Telefonaktiebolaget LM Ericsson (publ) (ERIC) Q1 2022 Earnings Report, Transcript and Summary

Hello, everyone, and welcome to today’s call covering the Q1 result in 2022. With me here in the studio in Siesta Stockholm, I have our CFO, Carl Mellander. And on a link from New York, I have our CEO, Börje Ekholm. So as usual, we’ll end this presentation with a Q&A session. . So I will start with this message. During today’s presentation, we will be making forward-looking statements. These statements are based on our current expectations and certain planning assumptions, which are subject to risks and uncertainties. The actual result may differ materially due to factors mentioned in today’s press release and discussed in this conference call. We encourage you to read about these risks and uncertainties in our earnings report as well as in our annual report. With that said, I would like to hand over to our President, CEO, Börje Ekholm. So please, Börje, you can start. Börje Ekholm: Thank you, Peter, and good morning, everyone, and a big thank you to all of you for joining us. I’m very pleased to present a solid quarter. We continue to see good results from our strategy execution, both within our core mobile infrastructure business, but also as we expand into the enterprise space. Before I go into the details of the quarter, I’d like to point out some new products we actually have released Interleaved AIR 3218 and Radio 4490 that you can see on the screen. These products form part of our leading 5G portfolio, which is really at the core of our success. So let me begin with some of the quarter’s key events. And of course, I have to start with the invasion of Ukraine by Russia and the continued aggression that marks a significant setback for the world. I’m really heartbroken by the consequences for those directly impacted. The war is devastating for our whole society. After the invasion in February, we realized that our business in Russia could not be sustained, and we suspended all deliveries to Russia already at that point in time. Over the weekend, the exemption for public telecom networks has been removed from the EU sanctions. So on Monday, we announced that we have suspended all -- or suspended our effective business in Russia indefinitely. This is a complex matter as telecommunication networks are part of the critical infrastructure. And as you know, many Western governments have pointed out the importance of maintaining Internet access and the flow of information for the people of Russia. So we will monitor the situation closely. We will continue to engage with the authorities, as we suspend our business in Russia indefinitely in an orderly fashion. We have recorded a provision related to Russia for the impairment of assets and other extraordinary costs of SEK 900 million in the first quarter. From an overall business perspective, we continue to execute on our strategy, and we see strong business momentum with continued share gains. In the quarter, we saw organic sales growth of 3%. As you already well know, the situation regarding the global supply chains is challenging. To ensure that we can deliver, we’ve made proactive investments in buffer inventory, among other things. We’re also investing in diversifying our supplier base due to the geopolitical environment we’re in, and that’s an environment that we foresee to continue for quite some time. This diversification drives, of course, some short-term costs, but it also establishes greater resiliency in the company as it improves our ability to deliver to our customers. And the actions we’ve taken have allowed us to deliver on our customer commitments during the quarter. We simply see that lost sales cause more longer term than carrying excess inventory a few quarters. We have also continued to invest in R&D to strengthen our market position and that will allow us to gain share, and we’ve seen that in this quarter again, but we were also endorsed, and I think that’s important, by Gartner, who named us a leader of 5G network infrastructure in their Magic Quadrant. We’re focusing our increase in R&D investments to maintain a strong competitive position. We’re investing in Cloud RAN, next-generation ASICs, as well as our Cloud-Native Core portfolio and service orchestrations. These investments in R&D will generate a strong return longer term, but it, of course, impacts the profitability short term as they are not yet revenue generating. Gross margin came in at 42.3%. Underlying business performance is solid as the gross margin includes the effect of 1 large software contract that normally is recorded in Q1, but this year was pushed into Q2. The effect of this contract is about SEK 0.9 billion. The software contract pushed into Q2 impacted also Networks’ gross margin, which reached 44.7%. And the impact of this software contract is SEK 0.9 billion on gross margin in Networks as well. In Digital Services, we saw encouraging sales development in the Cloud Native 5G Core portfolio with double-digit growth. However, we’re not satisfied with the overall results in the quarter. We need to improve faster and we increased focus on accelerating sales growth and addressing efficiency to improve profitability. Our EBITDA margin for the group was 11%, excluding a fair market revaluation and the provision related to Russia. In the quarter, we also received communication from the DOJ about a breach notice related to our DPA, and we’re currently engaging with the DOJ about this matter. What I can say now is that it’s our assessment that the resolution will likely result in monetary and other measures. However, the magnitude of these cannot, at this time, be reliably estimated. As this process is ongoing, we remain limited in what we can say about the historical events covered in the Iraq investigation and related matters. Let me now turn to the customer and market side of our business, where we continue to see a very good momentum. As we are now hopefully starting to transition out of the pandemic, I’m also happy to start interacting more face-to-face with our customers. And you know that what gives energy in this job is actually meeting both our people, but also the customers, as that’s a great way to see what happens in the business and drive our own improvement. And now we’re getting back to that more business as usual. And we continue to see good momentum in our interaction with customers. Overall, sales growth in Southeast Asia, Oceania and India decreased by 17% year-over-year, that was due to timing of orders and project milestones. We saw very strong continued momentum in North America, where sales were up 9% year-over-year, driven by continued very high demand for 5G solutions across all segments. And the U.S. customers continue to be at the forefront of 5G deployment. So for example, we see customers indicating good traction in fixed wireless access as a new use case. Sales in Northeast Asia declined by 20% year-over-year, primarily as a result of project timing in Japan. However, we continue to see good opportunities in Japan which is a highly developed market with dense networks and high demand on capacity. I would here like to point out that the increased sales in Mainland China, and this is driven by timing of orders there. In Middle East and Africa, sales decreased by 9%. This was due to lower investments in 5G in the Middle East and was partly compensated or partly offset by growth in Africa. Overall, we’re seeing encouraging momentum in the African market. And finally, in Europe and Latin America, sales increased by 15%, with Europe seeing an 18% increase. And this strong development was driven by Networks as a result of continued market share gains. And it’s great to see that we’re now back to strong growth in Europe. Let me talk a bit about our strategy execution. Our core business remains to extend our leadership in mobile networks. An example here is our massive MIMO portfolio that has proven to be highly competitive.

Yes, I think we lost Börje here for a few minutes. See if we can reconnect here with Börje. As I said in the beginning here, Börje is on a link directly from New York. Clearly that -- it’s some challenging -- challenges here. But let’s see if we can reconnect with Börje in a few seconds here.

Keep on going. So we look forward to hearing the continuation here of Börje to talk about strategy execution, both on the mobile network side, of course, and the core business that Börje was just talking about now, but then also which is so encouraging now the enterprise piece.

I can start hearing Börje in my ear. Now he is back. We saw him -- Börje, you’re back. Börje Ekholm: Do you hear me?

Yes. Börje Ekholm: So I don’t know where I lost you, but -- maybe I’ll -- yes, so let’s go into the strategy execution. And you know that our strategy and focused strategy we have remains to extend our big leadership in mobile networks. And here, you know the example of, of course, that we invest in massive MIMO portfolio, and that’s proven to be highly competitive and one of the reasons for our market share gains. But I also want to highlight that we foresee a longer investment cycle in our core business compared with previous mobile generations. And that’s because 5G’s broad applications will drive continued need to increase capacity as basically new applications migrate to wireless access. And I think also here, we want to highlight the -- what we see is, of course, that the continued investment that the operators are doing in CapEx is, of course, important. But it’s fair also to say that it’s only a portion of that overall CapEx that goes into active components. So what we see is that for the future, as the network needs to densify and capacity needs to increase that the portion of active components that we can supply in our addressable market actually will increase of the operator’s CapEx. And that’s why we’re very confident and very comfortable about the strong outlook for the market segment we are working in with 5G. And we continue to invest for this, what I will call, a bright and growing market. And we have continued to increase our R&D leading to the RAN market share gains that we see outside of China, but also to the increase in our profitability. We’ve launched new RAN products and solutions, including next-generation ASICs. We have a strong progress towards enabling our customers and our path towards sustainability and have the lowest carbon footprint possible. So for example, our new RAN solutions consume 25% less power compared to current products. We’re also expanding our leadership in 5G core with 16 out of the 20 largest operators globally using Ericsson 5G core. We’ve signed over 60 contracts, and we have 12 live networks, which is far ahead of our nearest competitor. Sales are now growing as 5G are getting launched around the world, but it’s still from a very low base. Dedicated Networks and Cradlepoint are the foundation of our enterprise strategy. Ericsson has taken a significant step towards growth here. Cradlepoint is now showing 52% yearly subscription billings growth with a strong momentum in the 5G portfolio. Dedicated Networks is gaining momentum, and we have launched Ericsson private 5G, which is fast and easy to deploy and easy to operate and offers a life cycle assured solution. The Global Network Platform, we aim to create a new market for network APIs that will enable developers to use the advanced network capabilities enabled by 5G, basically putting the 5G network at the fingertips of the developers. Given the new opportunities and assets from the intended acquisition of Vonage, we’re getting strong traction and interest with our customers. We’re accelerating the execution to deliver network APIs. The recent milestone was our announcement of the End user Boost, which is an application that allows for better network quality when it’s needed with a press on the button. So for example, when doing an important video call, so not dropping like it happened to me just a few seconds ago or a few minutes ago or for that matter for gaming. The interest level is very high. And the announcement that we did together with smartphone in Hong Kong generated more than 150 million unique visitors on our web page. In short, we believe the market for network APIs will be very large, and we can lead that and create that market. So we continue to work to close the Vonage acquisition during the first half of 2022. With that, let me leave the word over to you, Carl, to go through the financial details of our report.

Thanks, Börje, and good morning, good afternoon to everyone. And I just wanted to reiterate to start with here that we delivered a solid quarter today, and there are some one-offs, but the underlying business is really encouraging with great business momentum. But let’s drill into some of the numbers here, starting with the top line, SEK 55.1 billion in net sales. This is an organic growth of 3%. Reported sales grew by 11%, but we do have a strengthening dollar here underlying. So organic is 3% growth, as said. And you saw in Börje’s world map earlier, where particularly growth comes from with North America growing by 9% in constant currency and Europe, Latin America by 15%. We have won market share during the quarter as well, especially in Europe, in line with the strategy that we have. IPR revenues came out at SEK 1.4 billion. This is an increase of SEK 0.6 billion year-over-year, driven by renewal of license agreements. And this was in line with the guidance that we had provided already in the Q4 report -- , and we keep the same guidance also for the second quarter between SEK 1 billion and SEK 1.5 billion of IPR revenues. And as you know, of course, this guidance is based on or dependent on the timing of renewals and the terms and conditions of new agreements and so on. But we do remain very confident in our strong 5G position and the leading patent portfolio that we have. Gross margin and excluding restructuring charges, there was a decline of 60 basis points year-over-year to 42.3%. And we already discussed some of the items here, but of course, we are actively investing in the supply chain resilience. And we do have the lower software in the mix. So we’ll come back to that a little bit more later as well on gross margin. R&D. We increased investments. As Börje said, it came out at SEK 10.7 billion this quarter, that’s a SEK 1.1 billion increase year-over-year. Half of that is related to FX. But the investment we do here is, again, in Cloud RAN and next-generation ASIC for industry-leading Radio performance, better power, saving possibilities and footprint reduction. In the quarter, we had 2 one-off items, I should mention also as well again. One is the provision we made in connection with the Russia business, that’s the SEK 0.9 billion. And also, we had financial investment revaluation under our Ericsson Ventures umbrella, and that’s SEK 0.3 billion revaluation. And together, those represent SEK 1.1 billion than, both reported in other income and expenses. That brings us to EBIT. So EBIT, excluding restructuring charges, came out at SEK 4.8 billion, and this is 8.7% in EBIT margin. But however, remember these one-off items that we had, of course, including what effects we had in gross margin, which I will come back to, but also the one-off items that are impacting. So excluding the one-offs, EBIT would have been at SEK 5.9 billion in the first quarter, which represents an improvement by SEK 0.6 billion year-over-year in absolute terms. When it comes to tax rate, we had an effective tax rate in the quarter of 29%. And you also see here on the slide, the net income came out at SEK 2.9 billion following the provision to Russia notice. And then free cash flow before M&A, minus SEK 1.7 billion in the quarter, and this is following the active buildup of a buffer inventory for certain critical or vital components that we have decided to do. But if you look at the rolling 4-quarter free cash flow before M&A, we are at SEK 28.8 billion. This represents 12.1% of net sales, which can be compared with our long-term target, as you know, which is 9% to 12%. So we’re ahead of that long-term target still in free cash flow before M&A. Finally, on this slide here, the rolling 4-quarter EBITDA margin, if we look at that, excluding restructuring, again, is 14%. And this can be compared with our long-term target of EBITDA 15% to 18%. But let’s look at the segments a bit more, starting with Networks there. And here, we are encouraged by the 4% organic growth in the quarter, and we were able to deliver on customer commitments in terms of deliveries, thanks to all the hard work on the supply chain resilience that we have done. Börje mentioned -- let’s just repeat that Börje mentioned the SEK 1 billion in software here, and this is a discrete contract that usually comes into the first quarter. Now it’s pushed into the second quarter. Of course, it has a large impact on the gross margins of Networks. And I also wanted to point to the -- again, the rolling 4 quarter EBIT here reported is -- and that was 21.3% after Q1. In Digital Services, gross margin, excluding restructuring, again, decreased to 70 basis points to 42.9%. This is a result of initial deployment costs in the 5G Core contracts, which we are, of course, extremely happy to have one and that we are now implementing for customers. EBIT came out at minus 4 -- minus SEK 1.4 billion, excluding restructuring charges. And again, as Börje mentioned, we’re not satisfied with the overall performance here, of course, financially. So the target of limited loss for 2022 is challenging, given the increases in R&D that we see in the service orchestration, but also the Cloud Native 5G portfolio. That’s why we are increasing our focus now on accelerating sales -- both sales growth, but also addressing efficiencies through automation and other measures. In Managed Services, EBIT margin, excluding restructuring, ended up at 11.8%. And this is partly and importantly, a result of increased network optimization sales. And this happens in the wake of 5G build-outs where optimization services are demanded and requested by the customers. This helps our gross margin in Managed Services. There was also an element of timing of costs here impacting positively the margins in Managed Services, which actually recorded the highest EBIT margin since the inception of the segment. And lastly, on the bottom right side here of the slide, you see Emerging Business and Other. And as I said previously, we had this SEK 0.3 billion hit from the Ericsson Ventures revaluation. But instead, if we focus on the underlying business in Emerging Business and Other, we saw good progress, especially in Cradlepoint and also Dedicated Networks, as I said before. And the last 2 quarters, in fact, we saw record growth in Cradlepoint and the business momentum here with the new portfolio also tied into 5G is accelerating. We launched a new version of the Ericsson Private 5G within Dedicated Networks. This is a solution in a box, fully software upgradable, obviously, easy to install and manage; completely 5G ready, of course; and this has been deployed already with many enterprise customers; and we see good traction also on that offering. So let’s have a look at the gross margin again. I commented that briefly before, but we find it useful to look at this rolling 4-quarter picture as well on gross margin. And you see the rolling 4 quarter gross margin now is 43.3%. And I think we talked about the reasons behind here, so I will not repeat them. We talked about the software, the SEK 1 billion software. We talked about the supply chain investments that we do and also the initial deployment costs for the 5G Core contracts in Digital Services. So now I suggest we move to the next one, which is really looking at how have earnings then come out in free cash flow? And as usual, I can say, managing working capital remains really a focus area for us. It’s a strong focus. We talked about the investments in the supply chain in Networks previously. And this is also visible here in working capital in inventory buildup. We expect broader elevated inventory levels to remain in the next few quarters. But remember, this is a value-creating investment that we do in order to meet customer commitments, and obviously, the cost for doing this is far better than missing deadlines or missing customer commitments. So this is a good investment that we are making. As customary in Q1, I can also mention, we had cash outflows for accrued employee incentive-related expenses. And these effects were partially offset by a very good cash collection in the quarter and also an increase in contract liabilities related to customer contracts and also IPR payments. So free cash flow before M&A. This is a key metric for us at Ericsson, came out at SEK 1.7 billion, negative, as you see, mainly due to the buffer inventory that we have decided to build. And I already mentioned the rolling SEK 28.8 billion free cash flow, which is 12.1% of net sales. So after this quarter, we maintain a solid cash position, ahead of the planned Vonage acquisition. Net cash came out at SEK 65.2 billion, and the gross cash is now SEK 104.2 billion following the Eurobond, €750 million that we placed in the market in February. So with that, thank you so much, and I hand back to you, Börje. Börje Ekholm: Thank you, Carl. So to sum up, we report solid quarter with good underlying performance, but I will also say we know that we can do better. So while we’re navigating a challenging environment, we will continue to be well positioned to take the next step in our strategic journey. As we move forward, we will focus or continue to focus on executing on our strategy to expand leadership in mobile networks, but also expand into enterprise in a focused way. The mobile infrastructure will remain our core, and we will not spare any effort to strengthen our position in here. We saw a solid underlying performance in the quarter, and we’re excited about our outlook. Technology leadership will be driving our competitiveness, and we continue to invest in leading R&D and be on the forefront. And in this picture here, you see some of our new products Radio 4490 and Massive MIMO Air 6428. We are encouraged by the growth we see in North America and Europe built on 5G momentum but also share gains. And of course, our ambition is to continue to grow and develop this business both based on market growth as well as market share gains. On the IPR side, our strong 5G position, a leading patent portfolio makes us well positioned to conclude the outstanding renewals. On the Enterprise side, we’re seeing equally good development. Our portfolio of prepackaged enterprise solutions with Cradlepoint and Dedicated Networks sees -- we all see very good traction overall. And we continue to work towards closing the Vonage acquisition in the first half of 2022 and to start developing the global network platform. We’re confident that these investments we’re doing, both in our Core business and the Enterprise space as well as, of course, our cultural journey we’re going through will make Ericsson a stronger, more resilient company, while at the same time put us on a higher growth trajectory. We have a solid business today, and we’re on track of reaching our long-term target of an EBITDA margin of 15% to 18% no later than in 2 to 3 years. Finally, I want to thank all my colleagues in team Ericsson who made this possible. To put it simply, you rock. And with that, I would like to conclude this part of the presentation and hand back to Peter for your questions.

Thank you, Börje. I’m longing for the days when we will transform this on a 5G platform. Maybe once in the future. Let’s now move to the Q&A. So, Nash, we are ready for the Q&A session.

So, we’ll start here. I can’t really see a visible. Maybe, Nash, you could help me with the first question and who is that from?

Our first question comes from the line of Aleksander Peterc from Societe Generale.

I just have a couple of point of clarifications. First of all, given that you have SEK 1 billion of software sales in Networks slipping from Q1 into Q2, should we therefore assume that your second quarter sequential growth may come in ahead of the usual seasonality, I see like probably about 3 to 4 percentage point boost as a result of this slippage. Is this the right way of looking at it? Secondly, on the inventory. So I understand your investment there. Can you tell us if you’re now happy with your inventory levels? Or will this investment into resilience continue in the remainder of the year? And then just finally, a point of detail on your IPR revenue run rate, excluding the impact of delays in renewals, so your normal run rate. Should we think now there is a positive FX impact there given the current exchange rates or do the old levels that you have given previously still prevail?

Maybe, Börje, you can start with the software comments on... Börje Ekholm: Yes. No, you can take it Carl. You’re already gearing up, I see.

Exactly. But, I think -- thanks, Aleksander, for the question to start with. And of course, as you know, in every quarter, there are many puts and takes. And we typically don’t guide a specific outcome, of course, on top line, but we usually just refer to what the 3-year average seasonality is. In this case, it is true that the specific SEK 1 billion in software is getting moved, and we are certain of that into the second quarter. But as you know, there are many puts and takes in every quarter, and we have to, of course, win every day to get to the final results. So I would just look at the total seasonality there and then you make your own calculations or assumptions based on that. Then on inventory levels, are we happy? I mean, we see this as something that we that is a value-creating investment given the situation we have globally on the supply chain. In other words, we are building up this buffer stock so that we are able to meet this customer commitment. Should the global situation on components change, of course, this will also be -- we will be able to decrease those levels again and get up to a faster turnover of inventory. But for the next couple of quarters, few quarters, we believe that this elevated level of inventory will remain. And then on IPR, I don’t want to know if you want to comment on that Börje. But I mean, this really has to do with the renewal that we have in the pipeline at the moment. And I don’t think we can comment so much on that. You know which ones they are and only to say that we are progressing those in the speed that is possible between the 2 parties. And we will, of course, come back and inform you whenever we have something new to tell them. Börje Ekholm: Yes. I think the only thing to add there is the -- for us, it’s really important to protect the long-term value in the contract. So we’re going to do what we can to defend the value of the investments we make in a market-leading IPR portfolio with more than 60,000 patents. So we’re -- and you know it’s -- it also involves court processes. So let’s keep you updated as we progress, but we’re comfortable with the position we’re in.

Thanks, Aleksander. We’ll move to Predrag Savinovic from Carnegie.

So first, I’d like to ask about the higher R&D costs for the quarter. What can you say about this cost level generally for the remainder of 2022? Is this for Q1 alone? Or should we expect a new base effect for the rest of the year? And then secondly, thinking generally about cost inflation, what is your ability here to pass higher costs to customers? And I guess, Ericsson now you’d like to charge more for innovation and product launches. Börje you spent some time on talking about very nice launches in Networks in the intro. So question is, is general ability to pass costs excluding new products and also to what degree portfolio innovations receive uptake in orders within a year that would help you manage, say, logistics cost or input costs? Börje Ekholm: Yes. I can start on both of them. On the R&D level, you can say if you assume we’re going to continue at a higher level. And the reason for that is, of course, that we are going to be technology leaders in the mobile infrastructure. So you see our Cloud RAN investments, you see the ASIC investments, you see the 5G Core portfolio service orchestration. We’re going to keep pushing ahead, and we believe the long-term return on those investments are very high. And just to draw the analogy to 2017, we’re more than -- I call it, SEK 10 billion on the run rate R&D, and that has resulted in significantly improving profitability in the company. So the return on these type of investments that we’re doing may take a few years to materialize, but they are significant, and we see the same thing with the investments we make here now in Cloud RAN and service orchestration, et cetera. So we’re -- we think this is the right way to execute for a technology company in order to get paid through gross margin. So the commitment to lead on technology, we’re not wavering from that. But we also see that, that’s going to pay off in gross margin longer term. Regarding the cost inflation, and you’re right, this is a challenge. The costs are increasing, and we see that on salaries. We, of course, see that on components as well. We’ve had fairly high increases also in the first quarter, but you also see the solid underlying performance. And the important part here is that when you look at the cadence of new products that we’re introducing, we’re actually -- that’s what we use in order to protect or increase our gross margin longer term. So I believe in technology, it’s really about staying at the forefront using product substitution in order to define the future gross margins. And that’s what we intend to do. That’s why you see us also, for example, investing in the future ASICs because that’s going to help us drive, call it, a better performance, but also the better ability to price. So that’s why they go kind of your 2 questions, as a matter of fact, go hand in hand.

Thanks. Anything from your side, Carl?

No. I think Börje said it all.

Great. Then we’ll move to Peter Kurt Nielsen at ABG.

I’d like to turn to Digital Services, please. Over the past couple of quarters, your commentary on Digital Services and your confidence and outlook has been significantly more positive. Now we seem to be taking a step back. In addition to the increased R&D spend, can you elaborate a bit on what are the challenges there? And it sounds like you’re seeing some unanticipated challenges here also and unanticipated need for higher spend. Can you elaborate a bit for us to better understand why the outlook has now become a bit more cautious than it has been in the past, particularly given your positive commentary over the last couple of quarters, that will be appreciated.

Börje? Börje Ekholm: Yes. No, it’s a great question. Thank you for that. We see a bit, call it, a softer top line. That’s -- that’s a reality. And we see, though, very strong growth in our underlying 5G portfolio. We see good development in our BSS solutions. So there are positives and there are some slippages in here. We’re just a bit more cautious on the outlook. And we feel that we really need to put even more emphasis on sales execution and drive top line better than we were able to do during the first quarter. We believe the product portfolio we have is very competitive. We have 16 out of the 20 largest operators. So we believe we have a strong position, but we clearly need to execute better. And that’s where you see our hesitation here, and that’s what impacted. It’s not really a change in market outlook. We still see a very strong market outlook for our solutions and our competitiveness, but we have not been successful in our execution basically.

Thank you, Börje. And thank you Peter Kurt. We’ll move to Sébastien Sztabowicz from Kepler Cheuvreux. Sébastien Sztabowicz: One question on the business trends for the coming quarters. How do you see as a business developing in your main geographical markets for the coming quarters? Where do you see some specific growth opportunity? And where do you see some potential challenge taking into account maybe the contract or the underlying trend? The second one is on the specific annual contract slippage. What kind of visibility do you have to signing it in Q2? Is it something that is certain or there is still some uncertainty on the signing of this SEK 1 billion contract?

So I’ll take the second one, at least. We are certain that this will come in. It’s moved from first to second quarter. That’s specific. That’s the market comment is -- do you want to start, Börje? Börje Ekholm: You can start.

Now maybe just to kick it off then. When we look at the projections now that have been updated from Dell’Oro again reflecting this very good momentum in 5G deployments. You see that now the growth for 2022 is predicted at 5%. So it’s upgraded again and 8% in North America. And I think Börje talked about this before as well, the need for densification in North America and the fact that also the C-band, the second part of the C-band spectrum is coming out now in 2023, which means certain gearing up already now. So I think -- I mean, North American momentum definitely to continue. Then just to mention, perhaps one more example of the market, India, which -- where 5G spectrum will become available later during this year. It’s, of course, a massive market in general and one that we have great hopes for as well when it comes to increasing the footprint.

Börje, anything to add? Börje Ekholm: You can add. What we see is that 5G is increasingly getting rolled out across the world. And Carl said it, you see the U.S., of course, accelerating, but you see India as well, you see Europe starting. So this is happening now, and we believe we’re very well positioned in that market, and we feel confident about the growth outlook. We’re the clear market leader now outside of China. So for us, we’re going to continue to invest in driving that. What I think is important to highlight also is that 5G an access technology, we believe, will be both higher level than other Gs before, but also a longer investment cycle. And the reason for that is, of course, that we start to onboard new use cases on to wireless access technology. So think here about fixed wireless access going to drive traffic, you see a very rapid uptake in markets where fixed wireless access is launched. So examples in North America for the mentioned one, but we also see new applications in the sense of enterprise use cases, private networks integrated to the macro network will drive more traffic onto the wireless access networks. We see augmented reality applications coming online now that will drive traffic that didn’t exist before. So we see in a way 5G becoming a much more ubiquitous technology than 4G was. And therefore, we’re also seeing different investment pattern than we’ve seen before. That’s why we’re very excited about the outlook for wireless technology. And that it will actually play a bigger role in the future than it -- even if it was big in the past and allowed the consumer to digitalize, we see it as even more important going forward.

Thanks, Börje. And thanks, Sébastien. We’ll move to Francois Bouvignies at UBS.

Can you hear me okay?

Perfect.

Okay. Good. It’s actually perfect because Börje as I have a follow-up to your point. So when you look a bit beyond 2022 and maybe 2023 and the RAN market growth, when we listen to the U.S. operators, some of them are talking about maybe peak investment in 5G in 2022. At the same time, we see the Chinese operators that for 2022 are talking about lower investment in 5G because of some, say, lack of applications. So I mean how can we look at the U.S. market specifically in ‘23, given these comments, I mean, how it can be different than maybe the Chinese market? Maybe you can explain why we would not see the same trend than the Chinese market in the U.S., is there is any specific reason behind that? And the second thing is on the enterprise, how much do you estimate your enterprise channel is as a percentage of revenues today? And what is the growth rate? If you can give some color around your current exposure toward the enterprise business today as a whole would be very helpful?

Please, Börje. Börje Ekholm: Yes. If we start with the first question, and it’s a great question, where, of course, it is -- as your question indicates, a bit of uncertainty. But if you look at what is happening here, there are a couple of things going on. First of all, China has actually built out a very good network already now. So that has already, in a way, happened. So in order for that to drive additional CapEx, it really needs to get more traffic on to. So the China is a few years ahead of the rest of the world. So I think we are likely to see applications now starting to be developed on the Chinese networks that are going to drive traffic, but they will be -- because of the capacity they already have in the 5G network, they are ahead of the West. If you look at the U.S. specifically, what we see there is, is actually a very -- we see the C-band build-out continuing into 2023, as Carl said before, that will, of course, drive CapEx, but the other thing we also see, and that’s important, is we see also a shift in CapEx need into more active components into densification of the network, i.e., in wireless CapEx with lot of the CapEx, probably 3/4 of the CapEx goes into fiber, concrete, steel towers, et cetera. And that’s the bulk of CapEx. Our part is a small portion. And that portion, we believe given the development of the underlying traffic in the network actually will continue to grow and that’s what we also see when we look at North America as the networks becomes increasingly loaded with new traffic. They will also continue to expand capacity in the networks. And that’s why we’re still seeing 2023 as a very good year for wireless CapEx.

Good. Thanks, Francois. We’ll move to the . Börje Ekholm: We didn’t answer the enterprise, maybe Carl can take that.

Yes, Francois, thanks for the question. And no, I can just say, I mean, it’s a relatively small scale, of course, of Ericsson’s total business today, but it is a fast-growing sector. And that’s why we are obviously attracted into it and focus so much on the enterprise side as part of the strategy as well. And we have talked about the overall addressable market for our customers is growing very rapidly into the future. And we believe probably this is as large as the consumer side or as the CSP side as well going forward. Of course, it will take a little bit of time. And as Börje said, we are certainly working and engaging with many, many enterprise sectors, et cetera, to stimulate that demand and show what is possible with 5G. And we see great interest also from the enterprise side. So I would say today, rather small base, but high ambitions and a high growth rate in that market going forward, which is underpinning our statements that we believe that the fifth generation wave is going to be stronger for longer. This is what will come in, in addition to the traditional RAN business.

Thanks, Carl. Then we’ll move to Industry. So please.

Congratulations on the strong underlying performance. I have 2 questions, if I may. The first one regards to what Börje said earlier on in the call that the resolution of the DOJ matters likelihood result in monetary and other measures. I’m interested in what you can say about what other measures potentially could be? The second question is regarding Digital Services. You say that you’re happy with sort of what you have, but it’s a question of deliverance. So my question there is, do you see any need for possible changes in structure or leadership within Digital Services? Börje Ekholm: Maybe you’ll take the first card and I can answer the second one. The reality is we have been on a journey to execute in Digital Services. This is an area where we’ve had losses for a long period of time. So, of course, we need to look at what can we do to improve sales execution, what can we do to improve our delivery of competitive products to the market. But what I’m also trying to say is we have very strong portfolio today. The team has done an outstanding job of getting that portfolio onto the market. And when you look at winning 16 out of the 20 largest operators of 5G Core, for example, that’s a pretty good achievement. That’s actually something to be very proud of as a company. So what we see in the numbers is we needed to do further better than that, right? And that’s why we’re also signaling it’s a challenging target. But we’re also improving or increasing our efforts to improve sales execution even further. We have more to do also on the portfolio. We can invest in automation, service orchestration to have a competitive product portfolio. And here, we have more to do. But we will continue to do that and execute to the best of our ability. So the commitment on our side to reach a satisfactory margin out here in the next few years is the same as before. But we see a bit of need to improve that execution following Q1.

On your DOJ question. Yes, I mean, as we say, we are engaging now with the DOJ to resolve and discuss these matters and so on. And we are, of course, very limited in what we can say. So I can’t really speculate about what measures that DOJ will decide on. But we wanted now to say in the report that it is likely that -- the closure. The resolution of this will include both monetary or possibly other measures? And exactly what those are, it’s -- I cannot really speculate about that. So we will follow this, of course and inform as much as we can when we can under this matter.

Thank you. We’ll move then to Daniel Djurberg at Handelsbanken.

The question is, I could start with the Digital Service again because we saw double-digit growth in BSS and 5G Core while revenue is still down 2%. So there is -- is it mainly -- would you call it legacy sales that is dropping so much or is it something else? And also again, on the execution is it mainly the cost control or the sales execution that is you’re not really happy with? And also, if I may ask you on Managed Services doing well with 23% gross margin in the quarter. Should we see this as a new higher level or is it a temporary positive effect in the quarter for Managed Services? Börje Ekholm: If you take, Carl?

I can start -- maybe start from the back down on Managed Services. It is a good level. And as I said, it’s the highest we have seen. In Managed Services, there is a certain dependency on timing of cost. So -- and we have seasonally low cost, but also this quarter rather low cost actually that came into the books. And I think over time, we will see that normalize again. What is good, though, and I also pointed that out before is the network optimization sales. And that’s a good margin driver for us, and it certainly helps margin come up. But I would encourage you, Daniel, and everyone to look at more the 4-quarter rolling margin profile of Managed Services. I would say in all businesses, but especially in Managed Services, because of this cost fluctuations between the quarter. Börje? Börje Ekholm: You can start if you have good go on?

Yes. Okay. So your question was -- and it’s very correct. We see double-digit growth in 5G Core. This is, of course, a strong point here, and we’ve told -- we’ve talked about the number of contracts we won and so on. But you just said before that out of the 20 largest operators, 16 of them are actually on our 5G Core path, which is a great result, I think, and improves the capabilities of our offering. So that’s all good. But then, of course, we are in -- you could say we are in a shift between older parts of the portfolio and the new. And what is the fact with 5G Core contract is that we have some costs associated with those now initially, but revenues will come later. We’ve talked about that before also. It’s still true in this quarter. It’s growing but still at a rather low level. And of course, the majority of revenue will come as more and more networks actually go live and then when subscribers are migrated on to those. So at the same time then, of course, the legacy sales are not keeping up. And this is why we want to focus even more on accelerating the top line. Börje Ekholm: I think you can just add there, and Daniel, the question is well taken. We shrank in the first quarter. And you know that for us to really deliver on the potential of Digital Services, we need to get back to sales growth. And that’s really the reason why we need to put more focus on sales execution. We’re not going to win on the cost side here. We need to be efficient. We, of course, need to keep costs under control. But in reality, where we will be successful is by driving revenues, by getting our products into the market. And we see good traction in several parts of the portfolio, but I also see that we can do better and must do better.

Thanks Börje. Thanks, Daniel. We have another minute. I had the last question actually coming from Alex Duval at Goldman Sachs. So please, Alex.

I’ll keep it quick. You talked about your product power consumption being 25% better than current products. I just wondered how that compares in your view to products from the competition? And you’ve obviously referenced R&D investments, so I just wondered if there are further improvements we should be thinking about that can help sustain your competitive position there? Börje Ekholm: Yes, this is really the key of our long-term success is that, yes, today, it’s 25% lower. But tomorrow, it’s going to be even lower. And that’s what we invest for. And that’s why the key here is for us to stay ahead of the technology curve. We always make sure that we lead on power consumption, lead on spectrum efficiency, performance in the networks, that’s really why we can sustain a better gross margin as well as operating profit. And really, our -- what has driven the turnaround of the company is actually the commitment to invest in leading technologies. By doing that, we can get a better gross margin and better operating profit. So that has not changed, and we continue to see very good customer interaction when we launch new products, because it really addresses needs for the customers. And that’s where we will continue to be dedicated to.

Thanks Börje. And thanks, Alex, for that question. I guess before we end the call, you want to make a final remark, Börje? Börje Ekholm: Thanks, Peter. Thanks, everyone, for joining us for this call. We, as we said, put another solid performance or a solid quarter to the record. We feel the underlying performance in the business is strong. There are some one-time effects this quarter, it’s unfortunate. They happen in the business. But when you look at the real performance, it’s good on our execution on increasing our market share and footprint and we can grow top line, but we also have a good operating performance when you adjust for the one-time effects. So we are confident about our strategy, continue to extend the leadership in the core mobile infrastructure business and gradually build a presence in the enterprise space. And with those investments, we’re going to go to a higher margin profile as well as better growth profile in 2 to 3 years. So we’re very excited about that journey and look forward to executing on that. So thank you very much for joining the call.