Q2 2022 Telefonaktiebolaget LM Ericsson Earnings Call
Hello, and bushy and everyone and welcome to today's presentations of Ericsson second quarter has sold 2022.
Together here in the studio I have our CFO and our CEO Borja you got call it.
As usual, we will start this session with a present tension old around 20 minutes and then we will have the Q&A session more details around that where you would be able to find on our webpage, Eric So on dot com slash investor.
I will start with his first during today's presentation, we've been making forward looking statements.
These statements are based on our current expectation and certain planning assumptions.
Which are subject to risks and uncertainties.
They actually sold may differ material.
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.
With that said I would like to start with giving the word to you Laurie a piece about them.
Thank you Peter and good morning, everyone and welcome to today's presentation and a big Thank you for joining us of course I'm pleased to present, another quarter, where we continue to see a strong business performance.
We are growing driven by the global rollout of <unk> networks, as well as market share gains.
Today, we have a 39% ran marketshare and that's of course, excluding mainland China, and that's up from 33% and 2017.
Today, 50% of the world's five G traffic outside of China is carried over Ericsson radio networks and 80% of the top 20 operators in the World are you seeing other five G core.
Fundamental to our strategy is technology leadership since 2017, we have increased our investments in R&D significantly and we're committed to continuing this journey all the innovation.
This includes investments in our mobile infrastructure business, but also developing a leading offering in the enterprise space.
In the quarter, we announced some changes to our structure.
And that will allow us to speed up and accelerate the strategy.
The execution of our strategy.
We had five G anything that can go wireless will go wireless.
This puts Eric so on in a very good position as five days rolled out and transformed every sector of the society.
So now let me go through some of the key takeaways from the quarter.
We see good business momentum and our underlying business is developing well.
We continue to drive improvements through the introduction of new innovative solutions and continues to improve our underlying operation.
In the quarter, we saw organic sales growth of 5% with gross income, reaching $26 3 billion kroner.
This is driven by strong five G momentum in North America as well as in Europe .
Our EBITA margin for rolling four quarters were 14% that's tracking close to our long term target Overlord, you know 15% to 18%.
And that's our target we're committed to reaching in the next two to three years, while we establish also eric's on the stronger long term growth trajectory.
This is a testament to the hard work and commitment from our colleagues across the company, who has continued to deliver to our customers in spite of a very challenging supply situation and a big Thank you to our team out in the world.
You all know the global supply chain situation remains really challenging and inflationary pressures are significant.
We're investing and and we have been investing actually dating back several years to derisk, our supply chain to build resiliency.
This has included creating a more flexible manufacturing footprint, but we have also invested in building buffer inventories and this of course leads to a larger inventory situation in the company.
Ensuring supply.
A difficult supply environment is associated with extra costs.
However, we see this as a key driver over our ability to actually expand the footprint and strengthen our escape and from a long term perspective, we believe this is critical.
I remain convinced that actually lost sales and costs more from a long term perspective than carrying a bit of extra inventory short term for <unk> or for a few quarters, that's basically like an insurance premium for the future.
So this ability to deliver despite the very challenging supply situation. We believe is critical to establish a stronger footprint and also bigger scale, which will drive our long term profitability.
To handle these extra costs of course were gonna see compensation as contracts expire, but we believe that the key drivers to.
Call them, but the cost increases will be to continuously launch new innovative products and solutions with new features as well as lower cost and that's why we have used the last few years to do that to turnaround the company and we continue to use that in order to.
Actually call them about the cost inflation.
And we have continued to do that during the quarter.
The gross margin came in at 42, 2%, excluding restructuring and that's lower than what it was last year at 43.4% the decline in gross margin is largely.
Attributed to lower IPR revenues in the quarter.
That means we've been able to meet the gate a large part of the cost inflation with a continuous improvement of the business as well as product substitution.
IPR revenues are affected by several expiring pipe patent license agreements and that we are renegotiating and also some other five G license negotiations.
We're confident in our strong five G patent portfolio and we will seek to optimize the return from that portfolio and here. We believe we're in a strong position to negotiate a of course good future license deals. So we will seek the right deal right there.
And then ER or that will lead maybe to a slippage in time.
Because there is more important for us to have the right deal than do it fast.
Gross income improved two by $2 4 billion kroner and EBIT by 1.5, compared with Q2 last year.
We also continue to engage with the U S authorities. The D O J S. R. L. S. S E C.
In relation to the 2019 Iraqi Mr Gale and the D. P a breaches.
At this point in time, we cannot assess how these matters will be resolved.
We remain however, fully committed to cooperating with the authorities as these proceeds go wrong.
We also continue to increase our investments in ethics and compliance.
Actually a large part of the increase in our SG&A during the quarter is attributed to investments in ethics and compliance.
Where where we further.
No need to make sure that we have integrity in all decision, making in the company as well as do we have a prudent approach to risk taking and risk measurements in the company and we believe that all of those investments that we do in changing the culture as well as our processes and procedures will make ericsson a straw.
And more resilient company in the future.
Let me now turn to the customer and market side of our business.
While we continue to see strong traction across the business with organic growth in four out of five market areas.
Our strong momentum in North America continues where sales were up 12% year over year.
FX adjusted of course, and that's driven by continued high demand for fiber solutions and networks.
And the U S customers continue to be at the forefront of fiber deployment and the introduction of new use cases.
Overall sales in Southeast Asia, Oceania, and India increased by 6%. This was driven by networks and digital services, where we saw market share gains.
Sales in North East Asia had a small decline of 1% year over year that was mainly due to the timing of <unk> rollouts.
In Middle East and Africa sales increased by 8% year over year, that's predominantly driven by Africa will afford you rollouts as well as software upgrades in digital services.
Overall, we continue to see a very encouraging momentum in the market.
And finally in Europe , and Latin America sales increased by 4% year over year and that is.
Thanks to growth in Europe , while Latin America was stable.
Overall, we continue to see very good momentum on market share gains in Europe with networks, showing double digit growth. Despite sales being affected of course by the invasion of Ukraine, and Russia impacted sales by by one point to or lost sales by $1 2 billion kroner during the quarter.
So let me now move over to our strategy and that's based on leadership in mobile networks as well as a focused expansion into enterprise in the quarter, we took a.
A key step.
To accelerate our strategy execution by introducing a new group structure.
The mobile networks side that we've introduced a new segment cloud software and services by emerging digital services or managed services. This will allow us to capitalize on the convergence of cloud software and services and grow our core mobile infrastructure business.
And we're of course remain very committed to turnaround the business as quickly as possible in that segment in order to support us reaching the long term group targets.
On the enterprise side before them the new segment.
That's a new segment, where we have one business area called enterprise wireless solutions, which is the combination of crazy point and dedicated networks.
Crazy point continues to strengthen its position in the market and shows building growth in excess of 40% this past quarter.
The Enterprise segment will also include the global network platform with.
<unk>.
Create a which we believe will drive a paradigm shift in the industry.
And and that's because the network will be a horizontal platform whose capabilities.
We'll be.
Exposed consume them paid for through global network Api's.
The global developer community can therefore start to innovate on top of the network and really leverage all the capabilities of the network. This will be very important in establishing <unk> as the strongest innovation platform. The history has ever seen.
We believe this will inspire innovation, but most importantly, it will actually give our customers. The service providers. Another avenue to monetize the network investments and here, we're working very closely with Franco on their customers and we see a very strong response from our customers supporting data.
Production of the global network platform.
The intended acquisition of bowl niche, it's an important building block to execute on the global network platform.
And we're working to secure approval and close the transaction before the end of July .
Our strategy builds on technology leadership and.
And we continue to invest in R&D. So we can launch new and innovative product in the future as well.
Of course this includes investments both in our mobile networks business as well as in enterprise and we will spare no it resources in strengthening our position in those areas.
Now, let me give the word over to our CFO called me London.
Thank you Bill Yeah, excellent and good morning, everyone. Thanks for taking the time and first of all I wanted to say that this then will be the last quarter. We report according to the existing current structure.
Arguments and from the.
Quarter. Three report then we will report in the new structure with the four segments networks cloud software and services enterprise and other and we will provide a restate also for from first quarter 2021 until second quarter 'twenty two.
And also the full year 2020 in this new structure and we will do that in September well in time for the Q3 reports.
Yeah. So if we look at the numbers and then starting with net sales we does that sales amounted to $62 5 billion.
With organic growth in four out of the five market areas.
So organic growth of 5%. Despite then a couple of items that were you touched on the suspended business volume in Russia, that's $1 2 billion in topline drop due to that.
And also the IPR revenue at this point 9 billion lower year over year.
So this growth was really driven by the five D deployment in two of the largest market areas. We have of course, North America growing 12% that you saw.
And Europe , and Latin America growing.
4% organically as well, especially driven by Europe .
We continue to win market shares are not least in Europe and now we see the fruit of locked in in the topline growth.
So our reported sales grew by 14% and clearly we have quite a strong FX tailwind here due to the weekend the Swedish krona.
So IPR, we talked about the debate, it's was $1 4 billion in the quarter decreased by <unk> nine as I said and it can be noted that this is in line with the guidance that we had provided in the Q1 report for Q2, when we said that we would end up between one and one in <unk>.
<unk> billion in the quarter.
We came out at 1.4 in the same guidance now we maintain also for the third quarter, that's important to say.
Of course, the actual outcome will depend on on timing in terms and conditions of any new agreements.
Margin then excluding restructuring came out at 42, 2% and I'll drill more into gross margin in a moment. So we can continue or talking about the R&D expenses.
It amounted to $11 five that's an increase with 1 billion.
Of which around 40% relates to FX movements.
Yeah, but we have increased R&D in mainly in networks are two areas to mention the Ericsson Silicon, which is the next generation as a six but also in <unk> and cloud ran and of course, the silicon pieces to enable.
Really industry, leading radio performance energy savings and not least.
And the cloud ran has to do with more flexible deployment options for our customers.
We will continue with this increase R&D for for value creating purposes.
SG&A also increased 0.9 to $7 9 billion.
A portion of that has also to do with FX of course, but other than that it's related to legal and compliance.
Cost and expenses that we have.
So EBIT, excluding restructuring charges for $7 4 billion in the quarter, that's a year over year improvement of a one 1.5 and that corresponds to an EBIT margin of 11, 8%.
That in itself isn't a year over year improvement of one two percentage.
Percentage points.
And then further down the P&L net income I should mention also $4 7 billion in the quarter versus $3 nine.
As a result of course of the improved EBIT.
And I would say despite a more negative finance net.
Driven by our FX hedge results.
And then free cash flow would drill a bit more into it in a minute, but it came out as you see at $4 4 billion versus $4, one a year ago.
Despite a significant buildup of inventory to secure deliveries to customers Asbury outlined earlier.
EBIDTA is the key metric now of a profitability going forward given the long term targets, we have of 15 to 18 and and excluding restructuring that on a rolling four quarter basis came out at 14.1%.
Well, let's have a look at our gross margin and drill into that a bit more here and you can see Uganda.
More longer term perspective on gross margin. We think this is a more valuable and meaningful.
And you can see now on a rolling four quarter basis gross margin.
Excluding restructuring is at 43%.
And basically the the improvement you see here since the beginning of 'twenty 'twenty. This.
This is the rolling line is the Blue line here is really driven by the investments in innovation in R&D that we have done since we started in 2017 and that of course has enabled better product offering better features et cetera. This is what we continue to do as well now in the inflationary.
Mt.
And so we see how this has had a positive effect on the gross margin over time.
Despite increasing at the same time, the market share, which sometimes can have a slightly dilutive effect on margin.
So.
Big reason here for the year over year comparison on gross margin is the IPR revenue are of course, where we had a catch up effect in Q2 last year from IPO, the IPR side and.
This is really explaining the biggest part of the change in gross margin. Secondly, we did see increased costs for component and logistics and that's also clear and this proactive investments that we make in supply chain resiliency networks.
Clearly the right thing to do because we are able to deliver to customers, which you see in the top line development and.
And most of that impact we are able to offset by.
Other factors that we have the largest software contract we talked about in Q1, but of course also and this is important to the underlying improvements in our business as well which is a continuous.
Aspect, we work on.
So all in all you can say, we were able to absorb a lot of the cost pressure with higher sales on the one hand, if you look at the absolute.
Margin number.
And of course, our whole strategy is to continue to improve margins every day every month every quarter and into the long term.
Product substitution and other means.
Okay Digital services gross margin came out at 39, 9%.
Affected by initial deployment costs for for some of the cloud native five decor are contracts that we have we have talked about that before as well and also here a lower share of IPR.
We are encouraged though by Nvidia to services by the win rate of Heidrick core contracts.
Managed services then.
Gross margin increased by four percentage points to 23%, mainly driven by two things one is the network optimization business, which grew.
And the other one is the variable socal variable sales and managed services both of which contributed to the good gross margin improvement here.
And on managed services because this is now the last time managed services will be reported in this structure at least it's it's a good thing to note that rolling four quarter EBIT margin was $9. Five so that is within the range that we set up for 2022, 9% to 11%.
Basically two quarters ahead of plan.
Yeah, and I thought as we mentioned earlier then next quarter, we will report according to the new structure with digital services managed services combined in segment clouds.
Software and services.
And that we will follow up in a transparent way going forward as well lastly.
Lastly, then emerging business and other gross margin was 35, 8%.
Certain year over year decline and that relates to trade at a point, but mainly accounting wise because last quarter. Two in 2021, we had a positive one off effect, which had to do with the final PPA.
PPA purchase price allocation from that acquisition.
So in essence in the actual business cradle parents appoint performs really well with the growth of tour you mentioned over 40%.
And our gross margin, which is available group average.
And I will now move over to cash flow real quick before I hand back to Berea, and so free cash flow before M&A $4 4 billion.
<unk> versus $4 1 billion a year ago.
Mainly driven by the EBIT improvements of course, but if we.
Look at the working capital development.
And I can tell you and repeat that we focus a lot on cash flow and Ericsson.
And the fact that we were able to deliver the 4.4 here in spite of what we're talking about the proactive investment in supply chain.
Reflects I think very well on the team's effort here too to generate cash flow.
And you can see that in the operating net assets here. It's just it's a certain increase due to a mandatory but to a large extent offset but very strong customer collections as well.
So as we say in the report based on the currently stability, we expect inventory levels to gradually reduce during the rest of the year towards the end.
So all in all this leads to a solid cash position ahead of the vantage acquisition gross cash now it's a bit more than 100 billion of net cash at 70 billion.
And.
Final comment here is that when we look at free cash flow before M&A on a rolling four quarter basis.
I think it's important that we are hitting our long term targets because it comes out that's a bit more than 29 billion.
The Swedish krona, which is a 12% of net sales and as you know our long term targets in what when it comes to cash generation is 9% to 12% we are at 12%.
With that I hand back to our CEO , Mr. Borja called Thanks Cor.
So somehow some up then we had another quarter with solid business performance.
We were able to largely offset like Carl described and I said in the beginning the challenging supply situation, we're facing as well as cost increases through our investments in the G O resilient supply chain.
And underlying margin improvement, that's actually come from product substitution as well as gradual improvements of our operations.
And we continue to believe as we have shown in the past that innovation is going to be the most important way and the best way to offset inflationary pressures, but of course, we're also gonna look at adjusting contract terms as they expire.
We're well positioned to cap to capture the opportunity of digitalization of the consumer enterprises and society based on wireless connectivity as well as five G.
Five G is by far the fastest scaly mobile technology ever However, global penetration is still in an early phase.
Mid band penetration remains low across the world.
We foresee that global five G buildout will be larger and actually continue for longer than previous mobile generations.
With evolving new use cases for consumers enterprises, as well as governments and society at large.
We remain determined to reach our long term targets of an EBITA margin of 15% to 18% no later than two to three years, while we also establish Arizona and Ohio growth trajectory.
I'm very proud to work with colleagues, whose dedication and commitment actually have ensured that we can keep on delivering product to our customers in spite of the global supply supply challenges. So a big thank you to all of my colleagues.
Well before starting the Q&A I would like to mention that we're planning for a capital markets day on December 15, we'll come back with more details we're in venue and etcetera and lay out, but we will focus of course on describing our strategy as well as the opportunities for growth.
What we see going forward.
But now over to you Peter for questions.
Oh, yeah, so I would like to call out there Mark can you inform the audience that we will start now the Q&A and how to proceed.
Thank you.
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Thank you Mark.
Such with Francois Bogan here from UBS Hello Francois.
Hi, good morning, everyone. Good morning.
Just two quick question if I may so the first one is on inflation.
One of the main highlight for this quarter and I just wanted to know if it's possible to quantify the impact you saw this quarter and in the release bogey on your presentation. You said that you as contracts expire or are you going to try to adjust pricing. So my understanding is that the prices are mostly fixed.
You know at the end of the year. So should we expect this drag of inflation to carry on until the end of the year.
Oh, Yeah anything you can do before that so that's my first question.
A quick follow up.
You can start to build here.
I can take the latter part of that question well the key for us to to fight inflation and you see you know the inflationary pressures they've been very large on components as well as as the whole supply chain.
No transportation wages et cetera during the both first and second quarter. The key way for us to short term combat inflationary pressures is actually by introducing or call me with product substitution. We spoke about that in the first quarter that continues to be the key driver because.
That allows us to both store.
Start to discuss the price of new features but also to actually lower the cost of the product and and we remain very committed to that model that's been with us since 2017, and we continue to see the benefits of that than contracts. They they you know they are typically could be one two.
Two to three or four years in this industry and so they are regularly renewed and as they are renewed we can adjust terms, but its law and and I would say in between we of course, you know in service components on certain components, we have ability to adjust but I think our key way.
To adjust prices will be through product substitution and will continue to be that.
Yeah, maybe I can add them when it comes to prediction of this of course, that's going to be hard.
Hard for these type of macro factors, but I think more important for us to plan for this and to continue with our mitigation that we're doing and and I really want to emphasize again, what worries that initially that this is something not something new we have been working for at least since 2017 with the fact that the strategy to reinvest to innovate too low.
Launch new products. Please the customers of course, and then and then price accordingly overtime. So that that's really our our big focus here and are better to plan for a continuation of the situation. That's what we're doing in the in the supply chain then to assume that it will be improving very soon but.
On the inventory side as such we do say is to say in the report that we believe that inventory will come down towards the end of the year. So that is of course also to do with our supply and delivery planning to customers as well.
And I would say we should also remember the gross margin impact from IPR.
That's.
We're going to make sure we get the right deal rather than.
Then optimize in individual quarters performance. So that is a is a key reason why you see the gross margin drop.
Year over year.
Thank you do you have a follow up as well, France, where I'm very clear, yes, yes, as a quick follow up your time. Thank you.
So you mentioned mortgages I was wondering the presentation that dish.
Impressive market share if you keep the sense on the five day traffic outside China.
Ran side and 80% of the top 20 operators are using your five G core, which obviously shows you that gives you time to market and at more advanced products when they put the high G ramp.
But as we see a bit forward and based on your deals our win rate today do you see this market share should.
Sustainable as you know five G market is growing should we expect a normalization of this market share or do you still see.
The same similar.
Market share is as we move into next.
One you also based on your the behavior.
You know if you if you look on the core they're the key.
Part that will help us improve performance ease when traffic starts to pick up on the five D networks. So so that that still.
No. It it's mostly I would say system integration revenues today and there is a I believe Karl said, we have some extra cost on the initial deployments. So that is a bit living in that type of environment. So there it depends on how traffic picks up et cetera.
On the ran side, yes, we have strength in our market share from 33% to 39% over the past five years, where we believe we have a strong competitive position. So we our ambition is to continue to actually gain some footprint going forward because.
Because we believe long term scale in this industry is critical that's the way to to make sure. We can remain technology leader as well. So so our ambition is to hold and gradually strengthen our market share as well.
I can add one more thing.
Yeah and on market. So of course, we we talked a lot about the wrong.
Market and that's about a 41 and a half 43, maybe a billion dollar market, but we are not only addressing that obviously and what we say about the five core our win rate is is separate from that and also now to trade new growth in the company. We are focusing on the enterprise side and for example, the cradle point based.
This comes on top of the ran market and other things that we will do within the enterprise space such as the global network platform also partly.
It's added to that market that's not so when we talk growth it's not only that the ran market. That's that's my point there. Thanks.
Thanks, Scott and thanks Francois for those questions, we will move to.
The next question from Alex Duval Goldman Sachs. Good morning, Alex.
Good morning, and thanks for the question you talked about a solid backdrop this year and you've actually adopted a raised gross corn costs in North America.
I Wonder if you could talk a little bit about how you're feeling about sustainability around demand into next year.
A lot of discussion about challenging macro backdrop in the consumers' disposable income so how should we think about that and then secondly on digital services. It seems like you had solid organic growth.
But then it also looks like there was some deployment cost involved in initial stages, it's probably equal projects. So.
I think those kind of costs are going to persist.
Will more profitable software revenues be coming through.
It will just be great to get that table on how you can get more margin leverage out of that business.
Yeah.
Yeah, I can start with the first one so if we look at the five <unk> market, we see given that.
Largely for G is being focused on the consumer.
And what we see with five geez is structurally we're adding both new segments. So think about enterprises, but we're also going to add a lot of new segments like cloud gaming XR et cetera, all of that will drive further traffic growth in the networks.
That will mean over time of course, there is inefficiency is not a one to one relationship so let's not kid ourselves on that but the growing traffic will need to be carried with an increasing portion of active components in the network and that's where we are.
So we see it from a longer term perspective that five G will be you know both having a higher peak than any of the preceding wireless generations, but it will also last longer.
Because at the dress is so much more than than there is in your question is also a short term element, what's gonna happen rest of this year and into next year.
In a way harder to predict because it will depend on specific investment environment that each country has etcetera. So so I I think yes, if we get into of course big recession, We know from history that telecom is is much more insulated.
And are there sectors in the industry, but but predicting the exact demand on a quarter by quarter basis is hard.
But what I would say, though is when we look at penetration of mid band for example, it it's less if we look at Europe , and the U S. It's less than 25% of sites.
In Europe . It is typically less than even 15%. So it's a low penetration of five G of what I would say.
<unk> that actually gives the user experience that matters, so penetration remains very low.
And we see that the operators are now starting to build out a deeper coverage on <unk>.
Deeper part of the Ah.
<unk> sites converting them into five D.
That this will you know and I know them. If you look on a typical deployment.
Large part of the Capex for a wireless operator is in establishing new sites. So it's a lot of concrete steel and fiber et cetera.
We believe over time, there is an opportunity for the wireless operators actually lowered capex, while the active part of the network will increase in importance. So there is a mix shift going on here, where we see that our the markets. We address actually can continue to grow even though.
Capex in the industry, probably will start to taper off.
In the next few years, so we remain very.
In that sense confident that we're going to see a long term growing market for five G. But then of course short term fluctuations, but that should shrink it through to good demand.
Should I take the second one yeah, Alex you asked about did yes digital services.
There and I would maybe start on the big picture. The customers now are moving into obviously into five D and it's about.
Cloud technologies, and what we call intelligent automation and five decor of course plays such a critical part in that as well too.
But if you will the full potential of <unk> networks, that's exactly where we play and that's why you see the five year core contracts coming in and we have gained so many of them even 80% as we said so that's really the big picture and then now we are in the implementation of those initial contracts.
A bit of initial cost but of course as soon as we as those networks go live and we start to customers start to migrate subs subscribers over that we would see revenue take off and actually we saw strong growth of the five core contracts in this quarter already about stabilized more much more to come obviously.
On that side and that is one of the key pillars in the entire turnaround here of digital services going forward.
Thanks, Scott and thanks, Alex.
Move to the.
The next question, which comes from Pithecoid Nielsen the Abd ER.
How do I get to vote.
<unk>.
Thank you good morning, gentlemen, just a question Karl if I can stay with digital services you spoke extensively at Q1 about the need to for improving sales execution and this has just been highlighted you are seeing organic growth in Q2 is that simply a function of a better market and then in the coal market picking.
As you said.
We're seeing early signs of your own execution, improving yeah and are you sort.
Im confident that.
That you can improve that going forward in and to what degree do you expect the new structure and the merger with managed services will help you on that any any color would be appreciated and perhaps if you could talk a bit about how you see how we should view seasonality for the second half of the year. Thank you.
And maybe on the on the first point I mean, as we all get further and further into this our initial contracts are we also we learn and we improve and we get to a to the milestones in the projects and that's then reflected in the growth we see in those contracts and that will of course continue.
60, and also the 20 as you know are the largest operators have chosen Ericsson four five decor and we are in the midst of implementing those contracts now of course that is going to drive our revenue and profitability for our for the period for the coming periods that's quite clear.
Then when it comes to the new structure that maybe they do would you like to take this one.
Because of course, they obviously.
Clear benefit in margin the managed services and that it is the services part and the key here is there are there are increasing convergence between managed services and digital services in sense of automation orchestration of the network and we believe we can get both.
The core or call it something they are going to be some cost synergies clearly.
Some synergies from consolidating our offering some focusing really just having one solution. So to say, but we think also that's going to lead to better sales execution, it's easier to go to customers with a clear.
Collusion argument when we can offer and orchestration solution and automation solution combined with how we manage that so we believe we're going to see both.
Cost benefits and efficiency benefits may be better to call it as well as our sales execution benefits.
Okay.
Okay. Thank you. Thank you.
We'll move to a point to sorry, Mr. <unk>.
S it'd be a good one.
Panthers.
Good morning, Thanks for taking my question so.
<unk>.
The enterprise segment. That's of course, something you are focusing a lot on.
Putting a lot of.
Kind of answers you asked me to that segment.
Yeah.
Despite where you look it's going to be a large market in just a few years time.
And your numbers, we mainly see it in the credit point.
And those numbers.
Very good how.
But you are now shifting to reporting.
On a reporting segment called on to pricing can you just.
Tell us something about if you see any pick up outside of Crazy point.
On the enterprise business or.
Or any league kind of.
That segment really start to take off when would we see kind of full there dedicated private not too.
Private networks.
Grow as a separate.
The line item or drive absolute numbers my first question.
I can take that.
It's a it's a great question. So far we see most of the growth as you're highlighting crazy point, we are.
Starting to see growth in dedicated networks, it's from a low starting point.
Well, what we see is encouraging feedback from customers.
Where we're seeing a competitive solution, we still have more to do in order to really grow.
Call It depresses and dedicated networks. It includes for example, strengthening our go to market and that's why this formation of an enterprise wireless solutions.
The business area is so important because what we do is we are going to leverage the go to market from cradle point to help drive the growth of dedicated networks and we believe that that should start to contribute.
Maybe not during the fall as much as we would really like to see but into next year, we should start to see it.
So that we actually can leverage that go to market because I think that's the most important part of enterprises is that we need to build a.
Not necessarily direct but rather an indirect multichannel go to market structure and that's why we're focusing our attention on right now while we maintain the growth rate, though crazy point in and drive product development and dedicated networks.
So you know bear with us a bit before you'll see the real growth.
Take off here.
Thanks Maria Okay. Thanks for that.
Question.
Yeah, sure and I have another question. Please.
Yes.
I think it puts us with a cut off here, but then we will move to come back come back it can move up.
And see if we can take your point is after the next question from Stefan Slowinski and that will come back to two <unk>.
Stefan please.
BNP Paribas.
Great.
Hello, Peter Karl Thanks for taking the questions.
Two quick ones just on the supply chain.
Sounds like you have managed it well in terms of getting the actual supply even if youre seeing any inflation, but.
But can you just confirm that you didn't have any negative impact on revenues in terms of being able to secure the supply that you need it.
And then the second follow up question is just on the higher cost that Youre seeing I understand you want to push through some of those component.
Inflation costs overtime. It sounds like you also have some more costs associated with maybe moving away from just in time delivery, so more costs around warehousing and so on how much of those are going to be permanent and is it material does have an impact on your longer term margin potential as you maybe change the model a little bit.
<unk>.
Thank you.
Yeah.
You'll take them yeah, no we haven't seen any any material or any revenue impact actually I think this is one of the the strong points here, we're quite proud actually of how the power supply teams have and the organization has handled the.
Delivery situation in spite of these challenges so I think.
Customers have we have delivered to customers on time and on the quantities required.
So that's good when it comes to the longer term perspective I think.
We are we plan for what we can see right now and that is.
Supply chain, which is more resilient not just in time as you said, which were once more the case say pre pandemic.
This whole situation that we're in if that would ease overtime I'm fine, but theres nothing we plan for it I think it's better to be agile here and make sure that we put the absolute priority on delivering to customers and the rest will follow.
And I would say that the the higher.
I think this youre going to see in many industries, you will have higher cost of supply chain.
Cause we come from a supply chain that was optimized based on cost and now it's it's going to have higher costs. Due to you basically have to reset global supply chain due to the geopolitical uncertainty what what we see though is that we will be able to offset that with product substitution overtime I.
E continue to focus on drive and increase the cadence of introducing new solutions leveraging the scale we have in.
In Ericsson Silicon to drive.
New cost efficient solutions that will help us.
Basically it's to sustain and handle these higher costs.
As I see it it's always going to be fluctuations quarter by quarter, but over time the trajectory. We've been on we will continue to execute them.
Thanks, and thanks, Stefan Thank you.
Next question is from Don as you about the hummus banking.
Turning it on it.
Good morning, and thank you for taking my question.
My first question would you be a little bit on that.
The cost side.
And.
Thank you.
Have the empty miles.
The success on the net.
Gotcha.
Along the five year cycle, but all of these are still quite put some uncertainty around that.
Large volume that would be.
Given the Covid times you see my question is if you will need to address you underlying opex base E piece.
<unk> long term margins.
See the segments.
Taking out.
And also a question on the R&D high Silicon for example.
How should we think of some of these investments being more of an attempt.
Temporary nature or.
Might be a new base. Thank you.
I I.
I mean, I do believe that we see actually.
First of all on the <unk> market I suspect many of the outside analysts firms are going to raise the size of the market.
And all that.
I think we've we've seen Oh journey here, where many of the outside there.
Analysts and industry analysts have been a bit behind.
They take off in five G.
I think that it's likely to continue and I think we actually underestimate the new type of applications, we're going to see they may not come 2022, or 2023, but theyre going to come 2020 for 2025 that will require densification of the <unk> network to launch there.
This new type of use cases, so I'm I'm I'm actually believing yes, there can be always a bit fluctuations.
But we see that five G will be such a central piece of society going forward to drive digitalization that that it will have to be built out longer and more dense than we've seen in the past and Thats. Why we are you know we're very we're believing in the future. We're also gonna.
We invest correspondingly that means that as we look today you know we're going to continue to to invest in technology for technology leadership, and we're going to make sure that we are a technology leader. If we all can read retained that position, we have a value proposition to our customers.
So in reality, that's going to be front and center of course, if the world would come into a situation where the outlook changes I E that we have to adjust we would of course adjust.
But what we believe is for example, take our cloud run we think that's going to be deployed going forward, but also in enterprise segments.
So we did we invest today fairly significant amount of money.
And of course, we believe that the market here is going to come it may take two years before he comes but we think there for by investing now will be very well positioned when that market takes off. So we are continuing to invest for the long run at the same time, you'll see us in the past we've been committed to achieving.
In our targets overall, we remain committed to achieving the target. So we will adjust around the company that way, but but rest assured that our technology leadership that will feature is a pearl Minion Park. So maybe investments in cloud ran will taper off but then we're going to see <unk>.
Since in some other area, that's going to drive revenue growth, but the reason why we talk about cloud ran into some extent, Eric so silicon as well is that it has cost today, but we're not going to see revenues until well into two to possibly three years out, but that's what we invest for and that's what we're going to continue to invest for.
Yes.
Okay. Thank you.
Thanks, Don It will move to the next question.
Maybe we should add that you've made the point before cartilage, it's important to remember the growth potential in enterprises.
Sometimes we focus only on the infrastructure market, that's going to be the core of our company is the bulk of our company, we're going to make sure that we perform there that's for sure but we also see the applicability of our technology and enterprises and that's the segment that is going to be very large can possibly be even larger.
The infrastructure business in a few years' time, so the investments we make now.
It should be financed of course by by our infrastructure business and that's what you see we tried to do but the applicability will allow us also to capture the enterprise segment going forward.
Thanks Maria.
Thanks, Don.
The next question is from Andrew Gardiner from Citi.
Good morning, Andrew.
Yeah.
Good morning, Good morning, gentlemen, thanks for taking the question.
I've got a couple on <unk>.
Deflation, Todd and component cost inflation side.
Firstly in terms of what you're saying about the <unk>.
And products, and therefore, getting a better price and gross margin cost inflation.
A strategy that has worked well for you guys over the last five years.
I get to essentially what you're saying.
Maybe if you can increase the cadence.
Product introductions would make it faster than you can in that can help to offset some of this cost increase.
My first question is do you think operators are willing to accept that.
Yeah.
So the change.
Solutions faster than we have done in the past, they're willing to pay for that.
Perhaps because more and more is being driven by software is actually something that's quite reasonable.
And then secondly, I just wanted to you call on cash flow comments, where you're saying.
Inventory down later in the year I suppose normally we would expect that of them sort of a full queue.
Budget flush so the deployment schedule.
But.
Why.
Market, where youre expecting further component cost inflation.
If the components are available today, and it's a standardized and therefore useful next year why not buy as much as you can today at the current prices rather than wait until next year when prices are likely to rise yet again.
Why not use that cash flow strength that you've got.
There will be inventory rather than run it and later this year.
So and I think I can say.
The second part to start with.
No, but this is a I mean this is how we think we are trying to optimize for the deliveries we have of course and what you see in the amount there is partly what how you describe it that we are investing at.
Today, I button and it's I think the most important priority here is to secure delivery of secure the components, we need to actually ship products to customers in that that is the recipe and it means an elevated inventory level now and we are securing as much as we can and as much as we.
We need.
We are entering into longer term contracts with suppliers also to make sure that we get the allocation that we need from them in a scarce environment. So I think we are onto more or less what you're what you're talking about here are and that's why you see the inventory go up.
Then when we look at how deliveries will go out to customers during the second half of the year versus the inflow of components and how that will play out in inventory, we see that it's a net positive when it comes to the inventory level as such.
But again I mean, we're not optimizing on that really optimizing on customer delivery. We think that that's the real prize here and that's what's going to create the growth in the resilience of our company as well.
I think on the.
What you've seen is in this industry and this is nothing new it has a deflationary element in enterprise for equipment and that's because traffic growth is exponential right. So otherwise.
Yeah, It would be no money left for the operators. So that's what we have seen historically, we will continue to see that but what's important with our product substitution is that we can actually substitute a high cost product with lower cost product for us to manufacture and supply.
That's really where you'll see the product substitution, but the good thing is when you can introduce new features then you have a new chance to discuss pricing as well.
And if you introduce prices that lowers the cost for our customers you know can be energy for example.
Or automation or new type of solutions surrounding the network. Then we have a discussion about the value of the product and that that's why the the the whole increasing the cadence of the product can kind of help us on both the.
Call It a discussion with the customer to before but looking a focus on the value of the features and.
Help us lower the cost of the solution.
Thanks, Andrew You mentioned also software maybe I should add that also that of course, the software side of the business is.
Increasing and that's of course, that's pretty sad to create more value for the customer but.
Different our margin profile and obviously software is not impacted by the those inflationary pressures. So that's another factor to consider a positive.
And also the fact that we Shouldnt say this is not new we've been doing this since 2017, so the hall.
Call. It improvement of gross margin really comes from this strategy now we have cost inflation. That's why we feel we need to increase the cadence of new products to be able to execute and continue to execute on that strategy.
Thanks, Barry Thanks, Andrew and that's the last question will just move back to Dupont sucked military it's S. A b.
To give an opportunity to ask the question. He was aiming for so pontus expectations are high.
Sure Alright.
I think it's important.
Talk a bit about <unk>.
Does the Apple IPR revenues, everybody knows everybody you know they are but they are accruing in the background.
You have a very kind of opaque multi pronged process to arrive at an endpoint there.
I don't think it's very easy to follow for most participants exactly what youre doing that because it's multiple jurisdictions and it's kind of two pronged.
Going forward.
<unk>.
Going forward and then also kind of negotiation rolled forward.
Those I mean, the gross margin is there somewhere even though we don't see it at the moment I think it's important if you can describe quickly your confidence in that process.
Yeah, I first of all it starts with the value of the five G patent portfolio and if we look at them.
Third party analysts.
That'll have looked and tried to assess and this is a hard thing to do so but there we come out with a very strong five year portfolio.
So that's really the basics and I were talking about the standard essential patents here. So we come out with a very strong position. There. We have also some strong implementation patents. So we feel that we have a very strong portfolio that we've invested in and that's why we spent you know.
40, or 45 billion Swedish krona per year on R&D.
That is one area, where it shows up is actually the patent portfolio. So we have a strong position.
So now it's all about how do we.
Create the right value here of that portfolio, how do we capture that value that includes negotiations. It includes four of US are as you note of.
Some some litigation as well, but we are we believe that we're well positioned.
Two to actually achieve some attractive outcomes in our contract renewals based on on the portfolio as well as the way we execute on that but you know where we're going to work hard and we're not gonna.
Go into a deal fast to trade off the right value of our portfolio. So we'll work on that we know will lose some gross margin in the meantime, or loose we delay it is going to come back when we close the deals where you know we're very certain we will like we have done in the past and we continue.
User sign up.
There are five G licensees, so I'm you know.
I have a great belief in our in our team's ability to execute on this strategy. We are embarking on a I would say we have a we have a great IPR team and.
You know, they're there they're working on this I'm confident we will get there I'm.
I'm not going to predict the timing, but I'm comfortable with either.
Thanks, Maria and thanks, Paul that was.
The last question, but before closing the call.
Last remark from your side the boardroom.
Thanks, Peter and thank you everyone for participating.
And thank you for all the questions. It's another quarter, where we have shown that we execute on our strategy to be a leader in the mobile infrastructure business and also start to build a focused presence in the enterprise market and we saw that we could.
Despite the very difficult environment with supply chain challenges as well as geopolitical issues, we could actually keep on growing the company, we could do that by delivering to customers. So we had growth of 5% and we have also seen that.
The strategy of product substitution can help us fend off the cost increases.
Today, we're at the EBITA margin of 14% on a rolling 12 months or four quarters, and that's getting fairly close now to the long term targets of 15% to 18%, but we're committed to reaching the 15% to 18% within the next two to three years and at the same time putting.
Eric So on the higher growth trajectory. So we're very excited about the future of our technology has broad applicability both for the mobile operator, but also for enterprises as they move on to digitalize their business so with that thank.
You very much for listening in and wish you a good summer.
Thank you.
Yeah.
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