Q4 2023 Telefonaktiebolaget LM Ericsson (publ) Earnings Call
Thank you.
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Yeah.
Thank you.
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Hello everyone and welcome to Ericsson's fourth quarter and full year result of 2023.
Hello, everyone and welcome to Ericsson's fourth quarter and full year result of 2023.
Today I have as usual our CEO Börje Kohl and our CFO Karl Melander.
We do it today I have as usual our C O R.
Our CFO Carl Milan there.
And we will end this presentation as normal with Q&A and in order to ask questions you will need to join the conference by phone.
And we will end this presentation as normal with Q&A.
You know what it calls to questions.
Speaker Change: Need to join the conference by phone.
Details can be found on today's press release or on our website ericsson.com slash investors
Speaker Change: Details can be found on today's press release or on our website at website Exxon Dot com slash investors.
Please build with advice that this conference is
Speaker Change: I'm pleased to be able to advise.
Speaker Change: Thank you for watching!
Speaker Change: France is recorded.
Speaker Change: But before handing over to Börje, I would like to read the following.
Speaker Change: But before handing over to Billy I would like to read the following.
Speaker Change: During today's presentation, we will be making forward-looking statements.
Billy: During today's.
His presentation, we will be making forward looking statements.
Andreas Joelsson: These statements are based on our current expectation and certain planning assumptions
Billy: These statements are based on our current expectation and certain planning assumptions.
Andreas Joelsson: which are subject to risk and assessment.
Billy: Which are subject to risks and uncertainties.
Andreas Joelsson: The actual result made different material due to factors mentioned in today's press release and discussed in
Billy: The actual result may differ materially due to factors mentioned in today's press release and discussed in the.
Andreas Joelsson: Sandeep Deshpande, Andreas Joelsson, Peter Nielsen
Billy: This conference call.
Andreas Joelsson: We encourage you all to read about these risks and uncertainties in the earnings report today as well as in the annual report.
Billy: We encourage you all to read about these risks and uncertainties and in earnest eurosport today as well as in the annual report.
Andreas Joelsson: With that said, I would like to hand over the word to Börje, so please Börje. Thanks Peter and good morning everyone. Thanks for joining us today. So in 2023 we navigated a difficult mobile networks market marked by persistent headwinds and an unprecedented slowdown in the North American market.
Speaker Change: With that said I would like to hand over to where to build yet. So. Please go ahead, thanks, Peter and good morning, everyone and thanks for joining us today.
Where: So in 'twenty to 'twenty, three we navigated a difficult mobile networks market marked by persistent headwinds and an unprecedented slowdown in the north American market.
Andreas Joelsson: which really saw customers reducing capex significantly.
Where: Which really saw customers, reducing capex significantly.
Andreas Joelsson: With the rapid growth in India, we saw a dramatic change in business.
Where: With the rapid growth in India, we saw a dramatic change in business mix, but overall the total mobile network networks market really fell in size.
Andreas Joelsson: But overall, the total mobile networks market really fell in size.
Andreas Joelsson: Notwithstanding these challenges, we continue to execute on our strategy and I'm pleased to say that we concluded 2023 with a solid quarter and we succeeded in generating an EBITDA of 21.4 billion kronor for the full year.
Notwithstanding these challenges we continue to execute on our strategy and I'm pleased to say that we conclude the 'twenty to 'twenty three with a solid quarter and we succeeded in generate digging and EBITDA of $21 4 billion kroner for the full year.
Andreas Joelsson: Through our strong focus on gross margin that we've had for many years, as you know, we generated almost 40% gross margin for the year.
Where: Through our strong focus on gross margin that we've had for many years as you know we generated almost 40% gross margin for the year.
Andreas Joelsson: While our actions to improve performance are paying off, we're not satisfied with our profitability, so we have clearly much more work to do. As we look ahead, 2024 will be a difficult year and market conditions will prevail. And so we currently expect the current market outside of China to further decline as our customers remain cautious and the investment pace normalizes in India.
Where: While our actions to improve performance are paying off we're not satisfied with our profitability. So we have clearly much more work to do.
Where: As we look ahead 'twenty 'twenty four will be a difficult year and market conditions will prevail.
Where: And so we currently expect the current market outside of China to further decline as our customers remain cautious and investment pays normalizes in India.
Andreas Joelsson: With that in mind, we remain laser focused on managing what's in our control. We're consistently driving operational efficiency while keeping the investments critical to our future growth intact.
Where: Okay.
Where: With that in mind, we remain laser focused on managing well, it's in our control we're consistently driving operational efficiency, while keeping the investments critical to our future growth intact.
Andreas Joelsson: We remain firmly committed to our long-term goals of 15-18% EBITDA and 9-12% free cash flow.
Where: We remain firmly committed to our long term goals of 15% to 18% EBITDA in 9% to 12% free cash flow.
Andreas Joelsson: and we are seeking to maximize the value for all our stakeholders.
And we are seeking to maximize the value for all our stakeholders.
Andreas Joelsson: Let me now walk you through some of the key takeaways from the past year and how our strategy is critical to the industry's long-term success. So next slide.
Let me now walk you through some of the key takeaways from the past year and how we're our strategy is critical to the industry's long term success. So next slide please.
Andreas Joelsson: as expected
Where: As expected.
Andreas Joelsson: 2023 was a difficult year for the mobile network market with an overall decline combined with a dramatic change in market.
Where: 2023 was a difficult year for the mobile network market with an overall decline combined with a dramatic change in market mix grew.
Andreas Joelsson: Group sales declined organically by 10%, driven by an overall decrease of 15% in networks, with North America being down by almost 50%.
Where: Group sales declined organically by 10% driven by an overall decrease of 15% in networks with North America being down by almost 50%.
Andreas Joelsson: We work relentlessly to strengthen our performance and cost management. We recognized already in more than a year ago the need to take costs out.
Where: We work relentlessly to strengthen our performance and cost management, we recognized already in more than a year ago, the need to take costs out.
Andreas Joelsson: and during 2023 we've implemented efficiency improvement including reducing internal and external headcount by more than 9000.
Where: And during 2023, we've implemented efficiency improvement, including reducing internal and external head count by more than 9000.
Andreas Joelsson: and this has actually enabled us to deliver against our cost savings target of 12 billion kronor gross out.
Where: This has actually enabled us to deliver against our cost savings target, though 12 billion kroner girls out about.
Andreas Joelsson: About half of that came into effect in 2023 and the remainder will come in during 2024.
Where: About half of that came into effect in 2023, and the remainder will come in during 2024.
Andreas Joelsson: because of our efforts that we've done the past few years and you know the importance we place on gross margin we were able to deliver a gross margin of 39.6% and an EBITDA margin of 8.1% for the year I would say given an almost unprecedented market environment with volume declines as well as business mix change I think this was a very solid performance by the team
Where: Because of our at first that we have done the past few years and you know the importance. We place on gross margin, we were able to deliver a gross margin of 39, 6% and an EBITDA margin of 8.1% for the year I would say given an almost unprecedented bark market environment with volte.
Where: The clients as well as business mix change I think this was a very solid performance by the team here.
Andreas Joelsson: Across our business areas, we also took critical steps in building a stronger, more profitable Ericsson.
Where: Across our business areas. We also took critical steps in building a stronger more profitable Ericsson.
Andreas Joelsson: In mobile networks we continue to extend our lead technology leadership. Our leading technology empowers customers to build high performance differentiated and programmable networks while also leading the shift to open cloud native networks.
Where: Mobile networks, we continue to extend our lead technology leadership, our leading technology empowers customers to build high performance differentiated and programmable networks. While also leading the shift to open cloud native networks. The contract with AT&T is a key proof point.
Andreas Joelsson: The contract with AT&T is a key proof point demonstrating how our technology is leveraged to advance the network architecture of the future and deliver a reduced total cost of ownership for our customers.
Demonstrating how our technology is leveraged to advanced network architecture of the future and deliver a reduced total cost of ownership for our customers.
Andreas Joelsson: This deal will create significant value both for our customer and for Ericsson and we expect it to start to ramp up in the second half of 2024.
Where: This deal will create significant value both for our customer and for Ericsson and we expect it to start to ramp up in the second half of 'twenty 'twenty four.
Andreas Joelsson: In cloud software and services, we executed on the turnaround plan, and we're happy to have reached that target. So for the full year, we delivered an EBITDA of 1.7 billion kronor. I really want to thank the full team for their effort.
In cloud software and services, we executed on the turnaround plan and we're happy to have reached that target. So for the full year, we delivered an EBITA 1.7 billion kroner.
Where: I really want to thank the full team for their efforts from now on will continue to increase commercial discipline automation and David delivery efficiency, focusing on long term profitability.
Andreas Joelsson: From now on, we'll continue to increase commercial discipline, automation and delivery efficiency, focusing on long-term profitability.
Andreas Joelsson: In Enterprise Wireless Solutions, we continue to build out offerings, including the acquisition of Ericom, and we further strengthen our position in private networks.
Where: In enterprise wireless solutions, we continue to build out offerings.
Where: Including the acquisition of a recall and we further strengthened our position in private networks.
Andreas Joelsson: During Q4, we saw slower growth due to macro headwind.
Where: During Q4, we saw slower growth due to macro headwinds.
Andreas Joelsson: and through our global network platform we continue to work with front-runner customers to reshape the industry by transforming the network into a platform for innovation
Where: And through our global network platform, we continue to work with Frontera on their customers to reshape the industry by transforming the network into a platform for innovation.
Andreas Joelsson: In parallel, we've continued to drive our cultural transformation as we focus on building a culture of integrity and strengthening our governance, risk management and compliance.
Where: In parallel we've continued to drive our cultural transformation as we focus on building a culture of integrity and strengthening our governance risk management and compliance. All these initiatives of course come with a short term costs, but I would say, they're essential to our long term competitive.
Andreas Joelsson: all these initiatives of course come with the short-term costs but I would say they're essential to our long-term competitiveness and success.
Where: That's a success.
Andreas Joelsson: as I said
Where: As I said.
Andreas Joelsson: Going forward, we expect the Rand market outside of China to decline further as our customers remain cautious and the investment pace normalizes in India.
Where: Going forward, we expect the ran market outside of China to decline further as our customers remain cautious and the investment pays normalizes in India.
Andreas Joelsson: However, we expect our market share in North America to be helped by the AT&T contract in the second half of 2024.
Where: Yeah.
Where: However, we expect our market share in North America to be held by the AT&T contract in the second half of 'twenty 'twenty four.
Andreas Joelsson: It's important to note that looking historically large declines in the mobile network market are followed by a rebound.
Where: It is important to note that looking historically large declines in the mobile network market are followed by a rebound so operators can sweat the assets up to a point, but eventually will need to invest to manage the data traffic growth cost and then.
Andreas Joelsson: So operators can sweat the assets up to a point, but eventually we'll need to invest to manage the data traffic growth, cost, energy usage, and of course network quality and give the customer experience that the customer demands.
Where: Your usage and of course network quality and give the customer experience that the customer demands.
Andreas Joelsson: and that is actually something we see will happen this time as well so we fully anticipate the market will recover to more normalized levels however the timing is very difficult to predict ultimately this will be in the hands of our customers and the investments will vary by customer and by market and their competitive positions
Where: And that is actually something we see will happen. This time as well. So we fully anticipate the market will recover to more normalized levels. However, the timing is very difficult to predict.
Where: Ultimately this would be in the hands of our customers and the investments will vary by customer and by market and their competitive position.
Andreas Joelsson: We also see a somewhat slower growth in enterprise due as well to macroeconomic headwinds.
Where: We also see a somewhat slower growth in enterprise, you as well to macroeconomic headwinds. So again with that outlook. We will continue to prudently manage our balance sheet, while keeping sight of investments critical to our long term strategy.
Andreas Joelsson: So again, with that outlook, we will continue to prudently manage our balance sheet while keeping sight of investments critical to our long-term strategy.
Andreas Joelsson: So as we focus on driving fundamental improvements to our cost structure, and we expect to take additional actions, including reducing headcount as we pare back some investment areas and focus our portfolio where we really can win,
Where: So as we focus on driving fundamental improvements to our cost structure and we expect to take additional actions, including reducing head count as we pair back some investment areas and focus our portfolio, where we really can can win.
Andreas Joelsson: as you saw today as well the board has proposed a dividend of 270 per share corresponding to a total amount of 9 billion kronor
Where: As you saw today as well the board has proposed a dividend of 270 per share corresponding to a total amount of 9 billion kroner.
Andreas Joelsson: This is proposed to be paid out in two equal installments as in previous years.
Where: This is proposed to be paid out in two equal installments as in previous years.
Andreas Joelsson: While recognizing the near-term challenges, I would say this is a testament to the confidence the board has in the longer-term outlook for us as a company.
Where: While recognizing the near term challenges I would say this is a testament to the confidence the board has in the longer term outlook for us as a company.
Andreas Joelsson: But let me now take a step back to put our achievements in the perspective of our strategy. So next slide.
Where: But let me now take a step back to put our achievements in the perspective of our strategy. So next slide please.
Andreas Joelsson: While the mobile network market is challenged, it actually provides real value to the economies around the world, from regular communication for consumers to advanced digitalization for enterprises and society.
Where: While the mobile network market is challenged it actually provides real value to the economies around the world from regular communication for consumers to advance digitalization for enterprises in society.
Andreas Joelsson: But the problem is that the return on capital has been stagnant and many operators today fight to earn cost of capital.
Where: But the problem is that the return on capital has been stagnant and menu operators today fight to earn cost of capital.
Andreas Joelsson: I think to change this, there are two things we can do. We can passively wait for market just to improve or regulation to change, or we try to address the issue head on by changing how networks are consumed and monetized.
Where: I think to changed is there are two things we can do we can passively wait for market just to improve our regulation to change or we try to address the issue head on by changing how networks are consumed and monetized.
Andreas Joelsson: As you know we've chosen the latter route. We're actively working to reshape the industry by transforming the network into an innovation platform leveraging cellular connectivity in new areas. So let me expand on that.
Where: As you know we've chosen the latter route we're actively working to reshape the industry by transforming the network into an innovation platform leveraging cellular connectivity in new areas. So let me expand on that.
Andreas Joelsson: First, we're leading the way by building high performance and differentiated networks which will be needed to digitalize enterprise.
Where: First we are leading the way by building high performance and differentiated networks, which will be needed to digitalize enterprises by horizontal I've seen the architecture, we're allowing our customers to prioritize investments in different parts of the network at different clock cycles.
Andreas Joelsson: By horizontalizing the architecture, we're allowing our customers to prioritize investments in different parts of the network at different clock cycles.
Andreas Joelsson: This is important as it not only offers our customers advanced network architectures, but it also allows for a lower cost of ownership.
Where: This is important as it not only offers our customers advanced network architectures, but it also allows for a lower cost of ownership.
Andreas Joelsson: Second, with enterprise wireless solutions, we extend the use of cellular connectivity through private 5G networks and wireless WAN.
Where: Second with enterprise wireless solutions, we extend the use of cellular connectivity through private five G networks and wireless one.
Andreas Joelsson: And third, by developing a global network platform, we enable the exposure, consumption and payment of network APIs, which extends the market beyond consumers to enterprises as well as developers.
Where: And third by developing a global network platform, we enable the exposure consumption and payment of network a P ice which extends the market beyond consumers to enterprises as well as developers.
Andreas Joelsson: We're changing the monetization model of the industry, and this is a shift that, of course, will take some time, but we are encouraged by the progress we've made with a partnership with DT to offer network APIs to developers and enterprises, but we're also seeing very strong progress with frontrunner customers.
Where: We are changing the monetization model of the industry and this is a shift that of course will take some time, but we are encouraged by the progress we've made with our partnership with D. T. At all for network a P. I used to developers and enterprises, but we're also seeing very strong progress with Franco on their customers.
Andreas Joelsson: We're confident this will create a more profitable and sustainable future for our industry and our company.
Where: We're confident this will create a more.
Where: More profitable and sustainable future for our industry and our company.
Andreas Joelsson: So Ericsson has a clear leadership position today with leading offerings.
Where: So Ericsson has a clear leadership position today with leading offerings.
Andreas Joelsson: With our strategy and the actions we're taking, we ensure that we will continue to be well positioned when the market improves.
Where: With our strategy and the actions, we're taking we ensure that we will continue to be well positioned when the market improves.
Andreas Joelsson: Before handing over the world to Carl, I would like also just to comment on the announcement of our new CFO, Lars Sandström. Lars will be joining us from Getinge and comes with an extensive experience and knowledge from a variety of financial and management roles.
Where: Before handing over the wall to Carl I would like also just to comment on the announcement of our new CFO, Laura Cha from loss will be joining us from yesterday and comes with an extensive experience and knowledge from a variety of financial management roles.
Andreas Joelsson: Lars will join us 1st of April and we have also appointed Peter's successor as head of IR, Daniel Morris who joins us from Vodafone's IR team with a solid experience also as a sell-side analyst.
Where: Lars will join US first of April and we have also appointed Peter successor, as head of IR, Daniel Morris, who joins us from Vodafone IR team with a solid experience also as a sell side analyst.
Andreas Joelsson: So I would now just like to say a big thank you to both Carl and Peter for their time at Ericsson. It's truly been a privilege to work with both of you. Thank you both.
Where: So I would now I would just like to say a big thank you to both card and pizza.
Where: For the time at the Arizona, it's truly been a privilege to work with both of US. Thank you both.
Andreas Joelsson: and now maybe for the last time Carl it's time for you to go through the numbers thanks a lot Börje thanks for kind words and very good morning to everyone
Where: And now maybe for the last time card.
Speaker Change: It's time for you to go through the numbers. Thanks, a lot yeah. Thanks for your kind words and a very good morning to everyone.
Carl: I will address some of the key items around the financials here today and also some comments on the outlook going forward.
Speaker Change: So I will address some of the key items around the financials head today and also some comments on their on the outlook going forward.
Carl: So if you go to the next slide and look at Q4 to start with.
Speaker Change: So if you go to next slide and look at the Q4 to start with.
Carl: And I would just paraphrase a bit Bury here. The challenging market we saw in telecom and this market mix shift, they were really dominant factors throughout 2023 and reported full year net sales in the US were down by 35 billion Swedish kronor year over year. But India grew by over 20 billion. So you see clearly how powerful this shift was during the year 2023. And the impact of this on both profits and cash flow is clearly visible.
Speaker Change: Yeah, and I would just put a paraphrase a bit but he has the challenging markets. We saw in telecom and this market mix shift they were really a dominant factor throughout 'twenty 23 and.
Speaker Change: And reported full year net sales in the U S were down by 35 billion Swedish krona year over year by India grew by over 20 billion. So you'll see clearly how powerful this shift wall stirring the the year 2023, and the impact of this on both profits and cash flow is clearly there.
Carl: We have communicated around that many times, of course, however, partly countered with the cost out efforts and the achievements that we have done and efficiency improvements across the country.
Speaker Change: The boat.
Speaker Change: And we have communicated around that many times of course, however, partly countered with a cost out efforts that are then the achievements that we have done and efficiency improvements across the company.
Carl: but looking at Q4 then as a solid result despite the current market conditions.
Speaker Change: But looking at Q4, then as a solid result, despite the current market conditions and the execution. During this quarter I believe demonstrates both stronger increased resiliency in our in our company and a good team effort. The group sales declined by 17% organically.
Carl: and the execution during this quarter I believe demonstrates stronger increased resilience in our in our company and a good team effort. The group sales declined by 17% organically
Carl: to 71.9 billion in the fourth quarter partly the decline is due to the retroactive IPR revenue we had in the fourth quarter 22.
Speaker Change: To $71 9 billion in the fourth quarter.
Speaker Change: Partly the decline is due to the retroactive IPR revenue, we had in the fourth quarter 'twenty two but.
Carl: But I would say the primary driver here was the continued drop in North America, where sales decreased by 43% year-over-year in the quarter.
Speaker Change: But I would say the primary driver here was the continued drop in North America, where sales decreased by 43% year over year in the quarter.
Carl: India meanwhile
Speaker Change: India. Meanwhile.
Carl: There the five-year rollout continued but the pace slowed so we are up in sales in India by 10% year-over-year in Q4 but we dropped 40% sequentially as we see now the Indian market starting to normalize the investment levels following this unprecedented rollout pace that we've seen earlier in the year.
Speaker Change: There the five year rollout continued but the pace slowed.
Speaker Change: So we are up in sales in India by 10% year over year in Q4, but we dropped 40% sequentially as we see now the Indian market starting to normalize their investment levels. Following this unprecedented rollout pace that we have seen earlier in the year.
Carl: Gross margin then 41.1% excluding restructuring charges that is slightly down year over year but interestingly if we adjust for this large retroactive IPR revenue in the fourth quarter 22 it's actually an improvement in gross margin.
Speaker Change: Gross margin than our 41.1% excluding restructuring charges that is slightly down year over year, but interestingly if we adjust for these large retractive IPR revenue in the fourth quarter 'twenty two it's actually an improvement in gross margin.
Carl: And how did that come about? Well, gross margin in the fourth quarter was supported by a high share of software, thanks to the efforts in that area, but also the market mix.
Speaker Change: And how did that come about well our gross margin in the fourth quarter was supported by a high share of software. Thanks to the efforts in that area.
Speaker Change: But also the market mix.
Carl: I would also call out the cost reductions across the mobile networks business and one more factor to mention here, the lower variable pay accruals that we have seen which is also impacting OPEX positively. Thank you.
Speaker Change: I would also call out the cost reductions across the mobile networks business.
Speaker Change: And one more factor to mention here are the lower variable pay accruals that we have seen which is also impacting opex positively in Q4.
Carl: So in networks we achieved a gross margin of 43.2% excluding restructuring that's exceeding the 39 to 41% range that we had guided for and it's really a result of the activities I mentioned to improve the sales mix with a higher share of software.
Operator: Thank you for watching!
Speaker Change: So he networks, we achieved gross margin of 43, 2%, excluding restructuring that's exceeding the 39% to 41% range that we had guided for and it's really a result of the activities I mentioned to improve the sales mix with a higher share of software.
Operator: Hello everyone, and welcome to Ericsson's fourth quarter and full year results for 2023.
Carl: Further down in the TNL and EBITDA excluding restructuring declined somewhat to 8.2 billion versus 9.3 billion in 2022 I mentioned already the retractive IPR revenue which plays into the year-over-year comparison but we also had last queue for several provisions moving in the opposite direction as we disclosed at the time.
Speaker Change: Further down in the P&L in EBITDA, excluding restructuring declined somewhat to $8 2 billion.
Speaker Change: Versus $9 3 billion in 2022.
Speaker Change: I mentioned already the retractive IPR revenue, which plays into the year over year comparison.
Operator: Today I have, as usual, our CEO Börje Kohl and our CFO Karl Melander. And we will end this presentation as normal with Q&A, and in order to ask questions, you will need to join the conference by phone. Details can be found in today's press release or on our website ericsson.com slash investors. Please build with advice that this conference is, Thank you for watching! But before handing over to Börje, I would like to read the following.
Speaker Change: But we also had last call Q4 separate provisions moving in the opposite direction as we disclosed.
Speaker Change: At the time.
Carl: So if we look at year-over-year delta the underlying reason is really lower sales and a changed mix in
Speaker Change: So if we look at year over year Delta. The underlying reason is really lower sales and the change of mix in the networks.
Carl: Cloud software and services continued the positive trend, delivered an EBITDA of 2 billion in the quarter, driven by a couple of things, of course, operational improvement, but we see it in gross margin, but also in reduced OPEX. And that resulted in a fuller EBITDA of 1.7, as Borge mentioned, which is meeting, I would say, with the margin, our at least break-even ambition that we communicated earlier.
Speaker Change: Cloud software and services continued the positive trend delivered an EBIT of 2 billion in the quarter driven by a couple of things of course operational improvement, but we see it in gross margin, but also in a reduced opex and that resulted in a full year to be at a 1.7, Asbury a mansion, which is meeting.
Operator: During today's presentation, we will be making forward-looking statements.
Speaker Change: <unk> I would say with the mod in our at least breakeven ambition that we communicated earlier.
Operator: These statements are based on our current expectation and certain planning assumptions, which are subject to risk and assessment. The actual result may materially differ due to factors mentioned in today's press release and discussed in, Sandeep Deshpande, Andreas Joelsson, Peter Nielsen, We encourage you all to read about these risks and uncertainties in the earnings report today as well as in the annual report.
Carl: enterprise then grew by seven percent organically with a stable EBITDA loss year over year we had a negative impact in the quarter from some inventory write-offs in the enterprise wireless solutions
Enterprise <unk> grew by 7% organically with a stable EBITDA loss year over year, we had a negative impact in the quarter from some inventory write offs in the enterprise wireless solutions area.
Carl: Cashflow then, we delivered 12.5 billion of free cashflow before M&A in the fourth quarter and that's really ending the year on a strong note.
Speaker Change: Cash flow then we delivered $12 5 billion of free cash flow before M&A in the fourth quarter, and that's really ending the year on a strong note.
With that said, I would like to hand over the word to Börje, so please Börje. Thanks Peter and good morning everyone.
Carl: We had strong cash collection.
Speaker Change: We had strong cash collection.
Carl: and we released working capital from conclusion of large deployment projects as we had expected and talked about many
Speaker Change: And we released working capital from conclusion of large deployment projects as as we had expected and I talked about many times.
Thanks for joining us today. So, in 2023, we navigated a difficult mobile networks market marked by persistent headwinds and an unprecedented slowdown in the North American market, which really saw customers reducing capex significantly. With the rapid growth in India, we saw a dramatic change in business. But overall, the total mobile network market really fell in size. Notwithstanding these challenges, we continue to execute on our strategy, and I'm pleased to say that we concluded 2023 with a solid quarter, and we succeeded in generating an EBITDA of 21.4 billion kronor for the full year.
Carl: Then on cost out, to reiterate here, we have now achieved the committed run rate savings of 12 billion Swedish kronor, half of which impacted the P&L in 2023 already, and the remainder to impact in 2024. And here I just want to note that, of course, the 12 billion are...
Speaker Change: Then on Costa out to reiterate here, we have now achieved the committed run rate savings of 12 billion Swedish kroner, hassle, which impacted the P&L in 2023 already and the remainder to impacting in 2024.
Speaker Change: And here I just wanted to note that of course, the 12 billion or.
Carl: gross savings and meanwhile of course as all other companies and organizations we still have a cost inflation going on not least from annual salary increases that kick in and we're likely to return in 2024 to more normalized variable pay accruals from very low levels in 2023.
Speaker Change: Gross savings and Meanwhile of course as all other companies and organizations, we still have a cost inflation.
Speaker Change: Going on not least from annual salary increases.
Speaker Change: That kick in.
Speaker Change: And we're likely to retire in 2024 to a more normalized variable pay accruals from very low levels in 2023.
Through our strong focus on gross margin, which we've had for many years, as you know, we generated almost 40% gross margin for the year.
Carl: Restructuring provisions came to 1.5 billion in the fourth quarter and that brings the total to 6.5 billion versus the previously communicated 7 billion of restructuring in 2020.
Speaker Change: Restructuring provisions came to one and a half billion in the fourth quarter and that brings the total to six and a half billion versus the previously communicated 7 billion of restructuring in the 'twenty to 'twenty three.
While our actions to improve performance are paying off, we're not satisfied with our profitability, so we clearly have much more work to do. As we look ahead, 2024 will be a difficult year, and market conditions will prevail. And so we currently expect the current market outside of China to further decline as our customers remain cautious and the investment pace normalizes in India. With that in mind, we remain laser focused on managing what's in our control. We're consistently driving operational efficiency while keeping the investments critical to our future growth intact. We remain firmly committed to our long-term goals of 15-18% EBITDA and 9-12% free cash flow, and we are seeking to maximize value for all our stakeholders. Let me now walk you through some of the key takeaways from the past year and how our strategy is critical to the industry's long-term success.
Carl: If we move on and to the next slide and look at the full year in numbers.
Speaker Change: If we move on and to the next slide to look at the full year in numbers.
Carl: Reported sales then decreased to 263.4 billion compared to 271.5 previous year. That's a decrease by 10% organically following the week-run market disgust management.
Speaker Change: Our reported sales and decreased to $263 4 billion compared to 271 and a half of previous year. That's a decrease by 10% organically following the.
Speaker Change: Week ran markets discussed many times.
Carl: IPR licensing revenues as a positive we grew to 11.1 billion versus the 10.4 we recorded the previous year
Speaker Change: Licensing revenues are positively grew to 11.1 billion versus the 10.4, we recorded in the previous year.
Carl: And we see that as a result of new 5G license renewals during the year, partly offset by some expiring agreements.
Speaker Change: And we see that as a result of new five year license renewals during the year, partly offset by some expiring agreements.
Carl: Gross margin and excluding structuring declined in the full year to 39.6% versus 41.8% in 2022, as Börje mentioned earlier in the introduction. Again, driven by operators' capex reductions and the market mix, as we have described many times.
Speaker Change: Gross margin, excluding restructuring declined in the full year to 39.6% versus 41 point and eight in 'twenty two as Barry mentioned earlier in the introduction.
Speaker Change: Again, driven by operators Capex reductions and the market makes us we have described many times before.
Carl: If you look at cloud software and services on gross margin, we reached 36% up from 33% a bit more in 2022. That's encouraging and of course we continue to drive improvements in that.
So next slide, as expected, 2023 was a difficult year for the mobile network market with an overall decline combined with a dramatic change in market. Group sales declined organically by 10%, driven by an overall decrease of 15% in networks, with North America being down by almost 50%. We work relentlessly to strengthen our performance and cost management. We recognized already in more than a year ago the need to take costs out, and during 2023 we've implemented efficiency improvement including reducing internal and external headcount by more than 9000, and this has actually enabled us to deliver against our cost savings target of 12 billion kronor gross out. About half of that came into effect in 2023 and the remainder will come in during 2024, because of our efforts that we've done the past few years and you know the importance we place on gross margin we were able to deliver a gross margin of 39.6% and an EBITDA margin of 8.1% for the year I would say given an almost unprecedented market environment with volume declines as well as business mix change I think this was a very solid performance by the team, Across our business areas, we also took critical steps in building a stronger, more profitable Ericsson.
Speaker Change: If you look at the cloud software and services on gross margin.
Speaker Change: We reached 36% up from 33, a bit more in the 2022 that's encouraging and of course, we continue to drive improvements in that segment.
Carl: looking at the parts of OPEX R&D increased about a billion to 48.2
Speaker Change: Looking at the parts of Opex R&D.
Speaker Change: <unk> increased about 1 billion to 48 point too.
Carl: and that's impacted by negative currency effect of 0.9 billion.
And that's impacted by a negative currency effect of <unk> 9 billion.
Carl: And you see that the mobile networks business that's then the segment networks and cloud software and services
Speaker Change: And you say that the mobile network space Nast that said in the segment networks and cloud software and services.
Carl: was slightly down in R&D we do increase in enterprise and we also have the impact of course of the full year consolidation of Vonage now in the numbers
Speaker Change: It was slightly down in R&D, we do increase in enterprise and we also have the impact of course of the food year consolidation or vantage now in the numbers.
Carl: Turning to sdna excluding restructuring 38 billion also negative currency effect here 0.7 billion in this case
Speaker Change: Turning to SG&A, excluding restructuring 38 billion and.
Speaker Change: Also negative currency effect here point 7 billion in this case.
Carl: Same story, we decreased in the mobile networks part but increased in enterprise and this has mainly to do with investments in go-to-market activities in enterprise wireless.
Speaker Change: Same story, we have decreased in the mobile networks part by the increase in enterprise and this has mainly to do.
Speaker Change: Investments in go to market activities in enterprise wireless solutions.
Carl: also here of course we have an impact from the full year consolidation of one
Speaker Change: Also here of course, we have an impact from the food via consolidation of vantage.
Carl: so that leads us then to an EBITDA of 21.4 billion excluding restructuring in the full year that's at 8.1 percent margin
Speaker Change: So that leads us down to an EBITDA of $21 4 billion, excluding restructuring and the full year, that's eight 1% margin.
Carl: Obviously not a level we can be satisfied with in absolute terms but again I would like to say it illustrates the strength and resiliency in our company and our operations considering how extremely challenged the market has been in 2023 and still we deliver more than 20 billion a day.
Speaker Change: Obviously, not 11 11, we can be satisfied with the in absolute terms, but again I would like to say it illustrates the strength and resiliency in our company and our operations considering how extreme the challenge the market has been in 2023 and stayed where they live or more than 20 billion of data.
In mobile networks, we continue to extend our leading technology leadership.
Carl: pre-cash flow before M&A was 1.1 negative for the full year
Free cash flow before M&A was 1.1 negative for the full year.
Our leading technology empowers customers to build high-performance differentiated and programmable networks while also leading the shift to open cloud native networks. The contract with AT&T is a key proof point demonstrating how our technology is leveraged to advance the network architecture of the future and deliver a reduced total cost of ownership for our customers.
Carl: and as you will remember we flagged at the outset for this we would see a negative cash flow in 2023.
Speaker Change: And as you will remember we flagged at the outset for this we would see a negative cash flow in 2023.
Carl: It's due to the same business mix shift that we talk about on the P&L towards big rollout projects.
Speaker Change: It's due to the same business mix shifts that we talk about four in the P&L towards big rollout projects.
Carl: and those projects have a longer order-to-cash cycle than the normal business mix. So now what we saw in the fourth quarter and we will continue to see is that we move out of the intense rollout phase in those projects and therefore we see a positive effect on working capital reduction and therefore free cash flow generation.
And those projects have a longer order to cash cycle.
Speaker Change: Then the normal business mix and so now what we saw in the fourth quarter and we will continue to see is that we move out of the intense rollout phase in those projects and therefore, we see a positive effect on working capital reduction and therefore free cash flow generation.
This deal will create significant value both for our customer and for Ericsson, and we expect it to start to ramp up in the second half of 2024. In cloud software and services, we executed on the turnaround plan, and we're happy to have reached that target. So for the full year, we delivered an EBITDA of 1.7 billion kronor. I really want to thank the whole team for their effort. From now on, we'll continue to increase commercial discipline, automation, and delivery efficiency, focusing on long-term profitability. In Enterprise Wireless Solutions, we continue to build out our offerings, including the acquisition of Ericom, and we further strengthen our position in private networks. During Q4, we saw slower growth due to macro headwinds, and through our global network platform, we continue to work with front-runner customers to reshape the industry by transforming the network into a platform for innovation. In parallel, we've continued to drive our cultural transformation as we focus on building a culture of integrity and strengthening our governance, risk management, and compliance. All these initiatives, of course, come with short-term costs, but I It's important to note that historically large declines in the mobile network market are followed by a rebound.
Carl: some data points going forward if we move to the next one and for the first quarter so as Börje said we do expect the current market situation to prevail into 2024 and the AT&T contract will start to ramp up during the second half
Some data points going forward, if it moves to the next one and for the first quarter.
Speaker Change: So asbury aside we do expect the current market situation to prevail into 'twenty 'twenty four.
And AT&T contract will start to ramp up during the second half.
Carl: and we're expecting a gross margin here in the networks segment to land within the range of 39 to 41. There is a change in the mix from q4 to q1 and that is the reason for our guidance here 39 to 41 with less software.
Speaker Change: And we're expecting a gross margin here in the in the networks segment to land within the range of 39 to 41.
Speaker Change: There is a change in the mix from Q4 to Q1 and that is the reason for our guidance are 79% to 41 with less software.
Carl: Cloud Software and Services will continue to invest here. We have strategic investments in the 5G portfolio.
Speaker Change: Total software and services will continue to invest here, we have strategic investments and the five D portfolio, we're doing that for competitiveness and resilience and we expect that to remain into Q1.
Carl: We're doing that for competitiveness and resilience and we expect that to remain into Q1.
Carl: and please remember also when it comes to cloud software and services the nature of that business is such that results will fluctuate between individual quarters so we should not expect a linear development from quarter to quarter there.
Speaker Change: And please remember also when it comes to cloud software and services. The nature of that business is such that results will fluctuate between individual quarters. So we should not expect a linear development from quarter to quarter that.
Carl: Then in the enterprise segment, we expect some seasonality, negatively impacting sales from Q4 to Q1 with the
Speaker Change: Then in the enterprise segment, we expect some seasonality in there.
Speaker Change: Negative impacting sales from Q4 to Q1 with the.
Carl: maintain profitability lab.
Speaker Change: Maintain profitability level.
Carl: I want to comment also on OPEX and reiterate that the Q4 levels were low partly due to these low accruals for variable pay given the lower target fulfillment in the year and we expect this to revert to more normal accrual levels in the first quarter and some other factors play in as well including annual salary increases but also the investments that I mentioned in cloud software and services and enterprise so we would not expect OPEX in Q1 to come down as much as the average the last couple of years so I would recommend being cautious when you model this
I want to comment also on Opex and reiterate that the Q4 levels were low partly due to these low accrual for variable pay given the lower target fulfillment in the year.
And we expect it to revert to more normal accrual levels in the first quarter and some other factors factors play in as well.
Speaker Change: Coding annual salary increases, but also the investments that I mentioned in cloud software and services and enterprise. So we would not expect opex in Q1 to come down as much as the average the last couple of years.
So operators can sweat the assets up to a point, but eventually, they'll need to invest to manage the data traffic growth, cost, energy usage, and, of course, network quality and give the customer experience that the customer demands, and that is actually something we see will happen this time as well, so we fully anticipate the market will recover to more normalized levels, however, the timing is very difficult to predict. Ultimately, this will be in the hands of our customers So again, with that outlook, we will continue to prudently manage our balance sheet while keeping sight of investments critical to our long-term strategy.
Speaker Change: So I would recommend being cautious when you model the model at this point.
Carl: Lastly, I just want to mention on capital allocation, the strategy remains. We keep prioritizing organic investments in technology leadership and building an enterprise go-to-market organization.
Speaker Change: Lastly, I just want to mention our own capital allocation strategy remains we keep priorities prioritizing organic investments in technology leadership and building an enterprise go to market organization.
Carl: When it comes to M&A, we are prudent. We may do opportunistic tuck-in acquisitions that would complement our offering.
Speaker Change: When it comes to M&A, we are prudent that we may do opportunistic tuck in acquisitions that would complement our offerings.
Carl: and then we are targeting a stable to progressive dividend over time.
Speaker Change: And then we are targeting a stable to a progressive dividend over time.
Carl: and there obviously the board considers earnings, the business outlook, our financial position and opportunities.
Speaker Change: And there obviously the board considers earnings the business outlook, our financial position and opportunities.
Carl: We continue to aim for a gradual return to our target on free cash flow as you know it's nine to twelve percent of net net
Speaker Change: We continue to aim for the for a gradual return to our target on free cash flow as you know, it's 9% to 12% of net sales.
Carl: and following this as you saw the board recommends a stable dividend of 2 kronor and 70 öre for
Speaker Change: And following dates that you saw the board recommends a stable dividend of two kroner and 74 for the year.
Speaker Change: Then maybe on a more personal note I'd like to thank you everyone on the call here for all the great interactions over the years. This is my last of 30 earnings calls as the CFO for Ericsson, been a privilege. I look back at the absolutely incredible experience, fantastic people in our company.
Speaker Change: Then maybe on a more personal note I'd like to thank you everyone on the call here for all the great interactions over the years. This is my last of.
So as we focus on driving fundamental improvements to our cost structure and we expect to take additional actions, including reducing headcount as we pare back some investment areas and focus our portfolio where we really can win, as you saw today as well. The board has proposed a dividend of 270 per share corresponding to a total amount of 9 billion kronor. This is proposed to be paid out in two equal installments as in previous years. While recognizing the near-term challenges, I would say this is a testament to the confidence the board has in the longer-term outlook for us as a company. But let me now take a step back to put our achievements in the context of our strategy. So next slide.
Speaker Change: 30 earnings call as the CFO for Ericsson, it's been a privilege and I look back at the absolutely incredible experienced fantastic people in our company.
Speaker Change: and around us.
Speaker Change: And around us.
Speaker Change: I'm very pleased to have my successor now Lars Sandström named today and to leave the CFO Baton in his hands feels very good very good experience hands as I am about to embark on my next exciting chapter in life and I also want to say I'm very happy to announce which Börje did
Speaker Change: I'm very pleased to have my successor, now lost sundstrom named today and to leave the CFO baton in in his hands feels very good very good experienced hands.
Speaker Change: As I am about to embark on my next exciting chapter in life and I also want to say I'm very happy to announce and I wish both of you did.
Speaker Change: or previously Daniel Morris as the new head of investor relations.
Recently, our previously Daniel Morris as the new head of Investor Relations, which are it's a great addition to the team as well.
Speaker Change: is a great addition to the team as well. And finally, I want to say big thanks to Peter.
While the mobile network market is challenged, it actually provides real value to the economies around the world, from regular communication for consumers to advanced digitalization for enterprises and society. But the problem is that the return on capital has been stagnant, and many operators today fight to earn the cost of capital. I think to change this, there are two things we can do. We can passively wait for the market just to improve or regulation to change, or we can try to address the issue head-on by changing how networks are consumed and monetized.
Speaker Change: And finally, I want to say big thanks to pizza.
Speaker Change: You have been running the IR ship with a steady hand for the last 10 years in Ericsson and thanks for being such a dedicated companion and friend here as we have navigated through the waters here and I really wish you best of luck in the next chapter.
Speaker Change: You had been running the I R shaped with a steady hand for the last 10 years in Ericsson and.
Speaker Change: And thanks for being such a dedicated the companion and friend here as we have navigated that through the waters here and I really wish you best of luck in the next chapter Peter Thank you for that and I will get back to you, but yeah.
Speaker Change: thank you for that and with that back to you Burjan. Thanks Carl.
Thanks Scott.
Burjan: yeah 2023 was a challenging year and we said that in the end of 2022 calling it choppy it was a historically weak market and we expect current market uncertainty to continue into 2024.
Speaker Change: 2023 was a challenging year and we said that in the end of 'twenty to 'twenty, two calling a choppy.
Speaker Change: It was a historically weak market and we expect current market uncertainty to continue into 'twenty 'twenty four.
Burjan: But ultimately, we expect the market to recover to more normalized levels, but that will be over time, but it will be also based on operators need to invest to manage the rapid data traffic growth and also to continue the migration to 5G standalone.
Speaker Change: But ultimately we expect the market to recover to more normalized levels, but that would be over time, but it will be also based on operators need to invest to manage the rapid data traffic growth and also the continued migration to five standalone.
As you know, we've chosen the latter route. We're actively working to reshape the industry by transforming the network into an innovation platform leveraging cellular connectivity in new areas. So let me expand on that. First, we're leading the way by building high-performance and differentiated networks which will be needed to digitalize enterprise. By horizontalizing the architecture, we're allowing our customers to prioritize investments in different parts of the network at different clock cycles. This is important as it not only offers our customers advanced network architectures but it also allows for a lower cost of ownership. Second, with enterprise wireless solutions, we extend the use of cellular connectivity through private 5G networks and wireless WAN. And third, by developing a global network platform, we enable the exposure, consumption, and payment of network APIs, which extends the market beyond consumers to enterprises as well as developers. We're changing the monetization model of the industry, and this is a shift that, of course, will take some time, but we are encouraged by the progress we've made with our partnership with DT to offer network APIs to developers and enterprises, but we're also seeing very strong progress with frontrunner customers.
Burjan: Capacity will be needed to manage customer expectations to give the quality of service that will be needed or demanded from the consumer.
Speaker Change: Capacity will be needed to manage customer expectations. So to give the quality of service that will be needed or demand from the consumer.
Burjan: However, as we have said many times, it's really up to our customers to determine the cadence of investments and really not up for us to predict when the market will turn.
Speaker Change: However, as we have said many times, it's really up to our customers to determine the cadence of investments and really not up for us to predict when the market will turn.
Burjan: So in that environment, we remain laser focused on executing on our strategy to strengthen our leadership in mobile networks, grow our enterprise business and drive a cultural transformation.
Speaker Change: So in that environment, we remain laser focused on executing on our strategy to strengthen our leadership in mobile networks grow our enterprise business and drive a cultural transformation.
Burjan: We're relentlessly focused on managing elements that's in our control that includes of course the cost side as well as operational efficiency.
Speaker Change: We're relentlessly focused on managing elements, that's in our control and that includes of course, the cost side as well as operational efficiency.
Burjan: The steps we're taking are designed to help us navigate the near term, allowing us to prudently invest in technology leadership for long-term success, and it's all about ensuring that we're really well positioned when the market ultimately improves and recovers.
Speaker Change: The steps, we're taking are designed to help us navigate the near term, allowing us to prudently invest in technology leadership for long term success and it's all about ensuring that we're really well positioned when the market ultimately improves and recovers.
Burjan: Our goal is to make Ericsson a more profitable company based on the leading position in mobile infrastructure and the high growth enterprise platforms.
Speaker Change: Our goal is to make Ericsson and more profitable company based on our leading position in mobile infrastructure under high growth enterprise platform business. We remain firmly committed to our long term EBITDA margin target of 15% to 18% and also our cash flow targets.
Burjan: We remain firmly committed to our long-term EBITDA margin target of 15-18% and also our cash flow.
We're confident this will create a more profitable and sustainable future for our industry and our company. As a result, Ericsson has a clear leadership position today with leading offerings. With our strategy and the actions we're taking, we ensure that we will continue to be well positioned when the market improves. Before handing over the world to Carl, I would also like to comment on the announcement of our new CFO, Lars Sandström. Lars will be joining us from Getinge and comes with extensive experience and knowledge from a variety of financial and management roles.
Burjan: So 2023 was a challenging year but we took many critical steps in our strategy execution and we continued doing so in 2024.
So.
Speaker Change: 2023 was a challenging year, but we took many critical steps in our strategy execution and we continue doing so in 2024.
Speaker Change: Finally, I'd just like to say thank you to all my colleagues for their hard work in spite of really difficult markets, severe headwinds and challenges. A big thank you to the team. With that, I think it's time to move over to Q&A.
Speaker Change: Finally, I'd just like to say thank you to all my colleagues for their hard work in spite of really difficult market severe headwinds and challenges. The big Thank you to the team with that I think it's time to move over to Q&A Peter.
Speaker Change: yes it is and thank you Börje and thank you Carl and thank you both for the kind words
Peter: Yes. It is.
Peter: Thank you.
Peter: Thank you Karl and thank you both for the kind words.
Speaker Change: So let's return to the process. So it's time for the Q&A session.
Peter: So let's return to the process. So it's time for the Q&A session.
Lars will join us on the 1st of April, and we have also appointed Peter's successor as head of IR, Daniel Morris, who joins us from Vodafone's IR team with solid experience also as a sell-side analyst. So I would now just like to say a big thank you to both Carl and Peter for their time at Ericsson.
Speaker Change: As a reminder, as always, you need to press star and 1 and 1.
Peter: As a reminder, as always.
Peter: Need to press star.
Peter: And one and one on your telephone and wait for your name to be announced.
Speaker Change: on your telephone and wait for your name to be announced.
Speaker Change: And if you are streaming the webcast, please mute the webcast audio.
Peter: And if you're a student minda webcast. Please mute the webcast audio.
Speaker Change: will ask questions to minimize any sort of audio feedback.
Peter: Well ask questions to minimize any sort of all your feedback.
It's truly been a privilege to work with both of you.
Speaker Change: So let's see here who we have on the
Thank you both, and now, maybe for the last time, Carl, it's time for you to go through the numbers. Thanks a lot, Börje, for your kind words, and very good morning to everyone. I will address some of the key items around the financials here today and also make some comments on the outlook going forward. So, if you go to the next slide and look at Q4 to start with, And I would just paraphrase a bit Bury here. The challenging market we saw in telecom and this market mix shift were really dominant factors throughout 2023, and reported full year net sales in the US were down by 35 billion Swedish kronor year over year. But India grew by over 20 billion, so you can see clearly how powerful this shift was during the year 2023.
Peter: So, let's see here, who we have on the.
Speaker Change: first question
Speaker Change: First Chris Jim.
Speaker Change: I think the first question comes from Alexander Peterc at Societe Generale
Chris: Let's see here I think the first question comes from Alexandre pathetic.
Alexandre: So cetacean it out.
Aleksander Peterc: Good morning, Alexander.
Speaker Change: Morning Alexandre.
Aleksander Peterc: Yes, good morning, good morning all. Thank you very much for taking a question. Thank you, Carl, for your 30 quarters of reports. Great work done there. Thank you so much. My first question would be on the impact of the North American open run win on your margins, especially in the earlier stages. And the question here is, should we expect the initial margin pressure that you usually call, so, footprint acquisition costs,
Alexandre: Yes. Good morning, good morning, all and thank you very much for taking my question and thank you Carl for your first two quarters of <unk>.
Speaker Change: If we both family Great work done Pat Thank you so much.
Speaker Change: My first question would be on the impact of the North American opened around win on your margins, especially in the earliest stages and the question here is should we expect the initial margin pressure that you usually quote so footprint acquisition costs.
Aleksander Peterc: in this case, or should this not be the case because you don't get the benefit of the vendor lock-in over the long run in this contract? So that would be the first one. And the second one, just on India, you saw the shortfall in the fourth quarter, the roughly $4 billion of sales that didn't materialize in Q4. Is that materializing in the first half, and is that going to help your top line in the first half at all? Thanks.
Speaker Change: In this case or should we not be the case, because you don't get the benefit of the vendor lock in over the long run.
And the impact of this on both profits and cash flow is clearly visible. We have communicated about that many times, of course, however, partly countered with the cost-cutting efforts and the achievements that we have done and efficiency improvements across the country, but looking at Q4 then as a solid result despite the current market conditions, and the execution during this quarter, I believe demonstrates stronger increased resilience in our company and a good team effort. The group sales declined by 17% organically to 71.9 billion in the fourth quarter. Partly, the decline is due to the retroactive IPR revenue we had in the fourth quarter 22.
Speaker Change: In this contract so that'd be the first one and then the second one just on India. You saw the shortfall in the fourth quarter, roughly 4 billion of faith that didn't materialize in Q4 is that materializing in the first half and is that going to help your top line in the first half at all thank you.
Speaker Change: Thanks a lot.
Speaker Change: Thanks Alexander.
Speaker Change: um yeah i can take so when it comes to india yeah so we we really saw the peak now in in the third quarter and the volumes came down in the fourth quarter that is true nothing specific to talk about delays over over quarters if that's your question it's more importantly i would say we've seen an incredible speed in india during 2023 2024 we expect to be still a higher market larger market than it was prior to 2023 but of course compared to 23 coming down quite a lot so so that's what we have to understand
Speaker Change: It does.
Speaker Change: Yeah, I can take so when it comes to India.
Speaker Change: We really saw the peak I'm now in in the third quarter and the volumes came down in the fourth quarter.
Speaker Change: That is true.
Speaker Change: Nothing specific to talk about delays over over quarters. If that's your question is it's more importantly, I would say we've seen an incredible speed in India during 2023 a.
Speaker Change: 'twenty 'twenty four we expect to be a stale.
But I would say the primary driver here was the continued drop in North America, where sales decreased by 43% year-over-year in the quarter. In India, meanwhile, the five-year rollout continued, but the pace slowed, so we were up in sales in India by 10% year-over-year in Q4, but we dropped 40% sequentially as we see the Indian market starting to normalize the investment levels following this unprecedented rollout pace that we saw earlier in the year.
Speaker Change: Higher market larger market than it was prior to 2023, but of course compared to 23 coming down quite a lot. So so so that's what we have to understand.
Speaker Change: When it comes to the AT&T contract, you can continue on that one as well. But I just want to say, I mean, obviously, we don't talk about margins in specific contracts. We are extremely pleased with the confidence that AT&T has showed us. It will increase our market share in the North American market. And, of course, North America is such a key market for us, given our market share, which is already strong and now increasing with this contract as well. We will start to see meaningful revenue in the second half of that.
Speaker Change: When it comes to the AT&T contract umbrella you can you can continue on that one as well, but I just want to say I mean, obviously, we don't talk about the.
Speaker Change: Marty and St specific contracts we are.
Speaker Change: Extremely pleased with the confidence that AT&T has showed us it will increase our market share in the North American market.
Speaker Change: And of course, North America is such a key.
Gross margin was then 41.1%, excluding restructuring charges. That is slightly down year over year, but interestingly, if we adjust for this large retroactive IPR revenue in the fourth quarter, 22 it's actually an improvement in gross margin. And how did that come about? Well, gross margin in the fourth quarter was supported by a high share of software, thanks to the efforts in that area, but also the market mix. I would also call out the cost reductions across the mobile networks business and one more factor to mention here, the lower variable pay accruals that we have seen, which is also impacting OPEX positively. Thank you.
Speaker Change: Market for us given our market share, which is already strong and now increasing with this contract as well we will start to see meaningful revenue in the second half of that contract and I think that's all.
Speaker Change: That summarized it well.
Speaker Change: So you summarized it well.
Speaker Change: Thank you very much.
Speaker Change: Thanks, a lot.
Speaker Change: Thank you.
Speaker Change: So let's move further in the Q&A question
Speaker Change: Let's move further into Q&A Christian.
Speaker Change: we will move to the next question which comes from
Christian: We will move to the next question which comes from.
Speaker Change: Erik Lindholm, Røyestad at the Bank SEB. Good morning Erik.
Speaker Change: Hey, Eric Lin told them it really just started.
Eric Lin: The bank SNB good morning, Eric.
Erik Lindholm: Yes, good morning everyone. Thank you for taking my questions. So Deloro is expecting a 17% recovery here in North America in 2024, but you have quite cautious short-term commentary here. Can you talk a bit about how you expect this recovery to look if you think a recovery will materialize and if it's sort of more tilted towards age two? And then perhaps the second question, can you talk a bit about the sort of normalization here in free cash flow into 2024? Do you expect the working capital build-up that you saw in 2022 to fully normalized in 2024? Thank you.
Eric Lin: Yes. Good morning, everyone. Thank you for taking my question.
That's probably been Oro is expecting a 17% recovery here in North America I tried to charge for.
So in networks, we achieved a gross margin of 43.2% excluding restructuring, that's exceeding the 39 to 41% range that we had guided for, and it's really a result of the activities I mentioned to improve the sales mix with a higher share of software.
But you have quite cautious short term commentary here.
Eric Lin: Talk a bit.
Speaker Change: It's about how do you expect that recovery to look if you think a recovery will materialize caught up more tilted towards.
Speaker Change: It's too and then perhaps the second question.
Further down in the TNL and EBITDA excluding restructuring declined somewhat to 8.2 billion versus 9.3 billion in 2022 I mentioned already the retractive IPR revenue which plays into the year-over-year comparison but we also had last queue for several provisions moving in the opposite direction as we disclosed at the time. So if we look at year-over-year delta the underlying reason is really lower sales and a changed mix in, Cloud software and services continued the positive trend, delivered an EBITDA of 2 billion in the quarter, driven by a couple of things, of course, operational improvement, but we see it in gross margin, but also in reduced OPEX. And that resulted in a fuller EBITDA of 1.7, as Borge mentioned, which is meeting, I would say, with the margin, our at least break-even ambition that we communicated earlier, enterprise then grew by seven percent organically with a stable EBITDA loss year over year we had a negative impact in the quarter from some inventory write-offs in the enterprise wireless solutions, Cashflow then, we delivered 12.5 billion of free cashflow before M&A in the fourth quarter and that's really ending the year on a strong note.
Speaker Change: Can you talk a bit about the normalization.
Speaker Change: Regarding free cash flow into 2024 do you expect the working capital buildup that you saw in Q2.
Speaker Change: To fully normalize in 'twenty four thank you.
Speaker Change: Hum.
Speaker Change: Should I start with the market maybe?
Speaker Change: Should I start with the market and maybe.
Speaker Change: And and.
Speaker Change: I think what we are trying to do and it's a great question warehouse covers has the same one right. What we have said is we were rather taking a planning perspective that the current market conditions will prevail I, we see a challenging market for 'twenty to 'twenty four.
Speaker Change: That allows us to plan accordingly focus on taking costs out where appropriate making sure. We're disciplined in our investments and really pair back some of the investments areas. We've had so we're trying to use this environment to be really prepared on the cost side to be as lean as possible.
Speaker Change: At the same time, we want to make sure that we invest in technology leadership, because I think from my perspective, it's all about being well positioned when the market recovers and and that this and we've said that so many times it really depends on how the customer looks at their own cadence of investments some of them are.
Speaker Change: I'm going to show and we see that for example in early five D markets, where five G investments start to come back.
We had strong cash collection, and we released working capital from the conclusion of large deployment projects, as we had expected and talked about many. Then on cost out, to reiterate here, we have now achieved the committed run rate savings of 12 billion Swedish kronor, half of which impacted the P&L in 2023 already, and the remainder to impact in 2024. And here I just want to note that, of course, the 12 billion are gross savings, and meanwhile, as with all other companies and organizations, we still have cost inflation going on, not least from annual salary increases that kick in, and we're likely to return in 2024 to more normalized variable pay accruals from very low levels in 2023. Restructuring provisions came to 1.5 billion in the fourth quarter, and that brings the total to 6.5 billion versus the previously communicated 7 billion of restructuring in 2020.
Speaker Change: And that's why you've seen growth there for a couple of quarters now but.
Speaker Change: But when that will happen on a more global basis.
Speaker Change: it's ultimately in the hands of the customers but when it happens
It's ultimately in the hands of the customers, but when it happens we want to be really well positioned to take advantage of that turnaround and that recovery.
Speaker Change: We want to be really well positioned to take advantage of that turnaround and that recovery.
Speaker Change: If I take your cash flow question then, Erik?
Speaker Change: Thanks, Bert if I take your cash flow question, then I'm, Eric So we are going for the 9% to 12% free cash flow metric that we have or target.
Speaker Change: So we are going for the 9-12% free cash flow metric that we have or target. Just as with the EBITDA target, we are not saying when, we're not committing to a certain time period. But we have extreme cash flow focus in the company. And if you look at the fundamentals, we built up inventory due to the component shortage situation earlier. Of course, that is trading out more and more as we deliver to customers. And secondly, we had a market mix shift from the US and other markets, front-runner markets with shorter cycles to the longer cycles in India.
Bert: <unk> just us with the ability to target we are not saying when we're not committing to a certain time period, but we have extreme cash flow focus in the in the company.
Bert: And we should look at the fundamentals, we built up inventory due to the component shortage situation earlier of course that is trading out more and more as we as we deliver to customers and secondly, we had the market mix shift from the U S and other markets from China markets with shorter cycles to the longer cycles in.
Bert: In India.
Speaker Change: Assuming that that mix swings back to some extent and we already saw it in the fourth quarter with India coming down then we will release working capital and that's of course benefiting our free cash flow so we are going for this with a determination as usual and aiming for the long term 9 to 12.
Bert: Assuming that that mix swings back to some extent and we already saw it in the fourth quarter with India coming down then we will release working capital and that's of course, benefiting our fleet and free cash flow.
If we move on and to the next slide and look at the full year in numbers, reported sales then decreased to 263.4 billion compared to 271.5 billion the previous year. That's a decrease by 10% organically following the week-run market disgust management. IPR licensing revenues, as a positive, grew to 11.1 billion versus the 10.4 we recorded the previous year, And we see that as a result of new 5G license renewals during the year, partly offset by some expiring agreements. Gross margin and excluding structuring declined in the full year to 39.6% versus 41.8% in 2022, as Börje mentioned earlier in the introduction, again driven by operators' capex reductions and the market mix, as we have described many times. If you look at cloud software and services on gross margin, we reached 36%, up from 33% a bit more in 2022.
Bert: So so are we are going for this with a determination as usual and aiming for the long term 9% to 12%.
Speaker Change: I think only adding, you know, the other area that actually affects working capital is
Bert: I think the only adding.
Bert: The other area that actually affects working capital this week.
Speaker Change: We call it geopolitical resiliency. So we have tried to diversify our supply chain in total, and that's been a rather costly exercise, but it's allowed us to actually ship also when we had the supply disturbances.
Quarter geopolitical resiliency. So we have tried to diversify our supply chain in total on the and that's been rather costly exercise, but it's allowed us to actually shape also when we had the supply disturbances.
Speaker Change: I would say for other reasons than geopolitics, but it's kind of the whole notion that we need to have a geopolitical resiliency has actually impacted working capital.
Bert: I would say for all the reasons, then geopolitics, but it it's kind of the whole notion that we need to have a geopolitical resiliency has actually impact your working capital.
Speaker Change: Those increases will not happen. We've kind of built it in now. So we're in a much more stable position. But that, of course, have been a bit of a burden on cash flow.
Bert: Those increases will not you know.
And we've kind of built it now so we're in a much more stable position, but that of course have been a bit of a burden on our cash flow.
Speaker Change: Thanks Börje and thanks Erik for those two questions.
Speaker Change: Thanks Maria.
Maria: Thanks, Eric for those two questions.
Speaker Change: We will then move to the next question and then we have the question from François Boivinier from UBS. Good morning François.
Speaker Change: We will then move to the next question and then we have the Christian from Francois <unk> from UBS.
Francois: Morning Francois.
François Boivinier: Good morning, everyone. So I have two quick questions. The first one is on the software mix that impacted the quarter. Obviously, a good impact on margins. And, you know, I was looking at your reporting, you said that you had 38% of revenues from hardware, 22% in 2023, which indeed is higher than the last three years of reports where hardware was more than 40% of revenue. So it seems that 2023 was a bit more, you know, favorable in terms of mix software versus hardware versus the last three years. But then I was looking back, you know, like, beyond or before the last three years, so the last 10 years, and I was surprised to see that the hardware percentage and software percentage is actually in line with what you reported in 2023. And I was always thinking that your business would
Francois: Good morning, everyone just.
Francois: Two quick question. The first one is on the the software mix that impacted the quarter overseas a good impact on margins and you know it was looking at your.
That's encouraging and of course we continue to drive improvements in that, looking at the parts of OPEX R&D increased about a billion to 48.2 and that's impacted by negative currency effect of 0.9 billion. And you see that the mobile networks business that's then the segment networks and cloud software and services, was slightly down in R&D we do increase in enterprise and we also have the impact of course of the full year consolidation of Vonage now in the numbers Turning to sdna excluding restructuring 38 billion also negative currency effect here 0.7 billion in this case, Same story, we decreased in the mobile networks part but increased in enterprise and this has mainly to do with investments in go-to-market activities in enterprise wireless, also here of course we have an impact from the full year consolidation of one so that leads us then to an EBITDA of 21.4 billion excluding restructuring in the full year that's at 8.1 percent margin, Obviously not a level we can be satisfied with in absolute terms but again I would like to say it illustrates the strength and resiliency in our company and our operations considering how extremely challenged the market has been in 2023 and still we deliver more than 20 billion a day, pre-cash flow before M&A was 1.1 negative for the full year and as you will remember we flagged at the outset for this we would see a negative cash flow in 2023.
Francois: Reporting you said that you had 38% of revenues from hardware, 22% in 2023.
Francois: Which are indeed this is higher than the last three years of reports where hardware was more than 40% of revenues. So it seems that 2023 was a bit more favorable in terms of mix software versus hardware.
Francois: This is the last three years, but then I was looking back you know like beyond that before the last three years since the last 10 years and I was surprised to see that the hardware percentage on software percentage is actually in line with what you reported in 2023.
And I was always thinking that your business would be more software and service.
Speaker Change: Daniel Djurberg, Daniel Djurberg, Daniel Djurberg, Daniel Djurberg, Daniel Djurberg, Daniel Djurberg, Daniel Djurberg, Daniel Djurberg,
Francois: Intensive as as we move forwards because you always said that software and you know it's more important in the coming.
Francois: You know technologies, so how should we think about the mix in 'twenty 'twenty four is or maybe even longer term because I don't see much change in the last 10 years and that would be very interesting to know you know, how we should think about that or any.
Francois: Fundamentals behind and the second one second question if I means on Vanessa I mean, you mentioned his contract close that impacted the quarter can.
Francois: Can you provide a bit more color about what's going on here how can you reassure them about you know.
Francois: The offering of the Nash because two percentage growth is well below what you expected originally.
Francois: So was wondering if is there anything you can provide in terms of quota here. Thank you.
Speaker Change: I think if we start a bit on the software mix so what you see you know depending on where you are in the cycle you will have more hardware sales and thereby less software and that's really what you see in 2023 it was a rather sharp reduction in hardware volume
Francois: I think on their own or if we start to beat on the software mix.
Francois: So what you see O M. You know depending on where you are in the cycle you will have more hardware sale.
It's due to the same business mix shift that we talk about on the P&L towards big rollout projects, and those projects have a longer order-to-cash cycle than the normal business mix. So now what we saw in the fourth quarter and we will continue to see is that we move out of the intense rollout phase in those projects and therefore we see a positive effect on working capital reduction and therefore free cash flow generation, some data points going forward if we move to the next one and for the first quarter so as Börje said we do expect the current market situation to prevail into 2024 and the AT&T contract will start to ramp up during the second half and we're expecting a gross margin here in the networks segment to land within the range of 39 to 41. There is a change in the mix from q4 to q1 and that is the reason for our guidance here 39 to 41 with less software. Cloud Software and Services will continue to invest here. We have strategic investments in the 5G portfolio.
Francois: Sales and thereby less software and that's really what we're what you'll see in 2023.
Francois: Was a rather sharp reduction in hardware volumes, that's actually impacting the mix more than then.
Speaker Change: That's actually impacting the mix more than
Speaker Change: Daniel Djurberg, Sandeep Deshpande
Francois: Then kind of any structural change, but that has been the case in almost all where it has been the case than in previous cycles as well. So you see this shifting over time, depending on where you are on Rollouts and remember it's still only.
Speaker Change: one in three or maybe one in four even sites that are upgraded to 5g mid band and that's actually ultimately going to require hardware so it's so the it's a bit
Francois: One in three or maybe want them for even sites that are upgraded.
Francois: Two five G midband and that's actually ultimately going to require hardware.
Francois: So.
Francois: It's a bit.
Speaker Change: It's tricky to put exactly a number, but with what you're going to see with the separation of hardware and software going forward, you will see the hardware portion come down. It's not going to happen from one quarter to the next or a year to the next, but this is over a period of time as the new technology stack will be implemented, making us more focused towards the software side, basically.
Francois: Tricky to put exactly a number but with what youre going to see with the separation of hardware and software going forward you will see the hardware portion come down it's not going to be.
Francois: It happened from one quarter to the next sort of year to the next but this is over a period of time as as the new technology stack will be implemented making us more.
Francois: Focus towards the software side.
We're doing that for competitiveness and resilience and we expect that to remain into Q1, and please remember also when it comes to cloud software and services the nature of that business is such that results will fluctuate between individual quarters so we should not expect a linear development from quarter to quarter there. Then in the enterprise segment, we expect some seasonality, negatively impacting sales from Q4 to Q1 with the, maintain profitability lab. I want to comment also on OPEX and reiterate that the Q4 levels were low partly due to these low accruals for variable pay given the lower target fulfillment in the year and we expect this to revert to more normal accrual levels in the first quarter and some other factors play in as well including annual salary increases but also the investments that I mentioned in cloud software and services and enterprise so we would not expect OPEX in Q1 to come down as much as the average the last couple of years so I would recommend being cautious when you model this, Lastly, I just want to mention on capital allocation, the strategy remains.
Speaker Change: I would say that the longer term, the portion of software is going to increase and the portion of hardware is going to decrease.
Francois: Basically so I'd I'd I would say that the longer term the portion of software is going to increase in the portion of hardware is going to decrease.
Speaker Change: for that reason more than anything.
Francois: Batteries and more than anything else.
Speaker Change: And I could complement that also, of course, as you said, Börje, in build-out phases, of course, hardware grows as well. And that is, of course, a good thing, because that has to do with building footprint with the operators, shipping our hardware, installing it in the field. And then, of course, software comes on top of that installed base. So we are also happy, of course, with high hardware sales in these phases. So no question. And also, I would say over the years, the margin delta between software and hardware has also been reduced, because now we have a very competitive hardware portfolio as well.
Francois: And I can complement that also of course as you said brewery in Buildout faces of course hardware.
Francois: Our gross as well and that is of course, a good thing because that has to do with building footprint with the operators shipping out of hardware installing it in the field and then of course soft software. It comes on top of that installed base. So.
Francois: We are also happy of course with the Hyatt High hardware says in this in these spaces. So now no question and also the I would say over the years the margin Delta between software and hardware household so been reduced because now we have a very competitive hardware portfolio as well.
Speaker Change: and we should also mention that we should say
Francois: We should also mention that we should save them.
Andreas Joelsson: A lot of the investments we did in R&D, if you go back a few years, was actually to make sure we had a very or less sensitivity to the mix between hardware and software.
Francois: And that's actually a lot of G&A as well.
Francois: Specifically a lot of the investments we did in R&D. If you go back a few years was actually to make sure we had the very or less sensitivity to the mix between hardware and software.
Andreas Joelsson: and that's why when the increased hardware portion that you saw the last few years actually could still generate a very solid gross profit.
Francois: So that and that's why when the increased hardware portion that you saw the last few years actually work.
Francois: Could still generate a very solid gross profit section.
Andreas Joelsson: And on 2024, directionally, what feasibility do you have? Is it like more hardware or more software a year based on your activity and orders?
Francois: And you all know 2024, Directionally Directionally 'twenty 'twenty four is it a what visibility do you have is it like more hardware more software year based on your activity in orders.
Speaker Change: I would say the longer term trend is towards more software, as Börje said, given how networks will be built and so on. 2024, we'll have to see how it plays out. But maybe to mention one aspect I could play in, and that's the inventory buffering we saw in North America. And as you know, that's one of the reasons why we have shipped less hardware also in 2023, is that the carriers in the US have depleted their buffer inventory of radio equipment.
Speaker Change: Yeah, I would say the longer term trend is towards more software Asbury is given how the networks will be built and so on 'twenty 'twenty four we will have to see how it plays out but maybe dimension one aspect I could tell you and that's the inventory buffering, we saw in North America and as you know that's one of the reasons why.
We keep prioritizing organic investments in technology leadership and building an enterprise go-to-market organization. But when it comes to M&A, we are prudent. We may do opportunistic tuck-in acquisitions that would complement our offering, and then we are targeting a stable to progressive dividend over time, and obviously, the board considers earnings, the business outlook, our financial position, and opportunities. We continue to aim for a gradual return to our target on free cash flow, which is nine to twelve percent of net net, and following this, as you saw, the board recommends a stable dividend of This is my last of 30 earnings calls as the CFO for Ericsson. It has been a privilege.
Speaker Change: We have shipped less hardware also in 'twenty to 'twenty three is that.
Speaker Change: The carriers in the U S have depleted their puffery mentoring of radio equipment. Now we have reached of course the level, which we believe is the normalized inventory level, so that could bode well for additional hardware deliveries, but I think it's fair to say that the volume decline, we see is quite quite a lot in <unk>.
Speaker Change: now we have reached of course a level which we believe is the normalized inventory level so that could bode well for additional hardware deliveries but i think it's fair to say that the the volume decline we see is is quite quite a lot in hardware sites
Speaker Change: Hardware side of course.
Speaker Change: And then you had a question, François, about the development in Vonage. The Vonage, the mentioned contract is actually a very low margin contract. So from a profitability point of view, less impact.
And then you had a question first of all about the development going on just maybe about the therefore, they've all niche it's there.
Speaker Change: <unk> contract is actually a very low margin contracts. So it's tough.
From a from a profitability point of view less impact.
François Boivinier: any reason why I mean a contract loss I mean just give colors and
Speaker Change: And he was in a way I mean, our contract plus I mean, just give kudos and.
François Boivinier: uh
Speaker Change:
François Boivinier: do you still expect to go double the percentage you know after this normalization of contract loss or
Speaker Change: Kill you expect to grow the relative percentage you know after this combination of contactless or.
François Boivinier: Our ambition, I mean, we have to come back on thinking about what is the rationale behind Vonage, what is it we're trying to do. Of course, we have an existing business that we need to run, which is the CPaaS, UCaaS, CCaaS.
Speaker Change: No I I, our MBS I mean, they will have to come back on thinking about what is the rationale.
Speaker Change: Behind voltage what do you see if we're trying to do a win where of course that we have an existing business that we need to run which is to see past you Cassie Cas business that needs to develop as well but.
François Boivinier: that needs to develop as well and but we also have said that we want to prioritize higher margin product offerings within that
I look back at the absolutely incredible experience, the fantastic people in our company and around us. I'm very pleased to have my successor now Lars Sandström named today and to leave the CFO baton in his hands feels very good, very good experience hands as I am about to embark on my next exciting chapter in life. I also want to say I'm very happy to announce that Börje did, or previously Daniel Morris, as the new head of investor relations is a great addition to the team as well. And finally, I want to say a big thanks to Peter.
Speaker Change: But we also have said that we want to prioritize higher margin.
Speaker Change: Product offerings within that suite, but the real strategic area that we're actually working on used to develop the market for network. A P is and we do have the ability to expose the capabilities of the network in a new way.
François Boivinier: But the real strategic area that we're actually working on is to develop the market for network APIs and with the ability to expose the capabilities of the network in a new way.
François Boivinier: That is where we are 100% focused on while trying to maintain the existing business. This was one where of course it had an impact on the sales number but we didn't feel it was strategic for us and therefore that was not a critical contract for the success of the business but it did impact Topline.
Speaker Change: That is where were Honda percent focused on.
Speaker Change: While trying to maintain the existing business. This was one where we're of course it had any impact on the sales number but we didn't feel it was strategic for us and therefore that didn't.
You have been running the IR ship with a steady hand for the last 10 years at Ericsson, and thanks for being such a dedicated companion and friend here as we have navigated through the waters here. I really wish you the best of luck in the next chapter. Thank you for that, and with that, back to you, Burjan.
Speaker Change: It was not the critical contract for the success of the business, but it did impact topline.
Speaker Change: Thanks, Poirier, and thanks, Francois, for those questions.
Speaker Change: Thanks, Brett Thank you very much Francois for those questions.
Speaker Change: So we'll move further in the Q&A session and we have the next question from Andreas Joelsson at Carnegie. Good morning, Andreas.
Speaker Change: So it wouldn't move further in the Q&A session and we have the next question from Andrew yesterday, with some Connecticut good morning Andreas.
Thanks Carl, yeah 2023 was a challenging year, and we said that at the end of 2022, calling it choppy. It was a historically weak market, and we expect current market uncertainty to continue into 2024. But ultimately, we expect the market to recover to more normalized levels, but that will be over time, but it will also be based on operators needing to invest to manage the rapid data traffic growth and also to continue the migration to 5G standalone.
Andreas Joelsson: Good morning everyone and thank you for taking my question, just a follow-up on the overall market and maybe a little bit more long-term. We all know 5G importance for society as such and so on, but why do you feel or what is your view on why especially the US operators are a little bit more cautious now? What do they need to see in order to become a little bit more positive in putting investments into this?
Andrew: Good morning, everyone.
Andrew: Thank you for taking my question just a follow up on the overall market and maybe a little bit more long term.
Andrew: We all know <unk> importance for society, as such and so on but why do you.
Andrew: Or what is your view on why especially the U S operators are a little bit more cautious now what do they need to see in order to become a little bit more positive than putting investments in today.
Andreas Joelsson: And secondly, on the AT&T contract, also more long-term beyond 2024, how do you see that ramping up? And if you could say something about the visibility you have in that particular contract over time.
And secondly on on the AT&T contract also more long term beyond 2024, how do you see that ramping up and if you could say something about the visibility you have in that particular contract over time. Thanks.
Capacity will be needed to manage customer expectations to give the quality of service that will be needed or demanded from the consumer. However, as we have said many times, it's really up to our customers to determine the pace of investments and really not up for us to predict when the market will turn. So in that environment, we remain laser focused on executing on our strategy to strengthen our leadership in mobile networks, grow our enterprise business, and drive a cultural transformation. We're relentlessly focused on managing elements that are in our control, which includes, of course, the cost side as well as operational efficiency. The steps we're taking are designed to help us navigate the near term, allowing us to prudently invest in technology leadership for long-term success, and it's all about ensuring that we're really well positioned when the market ultimately improves and recovers.
Speaker Change: Thank you.
Andrew: Thanks.
Speaker Change: If we start with the market,
Andrew: But if we start with the market.
Speaker Change: without singling out any operators, because they're our customers, we work very closely with them. But if you look at mobile infrastructure, what is a bit unique with the mobile infrastructure is that
Andrew: Without singling out any operators because.
They are our customers, we work very closely with them.
Andrew: But if you look at mobile infrastructure, but what is a bit unique with the with the mobile infrastructure is that.
Speaker Change: you know the it's not a cut-off point you have it or you don't have it it's actually a degrading quality
Andrew: You know, it's it's not the cut off point you have it or you don't have it it's actually a D grade and quality.
Speaker Change: and and as that allows you in a way as an operator to
Andrew: And and asked that allows you in a way as a as an operator to two.
Speaker Change: Peter Nielsen
Andrew: Pare back investments for a period of time traffic continues to grow the underlying traffic growth 22%.
Andrew: Fast so sometimes when you have fixed wireless access.
Andrew: So that they in a way that the capacity demand continues.
Speaker Change: then you can can say okay i can degrade performance a bit i can actually i may not need the capacity short term so you can save invest
Andrew: Then you can can say, okay I can degrade before Mr. Beat I can actually I may not need the capacity short term. So you can say the investments are but but ultimately you would need the capacity.
Speaker Change: But ultimately, you need the capacity.
Our goal is to make Ericsson a more profitable company based on the leading position in mobile infrastructure and high-growth enterprise platforms. We remain firmly committed to our long-term EBITDA margin target of 15-18% and also our cash flow. 2023 was a challenging year, but we took many critical steps in our strategy execution, and we continued doing so in 2024.
Speaker Change: So what will then be the trigger for that? It will probably be competition offering a better service. It may be a front runner in the market that actually drives the others, therefore, to invest.
Andrew: So the what we will then be the trigger for that they will probably be competition offering a better service and it may be of throne drama in the market.
Andrew: That actually drives job, there's therefore to invest.
Speaker Change: It may be new type of use cases that come up that demands more bandwidth, whether that is XR applications, whether it's
Andrew: It may be new type of use cases that come up that demands more bandwidth.
Andrew: Whether that is XR applications, whether it's new type of streaming services, new type of social media I don't know, but we know when you get those new type of.
Speaker Change: new type of streaming services new type of social media i don't know but we know when you get those new type of
Finally, I'd just like to say thank you to all my colleagues for their hard work in spite of really difficult markets, severe headwinds, and challenges.
Speaker Change: of use cases into the network. It actually drives the need to invest.
Andrew: Abuse cases into the network it actually drives the need to invest in.
Speaker Change: and lastly I would say for the world to really benefit from 5G we need to migrate to 5G standalone and there are if you look across the world very few 5G standalone networks built out
Andrew: And lastly, I would say for the world to really benefit from five G. We need to migrate two five G standalone.
A big thank you to the whole team.
Unnamed Speaker: With that, I think it's time to move over to Q&A. Yes, it is, and thank you Börje and thank you Carl and thank you both for the kind words. So let's return to the process.
Andrew: And there are a if you look across the world very few five G. Standalone networks built out.
Speaker Change: Really where it's a frontrunner is China. In China, you start to see enterprise applications coming.
Andrew: Really where we're at as a front runner is China in China, you'll start to see enterprise applications coming on top of the five D network that we are not seeing in the rest of the world yet for the simple reason the infrastructure is not built out.
Unnamed Speaker: So it's time for the Q&A session. As a reminder, as always, you need to press star and 1 and 1 on your telephone and wait for your name to be announced. And if you are streaming the webcast, please mute the webcast audio; I will ask questions to minimize any sort of audio feedback. So let's see here who we have on the first question. I think the first question comes from Alexander Peterc at Societe Generale. Good morning, Alexander.
Speaker Change: on top of the 5g network that we are not seeing in the rest of the world yet for the simple reason the infrastructure is not built out
Speaker Change: So when you look at this, when will it exactly be? I don't know, to be honest. It's in the hands of the customers when they make the strategic decision to say, okay, we need this to offer the services, to offer the capabilities, to generate new type of revenues for the network.
Andrew: So when you look at this when will it exactly b I.
I don't know to be honest.
Andrew: It seems the hands of the customers when they make the strategic decision to say, okay. We need is to offer the services to offer the capabilities to generate new type of revenues for the network and I think that's gonna come the ultimate recovery will come.
Speaker Change: and I think that's going to come, the ultimate recovery will come, but it's just in the hands of the customer.
Andrew: But it's just in the hands of the customers.
Yes, good morning, good morning all.
Speaker Change: your second question around AT&T long term how that would be developed? I think we will have to come back to that. We have signed the agreement we are very pleased with that and we are now starting to ramp up the preparation for that. It will be visible in the second half but exactly how it plays out I would probably rather report when it happens on that. But it's a breakthrough contract. It's historic in nature also from a strategic point of
Andrew: And your second question around agency long term, how that would be developed now I think we will have to come back to that we have we have signed the agreement we are very pleased with that.
Thank you very much for taking a question.
Thank you, Carl, for your 30 quarters of reports. Great work done there.
Andrew: And we are now starting to ramp up the preparation for that they will it will be visible in the second half, but exactly how it plays out I would I would probably rather report when it happens on that but it's a breakthrough contract. Its historic in nature also from a strategic point of view.
Unnamed Speaker: Thank you so much.
Unnamed Speaker: My first question would be on the impact of the North American open run win on your margins, especially in the earlier stages. And the question here is, should we expect the initial margin pressure that you usually call, so, footprint acquisition costs, in this case, or should this not be the case because you don't get the benefit of the vendor lock-in over the long run in this contract? So that would be the first one. And the second one, just on India, you saw the shortfall in the fourth quarter, the roughly $4 billion of sales that didn't materialize in Q4. Is that materializing in the first half, and is that going to help your top line in the first half at all?
Speaker Change: We can say we have great visibility. It's going to take some time to ramp up the contract. That's going to happen, as Carl said, in the second half of this year. But then we have visibility on how that's going to look like going forward.
Andrew: But we have we can say we have great visibility.
Andrew: It's going to take some time to ramp up the contract that's going to happen.
Andrew: As Carl said in the second half of this year, but then we have visibility on how that is going to look like going forward.
Unnamed Speaker: So in networks, we achieved a gross margin of 43.2%, excluding restructuring, that's exceeding the 39-41% range that we had guided for. And it's really a result of the activities I mentioned, to improve the sales mix with a higher share of software. Further down, TNL and EBITDA, excluding restructuring, declined somewhat to 8.2 billion versus 9.3 billion in 2022.
Speaker Change: but let's come back.
Andrew: But but let's come back to that.
Speaker Change: Thank you.
Andrew: Thank.
Speaker Change: Thank you.
Speaker Change: we lost him we move to the next question probably hang up good morning Joseph so from Barclays how are you today
Speaker Change: And we lost him we move to the next question probably hang up [laughter].
Speaker Change: Good morning, Joseph saw from Barclays. How are you today.
Joseph: hi good morning everyone thank you for taking my questions and thank you kyle and peter best of luck to your future endeavors and thank you i have a few questions and i'll go one at a time and the first one is really on india and what is your expected normalized revenue level in 24 and going forward and is it sensible to assume it goes back to say the 2022 level plus your market share gain with jail for 5g or do you see some structural uplift in the overall market size that's my first question
Speaker Change: Hi, Good morning, everyone. Thank you for taking my questions and thank you and Peter Best of luck to your future endeavors.
Unnamed Speaker: Thanks. Thanks a lot, um yeah i can take so when it comes to india yeah so we we really saw the peak now in in the third quarter and the volumes came down in the fourth quarter that is true nothing specific to talk about delays over over quarters if that's your question it's more importantly i would say we've seen an incredible speed in india during 2023 2024 we expect to be still a higher market larger market than it was prior to 2023 but of course compared to 23 coming down quite a lot so so that's what we have to understand, When it comes to the AT&T contract, you can continue on that one as well. But I just want to say, I mean, obviously, we don't talk about margins in specific contracts.
Unnamed Speaker: I mentioned already the retractive IPR revenue which plays into the year-over-year comparison, but we also had lost queue for several provisions moving in the opposite direction, as we disclosed at the time. So if we look at the year-over-year delta, the underlying reason is really lower sales, and it changed mix. Cloud software and services continued the positive trend, delivering an EBITDA of $2 billion in the quarter, driven by a couple of things, of course, operational improvement, but we see it in gross margin, but also in a reduced OPEX, and that resulted in a fuller EBITDA of $1.7 billion, as Burja mentioned, which is meeting, I would say, with the margin, our at least breakeven ambition that we communicated earlier We had a negative impact in the quarter from some inventory write-offs in the Enterprise Wireless Solutions Act. However, cash flow then, we delivered $12.5 billion of free cash flow before M&A in the fourth quarter. And that's really ending the year on a strong note.
Speaker Change: Thank you.
Speaker Change: Few questions and I'll I'll go one at a time and the first one is already on India and what is your expected normalized revenue level in 'twenty, four and going forward and is it sensible to assume it goes back to say that the 2022 level plus your market share gain with scale.
Speaker Change: Or do you see some structural uplift in the overall market size. That's my first question.
Speaker Change: Thank you for your call.
Speaker Change: Got it.
Speaker Change: um yeah it's of course in the hands of the operators how much they invest but i think it's it's fair to assume that
Speaker Change: Yeah, it's of course in the hands of the operators how much they invest but I think it's fair to assume that.
Speaker Change: A normalized level is higher than pre-5G.
Speaker Change: Our normalized level is higher than pre five G.
Speaker Change: 2023 was a record year and it's coming down as we said in 2024 but we would still expect a higher volume than 2023.
Speaker Change: Our 2023 was a record year and it is coming down as we said in 2024.
Speaker Change: But we would still expect the higher volume than the 2022 of them.
Speaker Change: Again, it's up to operators how much they want to invest.
Unnamed Speaker: We are extremely pleased with the confidence that AT&T has shown us. It will increase our market share in the North American market. And, of course, North America is such a key market for us, given our market share, which is already strong and now increasing with this contract as well. We will start to see meaningful revenue in the second half of this year.
Speaker Change: Again, it's a it's up to operate just how much they want to to invest obviously.
Speaker Change: your second question you said?
And your new stuff.
Speaker Change: Yeah, the second question is about the ramp up for AT&T and shall we expect any revenue from AT&T in the first half of 2024, you know, at any kind of material level? And also, just regarding that, do you need to rehire in North America to execute the contract? Because obviously, you had a savings program where you had a huge headcount reduction in North America last year. And do you need to, you know, hire some of those people? Do you need to go back for the new contract? We don't expect material revenue in the first half. So that's why I really point that out. That is to be expected in the second half. Resources, rehiring in North America, elsewhere?
Speaker Change: Yes. The second question is about <unk>.
Speaker Change: Ramp up for AT&T and shall we expect any revenue from AT&T in the first half will tend to fall.
Speaker Change: Any kind of a material level and also just regarding that do you.
Unnamed Speaker: We had strong cash collection, and we released working capital from the conclusion of large deployment projects, as we had expected and talked about many times. Then on cost out, to reiterate here, we have now achieved the committed run rate savings of 12 billion Swedish kronor, half of which impacted the P&L in 2023 already, and the remainder to impact in 2024. And here I just want to note that, of course, the 12 billion are gross savings.
Unnamed Speaker: That summarized it well.
Unnamed Speaker: Thank you very much. So let's move further in the Q&A question; we will move to the next question, which comes from Erik Lindholm, Ryestad at Bank SEB.
Speaker Change: You need to really higher in North America to execute a contract because obviously you had the savings program. What why are you you had a huge head count reduction in North America last.
Good morning Erik.
Yes, good morning everyone.
Speaker Change: Last year and do you need to.
Speaker Change: Higher some of those people go back for the new contract.
Thank you for taking my questions.
We will we don't expect material revenue in the first half and it sounds as though that's why I really point that out that is to be expected in the second half.
So Deloro is expecting a 17% recovery here in North America in 2024, but you have quite cautious short-term commentary here.
Unnamed Speaker: Can you talk a bit about how you expect this recovery to look if you think it will materialize and if it's sort of more tilted towards age two? And then, perhaps the second question, can you talk a bit about the sort of normalization here in free cash flow into 2024? Do you expect the working capital build-up that you saw in 2022 to be fully normalized in 2024? Thank you. Should I start with the market? It's ultimately in the hands of the customers, but when it happens, we want to be really well positioned to take advantage of that turnaround and that recovery. If I take your cash flow question then, Erik? So we are going for the 9-12% free cash flow metric that we have or target.
Speaker Change: Resources Rehiring in North America elsewhere, William you want to take them.
Unnamed Speaker: And meanwhile, of course, like all other companies and organizations, we still have cost inflation going on, not least from annual salary increases that kick in. And we're likely to return in 2024 to more normalized variable pay accruals from very low levels in 2023. Restructuring provisions came to one and a half billion in the fourth quarter.
Speaker Change: We've also changed the structure so we have less
William: We have also changed the structure so we have less.
Speaker Change: um
Speaker Change: service engineers basically in-house.
William: Service Engineers basically in house.
Speaker Change: So we will rely more on third party for that.
William: So we will rely more on third party for that.
Speaker Change: So I don't expect material rehiring
William: So I I don't expect material re hirings.
Speaker Change: to deliver on this contract.
William: To deliver on this contract.
Speaker Change: Thanks, Borya. Thank you. Thanks, Yosef.
Speaker Change: Thanks, Brett.
Unnamed Speaker: And that brings the total to six and a half billion versus the previously communicated seven billion of restructuring in the twenty. If we move on to the next slide and look at the full year in numbers, reported sales then decreased to $263.4 billion compared to $271.5 billion the previous year.
Speaker Change: Thank you thanks Joseph Thanks.
Speaker Change: We will move to the next question and the next question is from
Speaker Change: We will move to the next question. The next question is from.
Speaker Change: Jacob Bluestone at ENP Paribas, Exxon. Good morning Jacob.
Jacob Bluestone: Jacob Bluestone.
Yeah.
Jacob Bluestone: Ian Parry about axon good morning Jacob.
Jacob Bluestone: Good morning. Thanks for taking my questions too, please. Firstly, on the AT&T contract, we heard from Nokia that price was a big part of the reason it lost the contract. I'd just be interested in hearing from your point of view, to what extent do you see these types of O-RAN contracts as being deflationary overall?
Ian Parry: Good morning, Thanks for taking my questions two please.
Unnamed Speaker: Just as with the EBITDA target, we are not saying when; we're not committing to a certain time period, but we have an extreme cash flow focus in the company. And if you look at the fundamentals, we built up inventory due to the component shortage situation earlier, but of course, that is being traded out more and more as we deliver to customers. And secondly, we had a market mix shift from the US and other front-runner markets with shorter cycles to the longer cycles in India. Assuming that that mix swings back to some extent, and we already saw it in the fourth quarter with India coming down, then we will release working capital, and that's, of course, benefiting our free cash flow, so we are going for this with a determination as usual and aiming for the long term 9 to
Unnamed Speaker: That's a decrease by 10% organically following the weak REN market discussed many times. IPR licensing revenues, as a positive, grew to 11.1 billion versus the 10.4 we recorded the previous year, and we see that as a result of new 5G license renewals during the year partly offset by some expiring agreements. Gross margin and excluding structuring declined in the full year to 39.6% versus 41.8% in 2022, as Börje mentioned earlier in the introduction.
Ian Parry: Firstly on.
Ian Parry: On the AT&T contract, we heard from Nokia the price because a big part of the reason that loss of the contract that is interested in here from your point of view too.
Ian Parry: To what extent do you see these types of overland contracts as being deflationary overall.
Jacob Bluestone: and then just secondly staying with the AT&T contract you mentioned rightly that it's a historic contract I've been interested in hearing are you seeing more demand for these types of contracts since you announced it so is there any sort of read across to other contract wins thank you
Ian Parry: And then just secondly, staying with the AT&T contract.
You mentioned rightly that it's.
Ian Parry: Historic contract that's been interested in hearing are you seeing more demand for these types of contracts.
Ian Parry: You announced it and so is there any sort of read across to other contract wins. Thank you.
Speaker Change: Oh yeah.
Ian Parry: Okay.
Speaker Change: You know, it's always interesting when competitors apparently know everything, so you can question how much they know sometimes, to be honest. But, you know, if you look at the contract like the one we're talking about, I think it's, you know, how does this actually work? It's all about.
Ian Parry: You know its always interested when when our competitors apparently no way everything.
Unnamed Speaker: Again, driven by operators' capex reductions and the market mix, as we have described many times. If you look at cloud software and services on Grossmodian, we reached 36%, up from 33% and slightly more in 2022. That's encouraging, and of course, we continue to drive improvements in that direction. Looking at the parts of OPEX, R&D increased about a billion to 48.2, and that's impacted by a negative currency effect of 0.9 billion.
Ian Parry: So you can question how much they they know sometimes.
Ian Parry: To be honest, but but you know if you look at the contract like like the one we're talking about.
Ian Parry: Yeah, you know what where how does these actually work. It's it's all about looking at the total Capex Opex envelope.
Speaker Change: looking at the total capex opex envelope.
Speaker Change: and actually optimizing that total cost so you make sure that you can invest in
Unnamed Speaker: I think only adding, you know, the other area that actually affects working capital is, We call it geopolitical resiliency. So we have tried to diversify our supply chain in total, and that's been a rather costly exercise, but it's allowed us to actually ship also when we had the supply disturbances. I would say for other reasons than geopolitics, but it's the whole notion that we need to have geopolitical resiliency has actually impacted working capital. Those increases will not happen. We've kind of built it in now.
Ian Parry: And actually optimizing that total costs, so you'll make sure that you can invest in.
Speaker Change: In order to actually increase the portion of that cost envelope that goes into revenue generating equipment.
Ian Parry: Technology in order to actually.
Unnamed Speaker: And you see that the mobile networks business, that's the segment networks and cloud software and services, was slightly down in R&D. We do have an increase in enterprise, and we also have the impact, of course, of the full year consolidation of Vonage now in the numbers. Turning to FDNA, excluding restructuring, 38 billion, also a negative currency effect here, 0.7 billion in this case.
Ian Parry: We increased the portion of that cost envelope that goes into revenue generating equipment and that is what this is all about so it's about putting technology in place that allows a much more efficient.
Speaker Change: And that is what this is all about. So it's about putting a technology in place that allows a much more efficient
Speaker Change: um
Speaker Change: Daniel Djurberg, Daniel Nielsen Daniel Djurberg, Daniel Nielsen
Ian Parry:
Call it rollout and operation of that network and that's what we're doing together with AT&T. So the substantial benefits here is actually that does it allows within the capex envelope of faster rollout, but that is really created by leveraging new technologies. So we were putting new energy.
Unnamed Speaker: Same story, we decreased in the mobile networks part, but increased in the enterprise. And this has mainly to do with investments in go-to-market activities in enterprise wireless. Also, here, of course, we have an impact from the fuller consolidation of bonding.
Ian Parry: Savings features in place multi band radios in place standardized sites in place et cetera, all of those contribute to make as much of the capital go into productive equipment as you mainly possible that's really our competitive advantage and that's why that contract is so important.
Unnamed Speaker: So we're in a much more stable position.
Unnamed Speaker: But that, of course, has been a bit of a burden on cash flow.
Unnamed Speaker: So that leads us then to an EBITDA of $21.4 billion excluding restructuring in the full year, that's an 8.1% margin. Obviously, not a level we can be satisfied with in absolute terms, but again, I would like to say it illustrates the strength and resiliency in our company and our operations considering how extremely challenged the market has been in 2023 and we still deliver more than $20 billion a year. Pre-cash flow before M&A was 1.1, negative for the full year, and as you will remember, we flagged at the outset that we would see a negative cash flow in 2023. It's due to the same business mix shift that we talked about on the P&L towards big rollout projects. And those parties have a longer order to cash cycle than the normal business mix. So now, what we saw in the fourth quarter, and we will continue to see, is that we are moving out of the intense rollout phase in those projects. And therefore, we see a positive effect on working capital reduction and, therefore, free cash flow generation.
Unnamed Speaker: Thanks Börje and thanks Erik for those two questions. We will then move to the next question, and then we have a question from François Boivinier from UBS.
Speaker Change: that's really our competitive advantage and that's why that contract is so important
Speaker Change: That's the reality and that's the fact. That's why it's value creating for us, but it's also value creating for our customers.
Good morning, François.
Ian Parry: Then yeah, you you know that's the reality and that's the fact, that's why it's value creating for us, but it's also value creating for our customers. So this is.
Good morning, everyone. So I have two quick questions. The first one is about the software mix that impacted the quarter.
Speaker Change: So this is a
Unnamed Speaker: Obviously, a good impact on margins. And, you know, I was looking at your reporting, you said that you had 38% of revenues from hardware, 22% in 2023, which indeed is higher than the last three years of reports where hardware was more than 40% of revenue. So it seems that 2023 was a bit more, you know, favorable in terms of mix software versus hardware versus the last three years. But then I was looking back, you know, like, beyond or before the last three years, so the last 10 years, and I was surprised to see that the hardware percentage and software percentage is actually in line with what you reported in 2023. And I was always thinking that your business would, Daniel Djurberg, Daniel Djurberg, Daniel Djurberg, Daniel Djurberg, Daniel Djurberg, Daniel Djurberg, Daniel Djurberg, Daniel Djurberg, I think if we start a bit on the software mix so what you see you know depending on where you are in the cycle you will have more hardware sales and thereby less software and that's really what you see in 2023 it was a rather sharp reduction in hardware volume, That's actually impacting the mix more than Daniel Djurberg, Sandeep Deshpande, one in three or maybe one in four even sites that are upgraded to 5g mid band and that's actually ultimately going to require hardware so it's so the it's a bit, It's tricky to put exactly a number, but with what you're going to see with the separation of hardware and software going forward, you will see the hardware portion come down.
Speaker Change: A way, I think, for the future that's going to show to be more interest.
Ian Parry: A way I think for the future that's going to show to be more interesting I I I think this.
Speaker Change: I think this
Speaker Change: It's hard to say. I mean, we have a lot of interest.
Ian Parry: It's hard to say I mean, we have a lot of interest.
Ian Parry: To look out C Miller type of solutions.
Ian Parry: For the future, but that's a you know we'll see it's too early to say that.
Speaker Change: That's going to be a lot of contracts coming, but we're seeing a great interest in exploring similar type of solutions for the simple reason that it actually reduces the non-strategic spend.
Ian Parry: That that's going to be a lot of contracts coming but we're seeing a great interest in exploring similar type of solutions for the simple reason that it actually reduces the non strategic spend.
Speaker Change: and you know think about the normal network right it's it's kind of a lot
Ian Parry: And you know think about the normal network right, it's kind of a lot.
Speaker Change: That goes into, I call it concrete and towers, right? But the reality is it's in passive equipment, it's in truck rolls going back and forth to sites, it's in energy costs, etc. All of that we like to put into active equipment instead, and that's what we're doing in this.
Unnamed Speaker: Some data points going forward if we move to the next one and for the first quarter. So, as Börje said, we do expect the current market situation to prevail into 2024. The AT&T contract will start to ramp up during the second half.
Ian Parry: That goes into I call, it concrete and towers right.
Ian Parry: But the reality is it's in passive.
Ian Parry: Equipment, it's in.
Ian Parry: Truck rolls going back and forth Society and energy costs et.
Ian Parry: Cetera, all of that we'd like to put into active equipment instead and that's what we're doing in this contract I think it's a it's a model for the future and can create a big potential for us.
Unnamed Speaker: And we're expecting a gross margin here in the networks segment to land within the range of 39 to 41. There is a change in the mix from Q4 to Q1, and that is the reason for our guidance here, 39 to 41 with less software. Cloud software and services will continue to invest here.
Speaker Change: I think it's a model for the future and can create a big potential for us.
Speaker Change: Thanks for it.
Speaker Change: Thanks, Brett.
Speaker Change: Thanks, Jakob.
Brett: Thanks Jakob.
Speaker Change: We move to the next question which comes from Sandeep Deshpande at J.P. Morgan, good morning Sandeep
Speaker Change: We'll move to the next question, which comes from some does it disbanded.
Unnamed Speaker: We have strategic investments in the 5G portfolio. We're doing that for competitiveness and resilience, and we expect that to remain into Q1. And please remember also when it comes to cloud software and services; the nature of that business is such that results will fluctuate between individual quarters. So we should not expect a linear development from quarter to quarter there. Then in the enterprise segment, we expect some seasonality, negatively impacting sales from Q4 to Q1 with the maintain profitability level. I want to also comment on OPEX and reiterate that the Q4 levels were low, partly due to these low accruals for variable pay, given the lower target fulfillment in the year. And we expect this to revert to more normal accrual levels in the first quarter.
Speaker Change: J P Morgan wanting send it good.
Sandeep Sudhir Deshpande: good morning uh my question uh i mean in your uh forward-looking statements you've given the guidance of delaro for the full year and delaro seems to have growth for the u.s market this year
Speaker Change: Good morning, My question I mean in your forward looking statements you've given the guidance of the low ROE for the full year and <unk> seems to have grow toward the U S market. This year.
Sandeep Sudhir Deshpande: in FY24. Is that your view on the U.S. market given where the starting point is at this point and if that is not, would there not be further risk to the top line in 2024?
Speaker Change: Slide 24 is that your view on the U S market, given where the starting point is at this point and if that is not well not be flipped the risk to the top line into 'twenty four.
Speaker Change: Yeah.
Sandeep Sudhir Deshpande: Yeah.
Speaker Change: Yeah. So.
Speaker Change: uh we do believe that there is a good chance that north american investments will start but we are careful in in saying here that it's in the hands of the operators
Speaker Change: We do believe that there is a good chance that the north American investments will start, but we are careful in saying here that its in the hands of the operators and we don't do it we don't want to be precise in putting any commitments for that are out there.
Unnamed Speaker: It's not going to happen from one quarter to the next or a year to the next, but this is over a period of time as the new technology stack is implemented, making us more focused on the software side, basically. I would say that, in the longer term, the portion of software is going to increase, and the portion of hardware is going to decrease, for that reason more than anything. And I could complement that also, of course, as you said, Börje, in build-out phases, hardware grows as well. And that is, of course, a good thing, because that has to do with building a footprint with the operators, shipping our hardware, and installing it in the field. And then, of course, software comes on top of that installed base.
Speaker Change: We don't want to be precise in putting any commitments for that out there.
Speaker Change: We also see Deloro's expectation that
Speaker Change: We also see the laurels expectation that.
Unnamed Speaker: And some other factors play in as well, including annual salary increases, but also the investments that I mentioned in cloud, software, and services, and enterprise. So we would not expect OPEX in Q1 to come down as much as the average over the last couple of years. So I would recommend being cautious when you model this.
Speaker Change: North America, coming from a record high level in 2022 down to probably unsustainably low level of investment in 2023, increases and grows again in 2024, and we believe that that's a reasonable expectation.
Speaker Change: North America from coming from a record high level in 2022 down to.
Speaker Change: Probably unsustainably low level of investment in 'twenty three.
Speaker Change: Some increases that growth again in 2024, and we believe that that's a reasonable expectation yeah, I would just echo that and.
Speaker Change: Yeah, I would just echo that. But I think what we're trying to do is also to make sure that we plan for
Unnamed Speaker: Lastly, I just want to mention the capital allocation strategy remains. We keep priorities prioritizing organic investments in technology leadership and building an enterprise go-to-market organization. When it comes to M&A, we are prudent. We may do opportunistic tuck-in acquisitions that would complement our offering. And then, obviously, the board considers earnings, the business outlook, our financial position, and opportunities.
But I think what we're trying to do is also to make sure that we planned for.
Speaker Change: A challenging market. I think that's the prudent way to plan our costs.
Speaker Change: The challenging markets I think that's the prudent way to plan our costs on our side to make sure that we're as lean as possible and then when the market recovers we have our technology investments. So we're at a at the leading edge there combined with a very efficient cost structure.
Speaker Change: on our side to make sure that we're as lean as possible. And then when the market recovers, we have our technology investments. So we are at the leading edge there combined with a very efficient cost structure.
Unnamed Speaker: So we are also happy, of course, with high hardware sales in these phases. So there is no question. And also, I would say over the years, the margin delta between software and hardware has also been reduced because now we have a very competitive hardware portfolio as well. And we should also mention that, if you go back a few years, a lot of the investments we did in R&D were actually to make sure we had a very or less sensitivity to the mix between hardware and software, and that's why when the increased hardware portion that you saw the last And in 2024, directionally, what feasibility do you have?
Speaker Change: because the when that recovery comes whether that's in you know in the beginning of 24 the end of 24 in 25 but we're at least well positioned when it comes and that's really what we're here to do because then we can succeed longer
Speaker Change: Because when that recovery comes whether that's in <unk>.
Speaker Change: The beginning of 'twenty for the end of 'twenty, four and 'twenty five, but we're at least well positioned when it comes and that's really what we're here to do because then we can succeed longer term.
Unnamed Speaker: We continue to aim for a gradual return to our target on free cash flow, as you know it's 9-12% of net. And following this, as you saw, the board recommends a stable dividend of 2 kronor and 70 euro for, Then maybe on a more personal note I'd like to thank you everyone on the call here for all the great interactions over the years this is my last of 30 earnings calls as the CFO for Ericsson been a privilege I look back at the absolutely incredible experience fantastic people in our company and a round of, I'm very pleased to have my successor now, Lars Sandström, named today, and to leave the CFO baton in his hands feels very good, very good experience hands, as I am about to embark on my next exciting chapter in life.
Speaker Change: thank you so we are moving out to the last question for this session and that one is from Sebastian
Speaker Change: Thank you actually bought it so we are moving off to the last question for this session and is from Sebastian <unk>.
Sebastian: Shtabounit from Kepler Chevreux. Good morning, Sébastien. Yeah, hello everyone and thanks Peter for taking my question. On the gross margin in networks you've seen a quite nice step up thanks to positive mix in Q4. How do we should think about the gross margin in networks moving into 2024? What are the puts and takes for the coming quarters there? And the second one on the cloud software and services you have strongly recovered in the fourth quarter. We know there is a strong seasonality in this business but looking at 2024 and beyond, where do you see your EBITDA margin moving in cloud software and services? Do you have any indication of the trend there? Thank you.
Speaker Change: <unk> from Kepler sugar good morning Sebastian.
Sebastian: Hello, everyone and thanks for taking my question.
On the gross margin in networks, you've seen quite nice step up things to put <unk> in Q4, how do we assume we should think about gross margin in networks moving into 2024, what does it.
Unnamed Speaker: Is it like more hardware or more software a year based on your activity and orders? I would say the longer term trend is towards more software, as Börje said, given how networks will be built and so on. 2024, we'll have to see how it plays out. But maybe to mention one aspect I could play in, and that's the inventory buffering we saw in North America. And as you know, that's one of the reasons why we have shipped less hardware also in 2023, is that the carriers in the US have depleted their buffer inventory of radio equipment, now we have reached of course a level which we believe is the normalized inventory level so that could bode well for additional hardware deliveries but i think it's fair to say that the the volume decline we see is is quite quite a lot in hardware sites, And then you had a question, François, about the development in Vonage.
And thanks for coming quarters, and this isn't one on the cloud software and services.
Sebastian: You recovered in the fourth quarter, we know that he lifting seasonality in the business, but you can't get 'twenty 'twenty, four and beyond where do you see your EBITDA margin moving in cuts of 2017 do you have any indication of the trend yeah. Thank you.
Unnamed Speaker: And I also want to say I'm very happy to announce, which Börje did, Daniel Morris as the new head of investor relations, which is a great addition to the team as well. And finally, I want to say a big thanks to Peter. You have been running the IR ship with a steady hand for the last 10 years in Eriksson. And thanks for being such a dedicated companion and friend as we have navigated through the waters here. And I really wish you the best of luck in the next chapter.
Speaker Change: Thanks Sebastian. Well, as you know, we haven't issued any particular profitability guidance for cloud software and services.
Speaker Change: Yeah. Thanks, Sebastien it well as you know, we we havent issued any particular profitability guidance for cloud software.
Sebastien: And services.
Speaker Change: We are on a turnaround journey. I think 2023 shows significant progress there and we deliver the 1.7 billion ebita for the full year. We continue there with actions. It's about commercial discipline.
Sebastien: We are on our turnaround journey.
Sebastien: 1023 shows significant progress there and we delivered $1 7 billion at the top for the full year.
Sebastien: We continue that with axon say, it's about commercial discipline.
Unnamed Speaker: The Vonage mentioned contract is actually a very low margin contract. So from a profitability point of view, less impact, any reason why I mean a contract loss, I mean, just give me some colors and uh, do you still expect to go double the percentage you know after this normalization of contract loss or not? Our ambition, I mean, we have to come back and think about what the rationale behind Vonage is, what we're trying to do.
Speaker Change: It's about automating to take cost out of service delivery, basically, and also ensuring that we exit from subscale parts of portfolio, if any, and manage the portfolio in an optimized way as possible. So that will continue.
Unnamed Speaker: Thank you for that. And with that, back to you, Birgit. Thanks, Carl.
Sebastien: It's about automate things to take cost out of service delivery.
Unnamed Speaker: Yeah, 2023 was a challenging year. And we said that at the end of 2022, calling it choppy. It was a historically weak market, and we expect current market uncertainty to continue into 2024. But, ultimately, we expect the market to recover to more normalized levels, but that will be over time. But it will also be based on operators' need to invest to manage the rapid data traffic growth and also to continue the migration to 5G stand-alone. This capacity will be needed to manage customer expectations to give the quality of service that will be needed or demanded from the consumer.
Sebastien: Basically and also ensuring that we exit from subscale parts of our portfolio, if any and manage the portfolio in a in a as optimized as possible so that that will continue.
Speaker Change: Then, of course, we keep on investing in this business. It's a long term, very promising area where you mentioned before the need for operators to come into 5G core as well as standalone.
Sebastien: And then of course, we keep on investing in this business. It's a long term a very promising area, but you mentioned before the need for operators to come into five cornerstone stand alone.
Unnamed Speaker: Of course, we have an existing business that we need to run, which is the CPaaS, UCaaS, and CCaaS services, that needs to develop as well, but we also have said that we want to prioritize higher-margin product offerings within that. But the real strategic area that we're actually working on is to develop the market for network APIs and with the ability to expose the capabilities of the network in a new
Speaker Change: of course and that sits in in this segment so so i think that gives a good opportunity for the future as well as that starts to happen as a strong craft
Sebastien: Of course and that sits in this segment. So so I think that gives us a good opportunity for the future as well as that starts to happen is the strong traffic.
Speaker Change: Then you asked about the network's gross margin yeah good outcome in the fourth quarter as you saw we are guiding for the first quarter between 39 and 41 percent
Sebastien: Then you asked about the networks gross margin M. Yeah, good outcome in the fourth quarter.
Unnamed Speaker: However, as we have said many times, it's really up to our customers to determine the cadence of investments and really not up to us to predict when the market will turn. So in that environment, we remain laser focused on executing on our strategy to strengthen our leadership in mobile networks, grow our enterprise business, and drive a cultural transformation. We're relentlessly focused on managing elements that are in our control.
Sebastien: So we are guiding for the first quarter is between 39 and 41%.
Speaker Change: how the rest of the year plays out has a lot to do with the big macro picture that we talk about namely how will markets
Sebastien: The rest of the year plays out has a lot to do with the big macro picture that we talk about namely how will markets.
Unnamed Speaker: That is where we are 100% focused on while trying to maintain the existing business. This was one where, of course, it had an impact on the sales numbers, but we didn't feel it was strategic for us and, therefore, that was not a critical contract for the success of the business, but it did impact Topline. Thanks, Poirier, and thanks, Francois, for those questions. So we'll move further in the Q&A session, and we have the next question from Andreas Joelsson at Carnegie.
Speaker Change: Daniel Djurberg, Andreas Joelsson, Peter Nielsen
Sebastien: Behave now than we are.
Speaker Change: cautious there we talk about the continued challenges
Sebastien: Cautious that we talk about the continued challenges.
Speaker Change: Depending on the previous question of what happens in North America, of course, we will see different outcomes on the gross margin as well and then top line in the network. So I think that's probably what we can say at this time.
Sebastien: Pending on the previous question about happens in North America of course, we will see different outcomes on the gross margin as well and then topline in the network. So I think that's probably what we can say at this stage.
Unnamed Speaker: That includes, of course, the cost side as well as operational efficiency. The steps we're taking are designed to help us navigate the near term, allowing us to prudently invest in technology leadership for long-term success. And it's all about ensuring that we're really well positioned when the market ultimately improves and recovers. Our goal is to make Ericsson a more profitable company based on its leading position in mobile infrastructure and its high-growth enterprise platform. We remain firmly committed to our long-term EBITDA margin target of 15-18% and also our cash flow.
Speaker Change: I think it's also fair to say that what we you know our focus on gross margin it's being one of the key drivers
Sebastien: And.
Sebastien: I think it's also fair to say that what we know why we're focused on gross margin. It's been one of the key drivers.
Speaker Change: Because what I think it does a couple of things it keeps us focused on commercial discipline
Sebastien: Because I would I think it does a couple of things it keeps us focused on commercial discipline.
Speaker Change: But at the same time, it drives our product development because if we can invest in technology that drives down our costs to deliver and serve customers, it helps the gross profit.
Sebastien: But at the same time it drives our product development, because if we can kind of invest in technology that drives down our costs to.
Good morning, Andreas. Good morning everyone, and thank you for taking my question. Just a follow-up on the overall market and maybe a little bit more long-term.
Sebastien: To deliver and serve customers. It helps the gross profit so for us the gross margin has been critical.
Speaker Change: So for us, the gross margin has been critical.
Speaker Change: and that's something that we have invested quite a lot in the last few years and we continue to do then exactly how as Carl said the gross margin develops depends on that
Sebastien: And and that's something that we have invested quite a lot in the last few years and we continue to do.
Unnamed Speaker: So, 2023 was a challenging year, but we took many critical steps in our strategy execution, and we continued doing so in 2024. Finally, I'd just like to say thank you to all my colleagues for their hard work in spite of really difficult markets, severe headwinds, and challenges. A big thank you to the team. With that, I think it's time to move over to Q&A. Yes, it is.
We all know 5G's importance for society as such and so on, but why do you feel or what is your view on why, especially the US operators, are a little bit more cautious now? What do they need to see in order to become a little bit more positive about putting their investments into this?
Sebastien: Then then exactly how as Carl said, the gross margin develops depends on that.
Speaker Change: Daniel Djurberg, Sandeep Deshpande, Daniel Djurberg, Sandeep Deshpande,
Sebastien: You know mix between product and mix between markets and mix between different parts of the company. So I I don't.
Sebastien: In the same way as trying to predict the future. It's easy to have an opinion, it's just hard to be right I think what we need to do here is to really plan for.
Unnamed Speaker: And secondly, on the AT&T contract, also more long-term beyond 2024, how do you see that ramping up? And could you say something about the visibility you have in that particular contract over time?
Unnamed Speaker: And thank you, Börja, and thank you, Karl, and thank you both for the kind words. So let's return to the process. So it's time for the Q&A session. As a reminder, as always, you need to press star and one and one on your telephone and wait for your name to be announced. And if you're streaming the webcast, please mute the webcast audio while asking questions to minimize any sort of audio feedback. So, let's see here who we have on the.
Sebastien: How do we.
Speaker Change: Put ourselves in the best possible position when we have a more call it rational or more normal market environment that we expect will come. So it's all about putting ourselves at the best possible competitive position at that point in time.
Sebastien: Put ourselves in the best possible position when we have a more call it rational to more normal market environment that we expect will come so it's all about putting ourselves at the best possible competitive position at that point in time.
Unnamed Speaker: Thank you. If we start with the market, without singling out any operators because they're our customers, we work very closely with them. But if you look at mobile infrastructure, what is a bit unique about mobile infrastructure is that you know the it's not a cut-off point; you have it, or you don't have it; it's actually a degrading quality, and as that allows you, in a way, as an operator to Peter Nielsen, then you can say okay, I can degrade performance a bit; I may actually not need the capacity short term, It will probably be competition offering a better service.
Speaker Change: Peter Nielsen,
Speaker Change: Thanks, Paul Yeah. Thanks, Colin.
Speaker Change: Carl Schencksebacher.
Speaker Change: Sebastian.
Peter Kurt Nielsen: Thank you all and this will actually conclude my 31st and last earnings call here at Ericsson.
Speaker Change: And thank you all and this will actually conclude my 31st.
Speaker Change: And last earnings call Herritarrok soon.
Peter Kurt Nielsen: and it has been sort of 10 fantastic years here at Ericsson and it's been a real pleasure working together with all my outstanding colleagues here at Ericsson, especially Juergen and Carl and the whole IR team.
Speaker Change: And it has been sort of 10 fantastic years here at Arizona, and it's been a real pleasure working together with all of my outstanding colleagues here at the Ericsson.
Aleksander Peterc: First question. I think the first question comes from Alexander Peterc at Societe Generale. Good morning, Aleksander.
Speaker Change: <unk> already on the call and the whole Iot.
Unnamed Speaker: Yes, good morning, all. Thank you very much for taking our questions. Thank you, Karl, for your 30 quarters of reports. Great work done there. Thank you so much.
Peter Kurt Nielsen: But also interacting with everybody following Ericsson, it has been a true privilege.
Speaker Change: But also interacting with everybody following Eric so on it has been a true predict.
Peter Kurt Nielsen: So again, a really big thank you to you all.
Speaker Change: So again.
Speaker Change: Really big Thank you to you all.
Unnamed Speaker: My first question would be on the impact of the North American open run win on your margins, especially in the earlier stages. And the question here is, should we expect the initial margin pressure that you usually call, so footprint acquisition costs? in this case, or should this not be the case because you don't get the benefit of vendor lock-in over the long run in this contract? So that would be the first one.
Speaker Change: Thank you. Thanks a lot.
Speaker Change: Thank you. Thank you. Thank you thanks all.
Speaker Change: © transcript Emily Beynon © transcript Emily Beynon
Unnamed Speaker: It may be a frontrunner in the market that actually drives the others, therefore, to invest. It may be new types of use cases that come up that demand more bandwidth, whether that is XR applications, whether it's new types of streaming services, new types of social media; I don't know, but we know when you get those new types of use cases into the network.
Okay.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: Yeah.
Unnamed Speaker: And the second one, just on India, you saw the shortfall in the fourth quarter, roughly four billion in sales that didn't materialize in Q4. Is that materializing in the first half, and is that going to help your top line in the first half at all? Thank you.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: [music].
Unnamed Speaker: It actually drives the need to invest, and lastly, I would say for the world to really benefit from 5G, we need to migrate to 5G standalone, and there are, if you look across the world, very few 5G standalone networks built out. Really, where it's a frontrunner is China. In China, you start to see enterprise applications coming, on top of the 5G network, that we are not seeing in the rest of the world yet for the simple reason that the infrastructure is not built out yet. So when you look at this, when will it exactly be? I don't know, to be honest. It's in the hands of the customers when they make the strategic decision to say, okay, we need this to offer the services, to offer the capabilities, to generate new types of revenues for the network, and I think that's going to come, the ultimate recovery will come, but it's just in the hands of the customer. Your second question around AT&T long term, how would that be developed? I think we will have to come back to that.
Unnamed Speaker: When it comes to India, we really saw the peak now in the third quarter, and volumes came down in the fourth quarter. That is true. I don't have anything specific to talk about delays over quarters, if that's your question. But more importantly, I would say we've seen incredible speed in India during 2023. In 2024, we expect it to still be a higher market, a larger market than it was prior to 2023, but, of course, compared to 2023, coming down quite a lot. So that's what we have to understand. When it comes to the AT&T contract, you can continue on that one as well. But I just want to say, obviously, we don't talk about margins in specific contracts. We are extremely pleased with the confidence that AT&T has shown us.
Unnamed Speaker: It will increase our market share in the North American market. And, of course, North America is such a key market for us, given our market share, which is already strong and now increasing with this contract as well. We will start to see meaningful revenue in the second half of that contract. That summarizes it well. Thanks, Alistair. Thank you very much.
Unnamed Speaker: We have signed the agreement. We are very pleased with that, and we are now starting to ramp up the preparation for that. It will be visible in the second half, but exactly how it plays out I would probably rather report when it happens. But it's a breakthrough contract. It's historic in nature, also from a strategic point of view. We can say we have great visibility. It's going to take some time to ramp up the contract, but that will happen, as Carl said, in the second half of this year.
Unnamed Speaker: So let's move further in the Q&A question. We will move to the next question, which comes from Erik Lindholm, Röjestad, The Bank, SEB. Good morning, Erik. Yes, good morning everyone.
Unnamed Speaker: But then we have visibility on how that's going to look like going forward, but let's come back. Thank you, we lost him we move to the next question probably hang up good morning Joseph so from Barclays how are you today hi good morning everyone thank you for taking my questions and thank you kyle and peter best of luck to your future endeavors and thank you i have a few questions and i'll go one at a time and the first one is really on india and what is your expected normalized revenue level in 24 and going forward and is it sensible to assume it goes back to say the 2022 level plus your market share gain with jail for 5g or do you see some structural uplift in the overall market size that's my first question, Thank you for your call, um yeah it's of course in the hands of the operators how much they invest but i think it's it's fair to assume that, A normalized level is higher than pre-5G. 2023 was a record year and it's coming down as we said in 2024 but we would still expect a higher volume than 2023. Again, it's up to operators how much they want to invest, your second question you said?
Erik Lindholm: Thank you for taking my questions. So DeLauro is expecting a 17% recovery here in North America in 2024, but you have quite cautious short-term commentary here. Can you talk a bit about how you expect this recovery to look, if you think a recovery will materialize, and if it's sort of more tilted towards age two? And then, perhaps, a second question. Can you talk a bit about the sort of normalization here in free cash flow into 2024? Do you expect the working capital build-up that you saw in 2023 to fully normalize in 2024? Thank you. Should I start with the market, maybe?
Unnamed Speaker: I think what we are trying to do, and it's a great question; we ask ourselves the same one, right? What we have said is that we are rather taking a planning perspective that the current market conditions will prevail, i.e. We see a challenging market for 2024, and that allows us to plan accordingly, focus on taking costs out where appropriate, making sure we're disciplined in our investments, and really pare back some of the investment areas we've had. So we're trying to use this environment to be really prepared on the cost side to be as lean as possible.
Unnamed Speaker: Yeah, the second question is about the ramp-up for AT&T, and shall we expect any revenue from AT&T in the first half of 2024, you know, at any kind of material level? And also, just regarding that, do you need to rehire in North America to execute the contract? Because obviously, you had a savings program where you had a huge headcount reduction in North America last year. And do you need to, you know, hire some of those people? Do you need to go back for the new contract? We don't expect material revenue in the first half. So that's why I really point that out. That is what is to be expected in the second half. Resources, rehiring in North America, elsewhere? We've also changed the structure so we have fewer, um, service engineers basically in-house. So we will rely more on third parties for that. So I don't expect material rehiring to deliver on this contract.
Unnamed Speaker: At the same time, we want to make sure that we invest in technology leadership because, from my perspective, it's all about being well positioned when the market recovers. And that, we've said that so many times, really depends on how the customer looks at their own cadence of investment. Some of them are going to show, and we see that, for example, in early 5G markets, where 5G investments are starting to come back. And that's why you've seen growth there for a couple of quarters now. But when that will happen on a more global basis, it's ultimately in the hands of the customers, but when it happens... We want to be really well positioned to take advantage of that turnaround and that recovery. Thanks, Börje.
Unnamed Speaker: If I take your cash flow question then, Erik, so we are going for the 9 to 12 percent free cash flow metric that we have. Our target. Just as with the EBITDA target, we are not saying when; we're not committing to a certain time period, but we have an extreme cash flow focus in the company. And if you look at the fundamentals, we built up inventory due to the component shortage situation earlier, but of course, that is being traded out more and more as we deliver to customers. And secondly, we had a market mix shift from the US and other front-runner markets with shorter cycles to the longer cycles in India. Assuming that that mix swings back to some extent, and we already saw it in the fourth quarter with India coming down, then we will release working capital, and that, of course, benefits our free cash flow. So we are going for this with determination as usual and aiming for the long term nine to twelve. I think only adding, you know, the other area that actually affects working capitalists. We call it geopolitical resiliency.
Unnamed Speaker: Thanks, Borya.
Unnamed Speaker: Thank you.
Unnamed Speaker: Thanks, Yosef. We will move to the next question, and the next question is from Jacob Bluestone at ENP Paribas, Exxon. Good morning, Jacob.
Jacob Bluestone: Good morning.
Jacob Bluestone: Thanks for taking my questions, too. Firstly, on the AT&T contract, we heard from Nokia that price was a big part of the reason it lost the contract.
Jacob Bluestone: I'd just be interested in hearing from your point of view; to what extent do you see these types of O-RAN contracts as being deflationary overall?
Unnamed Speaker: and then just secondly, staying with the AT&T contract you mentioned rightly that it's a historic contract. I've been interested in hearing whether you are seeing more demand for these types of contracts since you announced it, so is there any sort of read across to other contract wins? Thank you. Oh yeah.
Unnamed Speaker: So we have tried to diversify our supply chain in total. And that's been a rather costly exercise, but it's allowed us to actually ship also when we had the supply disturbances. I would say for other reasons than geopolitics, but the whole notion that we need to have geopolitical resiliency has actually impacted working capital. Those increases will not happen.
Unnamed Speaker: You know, it's always interesting when competitors apparently know everything, so you can question how much they know sometimes, to be honest. But, you know, if you look at a contract like the one we're talking about, I think it's, you know, how does this actually work? It's all about looking at the total capex and operational expenditure envelope and actually optimizing that total cost so you make sure that you can invest in, in order to actually increase the portion of that cost envelope that goes into revenue-generating equipment. And that is what this is all about.
Unnamed Speaker: We've kind of built it in now, so we're in a much more stable position. But that, of course, has been a bit of a burden on cash. And thanks, Erik, for those two questions. We will then move to the next question, and then we have the question from François Beauvenier from UBS. Good morning, François. Good morning, everyone.
Unnamed Speaker: So it's about putting technology in place that allows a much more efficient, um, Daniel Djurberg, Daniel Nielsen, that's really our competitive advantage and that's why that contract is so important. That's the reality and that's the fact. That's why it's creating value for us, but it's also creating value for our customers.
So I have two quick questions. The first one is about the software mix that impacted the quarter, obviously having a good impact on margins. And, you know, I was looking at your reporting, you said that you had 38% of revenues from hardware, and 22% in 2023, which is indeed higher than the last three years of reports where hardware was more than 40% of revenues. So it seems that 2023 was a bit more favorable in terms of mixed software versus hardware compared to the last three years. But then I was looking back, you know, beyond or before the last three years, so the last 10 years, and I was surprised to see that the hardware percentage and software percentage are actually in line with what you reported in 2023.
Unnamed Speaker: So this is a way, I think, for the future, that's going to show to be more interest.
And I was always thinking that your business would be more software and service, you know, intensive as we move forward, because you always said that software and services are more important in the coming technologies. So how should we think about the mix in 2024, or maybe even longer term, because I don't see much change in the last 10 years. And that would be very interesting to know, you know, how we should think about that, or any fundamentals behind it. And the second one, second question, if I may, is on Vonage. I mean, you mentioned this contract loss that impacted the quarter. Can you provide a bit more color about what's going on here? How can you reassure me about, you know, the offering of Vonage because 2% growth is well below what you expected originally. So I was wondering if there's anything you can provide in terms of color here.
Unnamed Speaker: I think this, It's hard to say.
Unnamed Speaker: I mean, we have a lot of interest. There are going to be a lot of contracts coming, but we're seeing a great interest in exploring similar types of solutions for the simple reason that it actually reduces the non-strategic spend, and you know think about the normal network. It's kind of a lot. That goes into, I call it, concrete and towers, right? But the reality is it's in passive equipment, it's in truck rolls going back and forth to sites, it's in energy costs, etc. All of that we like to put into active equipment instead, and that's what we're doing with this. I think it's a model for the future and can create a big potential for us. Thanks for it. Thanks, Jakob.
We move to the next question, which comes from Sandeep Deshpande at J.P. Morgan. Good morning Sandeep, good morning. My question is, in your forward-looking statements, you've given the guidance for delaro for the full year, and delaro seems to have growth for the U.S. market this year in FY24. Is that your view on the U.S. market given where the starting point is at this point, and if it is not, would there not be further risk to the top line in 2024?
Unnamed Speaker: Thank you. I think if we start a bit on the software mix, so what you see, you know, depending on where you are in the cycle, you will have more hardware sales and thereby less software. And that's really what you see in 2023. It was a rather sharp reduction in hardware volume.
Unnamed Speaker: That's actually impacting the mix more than than before, and one in three or maybe one in four even sites that are upgraded to 5G mid-band, and that's actually ultimately going to require hardware. So it's a bit tricky to put exactly a number, but with what you're going to see with the separation of hardware and software going forward, you will see the hardware portion come down. It's not going to happen from one quarter to the next or a year to the next, but this is over a period of time as the new technology stack is implemented, making us more focused on the software side, basically. So I would say that, in the longer term, the portion of software is going to increase, and the portion of hardware is going to decrease, for that reason more than anything. I could complement that also, of course, as you said, Börje, in build-out phases, hardware grows as well. And that is, of course, a good thing, because that has to do with building a footprint with the operators, shipping our hardware, and installing it in the field. And then, of course, software comes on top of that installed base.
Unnamed Speaker: Yeah, uh, we do believe that there is a good chance that North American investments will start, but we are careful in saying here that it's in the hands of the operators. We don't want to be precise in putting any commitments for that out there. We also see Deloro's expectation that North America, coming from a record high level in 2022 down to probably an unsustainably low level of investment in 2023, increases and grows again in 2024, and we believe that that's a reasonable expectation. Yeah, I would just echo that. But I think what we're trying to do is also to make sure that we plan for a challenging market. I think that's the prudent way to plan our costs on our side to make sure that we're as lean as possible.
Unnamed Speaker: And then when the market recovers, we will have our technology investments. So we are at the leading edge there combined with a very efficient cost structure because when that recovery comes, whether that's in the beginning of 24, the end of 24, or in 25, but we're at least well positioned when it comes, and that's really what we're here to do because then we can succeed longer. Thank you. So we are moving out to the last question for this session, and that one is from Sebastian Shtabounit from Kepler Good morning, Sébastien.
Unnamed Speaker: So we are also happy, of course, with high hardware sales in these phases. So no question. And also, I would say over the years, the margin delta between software and hardware has also been reduced because now we have a very competitive hardware portfolio as well.
Unnamed Speaker: So a lot of the investments we did in R&D a few years ago were to make sure we had less sensitivity to the mix between hardware and software, and that's why the increased hardware portion that you saw the last few years actually could still generate a very solid gross profit. And in 2024, directionally 2024, is it, what feasibility do you have? Is it like more hardware or more software a year based on your activity and orders? I would say the longer-term trend is towards more software, as Buri said, given how networks will be built and so on. In 2024, we'll have to see how it plays out.
Sebastien: Yeah, hello everyone, and thanks Peter for taking my question.
Sebastien: On the gross margin in networks, you've seen a quite nice step up thanks to positive mix in Q4. How should we think about the gross margin in networks moving into 2024? What are the puts and takes for the coming quarters there? And the second one on the cloud software and services you have strongly recovered in the fourth quarter? We know there is strong seasonality in this business, but looking at 2024 and beyond, where do you see your EBITDA margin moving in cloud software and services? Do you have any indication of the trend there? Thank you.
Unnamed Speaker: But maybe I could mention one aspect I could play with, and that's the inventory buffering we saw in North America. And as you know, that's one of the reasons why we have shipped less hardware also in 2023, because the carriers in the US have depleted their buffer inventory of radio equipment. Now we have reached, of course, a level which we believe is the normalized inventory level, so that could bode well for additional hardware deliveries. But I think it's fair to say that the volume decline we see is quite a lot in hardware size. And then you had a question, Francois, about the development of Vonage.
Unnamed Speaker: Thanks, Sebastian. Well, as you know, we haven't issued any particular profitability guidance for cloud software and services.
Unnamed Speaker: We are on a turnaround journey.
Unnamed Speaker: I think 2023 shows significant progress there and we deliver the 1.7 billion ebita for the full year. We continue there with actions. It's about commercial discipline. It's about automating to take cost out of service delivery, basically, and also ensuring that we exit from subscale parts of portfolio, if any, and manage the portfolio in an optimized way as possible. So that will continue. Then, of course, we keep on investing in this business. It's a long term, very promising area where you mentioned before the need for operators to come into 5G core as well as standalone, of course and that sits in in this segment so so i think that gives a good opportunity for the future as well as that starts to happen as a strong craft Then you asked about the network's gross margin yeah good outcome in the fourth quarter as you saw we are guiding for the first quarter between 39 and 41 percent, how the rest of the year plays out has a lot to do with the big macro picture that we talk about namely how will markets Daniel Djurberg, Andreas Joelsson, Peter Nielsen, cautious there we talk about the continued challenges, Depending on the previous question of what happens in North America, of course, we will see different outcomes on the gross margin as well and then top line in the network.
Unnamed Speaker: The Vonage mentioned contract is actually a very low-margin contract. So from a profitability point of view, it has less impact. Any reason why?
Unnamed Speaker: I mean, a contract loss? I mean, just to give you color and... Do you still expect to grow WD percentage after this normalization of contract loss? Now, our MBA, I mean, we have to come back and think about what is the rationale behind Vonage. What is it we're trying to do?
Unnamed Speaker: We, of course, have an existing business that we need to run, which is the CPaaS, UCaaS, and CCaaS services that need to develop as well. But we also have said that we want to prioritize higher-margin product offerings within that. But the real strategic area that we're actually working on is to develop the market for network APIs and with the ability to expose the capabilities of the network in a new way, that is where we are 100% focused on while trying to maintain the existing business. This was one where, of course, it had an impact on the sales numbers, but we didn't feel it was strategic for us and, therefore, that was not a critical contract for the success of the business, Thank you very much, Francois, for those questions. So we'll move further in the Q&A session, and we have the next question from Andreas Joelsson at Carnegie. Good morning, Andreas.
Unnamed Speaker: So I think that's probably what we can say at this time. I think it's also fair to say that our focus on gross margin is one of the key drivers. Because I think it does a couple of things. It keeps us focused on commercial discipline. But at the same time, it drives our product development because if we can invest in technology that drives down our costs to deliver and serve customers, it helps gross profit. So for us, the gross margin has been critical, and that's something that we have invested quite a lot in the last few years, and we continue to do so, exactly how, as Carl said, the gross margin develops depends on that Daniel Djurberg, Sandeep Deshpande, and we put ourselves in the best possible position when we have a more, call it rational, or more normal market environment that we expect will come. So it's all about putting ourselves in the best possible competitive position at that point in time. Peter Nielsen and Carl Schencksebacher.
Andreas Joelsson: Good morning, everyone, and thank you for taking my question. Just a follow up on the overall market and maybe a little bit more long term. We all know 5G's importance for society as such and so on, but why do you feel or what is your view on why, especially the U.S. operators, are a little bit more cautious now? What do they need to see in order to become a little bit more positive about putting investments into this? And secondly, on the AT&T contract, also more long term beyond 2024, how do you see that ramping up? And could you say something about the visibility you have in that particular contract over time? Thanks.
Unnamed Speaker: And if we start with the market... without singling out any operators because you know they're our customers; we work very closely with them, but if you look at mobile infrastructure, what is a bit unique about mobile infrastructure is that, you know, it's not a cut-off point; you have it, or you don't have it. It's actually a degrading quality, and as that allows you, in a way, as an operator to Peter Nielsen, Sandeep Deshpande, Andreas Joelsson, Peter Nielsen, Peter Nielsen, Peter Nielsen. Then you can say, okay, I can degrade performance a bit; I can actually, I may not need the capacity in the short term. So you can save investment. But ultimately, you need the capacity. So what will then be the trigger for that?
Thank you all, and this will actually conclude my 31st and last earnings call here at Ericsson. It has been sort of 10 fantastic years here at Ericsson, and it's been a real pleasure working together with all my outstanding colleagues here at Ericsson, especially Juergen and Carl and the whole IR team.
But also interacting with everybody following Ericsson, it has been a true privilege. So again, a really big thank you to you all. Thank you. Thank you a lot.
Unnamed Speaker: It will probably be competition offering a better service. It may be a frontrunner in the market that actually drives others, therefore, to invest. It may be new types of use cases that come up that demand more bandwidth, whether that is XR applications, whether it's new types of streaming services, new types of social media, I don't know, but we know when you get those new types of use cases into the network, it actually drives the need to invest. And lastly, I would say, for the world to really benefit from 5G, we need to migrate to 5G stand-alone. And there are, if you look across the world, very few 5G stand-alone networks built out. Really, where it's a front-runner is China, and in China, you start to see enterprise applications coming on top of the 5G network that we are not seeing in the rest of the world yet, for the simple reason the infrastructure is not built out yet.
Unnamed Speaker: transcript Emily Beynon transcript Emily Beynon
Unnamed Speaker: So when you look at this, when will it exactly be? I don't know, to be honest. It's in the hands of the customers when they make the strategic decision to say, okay, we need this to offer the services, to offer the capabilities, to generate new types of revenues for the network. And I think that's going to come, the ultimate recovery will come, but it's just in the hands of the customers. And your second question, around 183 in the long term, how would that be developed?
Unnamed Speaker: I think we will have to come back to that. We have signed the agreement. We are very pleased with that. And we are now starting to ramp up the preparation for that. It will be visible in the second half. But exactly how it plays out, I would probably rather report when it happens on that.
Unnamed Speaker: But it's a breakthrough contract. It's historic in nature also from a strategic point of view, but we can say we have great visibility that it's going to take some time to ramp up the contract that's going to happen, as Carl said, in the second half of this year, but then we have visibility on how that's going to look going forward. But let's come back. Thank you. We lost him; we move to the next question. I will probably hang up. Good morning, Josef So from Barclays. How are you today? Hi, good morning, everyone.
Thank you for taking my questions. And thank you, Carl and Peter. Best of luck in your future endeavors. And I have a few questions, and I'll go one at a time. And the first one is really about India.
Unnamed Speaker: And what is your expected normalized revenue level in 2024 and going forward? And is it sensible to assume it goes back to, say, the 2022 level, plus your market share gain with Jio for 5G? Or do you see some structural uplift in the overall market size? That's my first question. Yeah, it's, of course, in the hands of the operators how much they invest, but I think it's fair to assume that a normalized level is higher than pre-5G.
Unnamed Speaker: 2023 was a record year, and it's coming down, as we said, in 2024, but we would still expect a higher volume than in 2023. Again, it's up to operators how much they want to invest, and your second question, Jusses. Yeah, the second question is about the ramp-up for AT&T. And should we expect any revenue from AT&T in the first half of 2024, you know, at any kind of material level? And also, just regarding that, do you need to rehire in North America to execute the contract?
Unnamed Speaker: Because obviously, you had a savings program where you had a huge headcount reduction in North America last year. And do you need to, you know, hire some of those people back for the new contract? We don't expect material revenue in the first half. So that's why I really point that out. That is to be expected in the second half.
Unnamed Speaker: Resources, rehiring in North America and elsewhere. We have also changed the structure so we have less, and service engineers basically in-house. So we will rely more on third parties for that. So I don't expect material rehiring to deliver on this contract. Thanks, Borja. Thank you. Thanks, Josef.
Unnamed Speaker: We will move to the next question, and the next question is from: Good morning, thanks for taking my questions. Two, please. Firstly, on the AT&T contract, we heard from Nokia that price was a big part of the reason it lost the contract. I'd just be interested in hearing from your point of view, to what extent do you see these types of O-RAN contracts as being deflationary overall?
Unnamed Speaker: And then just secondly, staying with the AT&T contract, you mentioned, rightly, that it's a historic contract. I've been interested in hearing whether you are seeing more demand for these types of contracts since you announced it? So is there any sort of read across to other contract wins? Thank you. Maria.
Unnamed Speaker: You know, it's always interesting when competitors apparently know everything. So you can question how much they know sometimes. To be honest, but but but, if you look at the contract like the one we're talking about, I think it's, you know, where does this actually work? It's all about looking at the total CAPEX-OPEX envelope and actually optimizing that total cost so you make sure that you can invest in technology in order to actually increase the portion of that cost envelope that goes into revenue-generating equipment. And that is what this is all about.
Unnamed Speaker: So it's about putting technology in place that allows a much more efficient, and we call it the rollout and operation of that network. And that's what we're doing together with AT&T. So the substantial benefit here is actually that it allows within the CapEx envelope a faster rollout, but that is really created by leveraging new technology. So we're putting new energy savings features in place, multiband radios in place, standardized sites in place, et cetera. All of those contribute to making as much of the capital go into productive equipment as humanly possible. That's really our competitive advantage, and that's why that contract is so important. Then, you know, that's the reality, and that's the fact.
Unnamed Speaker: That's why it's value creation for us, but it's also value creation for our customers. So this is a way, I think, for the future that's going to be more interesting. I, I, I think this.
Unnamed Speaker: It's hard to say. I mean, we have a lot of interest in looking at similar types of solutions for the future. But that's, you know, we'll see. It's too early to say that.
Unnamed Speaker: There are going to be a lot of contracts coming, but we're seeing a great interest in exploring similar types of solutions for the simple reason that it actually reduces the non-strategic spend. And, you know, think about the normal network, right? It's kind of a lot that goes into concrete and towers, right, but the reality is it's in passive equipment, it's in truck rolls going back and forth to the site, it's in energy costs, etc. All of that we like to put into active equipment instead, and that's what we're doing with this. I think it's a model for the future and can create a big potential for us. Thanks for it!
Unnamed Speaker: Thanks, Jakob. We'll move to the next question, which comes from Sandeep Deshpande at J.P. Morgan. Good morning, Sandeep.
Sandeep Sudhir Deshpande: Good morning. My question is, in your forward-looking statements, you've given the guidance for Deloro for the full year, and Deloro seems to have growth in the U.S. market this year in FY24. Is that your view on the US market, given where the starting point is at this point? And if that is not the case, would there be further risk to the top line in FY24? Yeah, it's all... We do believe that there is a good chance that North American investments will start, but we are careful in saying here that it's in the hands of the operators. We don't want to be precise in putting any commitments for that out there.
Unnamed Speaker: We also see Deloro's expectation that... North America from coming from a record high level in 2022 down to a probably unsustainably low level of investment in 23 increases it grows again in 2024, and we believe that that's a reasonable expectation. I would just echo that, but I think what we're trying to do is also to make sure that we plan for... a challenging market. I think that's the prudent way to plan our costs on our side to make sure that we're as lean as possible.
Unnamed Speaker: And then when the market recovers, we have our technology investments. So we are at the leading edge there, combined with a very efficient cost structure. Because when that recovery comes, whether that's in, you know, the beginning of 24, the end of 24, or 25, we're at least well positioned when it comes. And that's really what we're here to do, because then we can succeed for longer. Thank you. Stabonit from Kepler's Chevreux.
Unnamed Speaker: Good morning, Sebastien. Yeah, hello everyone and thanks Peter for taking my question. On the gross margin in networks, you've seen a quite nice step up thanks to positive mix in Q4. How do we assume we should think about the gross margin in networks moving to 2024? What are the puts and takes for the coming quarters there?
Sebastien: And the second one on cloud software and services, you have strongly recovered in the fourth quarter. We know there is strong seasonality in this business, but looking at 2024 and beyond, where do you see your EBITDA margin moving in cloud software and services? Do you have any indication of the trend there?
Unnamed Speaker: Thank you. Thanks, Sebastian. Well, as you know, we haven't issued any particular profitability guidance for cloud software and services. We are on a turnaround journey. I think 2023 shows significant progress there, and we delivered a 1.7 billion EBITDA for the full year. We continue to act there with actions. It's about commercial discipline. It's about automating to take cost out of service delivery, basically, and also ensuring that we exit from subscale parts of the portfolio, if any, and manage the portfolio in an optimized way as possible.
Unnamed Speaker: So that will continue. And then, of course, we will keep on investing in this business. It's a long-term, very promising area. Burja mentioned before the need for operators to come into 5G core as well as standalone, of course, and that sits in this segment, so I think that gives a good opportunity for the future as well as that starts to happen as a strong anchor. Then you asked about the network's gross margin, a good outcome in the fourth quarter. As you saw, we are guiding for the first quarter between 39 and 41 percent.
Unnamed Speaker: How the rest of the year plays out has a lot to do with the big macro picture that we talk about, namely how will markets behave now, and we are cautious there; we talk about the continued challenges. Depending on the previous question, what happens in North America, we will see different outcomes on the gross margin as well as the top line in the network. So I think that's probably what we can say at this. I think it's also fair to say that you know our focus on gross margin; it's been one of the key drivers. Because I think it does a couple of things.
Unnamed Speaker: It keeps us focused on commercial discipline, but at the same time, it drives our product development because if we can invest in technology that drives down our costs to deliver and serve customers, it helps our gross profit. So for us, the gross margin has been critical, and that's something that we have invested quite a lot in the last few years and we continue to do. Then exactly how, as Karl said, the gross margin develops depends on that. Sandeep Deshpande, Daniel Djurberg, Sandeep Deshpande, Andreas Joelsson, Peter Nielsen, we put ourselves in the best possible position when we have a more, call it rational or more normal market environment that we expect will come. So it's all about putting ourselves in the best possible competitive position at that point in time.
Unnamed Host: Oh, yeah. Thank you. Thank you all, and this will actually conclude my 31st and last earnings call here at Derrick, and it has been sort of 10 fantastic years here at Ericsson, and it's been a real pleasure working together with all my outstanding colleagues here at Ericsson, especially Jybörjan, Karl, and the whole IR team, but also interacting with everybody following Ericsson. It has been a true privilege
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