Hello, everyone and welcome to today's presentation of Ericsson's Second Quarter Result 2022. Together here in the studio, I have our CFO, Carl Mellander; and our CEO, Börje Ekholm. As usual, we will start this session with a presentation of around 20 minutes and then we will have the Q&A session. More details around that you will be able to find on our web page, ericsson.com/investors. During today's presentation, we will be making forward-looking statements. These statements are based on our current expectation 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 start with giving the word to you, Börje. Please, Börje. Börje Ekholm: Thank you, Peter and good morning, everyone and welcome to today's presentation. And a big thank you for joining us, of course. I'm pleased to present another quarter where we continue to see a strong business performance. We are growing driven by the global rollout of 5G Networks as well as market share gains. Today, we have a 39% RAN market share and that's, of course, excluding Mainland China and that's up from 33% in 2017. Today, 50% of the world's 5G traffic outside of China is carried over Ericsson radio Networks and 80% of the top 20 operators in the world are using our 5G Core. Fundamental to our strategy is technology leadership. And since 2017, we have increased our investments in R&D significantly and we're committed to continuing this journey of innovation. This includes investments in our mobile infrastructure business but also developing a…

Thank you, Börje. Excellent. And good morning, everyone. Thanks for taking the time. And first of all, I wanted to say that this then will be the last quarter we report according to the existing current structure of segments. And from the quarter 3 report then, we will report in the new structure with the 4 segments: Networks, Cloud Software and Services, Enterprise and Other and we will provide a restate also for -- from first quarter 2021 until second quarter '22 and also the full year 2020 in this new structure and we will do that in September, well in time for the Q3 reports. So if we look at the numbers then and starting with net sales. We -- the set sales amounted to SEK62.5 billion, with organic growth in 4 out of the 5 market areas. So organic growth of 5% despite then a couple of items that Börje touched on, the suspended business volume in Russia, that's SEK1.2 billion in top line drop due to that; and also the IPR revenue which is SEK0.9 billion lower year-over-year. So this growth was really driven by the 5G deployment in 2 of the largest market areas we have, of course, North America growing 12%, as you saw and Europe and Latin America growing 4% organically as well, especially driven by Europe. We continue to win market shares, not least in Europe and now we see the fruit of that in the top line growth. So reported sales grew by 14%. And clearly, we have quite a strong FX tailwind here due to the weakened Swedish krona. So IPR, we talked about it a bit, it was SEK1.4 billion in the quarter, decreased SEK0.9 billion, as said. And it can be noted that this is in line with the…

Thanks, Börje. So I would like to call out Mark and inform the audience that we will start now the Q&A and how to proceed.

Thank you, Mark. And we'll start with Francois Bouvignies from UBS. Hello, Francois.

So I have 2 quick questions. if I may. So the first one is on inflation. I mean obviously, it's one of the main highlights for this quarter. And I just wanted to know if it's possible to quantify the impact you saw this quarter. And in the release, Börje, in your presentation, you said that you -- as contracts expire, you're going to try to adjust pricing. So my understanding is that the prices are mostly fixed until the end of the year. So should we expect this drag of inflation to carry on until the end of the year? Or is there anything you can do before that? So that's my first question. And I have a quick follow-up.

You can start, Börje .

Okay. Börje Ekholm: I can take the latter part of that question. Well, the key for us to fight inflation and you see -- you know the inflationary pressures, they've been very large on components as well as the whole supply chain, transportation, wages, et cetera, during the both first and second quarter. The key way for us to short-term combat inflationary pressures is actually by introducing or coming with product substitution. We spoke about that in the first quarter. That continues to be the key driver, because that allows us to both start to discuss the price of new features but also to actually lower the cost of the product. And we remain very committed to that model that's been with us since 2017 and we continue to see the benefits of that. Then contracts, they're typically could be 1 to 3, 4 years in this industry. And so they are regularly renewed. And as they are renewed, we can adjust terms but it's -- and I would say in between, we, of course, on service components, on certain components, we have ability to adjust. But I think our key way to adjust prices will be through product substitution and will continue to be that.

Maybe I can add when it comes to prediction of this, of course, that's going to be hard for this type of macro factors. But I think more important for us is to plan for this and to continue with the mitigation that we're doing. And I really want to emphasize again what we said initially that this is something -- not something new, we have been working at least since 2017 with exactly this strategy. We invest to innovate, to launch new products, please the customers, of course and then price accordingly over time. So that's really our big focus here. And better to plan for a continuation of this situation, that's what we are doing in the supply chain than to assume that it will be improving very soon. But on the inventory side as such, we do say, as you see in the report that we believe that inventory will come down towards the end of the year. So that has, of course, also to do with our supply and delivery planning to customers as well. Börje Ekholm: And I would say, we should also remember the gross margin impact from IPR, that's -- we're going to make sure we get the right deal rather than optimize an individual quarter's performance. So that is a key reason why you see the gross margin drop year-over-year.

You had a follow-up as well, Francois?

Yes, as a quick follow-up, Peter. So you mentioned, Börje, as well in the presentation, this impressive market share on the 5G traffic outside China, on the RAN side and 80% of the top 20 operators are using your 5G Core which obviously shows you that time to market and add more advanced products when the 5G ramp. But as we see a bit forward, do you -- and based on your deals win rate today, do you see this market share sustainable as the 5G market is growing? Or should we expect a normalization of this market share? Or do you still see the same similar market share as we move into next 1 year or so based on your other behavior? Börje Ekholm: If you look on the 5G Core there, the key part that will help us improve performance is when traffic starts to pick up on the 5G networks. So that's still -- it's mostly, I would say, system integration revenues today. And there, as I believe Carl said, we have some extra costs on the initial deployment. So that is a bit living in that type of environment. So there, it depends on how traffic picks up, et cetera. On the RAN side, yes, we have strengthened our market share from 33% to 39% over the past 5 years, where we believe we have a strong competitive position. So we -- our ambition is to continue to actually gain some footprint going forward because we believe long term scale in this industry is critical. That's the way to make sure we can remain a technology leader as well. So our ambition is to hold and gradually strengthen our market share as well.

I can add one more to that, Börje, on market share. Of course, we talk a lot about the RAN market. and that's about USD 41.5 billion, USD 43 billion, maybe, market. But we are not only addressing that, obviously. And what we say about the 5G Core win rate is separate from that. And also now to create new growth in the company, we are focusing on the enterprise side. And for example, the Cradlepoint business comes on top of the RAN market and other things that we will do within the enterprise space, such as the global network platform also partly is added to that market, as such, So when we talk growth, it's not only the RAN market, that's my point there.

Thanks, Carl. And thanks, Francois, for those questions. We'll move to the next question from Alex Duval, Goldman Sachs.

You talked about a solid 5G backdrop this year and you've actually adopted a raised growth forecast for North America. I wondered if you could talk a little bit about how you're feeling about sustainability of RAN demand into next year. Obviously, you have a discussion about challenging macro backdrop and the consumers' disposable income, so how should we think about that? And then secondly, on Digital Services, it seems like you had solid organic growth but then it also looks like there were some deployment costs involved in initial stages of 5G Core projects. So do you think those kind of costs are going to persist? Will more profitable software revenues be coming through? Overall, it would just be great to get a perspective on how you can get more margin leverage out of that business. Börje Ekholm: Yes, I can start with the first one. So if we look at the 5G market, we see, given that largely 4G has been focused on the consumer. And what we see with 5G is, structurally, we're adding both new segments, so think about the enterprises. But we're also going to add a lot of new segments like cloud gaming, XR, et cetera. All of that will drive further traffic growth in the Networks. That will mean, over time -- of course, there is an efficiency. It's not a one-to-one relationship. So let's not kid ourselves on that. But the growing traffic will need to be carried with an increasing portion of active components in the network and that's where we are. So we see, from a longer-term perspective, that 5G will be both having a higher peak than any of the preceding wireless generations but it will also last longer because it addresses so much more. Then there is, in…

Should I take the second one there? Alex, you asked about DGS or Digital Services there. And I would maybe start on the big picture there. The customers now are moving into -- obviously, into 5G and it's about cloud technologies and what we call intelligent automation. And 5G Core, of course, plays such a critical part in that as well to enable, if you will, the full potential of 5G networks. That's exactly where we play. And that's where you see the 5G core contracts coming in and we have gained so many of them, even 80%, as we said. So that's really the big picture. And then, now we are in implementation of those initial contracts. It takes a bit of initial cost. But of course, as soon as we -- as those networks go live and we start to -- customers start to migrate subscribers over there, we will see revenue take off. And actually, we saw strong growth of the 5G Core contracts in this quarter already. But still, there's much more to come, obviously, on that side. And that is one of the key pillars in the entire turnaround here of Digital Services going forward.

Thanks, Carl and thanks, Alex. We will move to the next question which comes from Peter Kurt Nielsen at ABG.

Just a question, Carl, if I can stay with Digital Services. You spoke extensively at Q1 about the need to -- for improving sales execution. And as has just been highlighted, you are seeing organic growth in Q2. Is that simply, Carl, a function of the better market and the 5G Core market picking up, as you said? Or have you seen early signs of your own execution improving here? And are you sort of confident that you can improve that going forward? And to what degree do you expect the new structure and the merger with Managed Services will help you on that? Any color here would be appreciated. And perhaps if you could talk a bit about how you see -- how we should view seasonality for the second half of the year.

And maybe on the first point, I mean as we get further and further into this initial contracts, we also -- we learn and we improve and we get to the milestones in the projects and that's then reflected in the growth we see in those contracts. And that will, of course, continue. 16 out of the 20, as you know, of the largest operators have chosen Ericsson for 5G Core and we are in the midst of implementing those contracts now. Of course, that is going to drive revenue and profitability for the period -- for the coming periods. That's quite clear. Then when it comes to the new structure, maybe would you like to take this one? Because of course, there we see a clear benefit in merging the Managed Services and the Digital Services part. Börje Ekholm: Yes. And the key here is there are increasing convergence between Managed Services and Digital Services in sense of automation, orchestration of the network. And we believe we can get both -- or call it some -- there are going to be some cost synergies, clearly and some synergies from consolidating our offerings and focusing really just having one solution, so to say. But we think also that's going to lead to better sales execution. It's easier to go to customers with a clear solution argument when we can offer an orchestration solution and automation solution combined with how we manage that. So we believe we are going to see both cost benefits, efficiency benefits, maybe better to call it, as well as sales execution benefits.

We'll move to .

I want -- the Enterprise segment, it's, of course, something you are focusing a lot on and putting a lot of kind of enthusiasm into that segment. And I never -- despite where you look, I think it's going to be a large market in just a few years' time. In your numbers, we mainly see it in the Cradlepoint and those numbers look very good. But you are now shifting to reporting segment called down Enterprise. Can you just tell us something about if you see any pickup outside of Cradlepoint, on Enterprise business or any leads kind of? When will that segment really start to take up? When will we see kind of fully dedicated private networks kind of grow as a separate line item or drive absolute numbers? That's my first question. Börje Ekholm: Yes, I can take that. It's a great question. So far, we see most of the growth, as you highlight, in Cradlepoint. We are starting to see growth in Dedicated Networks. It's from a low starting point. What we see is encouraging feedback from customers, where we're seeing a competitive solution. We still have more to do in order to really grow, call it, the presence in Dedicated Networks. It includes, for example, strengthening our go-to-market and that's why this formation of an enterprise wireless solutions business area is so important. Because what we do is we are going to leverage the go-to-market from Cradlepoint to help drive the growth of dedicated networks. And we believe that, that should start to contribute maybe not during the fall as much as we would really like to see but into next year, we should start to see that we actually can leverage that go to market. Because I think that's the most important part of enterprises, is that we need to build a not necessarily direct but rather an indirect multichannel go-to-market structure and that's why we're focusing our attention on right now, while we maintain the growth rate of Cradlepoint and drive product development in Dedicated Networks. So bear with us a bit before you see the real growth take off here.

Thanks, Börje and thanks for that question.

Can I have another question or...

Sure, please. I think was cut off here. But then we'll move to... Börje Ekholm: We'll come back to...

Come back -- you can move up and see if we can take after. The next question from Stefan Slowinski and then we'll come back to . So Stefan, please, at BNP Paribas.

Two quick ones. Just on the supply chain side. It sounds like you have managed that well in terms of getting the actual supply even if you're seeing the inflation. But can you just confirm that you didn't have any negative impact on revenues in terms of being able to secure the supply that you needed? And then the second follow-up question is just on the higher costs that you're seeing. I understand you want to push through some of those component inflation costs over time. It sounds like you also have some more costs associated with maybe moving away from just-in-time delivery, so more costs around warehousing and so on. How much of those are going to be permanent and is it material? Does it have an impact on your longer-term margin potential as you maybe change the model a little bit? Börje Ekholm: Will you take that?

Yes. No, we haven't seen any material or any revenue impact, actually. I think this is one of the strong points here. We're quite proud actually over how our supply teams have and the organization has handled the delivery situation in spite of these challenges. So I think customers have -- we have delivered to customers on time and on the quantities required; so that's good. When it comes to the longer-term perspective, I think we plan for what we can see right now and that is a supply chain which is more resilient, not as just in time, as you said which were -- was more the case, say, pre-pandemic and pre this whole situation that we are in. If that would ease over time, fine but it's nothing we plan for. I think it's better to be agile here and make sure that we put absolute priority on delivering to customers and the rest will follow. Börje Ekholm: And I would say that the higher -- I think this you're going to see in many industries, you will have higher cost of supply chain. Because we come from a supply chain that was optimized based on cost and now it's going to have higher cost due to -- you basically have to reset global supply chains due to the geopolitical uncertainty. What we feel, though, is that we will be able to offset that with product substitution over time, i.e., continue to focus and drive and increase the cadence of introducing new solutions, leveraging the scale we have in Ericsson Silicon to drive new cost-efficient solutions that will help us basically to sustain and handle these higher costs. So as I see it, it's always going to be a bit fluctuations quarter-by-quarter. But over time, the trajectory we've been on, we will continue to execute on.

Thanks. And thanks, Stefan. Next question is from Daniel Djurberg at Handelsbanken.

And my first question would be a little bit on the cost side. And in fact, we have the enterprise opportunity and the fixed value success versus one network, et cetera, that might prolong the 5G cycle but all these are still quick with some uncertainty on the large volumes that will be. And given the inflationary times we see, my question is, if you will need to address your underlying OpEx base, i.e. and very pleased to secure your long-term margins before we see these segments really taking off? And also a question on the R&D hike you see on silicon, for example and Cloud RAN, should we think of some of these investments being more of a temporary nature? Or will it more be a new base? Börje Ekholm: I mean I do believe that we see actually -- first of all, on the 5G market, I suspect many of the outside analyst firms are going to raise the size of the market. The -- I think we've seen a journey here where many of the outside analysts and industry analysts have been a bit behind the takeoff in 5G. I think that is likely to continue. And I think we actually underestimate the new type of applications we're going to see. They may not come 2022 or 2023 but they're going to come 2024 or 2025, that will require a densification of the 5G network to launch these new type of use cases. So I'm actually believing, yes, there can be always a bit fluctuations but we see that 5G will be such a central piece of society going forward to drive digitalization that it will have to be built out longer and more dense than we've seen in the past. And that's why we're very --…

Thanks, Daniel. We'll move to the next question. Börje Ekholm: Maybe we should add there. You made the point before, Carl, it's important to remember the growth potential in Enterprises. And sometimes we focus only on the infrastructure market. That's going to be the core of our company. It's the bulk of our company. We're going to make sure that we perform there. That's for sure. But we also see the applicability of our technology in Enterprises. And that's a segment that is going to be very large, can possibly be even larger than the infrastructure business in a few years' time. So the investments we make now should be financed, of course, by our infrastructure business and that's what you see we try to do. But the applicability will allow us also to capture the enterprise segment going forward.

Thanks, Börje and thanks, Daniel. The next question is from Andrew Gardiner from Citi.

Just another couple on sort of the inflation side, component cost inflation side. Firstly, in terms of what you're saying about the sort of investing in product and, therefore, getting a better price and gross margin, even with cost inflation, clearly, that's the strategy that has worked well for you guys over the last 5 years. I guess the point of what you're saying, it's almost like you think maybe if you can increase the cadence of product introductions to make it faster than you can -- that can help to offset some of this cost increase. So my first question is, do you think the operators are willing to accept that in terms of introduction of services -- sorry, solutions faster than we have done in the past? Are they willing to pay for that? Or perhaps because more and more is being driven by software, it's actually -- it is something that's quite feasible? And then secondly, perhaps one for you, Carl, on the cash flow comment, where you're saying you work the inventory down later in the year. I suppose normally, we would expect that on sort of a 4Q budget flush in sort of deployment schedule. We've often seen that. But my question is why in a market where you're expecting further component cost inflation, if the components are available today and if they're standardized and therefore usable next year, why not buy as much as you can today at the current prices rather than wait until next year when prices are likely to rise yet again? Why not use that cash flow strength that you've got to build the inventory rather than run it down later this year?

Should I take the second part to start with. No, this is -- I mean this is how we think. We try to optimize for the deliveries we have, of course. And what you see in the inventory is partly what -- how you describe it, that we are investing today. And it's -- I think the most important priority here is to secure deliveries, secure the components we need to actually ship product to customers and that is the recipe. And it means an elevated inventory level now. And we are securing as much as we can and as much as we need. We are entering into longer-term contracts with suppliers also to make sure that we get the allocation that we need from them in a scarce environment. So I think we are on to more or less what you're talking about here and that's why you see the inventory go up. Then when we look at how deliveries will go out to customers during the second half of the year, versus the inflow of components and how that will play out in inventory, we see that it's a net-net positive when it comes to the inventory level as such. But again, I mean, we're not optimizing on that really. We're optimizing on customer delivery. We think that's the real price here and that's what's going to create the growth and the resilience of our company as well. Börje Ekholm: And I think on the -- what you've seen in this industry and this is nothing new, it has a deflationary element in the price for equipment. And that's because traffic growth is exponential, right? So otherwise, there will be no money left for the operator. So that's what we have seen historically. We will continue to see that. But what's important with our product substitution is that we can actually substitute a high-cost product with lower-cost products for us to manufacture and supply. That's really where you see the product substitution. But the good thing is when you can introduce new features, then you have a new chance to discuss pricing as well. And if you introduce prices that lowers the cost for our customers, it can be energy, for example, or automation or new type of solutions of running the network, then we have a discussion about the value of the product. And that's why the whole increase in the cadence of the product can kind of help us on both the, call it, a discussion with the customer to be forward-looking and focus on the value of the features and help us lower the cost of the solution.

Thanks, Börje.

Andrew, you mentioned also software, maybe we should add that also. That, of course, the software share of the business is increasing. And that's, of course, as Börje said, to create more value for the customer. But different margin profile. And obviously, software is not impacted by those inflationary pressures. So that's another factor here to consider, a positive one. Positive factor, sorry. Börje Ekholm: We should say this is not new, we've been doing this since 2017. So the whole, call it, improvement of gross margin really comes from this strategy. Now we have cost inflation, that's why we feel we need to increase the cadence of new products to be able to execute and continue to execute on that strategy.

Thanks, Börje. Thanks andrew. And as the last question, we'll just move back to at SEB to give an opportunity to ask the question that he was aiming for. So expectations are high.

Sorry. Now this is -- I think it's important to talk a bit about because the IPR revenues, everybody knows about them, everybody they are -- but they are accruing in the background. And you have a very kind of a take in multi-pronged process to arrive at an end point there. And I don't think it's very easy to follow for most participants exactly what you're doing there, because it's multiple jurisdictions and it's kind of two-pronged going for legal road forward and then also kind of negotiation road forward. But those -- I mean, the gross margin is there somewhere even though we don't see it at the moment, I think it's important. But if you can describe quickly your confidence in that process. Börje Ekholm: Yes. I -- first of all, it starts with the value of the 5G patent portfolio. And if we look at third-party analysts,that have looked and tried to assess -- and this is a hard thing to do. So -- but there we come out with a very strong 5G portfolio. So that's really the basics. And we're talking about the standard essential patents here. So we come out with a very strong position there. We have also some strong implementation patents. So we feel that we have a very strong portfolio that we've invested in. And that's why we spent SEK40 billion, SEK45 billion per year on R&D. That is one area where it shows up, is actually the patent portfolio. So we have a strong position. So now it's all about how do we create the right value here of that portfolio, how do we capture that value. That includes negotiations. It includes, as you note, some litigation as well. But we are -- we believe that we're well positioned to actually achieve some attractive outcomes in our contract renewals based on the portfolio as well as the way we execute on that. But we're going to work hard. We're not going to go into a deal fast to trade off the right value of our portfolio. So we'll work on that. We know we'll lose some gross margin in the meantime -- or lose, we delay it. It's going to come back when we close the deals. We're very certain, we will, like we have done in the past. And we continue to sign up other 5G licenses. So, I'm -- I have a great belief in our team's ability to execute on the strategy we're embarking on. I would say we have a great IPR team and they're working on this. I'm confident we will get there. I'm not going to predict the timing but I'm comfortable we'll be there.

Thanks, Börje. Thanks, . That was the last question. But before closing the call, a last remark from your side, Börje. Börje Ekholm: Thanks, Peter and thank you, everyone, for participating and thank you for all the questions. It's another quarter where we have shown that we execute on our strategy to be a leader in the mobile infrastructure business and also start to build a focused presence in the enterprise market. And we saw that we could, despite a very difficult environment with supply change challenges as well as geopolitical issues, we could actually keep on growing the company. We could do that by delivering to customers, so we had growth of 5%. And we have also seen that the strategy of product substitution can help us fend off the cost increases. Today, we're at an EBITDA margin of 14% on rolling 12 months or 4 quarters and that's getting fairly close now to the long-term target of 15% to 18%. But we're committed to reaching the 15% to 18% within the next 2 to 3 years and, at the same time, putting Ericsson on a higher growth trajectory. So we're very excited about the future. Our technology has broad applicability, both for the mobile operator but also for enterprises as they move on to digitalize their business. So with that, thank you very much for listening in and I wish you a good summer.

Thank you.

Thank you.