Q3 2022 Telefonaktiebolaget LM Ericsson Earnings Call
Good morning, everyone and welcome to todays presentation, covering the third quarter in 'twenty to 'twenty two.
With me here today, I have exxon's C O bulkier cooling and our CFO called me down there.
As usual, we will end the presentation with a Q&A session.
I wanted to ask questions you will need to have joined the cats conference by phone.
Details can be found in today's press release as well as on the websites, Arizona Dot Com slash investors.
Please also be advised that today's conference is being recorded.
But before handing over to Carl I would like to say the following.
During today's presentation, we will be making forward looking statements.
These statements are based.
Our current expectation and certain planning assumptions.
Which are subject to risks and uncertainties.
The actual results may differ materially due to factor factual 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 release this morning, as well as in our annual report.
With that said I would like to hand over the word to Pittsburgh.
Thank you Peter Good morning, everyone and thank you all for joining us.
I'm pleased to present, another quarter with solid underlying performance and we continue to see robust performance in our business as well as mark at the momentum.
Since 2017, we've been able to increase our ran market share from about 33% up to 39% if we exclude mainland China.
We've taken market share from all competitors, including our European.
And we have continued to add to our global footprint during the past quarter.
So we're really talking about here are some massive gains in overall footprint for Ericsson.
These achievements are really based on our focus on technology leadership, and I would say technology leadership allows us to offer our customers leading technologies and highly competitive solutions.
Really important instead, it allows us to do product substitution and to manage our margins.
In the quarter. We also took a key step in our enterprise ambition by closing the acquisition of walnuts.
It's really an exciting step for Eric So on those volunteers will be a critical building block in our enterprise strategy.
And it will underpin our full range of cloud Communications solutions.
We aim to transform the way advanced five D capabilities, such as speed latency and network slicing or exposed consumed and paid for and we believe this will ultimately help our customers to monetize the network.
We expect that the niche acquisition to be highly accretive and it complements our enterprise wireless solution offerings, we'd crazy point and dedicated networks.
Overall, we expect our enterprise offering to have a growth potential north of 20% per year.
So let me go through some of the key takeaways from this quarter.
In the quarter with organic growth.
3% EBITA was 7.7 billion and margin of 11, 3%.
We saw gross income increased by $3 4 billion and reached 28.1 billion kroner.
This increase comes despite lower IPR revenues I was driven of course by the consolidation of all niche, but also a strong performance in our networks segment.
Let me comment debates on IPR, we believe we're in a very strong patent position with more than 60000 patents.
And when we sign license agreements that will be a retroactive compensation paid for the online since period and thus its not really lost sales, but it has a delay and here we will continue to seek to optimize the value of our portfolio. So he can always lead to some delays in revenue recognition.
Right.
Networks saw organic growth of 7% if we exclude the IPR and this was primarily driven by North America, where operators continue to be at the forefront of five D development group.
Gross income increased by 2 billion and reached 21.4 billion.
Billion kroner.
This result, really shows the attractiveness of our leading portfolio built on technology leadership.
And this is something we will continue to invest and to strengthen our position in a competitive advantage.
As I already referenced we took an important step in the quarter by closing the acquisition of all niche.
Ball niche is really a key cornerstone in our expansion into enterprise.
We expect the accuracy of central help our customers accelerate their digital transformation, while also shaping how five G networks will be exposed consumed and paid for in.
In the <unk> world operators could largely only monetize the network through a subscription model.
Five G features such as speed latency, but also network slicing.
Oh for new unimportant revenue opportunities, but we don't see that they can be monetized through subscriptions they have to be paid for aster consumed.
We believe that these new features will be paid for separately for that reason and the ability to do that will be through what we call network a P ice and with vantage, we have the ability to drive and develop this market, we're really creating a new market for us and for our customers.
And here, it's interesting to see that we're already working very intensively with Franco on their customers basically to develop the a P eyes, but also to bring them to the market and our customers recognized as this will be a very important monetization engine for them going forward.
So they can start to monetize the network investments that they're making.
And creating those new revenue sources for our corporate customers.
Actually it is of course critical because if they can't monetize the investments the investments in the network. They will ultimately not invest in the network. So for US. We believe this will also increase the demand in our business for mobile infrastructure.
So we're excited about welcoming vault needs to the ARINC some family and we look forward to working together with them to generate value for both Eric Sone, but also for our customers of course.
Following the reorganization earlier this year we are.
Today present, the first quarter for cloud software and services.
And as you know this is a core part of the business, but we also see it as very attractive, but we have not yet realized the full potential in this business.
We have a very strong starting position.
And by combining the two market areas that where all the business areas that we've done by when we form our cloud software and services.
We believe we can create a stronger unit with clear synergies and.
The new management team is further accelerating the transition to profitability and that includes of course, a strong focus on driving cost down, but also to leverage and solidify our technology, leading position as well as market leadership position.
We expect this business to have gradual improvements and we look forward to discussing more of this strategy and more of the plan to reach profitability at our upcoming capital markets day.
We continue to engage with the Doj and the S. E C. In relation to the 2019 investigation report and the breach notices and we're fully committed to cooperating with the government authorities.
We're also continuing to work to strengthen our culture. The culture, that's why I left its ethics and compliance program.
This work remains one of our key strategic priorities and an area, where we will continue to invest in to make sure that we are also a leader in that area with that let me give the word over to Carl Malone, Our CFO . Thank you Barry and thank you and good morning to everyone.
So yeah. This is the first quarter than what we report in the new structure with the four segments networks clouds suffering services.
Enterprise and and others.
And also the first quarter, where we consolidate in our advantage the acquisition closed on the 21st of July . So we basically have two months and 10.
10 days or so in our numbers this quarter, but before I start to dive into the numbers I want to just to say that I would refer to some growth numbers here and they will all be adjusted for currency and comparable units I call that organic for short and when I talk about profitability numbers those will be.
Excluding restructuring I, just say it now so I don't have to repeat that our 16 times through them through the speech him.
But let's start with the numbers.
Net sales came out of 68 billion.
Organic growth in three out of five of the market areas and the organic growth and was 3% for the growth and for the group and that's despite a 1.1 billion less <unk>.
P R licensing revenue as compared to last Q3 last year.
But reported sales and grew 21% of course helped by large currency tailwind and also the fact that we added vantage, which contribute now with $2 9 billion Swedish kroner in insights are this quarter.
So IPR came out at $1 6 billion. This is in line with the guidance that we had provided in the Q2 report, where we said between one and 1.5.
And we do provide the same guidance for IPR now for the fourth quarter as well between one and one and a half billion Swedish krona.
Gross income grew by three.
$3 4 billion.
In spite of the lower IPR revenues that I mentioned and growth of gross income really come from a sales increase in networks given footprint wins, we have.
And vantage contributed $1 2 billion to the gross income number.
Gross margin at 41.4% down from 44.
Key reasons there for that decline being then first of all again for the third time, the lower IPR revenues, it's about a one percentage point on gross margin but.
But we also say supply chain cost in networks that we have talked about before and and Furthermore, a large share of services business again coming from the footprint gains that that we have secured over time and that come out in the P&L now in the networks segment, especially.
Looking at R&D EM the engine for value creation in our company, we grew that by a $1 7 billion in Q3 FX.
<unk> stands for about a third of that increase.
But what we actually invest in here is the in the in the network side as the Erickson silicone or the next generation Asics.
Which enables industry, leading radio performance of course, but also things like energy savings.
Savings compared to previous generations.
But we also invest in the cloud ran portfolio.
Switch.
Gives our customers more flexible options for deployment in networks.
And thirdly, we also focus are.
R&D money on the what we call enterprise wireless solutions. It is really crazy point and dedicated networks too.
Further extend or enhance the portfolio there in the offering.
S D N a.
Increased by $3 2 billion again, big FX impact about <unk> 7 billion in this case.
And the increase here is mainly related to adding vonage consolidate enrollments into our numbers.
Because one that's impacted SG&A by at 1.8 billion and that in itself includes intangible Amortizations, which are then of course not included in our EBITDA a metric will come to that but also one offs and the combination of those.
Intangible amortization someone else's around a point 6 billion, that's 1.8 dimension.
So coming to the beta than a 7.7 billion a decline of 1.6 year over year and this is an 11.3% EBITDA margin.
And again I want to point out we did have some one off costs here, including them.
And M&A transaction costs that we talked about for the <unk> transaction.
And so in essence, the increase we saw in gross income, which is the fruit of winning market share footprint, increasing sales was more than offset by the increase in Opex, which I. Just described are mainly for technology investments.
Adding vantage into our Ericsson family and currency.
So that leaves us with a net income of $5 4 billion.
And here I can say this is supported by a lower.
Income tax or so so the tax rate now for Q3 was a 25% compared with 40% a year ago.
Finally here the free cash flow came out that $2 5 billion.
And we continue to build a buffer inventory in order to meet deadlines of customer deliveries deliveries.
And I'll come back to that a little bit more when we talk to our working capital and cash flow.
So on a rolling four quarter basis, our EBITDA.
Margin was 12.8% and that we can compare with our long term target of 15% to 18% EBITDA margin.
So from that we can move to the next slide and drilling a little bit more into the segment numbers. So.
So starting with the mobile infrastructure piece, which consists of of networks and cloud software and services.
Networks then.
But he already mentioned is organic growth of 4%, but excluding IPR, which is a special case as we all know given renewal negotiations the growth was actually 7%.
Gross income 2 billion added year over year. Following the added sales that we talk about.
And gross margin of 44.4% that's impacted again by the lower IPR revenues of course, Oh, which networks a record 82% as you know, but also some increased cost of components and in supply chain our investments though.
In cloud service software and services, we decreased the sales organically by 5%.
Yeah, primarily again due to the lower IPR contribution and here, we have 18% of all the IPR recorded in this segment.
But we also saw some difficult Ping all of some of the managed services business that we have some of those contracts decreased and that's what we see in the minus 5%.
And gross income in this segment stable with a margin of 30.
<unk>, 32.1%.
And a bit of a negative point 7 billion in the quarter. Finally, then on the enterprise side.
Now that the share of total sales in enterprise has grown up two 8% in the quarter the enterprise size as the total of Ericsson sales.
And we did see very strong growth here with 21% organic.
Bye.
That's the same in Crazy point.
The reported sales of course op.
The $3 6 billion or so and that has to do with adding more niche of course contributing with $2 9 billion as I mentioned.
Yeah.
So it would be thought here in enterprise I want to comment also was minus 211.2 billion Swedish krona compared to minus a 0.5 the previous year.
And the decline here was mainly due to one off acquisition costs and some of these accounting for the acquisition accounting that we talk about with sales stepped down etc.
Excluding these items I want to say also that vantage was EBITDA positive in the quarter.
Next slide looking at the market areas a bit more we we do see strong traction as mentioned for the solutions and that is resulting in increased footprint and we saw strong.
Organic growth here in North America, 9%, but also southeast Asia, Oceania, and India, which is one of the Fi market areas as well with 13%.
Hum.
In North East Asia, we saw a decline of 6% and in Middle East and Africa.
As I grew by 3% organically and finally, then Europe and Latin America, I'll say, three rather flat year over year.
And.
Finally on this slide I just wanted to highlight that when we talk about the market area thesis about our mobile our network infrastructure business of course, but.
In addition, we have the enterprise piece, which we now book in market area.
Just to make that clear.
Yeah.
Okay. If we go to the next one and talk a little bit more about the cash flow side than a key metric for us of course is free cash flow before.
Before M&A $2 5 billion impacted by the inventory build up and down.
We talked about component inventory.
In comparison Q3, 2021 had.
A higher than normal cash collection from customers, including a rather large amount of prepayments, but also lower than usual payments to suppliers.
But this quarter, we instead saw yeah. Good good collection, but also impacted by inventory, which is back to the proactive decision to safeguard delivery at times to two customers.
Based on what we see now currency stability, we expect this component demand or to come down.
Towards the end of the year and into next year.
At the same time I want to mention in terms of being forward looking here that given our market share gains so footprint gains that we have we believe that working capital will remain on a rather high level as we roll out large volumes globally.
So a gross cash position after this quarter and I was $45 8 billion in net cash of 13.4.
And I would say, we have a well balanced maturity profile here.
For resilience with the maturity profile of 4.1, yes, which is a slight increase from a year ago.
Maybe just a final comment on this slide are when we look at again, the rolling four quarter perspective.
We have generated $18 8 billion of free cash flow before M&A and that's a 7.3% all of that says and you can compare that against the long term target of 9% to 12% of sites.
Next slide please I wanted to spend a few minutes on the vantage acquisition.
And how the purchase price actually translated into our accounts here basically starting with the $6 3 billion U S dollars that we announced when we close the acquisition.
Yeah, and I would like to guide from that to the numbers that you can see that in our cash flow statement. So first of all we have in that 7.1 billion deducted.
Then there are some deferred consideration.
Considerations here 2 billion, that's mainly related to employee benefits and stock based compensation.
And finally, we had a benefit here from hedging a $3 7 billion well.
Well done by the Treasury team are in terms of setting. This heads up for this particular acquisition and that all results in the $51 3 billion paid as you can see here in the both of them on the table and in the report.
I can also mention that during the quarter. During Q3, we repaid $5 9 billion of von niches existing debt.
And both the debt side and these shares were paid by cash on hand.
Before leaving this I wanted to mention one item here and I refer you to the other information in the report because they always talk about.
A discussion between vantage and the Frederick Federal Trade Commission FTC in the U S around.
Historic.
Consumer practices.
And there is an estimate that here already provided for and Mona just book of $100 million.
And upon depending on the.
Timing of these resolution et cetera on the specifics are we might see the cash outflow.
From that happening in the fourth quarter.
Yeah, you also see a will stay at the goodwill and intangible asset numbers here. It's in line with what we have said before so goodwill. According to the preliminary P. P E and I'm $43 7 billion in intangible assets 21.9, and therefore, we expect amortization to be about 2 billion Swedish krona par.
Yeah.
Yeah.
Move to my last slide four today. This is about the outlook for Q4 and and also for next year some extent.
And this is repeating on what we are saying in terms of providing information on for Budd.
Starting with them some specifics for the fourth quarter than IPR again, we we estimate that to be between one and one and half billion IPO revenues in Q4.
Oh Opex.
Has the seasonality it typically increases with some 3.1 billion between Q3 and Q4 and for Q4 I think this could be a pretty good indication wary every heading.
But of course, a bit of caution that can always be some large variations between quarters.
Then regarding networks. After these record Capex that we've seen and are seeing in North America in 2022.
Where we expect the run market to grow by 12%.
We are we see that investments are expected to hold up well during 'twenty 'twenty three, albeit at a slightly lower level or lower level in 2022.
And we expect that initial adjustment of capex levels to materialize is somewhat already in the fourth quarter.
At the same time and this is important we see revenues from footprint footprint wins in other geographies.
Accelerating during the fourth quarter and we are we expect that this will compensate for potentially lower sales in North America in the fourth quarter.
And.
As mentioned on some of these footprint gains as we have stated before Oh so.
In early stage and large scale projects, we might have a dilutive impact on the gross margin.
But of course, that's Buda you mentioned earlier in his introductory remarks, we focus a lot on increasing the absolute siaka.
See I can mount here in in gross income.
So and looking at the 'twenty to 'twenty three than the global footprint gains lead to an expectation. We have that are 2023, you will imply a additional growth.
Yeah. So.
One more thing on networks, then we state in the report that we now expect Netflix to exceed.
For 2022.
The financial target range that we had provided for networks, which was 16% to 18%, we expect them to exceed that somewhat.
And in cloud software and services, we are now saying in the report that we expect full year 2022.
Result to equal 'twenty, 'twenty, one and full year results.
Finally, just a couple of words before I hand back over to you a couple of words on the inflationary environment that the world is experiencing now and of course, we are taking action to respond to that situation.
Basically three or four France first of all we are making pricing adjustments with customers.
But we also leverage product substitution is a very important mean to rebase our pricing.
And here of course technology leadership as its key again through our R&D investments are with the idea to bring new value, adding products to the market.
We are also as Burton mentioned, but I'll repeat simplifying operations in our company in and reviewing our options to reduce cost.
And we talked in the report about this redundancy or restructuring costs, rather, which we have since earlier our guidance of 1% of net sales.
And we will of course come back to that then all of these actions are of course to ensure that we are secured our ability to deliver on the long term financial targets for the group, which is as you know 15% to 18% EBITA excluding restructuring.
So with that I hand back to our CEO , Mr. Barry <unk> com. Thank you card.
So to sum up we delivered another solid quarter with good business momentum.
As you know our strategy is based on leadership in mobile infrastructure under focused expansion into enterprise.
Mobile infrastructure clearly remains our core and we are fully dedicated to continue to invest in technology leadership to further strengthen our position.
In line with our strategy, we're adding to our footprint, which strengthens our scale and competitiveness.
The second leg of our strategy is focused expansion into enterprise here, we added a significant building block by closing the acquisition of walnuts.
And we're now starting to have a meaningful presence also in the enterprise space.
In enterprise wireless solutions, we almost doubled our sales compared to last year.
I would say our strategy puts us in a position to continue to lead the industry as five G is rolled out and transformed every sector of our society.
As you know network development in North America has been very strong and.
After expected record Capex in 'twenty to 'twenty two.
So as our guiding for lower Capex in 2023.
We expect levels to hold up well in 2023, but they will be at the lower level than in 'twenty to 'twenty two.
Globally, we continue to further strengthen our position by increasing our footprint and we expect to see lower sales in North America for Q4.
Q4 to be compensated by growth in other regions.
However, these contract wins will ramp up to full more full volume in 'twenty two 'twenty three.
We expect our added footprint to give full effect next year and we expect to see overall growth in networks globally in 2023.
To add footprint, that's been a critical part of our strategy since 2017, and it will continue to be a priority.
And we know from experience that the earliest stage large scale rollout projects tend to be dilutive to gross margins. However, the increased volume will increase total gross income and thereby allowing us to continue to invest in technology leadership, which has been the core of our success.
Yes over the last few years.
And if you look at the global five G market, it's important to remember here that the five day cycle is really just started.
The fact is that less than a quarter of global LTE nodes have been upgraded two five mid band so far and as you all know meets band frequencies are critical.
To fully realize the potential or the performance over to five G network.
So I would say these shows that there is still a lot of growth potential in the market.
I just pick one example, India, where we will see a rapid build out the mid band massive mimo.
India, we likely have the strongest digital infrastructure outside of China, which will drive digitalization of India.
Combined this with the new use cases for five G. Both for enterprises, but also for consumers and that includes for example fixed wireless access.
We see that the demand for network performance and network infrastructure will continue to be at the at a high level. So we see the five day cycle, both to be longer and higher than previous cycles in previous mobile generations.
I'm convinced that with five G. Everything that can go wireless will go wireless.
So as we continue to navigate the very complex macro environment and that includes us call mentioned clear inflationary pressures, but also geopolitical uncertainty.
We remain very excited about our future and we're dedicated to the execution of our strategy based on technology leadership.
Regarding inflationary pressures, we're already taking actions and this of course includes a focus on cost.
And really making short term cost efficiency is the key way to allow us to continue to invest in R&D because again technology leadership is really what makes the difference and will allow ericsson to continue to grow.
So.
We were convinced that that also has the right focus to remain successful in this competitive market.
And we are Super excited about our position in this excited mark exciting market.
One more thing and that is we're very committed to continue to strengthen our culture and that of course includes the ethics and compliance program. This is one of our key strategic pillars and an area. We will continue to invest in.
Based on our strong position, we remain committed to reaching our long term target of an EBITA margin of 15% to 18% no later than 'twenty 'twenty four.
And you know in December will host our first capital markets day since our since the pandemic and we really look forward to welcoming you all in New York and then we can discuss more in detail our strategy market developments and our plans to build the competitiveness and future value creation in many years to come.
Finally, I would like to say a big thank you to the team Eric Zone. It's a lot of hard work and dedication that has called in to make our current position are really in the strength of our current position. So I'm proud to be part of this team and thanks, everyone for that with that over to you Peter for questions.
Yeah.
And so we have now 30 minutes for a question and answer session.
And as a reminder, a tough question you need to press star one and one on your telephone.
And wait for your name to be called out by me.
If you're a student minute webcast. Please mute the webcast audio while asking the question to minimize any sort of old audio feedback.
So those are the rules that you have to stick to for the Q&A session.
And I see here that we have our first question from Alexandre <unk>.
It's a station or a hello Alexander.
Yeah.
Yes, good morning I.
I Hope you can hear me well perfect.
So yes, thank you for that for the question.
So the first question I would have really is on the developer the networks margin. So we see that the footprint acquisition costs are back. So this may be good for your longer term growth, but near term. That's some pressure. So could you just give us an edge.
The gross margin decline in Netflix sequentially in the third quarter is that more down to this woodford acquisition push or is it.
Still higher inflationary cost pressures than those that you saw in the previous quarter.
And then obviously in Q4, you have the usual seasonality in your gross margins in networks.
From what I understand this should be at a compounded a little bit by these two effects.
Could you.
They develop on that and then just secondly, very briefly if you could give us an idea of where the restructuring.
Costs will be directly disease have cogs, R&D or SG&A in English Division X.
Hum.
Okay. So thanks Alexandre regarding the networks are gross margin, then and and you asked specifically about sequentially I understand that but I just wanted to repeat here the year over year comparison is then impacted by the IPA or a difference of a quite a large amount on total group is $1.1 billion.
82% of that this assay in the networks, but otherwise I would say there are a couple of factors impacting our networks here. One is the what we've talked about around the components and supply chain costs, where we are investing now, but it's also a higher cost, which we are absorbing though and the other part actually comes from.
Something very positive and that's the.
The growth that we see and our early stage large scale contracts that we're executing on where the services salaries higher.
And that has any impact on gross margin and we have seen before that we might have that initially impact, but then of course, we recover over time as we as we roll out. So I would say those are those are the key impacts, though networks I would only add that the for the you already saw these effects in the third quarter, we should say.
The increased service share is visible in the result.
Then you asked about the restructuring.
And I like to think that we're well we're going to do is to digitalize and actually simplify Ericsson that that's really our focus. So it's it's more of a gradual improvement and are we going to work on taking cold salt I I would say it touches.
Both Cogs, but also of course, the G&A structure in the company.
And exactly how the split is that's discussed at the capital markets day.
But we are going to tackle both of these are sites because I think ultimately a leaner company will be a more agile company and we'll be better at responding. So so I'd I would also say, we we kind of recognize days earlier and that's why we launched the group function Global operations and you know that from this.
Spring this year and.
And that the ambition with that filing shavuoth actually to drive a.
You know call it a better customer experience by simplifying our processes and digitalize seeing them and that's something that we will know more or less accelerate in light of the macro uncertainties.
Maybe I can add on the cost side, that's where I live.
I can add one more thing it's not only a defensive move because of inflation. It's it's also about the competitiveness of course, I mean, we constantly work on improving our structural cost base to be really competitive not only on technology, but also on the cost side of course in the market.
Thank you Alexandre Faure.
For those two questions. So thank you and now we are ready to move to the next question from the audience.
And that will come from Andrea if you will so on the Danske bank good morning Andreas.
Good morning, Peter and good morning.
I know that you will come back to this at the <unk>, but I need to still ask about the cloud software and services. We have seen these deployment costs for a while now and can you just explain a little bit why there is a delay in the positive impact that we should expect has anything changed struck.
Actually in this that you see and also.
If we now have a weak macro situation and the pick up of five G.
Delayed how would that impact.
So you need going forward.
And.
If I may also on IPR.
$1 1 billion sector lower is that there is FX and that of course, but it's the majority of that related to Apple in the litigation process that you're into right now.
Thanks.
Should I take the first part.
IPR part.
Yeah.
The reality is we have a higher cost for new product introductions. So it has a bigger service content.
Short term and that's what you see impacting.
Call it the margins in cloud software and services. So so and we knew that from before and you've seen that before that continues to be at the high level. We were still only seeing the early stages of deployment of the five core so revenue wise. They lag are these costs.
So they are impacting that's no no.
No doubt about that.
I think it's also fair to say that we don't really yet see a slowdown in the rollout of five G and I really don't expect to see that either for the simple reason that traffic at the end consumer continues to grow at a healthy rate. So there will be a need to migrate customers over to <unk>.
So we will see five G networks increasingly carry traffic in the future. That's a that's at least what we see as of now.
And then I would say in order to restore profitability or reach profitability, which is really the you know that's the first step I think we have a much higher potential in this business.
Then that are where we can capitalize on our leading position in a good way.
In order to reach that the first phase here, we need a tight control on costs and that's why we put together two earlier business areas into one so we get the stronger focus on having cost control.
But also get synergies on product development, because we had the overlapping product portfolios between the two as you can recognize this takes some time to take out but but that is what the team is working on to really.
Call it become much leaner and much better cost structure in the combined entity leveraging the synergies across the different offerings. So that's where we're working.
There will of course take some time to get the full benefit, but we should start to see that coming into next year and be in a much better position. So then we'd gets helped by the ramp up of five G. But also that we are addressing our own quoted coast cost position.
Good and the last question was around the IPR and the Delta there and yeah I can say, it's it's the the big thing here is of course contract Thunder a renewal.
Negotiations, so and as you know just as a reminder, when when such contracts are entered into we also have the retroactive.
Effect of that in our P&L from the date of expiry.
And you'll see you know that.
Thanks.
Thank you Andreas for the those two questions. So we are now ready to move into the next question.
From the audience today, and we have the next question from Francois <unk> from UBS.
Francois.
Good morning, everyone can you hear me okay perfect.
Great. Thank you.
Two questions.
First on the.
Acquisition can you.
Give us a bit some lights on the underlying performance of on that just because you've just acquired so just wanted to.
Where it concerns the numbers in the early days of the integration and how should we think about the enterprise profitability.
Going forward.
The number of one off maybe this quarter just trying to understand the profitability trend that we should take into account in the next two quarters.
My second question is well.
Well get you talked about five key use cases being.
A driver of the <unk>.
Gross another person specific lean in India for example for next year.
Contract.
And we asked you many times I guess in the past the use cases for <unk> that could be a game changer for the adoption can you at least maybe in some use cases that you see particularly interesting and know how is it evolving there because when we took two two operators it doesn't seem obvious you know.
In terms of use cases, especially like for example in China when they still good to see you know much application all use cases.
Since you have your perspective here.
Is it evolving thank you very much.
But I'll just start with the other I can go first with the five new use cases or you'll take the other two.
Yeah. This is an interesting question.
You know the reality is when <unk> was introduced everybody.
Would say if you ask our operators that you don't really need for G. Because you'll have three G.
That proved to be incorrect and the reality is with five D. We're starting to see a number of emerging use cases, maybe the first one is that's actually already today commercial is fixed wireless access.
And we see that gaining traction quite quite fast for example in North America, but we also see a.
What other operators around the world are doing like in India. So we see that this is a completely untapped revenue pool today will be captured by building out of course.
Of the five G network, both in mid band, but also in millimeter wave in order to capture that we think that that's a massive potential. So that's one thing, but then then I think the other where we're starting to see emerging use cases. For example is the connectivity simple connectivity to a enterprise.
Where in the <unk> World. It was typically fixed access today, we are starting to see some sme's de facto using wireless as the primary connectivity and that's what we're seeing is benefiting the growth and create their points for example.
And just to give you. Another case this of course within factories, so private networks with dedicated networks. There we see a rather large amount of use cases for example, before self driving vehicles self guided vehicles factory automation et cetera used in mines enterprises.
And you're already starting to see that market shaping up quite substantially.
Part of that market will be captured directly from the enterprise. This of course and that's why we're building up an enterprise presence a part of that will be captured by the operators are and and I would say, we don't know how that market is going to shape up but it will happen and and the last element that I think is equally important is.
We're starting to see and here we have worked together with a number of application developers on how they need to use speed.
Tennessee to drive new applications and those are clearly, where we believe our bowl niche acquisition will fit perfectly in order to have a platform to present those and here what are we talking about we're talking about collaboration software. We're talking about XR V or applications are that will start to come.
And we will very soon start to see devices that will need to speed latency.
Ability for mobile edge, compute et cetera, and those will actually spur demands for a completely new use cases, so I think we need when we talk about this everyone looks for the you know the the silver bullet.
The the magic a killer application so to say I think we will start to see those emerge in 123 years at Nee as networks really get fully developed that's when you'll start to see the benefit of five G. In society. So what we see is still a very strong.
Development under a very exciting development, if you only or for mobile broadband I think Dennis is going to be a different market than it is only a.
Quota capacity add onto Forgey, then it's very different but we see those new use cases, starting to develop now.
Yeah.
Okay.
Basically address the other question very well as well on the enterprise side, but maybe a few more words.
On the enterprise of course for Vonage. It's early days honestly, we have two months and 10 days and as we said and I think this is quite important during this period walnuts underlying if we include exclude some of these acquisition accounting and one offs and so on they are EBITDA positive and and also cash flow positive in the quarter. So that's a very.
Good sign.
I think very important and very described this is about growth here in the enterprise side, we see great growth in Cradle point, and we expect that involved niche as well and onboard nature of course that we're looking at this.
Through our three horizons, so three lenses either the existing vonage business to boost that and continue growing that.
And secondly, the synergies from more niche offerings into ericsson's global footprint of customers and then thirdly of course, what woodberry really talks about the network API side of the base since wherever we can create an entirely new market and of course it all together.
We see this as a very value accretive for for the group.
At the C. M D and I think we will come back for short to the enterprise side and describe lay out a bit more of the strategy and the expectations there.
Thanks transfer. Thank you gentlemen, thank you for Francois I hope you're happy with those answers so we'll move to the.
Next question for today, and we would have one coming up from.
Let's see here peer froggy at New Street.
Good morning, Pierre can you hear us.
Good morning, this is Ben Horowitz standing them therapy areas and Ah, Okay apartment and comp speak that's okay. As well, we just had a couple of questions on your enterprise business. So.
We just want to know how you view the competitive landscape and in the wireless enterprise networks.
And then what are your competitive advantages and and.
And how do you see yourself competing with companies are partnering with either.
Skaters are enterprise companies that already have a fairly broad set was reached.
Thank you.
That's a great question I think this is something that we'll spend a lot more time on in the capital markets day, but we'll give you a quick couple of of cold months, Yes, you're absolutely right.
It's a competitive space, we feel though that we're the market leader in the wireless walnuts today through cradle points. So that we're well positioned here already and we have a very strong and growing presence in dedicated networks built upon some some clear product advantages are so.
We we believe we're.
We're going to continue to develop these strongly and of course this space is going to be having a lot of competition coming in also from Hyperscale.
And we see that our solutions will be really run on hyperscale as well. So I I think why should not only think of them as competitors are going to be partners for us as well in order to reach the market.
Thanks, Paul Yeah, that's great. Thank you.
Thank you for the question.
So we have still 10 minutes to go so I'll move to the next question in the call and that one is from Youngstown.
Men on the yeah, Chris.
Good morning, Dan.
Hi, good morning, Peter.
Thanks for taking the question.
Just wanted to go.
A little bit more into the outlook for gross margin.
Into 2023 and into Q4 are arising from the sort of shifting landscape of regions for the networks Division.
So you are saying that U S or North America will be down next year.
Can you give us an idea of how much it will be down.
At this point I know that visibility for the full year, maybe a little bit what is your initial field since you've already said that it will be down.
And just from a product mix point of view.
Regional mix point of view what can.
Can we assume as a sort of an impact on gross margin.
And is it something that will be.
Sort of.
A bigger hit in Q4, and maybe a first one or two quarters of next year and then as you go.
Go through the initial phase of deployment in places like India.
Margin will would rise.
Into the second half of next year, So what I'm, saying is should the gross margin profile would be one of steady increase at a low point in the early part of next year. All the way into Q4 is that how we should look at it and then I have a brief follow up with I mean.
Understood.
Okay.
I'm not exactly sure. So what we talk about in the report is that the U S will hold up with things. So North America that is but with a lower level.
Exactly what the amounts were not providing a detail on but we.
Think it's a very key.
To realize that we also win basis in other parts of the globe across the globe and that that will compensate.
How are the gross margin will develop we comment that by talking about some of these footprint wins, where it tends to have a dilutive impact in the beginning but that over time, then that that comes back so of course it on your question how it would develop during next year.
It's a function of when these projects are ramping up in volumes in big rollout projects and so on and come in.
But again, we focus a lot on this of course and even more so on the gross margin or the gross income sorry delivery here because in absolute money that is what drives our ability to invest in technology. So I think that's what we can say now.
And remember the.
You're asking a question on a quarterly basis, our contracts are rather long and it has a long rollout cycles. So how it exactly hits each quarter will always be a bit subject to two kind of what happens.
So we're trying more to give the overall sense, where these type of developments will be next year.
So.
I would encourage you more to think about there.
What they said we're trying to do yes, it's actually to strengthen our market position and based on that we will manage gross margins falling a bit. This guy does the call went through.
But it's it's all weigh in I understand your.
This idea to have this on a quarterly basis, but it is a bit.
All in these large contracts that's why they are a bit swings between quarters are not inconsequential.
So it is true and I think the on the Big picture. All so I think it's good to remember the 15% to 80% are it'd be thought that captures all of this actually in and as you know we said in the fourth quarter 'twenty. One that we will reach that point that range within two to three years now we specify that we're talking 2024 that's.
Our our ambition that's what we're going for as a company and of course, we will manage our quarterly swings and so on to get to that longer term position.
Thank you Carl.
How does this follow up as well.
Yes, just very quickly on the 2024 target.
So.
What would be the key factor in that jumbo.
Can we have is that an increasing amount of confidence that the.
The previous sort of digital services business.
The current cloud and software business.
<unk> reached that critical mass.
<unk>.
Hum.
Jump into 2024 or is it more coming from the enterprise business, where those profit margins, including Ungrateful point, then vantage will become bigger I agree that you probably give us more color more color on that and that deal at the capital markets day, but just out of an initial view.
You know what are the moving parts on that.
Hum.
Clearly you know, where we think we see it with a very good business in in cloud software and services and that that clearly will be a big part of the of the contribution to reaching these long term targets, that's for sure and especially swinging from a low seam to two eight.
A profitability so that that's one part but of course the rest is.
What we see is really on the enterprise side, where we're going to continue to grow and strengthen our position. So it's all about the mix of those two contributing but we'd go into this in greater detail when we meet in December .
Understood. Thank you very much.
Yeah.
We will now actually moving to the last question.
For today's session.
And we will have the last question coming up from Sandeep deshpande of attitude.
Morgan.
Morning Sandy.
Yes, hi, good morning, sorry, I might have missed the question.
Excuse me my question is on the cloud software and services.
Uh huh.
<unk> always was.
Underperforming as well as part of this restructuring what will be done.
They get better performing and what has changed.
Yes.
Now even to be flat with last year.
Something has.
So we'd like to understand that.
Sandeep, if we start with the business promise, if if we or if we look at it from a.
Yeah.
You're absolutely right, we have underperformed in this area for a long time, but we have also seen a relatively strong improvement compared to 2017.
Since we're running much bigger than today. So it's a it's always a journey. So of course, we got to this level and we're not happy at this level, we need to we need to fix this it should be a profitable business with our market position in the technology. We offer this has all the potential to be profitable.
So if you look at the improvements over the past couple of years a lot of it comes from.
Basically turning around parts of the business you know like the dollar be SaaS offering for example.
But where are we now have a or hubs.
Challenges I would say is of course on our five core and that that has taken a bit longer to get to market than we expected a year ago.
And it has carried a lot more system integration costs and early call. It service costs than we anticipated a year ago.
But we have also a lot of geopolitical developments are that you are well familiar with and that also impacts the business volume.
In our cloud software and services very detrimental is so and that has also hurt the business. This year. So it's a multitude of factors. So what we said here is that given that backdrop. That's why we also felt we need to get more synergies out in the investments we make.
For the future and that's why we combined the amount of services and digital services. So we can start to create those type of offerings that leverage as the synergies between the two of course, there is sort of a G&A synergy by removing one one business area, but there are other synergies.
On the R&D side, as we invest in AI and machine learning and actually the distribution of those software to our customers, that's where we get the big benefit that will take some time to get out, but that's where the team is really focused on getting the benefits out.
Thanks, Sandeep and thanks, Laurie and thanks, Colin for good answers in this session.
Before concluding I just wanted to play football you said that are we would have the capital market day in New York December 15.
And there will be possibilities to register our upcoming week here for all of you that want to participate so by that thank you all for participating in today's call.
Thank you thank.
Thank you.
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