Q3 2021 Telefonaktiebolaget LM Ericsson Earnings Call
Hello, and good morning, and welcome to the Ericsson's third quarter 'twenty to 'twenty one call.
Today's call will be a little bit different from others, we will start with the normal procedures going through the Q4 numbers. The second part we will actually spend a little bit on strategic topics, one addressing the path to profitability. It introduces services by corn and then we will address the opportunities that we see in.
Enterprise fiber yep.
And with me here today as usual I have our president and CEO.
M. A C of O caught me London.
So hopefully anyway, even though we'll have a little bit longer presentation I hopefully can spend the second part of this hour on Q&A.
And that in order to ask these questions you need to contact or connect to the conference via telephone.
And you can find all the details in the press release on or on Arizona.
There are some stock comp.
We encourage you all to read about these risks and uncertainties in the our earnings report as well as in our annual report.
With that said I would like to hand over to our president and CEO Borja called Cisco Yeah. Thank you Peter and of course, a while to come everyone and very happy to have everyone. Joining us for this call.
So the third quarter, we're very happy about the performance that we can deliver.
Based basically on Oh, sweetening footprint across our portfolio leveraging our.
Strong five G portfolio.
And I would say that this ability to gain footprint is clearly based on our investments in technology leadership and the substantial commitments. We have made to growing our R&D efforts over the last few years, but I would say, it's also show the commitment of our people show to deliver a bit.
Four months.
Is that the that actually are on the path to becoming a really strong performance in the future.
Today, we have 95 live five D networks, we have 149 commercial five G agreements across our portfolio.
With unique cooperates this I should say.
But you have also seen that we have decided to delay our capital market or postpone our capital markets day, our investor update to our instead next year have a full capital market stay with the full management team.
To participate in the update you more in details of the plans, we see going forward.
We will spend as Peter said, a little bit of time on updating you all on our strategic thinking at the end of this presentation.
But Carl and I will focus there first part here on the Q3 performance and go through a bit more in detail.
So if we look at the quarter, we continued to see very good momentum in the U S and it's underpinned by our recent signing of a five year contract with AT&T, which now means that we have five year contracts with all three.
Tier one U S operators.
And these contracts are by the way the largest in our.
History at Ericsson.
We also continued to gain market share overall, however, it's quite clear that up.
Our market share in mainland China has been reduced.
And this is a consequence of a for most of the decisions in Sweden took.
To exclude Chinese vendors in the build out of <unk> networks in Sweden.
And this is fully in line with the guidance we have offered before.
But we also see that we've been able to partly offset that loss of market share by growth in other markets. During the quarter. We are seeing good growth in Europe, and Latin America, as well as North America, but I also want to highlight that also Africa. So growth following a very difficult period jewelry.
The pandemic.
But of course, it's quite clear the loss of sales in China Hurts, our sales volume in total.
And we have.
You know, we need to invest even more to regain that lost volume by growing in other markets.
This quarter also I would highlight the impact on on disruptions to our supply chains are that we are I would say a impacts many companies across many different industry sectors alike.
So so for US we have had very limited to no impact.
All of our customers up until the end of the third quarter.
We've taken a very proactive at first time, we have built.
Inventory on and create it in a way a.
Flexible supply situation, but late in the third quarter, we saw some impact on shortages of individual components.
Basically that resulted to loss of some sales, but it resulted also in higher inventory.
And this is a risk that we see can have a bigger impact also on the fourth quarter.
Of course, there or it's highly unlikely it would have no impact, but it will have some impact that we think is likely.
Despite the share.
Share gains we've had outside of China, the reduced market share in China, and the supply issues and lower sales in managed services led to a slight negative organic growth rate overall, so we're minus 1%, but if we exclude China, we saw a 6%.
Organic growth year over year.
We also continued to deliver strong profitability gross margin improved sequentially as well as year over year and it reached 44% and our EBIT margin increased to 15, 7%.
An IPR with also good progress and we increased our IPR revenues to two 6%.
This was driven by new agreements as well as a dispute settlement.
Both have some red retroactive financially impact as we have said before.
Yeah.
And what we see also is that the significant value of our product portfolio and strong technology position in five G.
And that positions us very well to conclude on the future of all ongoing as well as future patent license renewals. So we feel quite strongly about our position in IPR.
However, you all know that timing of these.
License agreements may cause temporary gaps in our overall IPR revenues, but we will not waver from trying to maximize the value of our existing patent portfolio.
We had a very strong cash flow.
And the free cash flow before M&A was 13 billion during the quarter.
And I would say this is primarily a result of the investments and the commitments we have done in our strategy to improve flexibility reduce sensitivity to business mix as well as lower our working capital needs.
We have now built a robust cash position and gives us a strong foundation to grow by investing further in technology leadership, but also from inorganic moves.
We have a strong commitment to sustainability you all know that and it continues to deliver good value for us, but also for our customers and you saw that we just recently launched a new massive mimo are.
A portfolio that has a gains on energy efficiency, it's much less heavy and it it has a lower wind factor all in the world, providing clear values to our customers.
But we also saw that during the quarter, we signed a $2 billion sustainability linked revolving credit facility.
And finally, I want to say our commitment to strengthening our ethics and compliance program continue.
This is a longer term journey, we are committed to invest what it takes and we have we are increasing on carrying significant costs in improving our ethics and compliance programs, but it's also a cultural journey for us as a company and here we are firmly committed to ensuring that we have.
<unk> did a culture built on on integrity is a fundamental value.
So now let's move on to the market area performance.
Sales in North East Asia fell by 33%.
That is of course due to the significantly lower market share in mainland China, but sales in other parts of the market there yeah actually improved during the quarter.
And as a consequence of the loss of sales in China, we have to right size, our sales and delivery organizations in China and that will start in Q4, and we will have some structural cost of restructuring cost to that.
In South East Asia, Oceania, and India sales decreased by 16%. This is really due to a lot of accelerated rollouts in the end of last year for network, but also some timing of orders and projects in digital services.
If you look at Middle East and Africa sales declined by 8% in networks. We saw there primarily impact of timing of five G contracts in middle East.
But I would also say that Africa, clearly returned to growth.
And we see primarily in digital services, we saw actually a strong software upgrades in the African market.
In Europe, and Latin America, we saw Europe or or in total sales increased by 9%.
And if we look at the parts here Europe grew by 5% basically.
On the back of market share gains.
And the same thing in Latin America, we saw a 29% growth of course is coming off a very difficult periods in COVID-19, but it's still growing very strongly on the back of our share gains and we see that in both networks as well as in digital services.
Yeah.
Five gene momentum in North America continued and sales increased by 13% and clearly this demand is driven by demand for five G solutions.
So, let's now move on to the business segments.
If we start with networks of core sales was hit by China, but if we adjust for mainland China sales actually grew by 8% year over year.
And this reflects clear gains in other markets.
We had that have been possible. Thanks to a strong product portfolio and we continue to see very good momentum in in deployment of five D around the world.
Of course, the impact on the supply chain from the disturbances also of course heat networks, and we expect that to pose a challenge as well during the fourth quarter.
Nevertheless, we saw gross margin strengths into 47, 8% compared to 46, 7% last year.
In digital services, it's very encouraging that we're now starting to see revenues from the five year contract.
And that's of course, helping them to achieve some growth. We saw this segment grow by 1% in the quarter and that's despite a significant reduction in mainland China.
If we exclude China sales actually grew by 6% year over year.
Gross margin was 42, 3% compared to 43, 5% and going forward, we expect our profitability.
Profitability to improve gradually and it's going to exceed our initial target of an EBIT margin of 10% to 12%.
Sales of managed services fell by or decreased by 7%.
Organically.
And clearly here Q3 was impacted by reduced variable sales.
Contract re scoping as well as some planned exits mainly in Europe.
We also saw that network optimization grew primarily in Europe, and we continue to invest in developing our portfolio with AI and automation.
To further strengthen our competitiveness.
Gross margin decreased 18, 7% compared to 20.1 last year.
In emerging business and other sales grew by 4% organically.
And gross margin actually increased very strongly to 39, 4%.
Compared to 30 on the half last year.
Reported sales grew by 26% and that's of course, mainly due to the acquired Crazy point business.
And what I would say here is the strengthening of the gross margin actually came out of where it is to a very large degree explained by cradle point and it's even encouraging to see that Crazy point is one of the key drivers of the overall strength and gross margin for Ericsson as a group.
With that I want to go over to Karla to go through more details on the report I gave some more perspectives on on our path to profitability in the services Carr. Thank you yeah. Thank you and let's have a closer look at the numbers then.
So our reported $56 3 billion.
Negative organic development and a 1% as Barry described and this is following four consecutive quarters of organic growth.
And you saw the two largest market areas are presented growth in the quarter and the remaining three months or so decline.
We had some disturbances of course in the supply chain is very also mentioned about that but the big factor here. When it comes to the topline is clearly the mainland China and the reduced market share there and in addition to what various had that we would have grown 6% in the quarter, if we excluded the non China.
Yet the corresponding year to date number that is a 10% growth if China is excluded.
IPR, then $2 6 billion in revenue out of that.
We have certain retroactive benefits from the contracts or agreements that we signed in the quarter. It is an increase of the 0.5 year over year and IPR revenue.
So, let's just see how now on a rolling four quarter basis. Our sales is now tracking around 231 billion.
Where you showed the gross margin numbers per segment.
A little bit further into this 44% on the group level. That's up 80 basis points are really based on continued improvements both in the networks and as well as the emerging business and other segments.
And in networks are pleased and encouraged to see continued operational leverage are contributing to the margin here, but also the higher IPR revenues is as we said before and the gross margin in networks and now it's 47, 8% compared with $46 seven.
In digital services gross margin and excluding restructuring again <expletive>.
Client 120 basis points and this is really connected again to what we have discussed before the higher costs for initial deployment and the five D core contracts.
And sales there I must say and again emphasize sales in fact, the core is really progressing well and we'll come back to a little bit of a deep dive into that a bit later in the call.
On managed services gross margin again, excluding restructuring declined by 140 basis points.
And this mainly comes from a reduction of variable sales on a on a few customer accounts.
And as with any emerging business up nine percentage points in gross margin fueled by to a large extent our development in a cradle point of course credit point did not exist in our numbers a year ago.
So.
Packs as you say 16.4 billion up from $15 9 billion a year ago.
Again, mainly related to the addition of Cradle point business, both in R&D and and SG&A.
When it comes to R&D.
The increase there in addition to credit point comes from more investments into the five core portfolio in digital services as we have reported on before it as well.
We are there is one line not visible on the slide here, but it's on other income.
And other operating income and expenses, where we had the positive development in the Ericsson ventures investment portfolio this quarter.
And the net of that positive development in an empowerment contributed with 0.4 billion to two EBIT.
And this is all in emerging business and other segments.
EBITA ending up at $8 8 billion.
Or a margin of 15, 7% in the quarter, which is up 10 basis points year over year.
And this remember is in spite of the lower sales volume.
EBIDTA AR as you know our beat our long term target is 15% to 18% of net sales and we are now if we look at the rolling four quarter basis.
He think 14% EBITDA margin.
[noise] taxis, two and a half billion in the quarter and an effective tax rate of 30%. This is also effective tax rate for the for the full year to date.
And now lets a look into how these profits converted into cash flow.
So operating activities cash flow increased by $9 4 billion to a total of $14 seven.
And we can also remember that last year Q3 was impacted by a 2 billion contribution to the Swedish pension fund.
But we work it out with working capital in our company and we focus a lot on lead times and efficiencies.
And you can see that also this quarter, the resulting free cash flow benefited from the.
Working capital at work that we put in we had good collection from customers, including some prepayments as well.
And.
As Barry also mentioned, we did increase inventory again. This is something we have talked about on previous calls also in order to create <unk>.
He even higher resilience in the supply chain.
But that was actually offset partially at least.
With higher trade payables, so the impact on cash flow was not that big.
Big.
Capex net and and other investing activities was relatively stable year over year. So that all resulted in a free cash flow of $13 billion.
Up more than 200% year over year, and maybe again on a rolling four quarter basis free cash flow before M&A was now so the $1 3 billion Swedish kroner, which.
Corresponds to 13, 6% and again, that's beating and our long term free cash flow generation targets, which is 9% to 12% of Netflix.
This all meant that a our gross cash and net cash increased by $11 billion and 12 billion respectively.
Okay, if we move on to our planning assumptions here finally on the quarter then.
First of all starting with the market that we operate in.
The Lora now expects the ran market to grow by 13% in 2021.
And which is often from the 10% that was estimated in the many report.
And if we break that down by region some of the regions than in China, a 13% North America 15 Europe.
10% and looking ahead into 2022, the Lora forecast for the ran market is.
To grow by 2% or 3%, if we exclude China.
Second point on the supply chain and we are we see saw some disturbances in the third quarter as mentioned.
Including some individual component shortages.
And we continue to see this as a risk going into the fourth quarter as well for networks sales.
Over to IPR we.
Have a run rate in the current portfolio of 7 billion. This is the same number as we stated in the Q2 report.
As well and if it is the contract portfolio currently on an annualized basis.
And again as we have discussed many times before as these key IPR contracts are approaching expiring.
We may see an impact on revenues until those contracts are actually renewed.
Lastly, then on digital services, we expect to reach breakeven in the fourth quarter.
So now having gone through the quarter or thoughts I would like to shift gear and safety words about digital services.
And the road back to profitability in this segment.
And to start with as we've communicated already in the second quarter report now we we expect a limited loss in 2022.
One impacting factor is again the decreased market share in mainland China.
But the long term target, 10% to 12% remains and of course, our ambition is to even exceed that over the longer term.
Before diving in really I, just wanted to start here by re emphasizing again the strength in our.
Core portfolio and the business momentum is really here.
The Standalone five decor market window is open customers now make long term commitments in their choice of vendors.
Here and we'll come back to our track record so far but we are winning a lot of this are the incentives. This is really a cornerstone.
In our journey here in digital services, Pfizer core contracts and what we call attached sales surround that and hence the investment in R&D in this in this area.
If you look at the chart here starting on the left side and with our investments in R&D.
So earlier in this year and we have talked about this before we decided to really prioritize long term ambitions here.
And rather than going for for short term results. So we have increased R&D significantly.
When it comes to hydrocodone orchestration.
It adds expenses in the P&L of course short term, but builds value clearly for the mid and long term are very similar to the development we've seen in networks as well.
So we also continue to make our R&D investments in automation and this is really more to drive efficiency in our delivery of software and to become more efficient in our in in our own R&D.
And thirdly, we also invest going forward now for the future in service orchestration and an evolving now that the portfolio to enable our customers to serve not least their enterprise customers, including a five D network slicing and edge solutions.
Looking at gross margin here a couple of aspects first just to put in perspective, the packet core area, including five <unk> that we talk so much about now that represents about 20% to 25% of the total revenue in digital services.
The other 75 or 80% of revenue is delivered from from the other areas, which all have a clear trajectory towards improved profitability.
And this is underpinned by the transformation that we are driving toward more software based content and more industrialized solutions.
One area, which I think is worth to call out here is the BSS.
Because we were actually pleased to see that the BSS strategy that we revised in 'twenty 18 is delivering its been executed and now the BSS areas delivering gross margins in line with the group average levels.
Another aspect are impacting gross margin also positively now is that we are managing all of these 45 critical contracts that we talked about the started to mentioned back in 2017.
However than the gross margin improvements that I, just mentioned and the things, we do coming out of technology investment.
And then partially offset by the initial five decor deployment costs for new product introduction.
And that's why we see an improved gross margin after 2022 but not yet enough.
However, beyond 2022, and we see that we continue the transformation towards software based solutions to customers.
And this is going to contribute to the improved gross margin that you can see here to the right on the on the slide.
Software share will increase.
And the recurring element of software will also grow in our digital services business and you can see here that is really the most significant contribution to our long term profitability target.
Finally, then if we turn to net sales.
The way to fight the current 50 core contracts work is that we start to see revenue in the P&L when when the networks go lives.
And then.
The net the revenue from those contracts grow then with added subscribers to those and networks.
Means that revenue from those will start now start towards the end of the year and then continue to grow overtime.
So.
To continue then are on the market on the sales pace of course to the mainland China reduction has cost us quite a bit of topline and that's what you can see in the scene.
Themed sale flying leading after 'twenty to 'twenty, two but of course, our ambition here is to compensate that with market share gains in other markets and as we already so actually in even in the third quarter that this is happening.
Finally, when it comes to our ambitions than on on CSP Enterprise and service orchestration portfolios.
We expect us to start to be visible in terms of revenue by 2023.
And onwards, and this is Dennis.
Things like dedicated networks start to scale up.
As I mentioned the network slicing components are being commercialized.
So next slides and I will finish off with this shows a bit about the momentum in this one.
So far we have landed 45 standalone <unk> core contracts you can see that on the left here.
And 15 of those are added since October last year, and eight of them are live and generating revenue.
And it's really based on our containerized cloud native technology.
That we win these deals and we anticipate that we will continue to lead the five decor.
Market and more add more customers to this list as well.
But as mentioned before it's not only about two five D core to the right you see examples from the other parts of the portfolio in India due to services.
Starting with DSS, we have 70, new deals in 2021.
All in line with the BSS strategy that we have put in place.
And actually our customers need to modernize that'd be assessed to become more agile in our consumer business, but also to meet the enterprise customer's requirements.
Finally core a sad drives attached sales as well and a good example of that is here what you see on an Oss where network orchestration is a good example, and last year, we celebrated more than 100 customers are here.
Our Ericsson Orchestrator.
And since then we've added another thought to customers on top of that cloud communication.
And more than 160 customers have chosen our volt the solution for their voice offerings.
Oh, each about 20 is our 20, new customers or new since since last year.
And then on cloud infrastructure, we have about 230 customers.
Already in 29, new customers added so far in 2020 one.
That gave a little bit more meat on the bone on the J S. Our digital services segment.
And the road to profitability essentially it's about investing in technology leadership.
Winning market share and improving the margins.
Through a shift to higher software content.
Thank you and back to you Brent.
Thank you Cor.
So now I'd like to shift gears, a bit and talk and talk more about our overall strategy as well as what.
What the opportunities we see that we can grow in enterprises.
But starting here is and I'm really saying is as a result of the focused strategy. We launched in 2017, we have now delivered a.
In a way a clearly improved performance, including cash flow performance and it's all based on a very strong commitment to R&D to be technology leaders.
But this has also established a strong cloud for them to make strategic choices for them going forward.
The basis for our performance and the basis for us as a company is of course, a competitive product portfolio.
And that today is built upon the leadership in ran core as well as management and orchestration and we.
We can deliver those at a very competitive cost.
And for US continue to drive that performance in the core business is going to be critical and it's actually the fundamental.
The quarter's ingredients that allow us now to make strategic choices for the future.
But I think it's also fair to recognize and you all do that that the five G deployment curve, even though its been growing sharply now and growing great now it will flatten out or it's at least likely to flatten out and you'll see that in the blue bars here the darker blue bars on this chart.
And we see that happening in the years ahead.
And and this is a pattern we've seen in other Gs before.
But I would also say that the previous generations of mobile technology. It really only addressed a consumer market what is actually different with five G is that its also addressing enterprise needs and it was actually designed to fulfil enterprise needs. So we believe that is.
Going to drive traffic into the networks and actually provide a much longer investment cycle in the networks, but it will also start to open up four new segments to be attacked with mobile communication.
So we believe that focusing on maximizing the value in our core mobile networks is is the fundamental focus going forward, but we also see that we can make a focused expansion into enterprises. This.
This will open up higher growth markets as well as new value streams that we can realize here.
Yeah.
What we see with the new future with five G is that businesses are increasingly making choices, where wireless can be a primary access technology.
This is very different and we believe this opens up new markets for us that could be worth up to 25 billion.
U S dollars by 20 to 25.
And this is maybe more importantly, a market that is growing very fast already today achieved.
Achieving growth rates, well above 20% per year.
But it's also a first good gross margin as well as operating margin.
Opportunities for us.
The last 18 months, we have seen the importance of mobile network to manage during the COVID-19 situation and mobile.
It works now play a key role in society as well as allowing many people around the world to work remotely.
But there is no question that with five G. We're lifting the performance to a completely new level.
We will have much higher bandwidth lower latency and much higher capacity and we think that also will offer new opportunities basically to specify quality of service that that in addition to enterprise or consumer applications will start to allow enterprises to.
Take advantage of the wireless networks.
We see that were already being able to unlock value for enterprises with five G.
As we can adjust in a way the digitally infrastructure based on the needs and Carl mentioned it already we start to see network slicing, gaining momentum with the orchestration and edge clouds.
And that is something we are developing together with leading partners.
In the whole ecosystem.
And we see that we are only at the beginning of the development and the opportunities are clearly ahead of us.
So we see that there is a long term value for us that can be captured by being an enabler as well as orchestrator of that ecosystem, that's going to come.
Yeah.
Yeah.
What we also know is that from the <unk> experience is that really the if the developers that develop applications on top of the networks, they're actually realizing value that's multiples of the of the investments that goes into the network itself and we believe with five D that will be even more.
Yes.
So let me give a couple of examples.
One is for example on quality of service, where you can have or network performance adjusted in real time. This.
This basically enables us to differentiate the service to customers recognizing each customer may have different quality need so performance needs being for example, telemedicine or seeing for example, a sensitive video conference, where you need to adjust and rely on very high quality.
Performance, where high quality networks.
I think this is an opportunity for sustainable growth for us.
And I'm very excited about driving this strategy into the future.
We of course are going to see.
That we are already today, starting to offer dedicated enterprise offerings. So we have a dedicated networks. We have mission critical networks Iot, but we also have of course network near solutions.
And here one that we're clearly investing in has created appointed so network near it in a way is grow or it. It helps not only does it provide us with the market opportunity. It actually generates revenues also for the C. S piece, because with every crazy point.
And there is a network need as well.
Yeah.
So we see this to be.
Win win together with our CSP customers and.
But we're also very encouraged about the performance we see in those enterprise applications, where we can provide a very high growth.
For example, we see crazy points growing very rapidly following well on our plans.
But most importantly, we're also seeing the.
The gross margin performance of that business to contribute to our sister company now.
And that shows that to succeed in the enterprise area. We know already that we need to of course build on what we have to develop them organically, but we also need to rely on inorganic opportunities.
And with the capital situation, we have we have the opportunity to make.
The the acquisitions, we need to strengthen our offering in enterprises.
But now let's move on to the summary slide.
So I'm, putting another I would say strong quarter.
Two our track record, we continue to be well positioned to take advantage of the market opportunities are.
As <unk> continues to be deployed globally.
We continue to take proactive steps to manage the supply situation.
But we of course had some impact.
The impact this quarter and we're seeing think it could pose a risk for the fourth quarter.
The C band rollout continues in North America, and that's a key opportunity for our customers and therefore also for us.
But based on a very competitive five year portfolio we.
We continue to see a path towards winning more of a five year contract.
As we move along both in North America and in the World.
So when we look ahead we.
We do feel that we're in a good position, where we are where we can take the next steps strategically, but we're of course as a as an interim step.
I'm going to deliver on the 2022 targets.
So long term as a as a group target, but we're also very committed to our long term targets for the group with that I give the word back to Mr. <unk>.
Thank you Mr. Eckel for that presentation, I think you called for the presentation that was more of a strategic focus.
Focus so with that we have still have 20 minutes and will be a little bit more to answer your questions. Here. So I would like to give the word to Mark can you hear me.
Thank you just as a reminder, sponsors if you do wish to ask a question. Please don't see Roger one on your telephone keypad now and if you find your question involves the sports showed signs of speed keeps them don't see rates huge council.
Our first question comes from the line of Edward Snyder at Charter equity Research. Please go ahead. Your line is open.
Hello, and thank you very much.
Good morning, how are you how are you.
Good Gratulation is on the gross margin performance, which was very impressive I believe that's the highest we've seen since we started covering ericsson in 1999.
That's a lot to recommend you youre your turnaround strategy.
On gross margin as the mix of five G deployment skus, even further from China, especially towards North America, why shouldn't we put upward why shouldn't that put upward pressure on margins.
I have a higher software content than in.
Pass systems.
Chip strategy is proving more successful than any of your competitors. So I'm just curious about why coverage projects wouldn't run close to these levels and then densification, perhaps raise them further and then I have a follow up.
You want to take.
Oh I think we're we're seeing in the gross margin. Thank you for the comments by the way on a on the gross margin and what we're seeing is the fruit of all the whole strategy and the entire work we have put in actually since 2017, I would say I mean investing in and leading technology, that's gaining marketshare and nuts.
Also now translating.
In an ever improved their gross margin and I think our job is to obviously continue on that path and continue to design cost out of our product at the same time make it more and more attractive for customers to win further further chair.
Yes, it does.
Only say Ah. Thanks, Thanks, again as Carl said for the your comment first.
We have spent quite a big effort in actually in a way removing the exposure to business mix bit.
But what you see early in the cycle is of course more hardware.
So so we do believe there there is.
You know.
Yeah.
We're quite comfortable about the future gross margin development, I would say and I see that to be a you know providing an attractive basis for our future performance clearly.
Yeah.
Great and then you mentioned that the IPR annual run rate would be around $7 7 billion for existing contracts is it possible to get back to 10 billion without China or should we expect this is mainly it is until some other resolution sure.
If we could.
Remind us of the foreign exchange impact Oh, your exposure to the U S dollar.
All else is held constant what would we what should we expect for say, 10% decline in the dollar what would that do to revenue and cost.
You know if we start on the IPR and then Carl comment on the on the sensitivity to currency.
We were.
Let's not speculate about how future contracts are going to look like.
So we will communicate once we know how they will be and when we have landed them.
But but clearly we're very we have a strong portfolio, we have a good IPR portfolio.
That allows us to negotiate our way.
With the licensed partners and hopefully we can can realize good value going forward, but that's at least our ambition, but but let's not go into the details yet.
Right.
On an FX, if we let's say for generalize a bit the hour rule of thumb is that a 10% change in the U S. Dollar theater rate translates into about five percentage on 5% on the top line and a one percentage point on EBIT.
This quarter the impact was not that large from currency previous quarters, we have seen a quite more dramatic change of course.
Great. Thanks, Ed. Thank you very much we will move to the next question, which is from Alexander Patrick at Societe Generale.
Hi, good morning, good morning rich.
I just had a question on on the supply chain risks that you see I'm just trying to understand what kind of visibility you have to the supply chain do you have good visibility for the next.
Three months.
You might have some impact, but nothing really major and then if you could.
Maybe more details on what you mean exactly in terms of components.
Thanks Robert.
He is a problem.
And does that also lead to any tangible increase in your input costs.
It will come down.
Gross margins were weak pricing going forward.
Okay.
Yeah.
Now what we see during the end of the third quarter is actually its individual components.
That's been missing so that has been a way driven up our.
With inventory and resulted in some lost sales basically that's what happened.
We think these are disturbances that could happen I wouldn't exaggerate them, because we have reasonably good visibility and we have the quiet.
Quite a quite good management of the supply chain.
But these were late in the quarters are the commits that resulted in this disturbance.
I wouldn't exaggerate the risk going forward, but it posed some threat put it that way, it's very hard to.
And I'll tell you exactly how Q4 is going to look now, but we feel quite comfortable about our supply situation.
Going into the quarter.
If you look at logistics cost etcetera, we of course, you'll have some upward pressure there, but we also think those are manageable as we see today.
It's.
We're actually benefiting a bit from our supply chain, which we have created with some flexibility with some new facilities around the world to reduce our exposure a bit to logistics costs.
But of course, you know we need to always be vigilant at how we manage our cost structure and manage our deliveries to customers.
But so far that that has had to.
Some but very limited impact on our margins, so we kind of absorbed that.
The margins actually you see they are developing quite quite well anyway.
Thanks, Alex.
That's great. Thanks, a lot will move to Francois <unk> from UBS Hello Francois.
Hello. Thank you very much. So my first question is on the globally in one market that you expect or maybe Darryl.
To grow 2% in 2022 and 3% excluding China.
So what I wanted to.
Just curious how you feel ericsson can be that's just the target today and we saw a stronger market in the U S. Obviously in the last six months with twice your credit your numbers for 'twenty. One so how much do you think is you're pulling or is it something that also the strong market that you see.
At the end of the year is also going to translate into 'twenty 'twenty. Two so just try to clarify a bit on the 'twenty to 'twenty two outlook and how Ericsson is comparing to.
And my quick follow up is on the IPR just a clarification. So you have like two 6 billion. This quarter. So how should we think about both Q4, because I don't understand how much as a one off for you know catch up to them.
On tissue just kind of high.
I am sorry, if I missed it so how much we should think about Q4. Please thank you.
Thank you all.
Okay.
The ran market I think.
Obviously del Oro expects now as you said, 2% growth in 2022, 3% excluding China.
Our ambition remains to grow faster than the market and I think we have we have proven that our in the past that we are gaining share.
And of course, some of the deals that we have won contracts like we have land that are not yet visible in the sales numbers either.
So that that remains to be seen.
U S of course being a very big component here that we have very good momentum in Asbury mentioned before now with the C band build outs.
We are seeing you know a good capex levels from our customers and we expect that to continue as well, but we.
We are have decided to look at the del Oro and talk about the Lora forecast for for the future market developments, though so we'll stick to that and then try to grow faster than that number.
IPR on the IPR yeah. So.
And we Havent disclosed exactly the retroactive element there, but as you know, it's 7 billion on an annualized basis.
There is a certain retroactive element here in in Q3, but I think that's that's as far as we can we can go so.
The IPR revenue should come down a little bit from the Q3 numbers because of the retroactive elements included in Q3 numbers.
I know.
I just wanted to comment on because I know everybody wants to know a lot more about the details on IPR, but there is a commercial element here that we also need to make sure that we maximize the value of the quality of our patent portfolio. So disclosing too many of the terms in India.
<unk> dual contracts, just simply gets too sensitive and I may actually hurt our ability for the future. So that's why we're we're a bit restrictive here, but I'm trying to provide the guidance that at least can make you formed some sort of opinion about each quarter.
I know it might be a bit unsatisfactory, but it's it's really too.
It's not for a lack of willing it's actually too to try to run a better business.
Makes sense. Thank you.
And thanks, Francois we removed two a Morgan Stanley and Dominik Olszewski our hydro.
Hi, Peter Hi, everyone, Hi, Hi.
So two questions.
Firstly on <unk>.
Could you just talk about what drove better EBIT performance in Q3, specifically.
It's better than the comparable performance that you talked about when you when you're talking about Q2, and Q2 Q3 being the same level of profitability. So what was the what was it different than anything and it costs more.
Science.
And then second question is on Crazy point can you talk about the success you've.
<unk> had been basically adding value to that acquisition one of the elements I remember was going international and.
You acquired the company I think 90% of revenues was in North America. So how much success you had in actually growing that the rest of the world.
And are you still expecting a 25%, 30% top line growth in that business and over 60% gross margin you talked about before.
I should I tackle the credit reports and then give you the digital services.
So if we look at Crazy point, we have started now to gain success in the international markets.
It's still.
Early in the days, but we're starting to see that to pan out and the investments. We've made in SG&A have actually started to two two to contribute today.
<unk> gross margin is actually better than the than what we predicted when we made the acquisition. So we are thereby.
Feeling feeling that we are delivering even a little bit better than we had in our own plans a year ago. When we made the acquisition, we have not disclosed or details here.
But but as we build out the enterprise we will of course see.
See how we're going to disclose more and more of the activities we do in there.
So so you're you know bear with us a bit there, but at least you can we can see that we're going in the right direction, both on top line as well as the bottom line.
Growth rates going forward should be a you know at least in the what we think there. The market is if the market is 20 to 25, we believe we should be able to grow a bit faster than that.
Because we can add the value of international exposure as well.
Good and done on a digital services are why did it turn out better.
It's a combination actually of higher sales volumes than the unexpected and and as you saw.
Even after the decline in China, we actually grew in that segment were 1% so that exceeded our expectation and secondly, gross margin was stronger and that has to do with the software chair Upsells, which again is exactly in line with our strategy to drive up software, but it came out stronger in this in this quarter so that there.
Four we beat the expectations there.
Very encouraging by the way.
Thanks, Carl Great are you happy with them.
Yes.
We'll move to a donor zubair.
Spanking good morning downhill.
Good morning, and thank you for taking my question and also congratulations on a solid gross margin and cash flow truly impressive.
I would like to start again on the supply chain constraints.
Could pose a risk.
That you mentioned.
It's really if you expect fleet.
The impact to be lost revenues or more of a deferred revenue soon too.
Our future development or I should say.
That is the first question and then if I may on the data to sort of assess.
You comment that 75 Suntrust lifestyle packet core.
There was particularly good momentum here with a plus deals.
BSS and Samsung.
So far.
But can you comment a little bit on the revenue model for those because I can see the full.
Full impact from.
That was quite high numbers to me at least.
I'll comment more on that.
Or if we should expect.
Given the 75%.
Outside of packet core.
So bill comment on this.
Percentage of Opex being tilted to those 75% of sales would.
It would be great. That's all my questions. Thank you very much.
I'll take the supply chain, maybe you can take the Djs question corner. So on supply chain, yes, we we we have seen some disturbances.
Our ambition is to work with the customer of course to make sure that we fulfill their needs. That's ultimately the only way for us to be successful.
And if we can do that it really will end up being delayed sales.
We can realize it later on so that's what we're trying to work towards but.
So it's always a risk when you have a supply disturbance.
That that you know you can satisfy the customer, but we're going to do what we can and so far we have not seen a that we have lost sales and our ambition is to keep it that way.
Yeah.
Okay, and and Daniel on <unk>, Cerro digital services.
Yeah, I would say when it comes to the revenue models and so on it's it's.
Similar to two the rest of course, it's a change towards its a change versus what we had years ago, where we went in for example in the BSS area with a services led a scope, sometimes a little bit undefined and as you know we had more than 40 contracts of that nature that we have now.
Worked hard to get back to a decent profitability level now instead of course, we lead instead with.
Software with the product and that goes for all of these categories. There is a certain element of system integration of course are in there as well and we charge as we go.
But mainly it's a software business now and this is also what we are what we're driving for in all of these areas and that's also as you saw on the graph before what is going to improve.
Our overall profitability the most.
Opex percentage, but I don't have on top of my of my mind actually so that I think we can we can leave that for fun I'll, maybe come back to it sorry.
Yes, Maggie are a short follow up on the same topic.
On the Euro assumption, thank you for giving the color.
Can you comment on your run rate IPR assumption for digital services in 2022.
7 billion that you talked about or is it.
Something else because of the litigation ongoing.
On IP or what we have said earlier actually is that we assume IPR to stay flat in our ER business planning activities.
Yeah.
Thanks, Danielle and we will move to the next question I know, we're running over over the hour, but I will take two more questions because we had a little bit of a longer presentation. So in the next one is from Pepsico teams Senate Abd.
Hello, Thank you very much.
Hello. Thank you for taking my question can I just turn.
Turning towards the sales off the top line side.
Yeah.
As for the lower sales in China.
The organic growth.
Appears to be a bit below that.
Market growth forecast its home market.
And even for the other regions.
You are talking about gaining market share. So could you elaborate a bit on why are we not seeing.
Sales momentum given the strong.
Momentum in the market and then just.
Turning to your comments about the about the three large contracts in North America should we expect to see a step up here from next quarter and next year.
And if I may add a follow up.
On digital services.
As was highlighted in the previous question.
Q3, EBIT also significantly lower than.
You expected three months ago, you're still anticipating a breakeven in Q4 why is that given the positive.
Thank you very much.
Should I start with the second one Maria you can do that take the third one was.
Okay.
Yeah on digital services, yes, we maintained the guidance Oh anticipation on breakeven in the fourth quarter.
And the way to look at it I think is to look at the second half then that will perform significantly better. Thanks to the improvement that we saw in Q3, but we still maintain the breakeven ambition in guidance for for Q4 look at the full six months and it's then a substantially improved.
And if you take the top line I think it's a couple of different factors to keep in mind here. One is of course the supply chain disturbances. We had that have had any impact on networks sales in the third quarter, but we should also remember that what we have tried to do is.
To where.
Or we have some part of the the gain in footprint have been how or have very limited attached services.
So as we see going forward is that we will have a little bit less of attached services and thereby you know youre going to see saves maybe.
Not developing as fast as necessary to the growth in the underlying market.
But at the same time, we do believe our product sales is longer term and much more attractive business then.
And then selling the services so I.
When you look at the growth rate you need to adjust for that as well.
Okay.
Great.
For that we would actually now move to the last question or reassess and that's to surpass tends to bone, which from a capital Hello Sebastien.
Yes.
Thanks for taking the question one of your new China, because your top line is dropping fast and you plan to.
Actually it could be because they have to protect your margin do you see any opportunity to come back in the country at some point.
Small contracts that would be the tough question and so on one.
The rise of food cost anywhere in the market cheap so just against you.
Yeah.
To increase the price of <unk> base station in some specialty contract too.
So much of the margin.
Yes.
<unk>.
You know I I like to think when you lose a contract the day. After you start to fight to win it back the same as it is the thing with China.
I do believe we have a chance to win back the trust.
To deliver product in the future. So we're focused on on regaining that but of course short term, we don't seem to need to adjust the cost structure to rightsize that as much as we possibly can.
But where we're going to try to be there I think it's important to remember, yes, we see a cost pressure upwards.
As you as you indicate but what we're also seeing as we counterbalance that is actually that we you know.
This is an industry, where it moves very fast on generation says well and where we're actually introducing new products at a higher pace than we have ever done that's also a way to combat.
Call it input price increases so.
So we feel quite comfortable about our gross margin profile and underway, we run the business right now.
Yeah.
Great about them.
Yeah.
With that actually we had that was the north Chris I'll say you'll have more.
Questions on the list. Please contact the IR team and we will set up meetings and we can discuss those but before closing.
Maybe from your side I, just want to say that we continued to execute on our strategy is built upon.
You know winning in the core mobile networks business and here, we continue to have a very high intensity on our R&D that helps us to do two things one is to offer competitive solutions to our customers, but equally important. It also addresses the cost structure and we can actually.
Continuously become more efficient by investing in R&D. So we feel that with the targets we have committed to for 2022 as well as the long term targets, we're very comfortable about our ability to deliver on those.
Yeah.
Thank you Maria and have a great day.
Thank you.
Yeah.
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