here, we will continuously evolve and assess what is the right capital structure and of course start a discussion internally together with the board and then at that at a later stage then externally also communicate how we look upon this.

Börje Ekholm
President, CEO & Member of The Board at Ericsson

One philosophical thing, Andreas, that we very rarely talk about, but actually our customers care a bit. They typically make 10 year commitments when they put our networks in the in operation. So they would prefer that we're solid from a financial perspective so they can comfortably make that commitment, right? So to avoid to have that discussions in customer interactions, it's better to be maybe a bit conservative, as Lars said, on the capital. We talk a little bit less about that, but I think that's been a factor.

Börje Ekholm
President, CEO & Member of The Board at Ericsson

And here, I think it's going to take some time and has taken time for the customers to realize that we are increasingly becoming a software business. When we were if you go back 15 years, we were much more hardware centric. And then, of course, it was a bigger question for the customers. As you move into becoming a software vendor, I think that capital I mean, the working capital becomes less and less and less. So I do think that, that's going to change.

Börje Ekholm
President, CEO & Member of The Board at Ericsson

But so far, that's been one of the things that actually been important in order to capture customers. And we come from a spot in 2017 when this was a topic in every customer interaction. Hasn't been since then, but every customer I met were focusing on Ericsson going to stay alive, are you going to turn, etcetera. That's not the question anymore, but we want to also be a bit prudent in that perspective.

Andrea Johnson
Program Officer at Carnegie Corporation

Thank you. Very helpful. Thanks.

Daniel Morris
Head Of Investor Relations at Ericsson

Thanks, Andreas. Moving on to the next question, please. Next, we have Sandeep Deshpande from JPMorgan. Sandeep, please go ahead. Sandeep, we don't hear you yet.

Daniel Morris
Head Of Investor Relations at Ericsson

Can you check your mute?

Sandeep Deshpande
Sandeep Deshpande
Service Desk Team Lead at JPMorgan Chase

Yes. Hi. Can you hear me?

Daniel Morris
Head Of Investor Relations at Ericsson

We do now, yes.

Sandeep Deshpande
Sandeep Deshpande
Service Desk Team Lead at JPMorgan Chase

Yes. Hi. I have a quick question, Boorhe, about you talked about the stabilizing end market and particularly North America. But what is it the share gains that is causing the improvement in the North American market? Or is it the 5 gs Advanced?

Sandeep Deshpande
Sandeep Deshpande
Service Desk Team Lead at JPMorgan Chase

What is the next product to drive the growth from here given that 5 gs has been rolled out in the U. S. At this point and somewhat in other markets, clearly not as much as in the U. S. But the other part of the question is, do you need the 6 gs to happen anytime soon and what is the timing of 6 gs?

Sandeep Deshpande
Sandeep Deshpande
Service Desk Team Lead at JPMorgan Chase

So what I'm trying to understand is timing of new product to drive this continuing growth that you've seen in the second half of this year Or will we see a situation where in the second half of this year when the comps become more difficult and the growth suddenly weakens again?

Börje Ekholm
President, CEO & Member of The Board at Ericsson

Well, if you first of all, I think 2023 was a very low year. So if you look at the percentage growth in North America, it's actually I wouldn't focus on that. That's not going to be the predictive power going forward, right? So and our market is not that type of high growth that we saw in Q4. But if you look going forward and if you actually look a little bit and dissect Q4 a bit, what you see is, of course, that a part of the increase in North America comes from the market share gain from that big contract.

Börje Ekholm
President, CEO & Member of The Board at Ericsson

No doubt about that. That's an important driver. That moved into deliveries during the 2nd part of the year. We started some in Q2, but in reality, it was 2nd part of the year. So that, of course, helped us.

Börje Ekholm
President, CEO & Member of The Board at Ericsson

But as I said, it's also a broader based recovery. And then you start to say, why is that happening? Well, first of all, 5 gs has not been built out. 5 gs is at the early stages still. So if you take the North American market, 5 gs stand alone is not rolled out.

Börje Ekholm
President, CEO & Member of The Board at Ericsson

I think you probably live in London. London, I mean that in Europe, it's very limited build out. 5 gs is hardly built out. Most of the time when you get a 5 gs icon on your phone, you're basically on dynamic spectrum sharing using a 4 gs spectrum. Gs spectrum.

Börje Ekholm
President, CEO & Member of The Board at Ericsson

So 5 gs has not been built out. We're still very early in that build out. That's what we're starting to see in North America. The 5 gs the demand for 5 gs comes from growing 5 gs traffic, and we're still early in that build out. So I'm I actually I don't know if we have not maybe been clear on this historically, but it's actually a low percentage that's been built out for and to have 5 gs, you need to build out mid band.

Börje Ekholm
President, CEO & Member of The Board at Ericsson

That's very limited build out, to be honest. So we are still very early in the 5 gs build out cycle. And if you look at what you would expect in the future, you should expect that 5 gs will have more base stations in reality than the 4 gs network because it's at higher frequency. So you're going to need a denser grid. So if we're going to get the full benefit of 5 gs with the low latency, the high performance, the ability to actually have many users in one cell site, we need to see much more build out.

Börje Ekholm
President, CEO & Member of The Board at Ericsson

And we're actually very early in that. So I think the notion that, that new growth, it actually drives from the growth in traffic in the underlying traffic. And that's migrating from 4 gs over to 5 gs, and you will see changing nature on the 5 gs from consumer applications, basic mobile broadband, download the video or stream music into much more advanced applications, voice as a operating interface. You're going to see AI traffic, and all of that will start to drive traffic in the new way. That's why you see us introduce new type of products, new type of massive MIMOs, but it's not saying that it has to be a new generation or anything.

Börje Ekholm
President, CEO & Member of The Board at Ericsson

It's actually introducing, it's actually introducing, call it, improved and strengthened products in the portfolio that improved energy efficiency but also cell edge performance, for example. Can I touch on 6 gs, which is a very good question? It populates often. I mean, 6 gs, if you think about it as a technology, probably going to get introduced 2,030. It's something on that time frame.

Börje Ekholm
President, CEO & Member of The Board at Ericsson

But what's more important is 6 gs is actually an evolution of 5 gs. So we should think of 6 gs not as a new type of a generation where you upgrade it from 3 gs to 4 gs or 4 gs to 5 gs. It was kind of a 4 you needed also to upgrade the whole network. Well, the 5 gs and 5 gs Advanced even more so will be cloud based. It will have new type of principles be structured in a horizontal way, and 6 gs will be more of an evolution on that.

Börje Ekholm
President, CEO & Member of The Board at Ericsson

So if you're going to move into 6 gs, you actually need to have the 5 gs network and the architecture of 5 gs built out already. Then you can benefit from adding new frequencies, new capabilities that 6 gs will give. So I encourage you not to think of 6 gs as a normal new generation. It's actually more of any generation. So it's going to change the nature of the industry.

Börje Ekholm
President, CEO & Member of The Board at Ericsson

And I think this is important when we think about the horizontalization. We'll actually allow the our customers, the operator, not to have these cycles in investments as much, much more smoother development of the demands of the network, call it traffic volume and type of traffic. So I think we're entering a new phase here where the where our customers will look different, we will look different. But I think that actually for us is a positive with less hardware components, more software content on our sales.

Sandeep Deshpande
Sandeep Deshpande
Service Desk Team Lead at JPMorgan Chase

Thank you, Boris.

Daniel Morris
Head Of Investor Relations at Ericsson

Thanks for the question, Sandeep. We've got time for one very short final question. We're nearly up for time. If we can take the last question, please. The last question is coming from Joakim Ganahl at DNB.

Joachim Gunell
Equity Research Analyst at DNB Markets

Thank you, and good morning. So in 2024, I mean, the progress in networks has really stolen the attention here and that's been a stellar performance. So but on Cloud Software Services here, I mean, even including the IPR catch up statements, the margin levels here on operating profit levels have been fairly flattish. So can you comment a bit on what do you want to see in order to improve this trend going forward? And in relation to the more long term 15% EBITA target for the group, where do you envision Cloud Software and Services margins be in order to deliver on that?

Lars Sandström
SVP, CFO & Head of Group Function Finance at Ericsson

Well, I

Lars Sandström
SVP, CFO & Head of Group Function Finance at Ericsson

think sorry, when it comes to cloud service, we see actually a good underlying improvement. It doesn't have at all the same swings that you have in the network business, which is quite different. That's more of a you have the whole service component into that, etcetera, as well, which is quite a different margin profile on that. It requires what we have done there, continued commercial discipline, also driving the cost efficiency in the whole delivery that we have in cloud software and services. But also to improve margins further going forward and increase this pace, we need to continue to drive also top line here and start thinking on how do we address growth areas within the segments where we are active there.

Lars Sandström
SVP, CFO & Head of Group Function Finance at Ericsson

And that is work that we are going into now. So that would be, so I'd say, the add on from the current strategy going forward. And I think that there are good plans and good hard work in that to make that happen, and we should see some signs of that already now in 2025, I believe. But also I think what they have done also is to really prioritize different parts of the group and reduce cost in some other areas really to make sure that we end up in the right cost balancing, cost levels in different parts of within cloud software and services. So they should be able to gradually continue this EBITA margin improvement journey and to start getting towards more in the mid long term double digit level here.

Joachim Gunell
Equity Research Analyst at DNB Markets

Thank you very much.

Daniel Morris
Head Of Investor Relations at Ericsson

Thanks, Joakim. Thanks, everyone, for joining. That now concludes the Q and A session. Thank you.

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Nine Energy Service Q4 2024
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