Hello, everyone, and welcome to this call covering Ericsson's second quarter 2023. With me today, as usual, I have our President and CEO, Börje Ekholm; and our CFO, Carl Mellander. As usual, we will start this with a presentation and end with a Q&A session. And then in order to ask questions, you need to join the conference by phone, remember that. Details can be found in today's press release and on our website, ericsson.com/investors. And please advise that today's conference is recorded. But before handing over to Börje and Carl, I would like to read the following: during today's presentation, we will make forward-looking statements. These statements are based on our current expectations and certain planning assumptions, which are subject to risks and uncertainties. The actual results 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 the earnings report as well as in the annual report. With that said, I would like to leave the word to you, Börje. So please, Börje.

Thank you, Peter, and good morning, everyone. Big thank you all for joining us for this second quarter report. I'm happy to present a quarter where we continued to execute on our strategy to build a stronger and more profitable Ericsson for the long term. Based on our strategy and our strong position, we're able to deliver a solid quarter despite challenging market conditions. We see a changed business mix with North America representing one of the lowest shares we've seen in many years. But on the other hand, we see India growing very, very fast. Our strategy, as you all know, is focused on 3 priorities: the first one to bolster our leadership in mobile networks; second is to grow our Enterprise business; and thirdly, drive a cultural transformation of the company. Mobile networks continues to be the bedrock of Ericsson. With about half of the world's 5G traffic outside of China carried through our radios, we are a leader in the market, And we remain fully focused on continuing to strengthen this leadership position. In parallel, we're using our expertise in advanced cellular networks to expand into the fast-growing enterprise market and that will substantially increase our addressable market, diversify our portfolio and puts us on a higher growth trajectory. In our platform business, we're developing new ways to monetize 5G's unique features like speed, latency, et cetera. Operators and enterprises are showing great interest in this area and it will allow them to differentiate their offerings and start to develop completely new use cases. We're also continuing our relentless focus on enhancing our compliance program to make sure that it's fully embedded throughout the company. With that, let me now go through some of the key takeaways from the quarter. As we've said before, 2023 is a…

Thank you, Börje, and a very good morning to everyone on the call. So as you saw this morning, the results that we published came out according to our expectations and per the guidance that we had issued in connection with the first quarter report. I'll start by having a look at the development in the different market areas and then comment on some of them, if we go to the next slide, please. So looking here at the geographies, as Börje said, we saw rapid 5G rollout in India. It's very clear. And the Network sales in India doubled year-over-year. This resulted in an organic growth in our market area called South East Asia, Oceania and India by 71% organically year-over-year. Our strong growth in this market area partly offset the softening, as we have discussed many times, in the North American market. This was as expected. And the decline there in North America was 42% year-over-year organically due to lower CapEx spend, as anticipated, and also reductions of customer inventory following the very high investment levels in 2021 and 2022. However, Cloud Software and Services grew 10% in the North American market area, driven by 5G. In Europe and Latin America, which actually was the largest market area for us in terms of sales in this quarter, we saw a decline in Europe by 6% organically. But in Latin America, we recorded a growth of 3% organically mainly driven by additional 5G deployments in Brazil. And overall, this resulted in a 3% decline for the market area as a whole. If we leave this and then zoom in on how all of this came together in the group P&L. So our reported sales in the quarter were SEK 64.4 billion. That is a decline by 9% organically due…

Thank you, Carl. So our strategy is really working, and we are leveraging our technology leadership in mobile networks as well as taking the critical steps in our ambition to grow in enterprises. As we look ahead, I think it's important to single out that the fundamental driver of Network CapEx is really the continued data traffic growth. And we see that 5G really continues to grow very fast. We currently forecast 5G subscriptions to be about SEK 1.5 billion by end of 2023 and reach SEK 4.6 billion by 2028. We also see that the data traffic in the network continues to grow. And we also start to see new type of use cases, call it fixed wireless access, but we're also starting to see enterprise use cases. So data traffic is growing. And with the operator's desire to meet the, I would say, the user's expectation for network quality, but adding on cost and energy efficiency, and you know CO2 footprint starts to be more and more important, we see that, that will stimulate further investments. In addition, we see that 3/4 of all base station sites outside of China are not yet updated with 5G mid-band. So this, in combination with the migration to 5G stand-alone, will basically continue to drive the need for investments in 5G networks around the world. So we are confident that the market will recover, and that's what we have said for several quarters. And as a consequence of these factors, of course, the exact timing of the recovery will be in the hands of our customers. But we are encouraged by the discussions we've had with several customers, where we see a recognition of the need to strengthen capacity in the network. That said, we expect a gradual recovery towards late…

Thank you, Börje. So it's now time for the question-and-answer session. [Operator Instructions]. If you are streaming the webcast, please mute the webcast audio whilst asking question to minimize any kind of sort of audio feedback.

So our first question now comes from the line of Aleksander Peterc.

I will just have a first one, which is a bit dense and then a very small follow-up, if I may. So my first question is really there's a disconnect between your guidance of 15% EBITA margins in 2024 and the consensus which is currently at 11.5%. Now the jump in EBITA that is implied in your ambition or guidance is almost SEK 20 billion now, and that's almost double your planned annual cost savings run rate, which is SEK 11 billion, some of which will already be in the '23 numbers -- already in the base. So I'd just like to understand where exactly is consensus getting it so wrong? Is it the market mix? Do you see much more substantial growth into 2024? Where are we all getting it so badly wrong?

Maybe I can start. The fundamental premise for our targets for 2024 has been the -- what we see as a recovery in the market, and you have to factor that in. And that, to me, is of course -- it's impossible to say exact timing when that will happen. But we're very confident it will happen and that will provide basic support for the market. Then our cost-out ambition is at least SEK 11 billion. So we should be reaching that, that will provide support. In addition, there are a couple of things, which I'm not sure is factored in. One is IPR revenues. That, we see will continue to grow into next year. We also see that the fundamental turnaround of our Cloud Software and Services will provide a strong support next year. And we will also see some portfolio adjustments that we have already spoken about before to provide support. So yes, we do continue to focus on reaching that target for next year and we've said we should be in the lower end of that range. We are focused on reaching that, and that's why we're trying to be as aggressive as we can on the items we can control right now.

You had a second question, Aleksander as well, right?

Yes, just a quick follow-up. I do feel that your message for the recovery has slipped by about a quarter. You mentioned before, I think in Q1, we spoke of a gradual recovery in the second half. And now basically, third quarter is very similar to the second with a slight improvement in EBITA margins, but not that material and the real recovery is in Q4 so -- or then seriously in 2024. So can you tell us which markets are a little bit weaker than you previously thought? Is it a longer slump in the U.S. primarily or anything else?

Börje?

We see overall a softer market that we've said since the end of last year. And of course, it's very hard to predict the exact timing when customers will buy. What we see is the network quality around the world, actually in many markets, starting to deteriorate. And of course, that provides the basics for the investments. Exactly when that's going to happen, I feel that it's really in the hands of the customer. So it's in the hands of their view of capital market, their view of prospects in the business for increasing revenues, et cetera. So that's little bit difficult to say. With our current visibility, we believe it's realistic to plan for that to happen later in 2023. Is it later or earlier than we have said before? I don't really know. If anything, probably fair to say that it's slightly later. But it's not a dramatic change in outlook that we try to say already last year. In the end of last year, we spoke about the slower build-out pace than we expected. We spoke about the inventory adjustments our customers are making. Of course, as this quarter continues, there will be less and less of the inventory adjustments. So that will provide a support for the market recovery and kind of looking better towards the end of the year.

Thank you, Aleksander, for that question. So let's go to the next question, and we will see -- we'll have the next question from Francois Bouvignies from UBS.

I have two quick ones as well. So the first one is on -- a follow-up to Alex's question on maybe the, Börje, what you said on inventories. So you were impacted by inventories correction and you are still now in Q3. Do you have any estimates of where we are in this inventory correction? I mean, in other words, versus a normal level at your customers, where is it now? Do you have any intelligence to provide some color around this?

Yes. Francois, maybe I'll take that one. Yes. So we -- as you said, we saw this happening in Q1 as anticipated and also in Q2. It will continue to some extent in Q3 as well. And that's why we talk about a very similar trend and similar market mix and is part of that story, the inventory reductions. But from that point, we also see with the visibility we have now and the customer dialogues that, that will flatten out towards the latter part of the year. And as Börje just said, this will support, of course, the overall recovery and making the second half a stronger half than the first half this year.

Okay. And maybe longer term, Börje, you talked about the 75% of all base stations outside China not yet updated with mid-band. And the question is not if, like you mentioned, we don't know if it will happen. But I'm questioning more the how it's going to go back up, if you like. I mean, are we going to see a strong traction of upgrade? Or is it going to be like a very granular Phase 1 upgrade all these, the base stations, to mid-band especially in the context of current macro environment, lack of, maybe you can argue, applications. How should we think about this pace basically of upgrades that you foresee?

Yes. The first, I think, we need to recognize that for a fully built-out 5G network, there is probably going to be a need for more sites than it was in a 4G world. So even if we benchmark to the total size of 4G base stations, we're probably going to see more sites on 5G. And then what we see will happen is ultimately the -- when you talk about 5G from a nonstand-alone basis, you don't get access to the features that are going to be needed for future digitalization and future use cases. So if you need the ultra-low latency, higher speed capacity on demand, et cetera, you will need to get 5G stand-alone. And that migration is really only in its early phases. So what we see will happen here is that we will start to get new use cases. It can be generative AI, but it can also be XR. And those will start to drive new type of traffic that will require the 5G to be built out. Then it's all about how you monetize that. And that's why I want to tie it into the discussion about network APIs. We think that's going to be critical. So when you are going to call up -- so you put on your XR devices and you say, okay, now I need super low latency, and I can do that through a network API. Then you start to drive a completely new upgrade cycle of the network, you'll drive new monetization and you drive a new way for us also to create revenues. And that's why we invest quite heavily in the network APIs. So you see that this start to come together in order to drive the network upgrades. Then, of course, how will that…

Thank you, Börje. Thank you, Francois, for that question. So we are now going to the next question in this Q&A session. So the next question is from Alexander Duval at Goldman Sachs.

I just had a clarification on market outlook. You're talking today about scope for gradual market recovery this year and improvements next year. Just want to understand the main factors to drive that kind of recovery. I would note, for example, in the U.S., you talk about 50% decline in the market or at least in revenues and that's obviously one of the front-runners on 5G. One would assume that, that would be followed by other markets that are a bit further behind also declining. So I just want to understand what would drive that improvement into next year? And then I've got a quick follow-up.

Carl?

Yes. I think actually Börje talked about a lot of those key drivers for exactly what you're asking about, the recovery. I mean we see data traffic growth continuing at very, very high speeds in North America and in other markets as well. That's a key driver, of course, because for an operator to be able to deliver the customer experience that they need to, investments in the network will be required to cater for this. And 5G, of course, also happens to be the most cost-effective way of delivering those gigabytes through the networks. But then you have the energy side and CO2 side of it as well, driving investments in more modern technology to get your energy bill down, not to mention the new applications that are coming onstream. And we have seen new XR or VR devices launched by several players now. Of course, they will -- once they become a bigger part of the ecosystem, of course, will drive very high demands on the network. So all these fundamentals are there, and that's what we believe will drive the long-term recovery of the market.

And you also have to add -- that's the long-term drivers, and those are the fundamental drivers, right? Short term, we also have the inventory adjustments, which is working its way through. The -- in several markets around the world, you saw over '21 and '22 our customers to build up inventory to manage an uncertain supply chain, call it that. And that led them to have excessive inventory and those have been working its way through the systems over this year. So of course, those will run its course. Once they've run its course, then we're back to the fundamental drivers of the demand for CapEx. And that's why we are confident that, that will come back. Exact timing is, of course, in the hands of customers and depends on many considerations they have to do. But ultimately, if you're going to deliver customer service, I think you, for example, you would like to have connectivity most of the time. But if you run out in a network where you have capacity constraints, you may see bars on your device. But in reality, you have no data connectivity. That's typically when you have -- when you're starting to run out of capacity or you simply cannot make a phone call. I think in our day and age, we are not going to be happy with that and we would expect a better service as a user. And that's ultimately what's going to drive the demand.

Thanks, Börje. You had a second question as well, Alexander?

Yes. Greatly appreciate the clarification. Just a quick second one. You talked in your release about the fourth quarter being seasonally strong from a margin perspective, and just wanted to understand all of the factors that feed into that. Obviously, you talk about a RAN market, which is now weaker according to the release, both on a global basis and in North America, which is a very profitable market. But at the same time, you're talking about normal seasonality in Q3 on top line. So that would imply worse than normal seasonality in Q4. So I just wanted to understand what are the factors that sort of give you comfort there? You just referenced, for example, the fact that there won't be as much of an adjustment in inventory. But I'm wondering if there are other factors that give you confidence.

Carl?

That is one, for sure, the inventory adjustments where that depletion is coming to an end and normalizing. But we see also a mix effect here in Q4. This is the traditional seasonality we see. Also, it's a better mix of business, typically in the fourth quarter. It depends on, of course, how customers -- what spending patterns customers have and so on. But we always see that improvement in the fourth quarter. It's about how projects are concluded and how we deliver to customers to close the year. So we typically see that inventory is one thing and then the normal seasonality of our entire industry. And as long as I've been working here, we've always seen a stronger Q4 many, many years.

Okay. Thanks. Thanks, Alex, for the question. Then we'll move further in the queue here. And I'll see -- I have the next question from Andreas Joelsson at Danske Bank.

Maybe a slight shift in the questions, looking into the Enterprise side. If you could explain a little bit more the reception you have got from this, the strategy that you have in this area from your customers, especially in the U.S. but also how to leverage this portfolio outside the U.S. Any comment on pipeline and if we can expect this, the growth that you have now, to continue also for the coming quarters, that would be great.

Börje?

Maybe we divide it into the 2 components. So Enterprise Wireless Solutions continues to have a good growth rate. Of course, a little bit tougher market conditions due to the general economy, I will say. But we see also a very strong development with a strong pipeline of products that we are bringing to the market now. We're still in the, I would say, in the early phases of building up our go-to-market organization there. We will, of course, pace that with sales. So it's not about increasing the cost, per se, but we're still not getting the full efficiency of our sales force on the Enterprise side. But we see a very good collaboration with our CSP customers, and they are actually very excited about bringing these type of products to the market as it drives revenues for them as well. But here, we have more work to do. We will -- and please remember that it's a different business model with a large part of deferred revenues. So we create a recurring business there. Will impact the P&L initially, but over time it will be a highly profitable part. I would also say on Dedicated Networks, we are still early outside of China. There are some use cases, imports, some basic early manufacturing, but it's still a relatively small market around the world. If you compare it to China, China has -- by the end of last year, they had more than 6,000 dedicated networks deployed in China. We see in, call it, the Western world, Europe and the U.S., maybe we have about 1,000, maybe 1,500, but it's significantly smaller than it is in China. And that, I think, points to the actual opportunity here being much larger than we're servicing now. And of course, this will…

Thanks, Börje.

So maybe a follow-up just on what the Chinese enterprises see in these dedicated networks as a benefit that you are not seeing outside of China. And how can you help the enterprises seeing that benefit?

Yes. That's a great question, Andreas. As a matter of fact, what we see in China is that they are developing completely new use cases. So what is unique with cellular connectivity and 5G in particular is to get reliable, always available and secure connectivity. And that's critical in an enterprise application. So take a manufacturing site. What we see is a full deployment of sensors. You can develop a full digital twin of the factory and basically make adjustments in the digital twin and then implement it very quickly and very flexibly. So that's one use case. Another use case that's also gaining traction is the in-line inspection. So you actually do image processing of in-line inspection going much faster than manual and as much higher precision. Then you see more traditional use cases, connect self-guided vehicles. And as a matter of fact, there are some front-running manufacturing sites outside of China where we see deployment of dedicated networks resulting in much higher cycle time, much reduced cycle time, speed in manufacturing goes up as well as higher quality levels. So we're starting to see some early signs outside of China, but I will say China is ahead of the new type of applications here.

Thanks, Börje. And thank you, Andreas, for those 2 questions. So we'll move further in the Q&A session, and we have the next question from Peter Nielsen at ABG.

My first question relates to the Network gross margin, please. You've obviously talked -- spoken essentially about the mix impact. And with the decline in North America, growth in India, that's plain for us to see. However, Carl has also -- as Carl said earlier, the initial phase, the ramp-up phase in India, the deployment primarily comes with low margins, which should then gradually improve as you move further in that project. So my question is, when will we start to see the underlying margins, gross margins, in India improve and contribute, how should I say, to a better overall gross margin irrespective of the mix changes we are seeing? I.e., when will gross margins in India improve in this rollout phase? And then my second quick question is just, Carl, could you tell us what the underlying run rate in IPR revenues is now adjusted for the one-off payment in Q2, please?

Carl, should you...

Yes. I can start with the IPR piece so -- and will say this also. So the IPR expectation for the third quarter is somewhere between SEK 2.5 billion and SEK 2.8 billion. That's the number that we give. And obviously, with a new signed contract, we are on our way towards this substantial growth of the IPR portfolio that we have talked about before, some SEK 12 billion, SEK 13 billion as an aim for next year, thanks to these new contracts. So SEK 2.5 billion to SEK 2.8 billion next quarter. That's where we aim.

And then the gross margin question, the reality is we're going from about 35-ish percent share of North America to about a 25% share of sales. And India goes from, I believe, for...

3% to 16%.

Yes, 3% to 16%. So it's a big mix shift. And we can still execute with a gross margin that's about 39% in Network. So it's -- there is a big change here in our sales mix. Of course, the details on contracts we're not going to discuss here. But we are already seeing a strengthening of the gross margin profile, delivering well according to our plans.

Okay. Are you good with that, Peter Kurt? Okay. Thank you for that question, Peter Kurt. And we'll move to the next question. That question is from Andrew Gardiner at Citi.

I had another one on your visibility into the recovery that you're calling for later this year and into 2024. Yes, I hear what you're saying in terms of the need for additional deployment, mid-band coverage, networks perhaps deteriorating a bit under the traffic load. All of that sort of makes theoretical sense to me. But I'm just wondering if you're not yet seeing it in terms of firm orders from the customers, by when would you need to in order to see a reasonable recovery in the fourth quarter? I know you don't have the longest lead times and you will have inventory on hand. But I suppose I'm just worried that if we're here in the middle of July and you're still not seeing the firm orders coming in, are we not setting ourselves up for a risk of disappointment come sort of September and October if indeed they haven't arrived? So just what -- by when would you need to see the customers react and place the orders in order to see that 4Q recovery?

Börje?

Historically, when we've seen these type of market situations, it's a very short lead time. And that's why it also depends on software, can we upgrade with only software, et cetera. So it depends a lot about the specific network situation for the customer. That's why it's hard to give you a specific answer. But at least we know from the customer discussions we're having now that a lot of the customers are starting to see deteriorating network performance that actually leads to churn. And that's why we're also confident that it will come. I can't predict exactly. And as a matter of fact, that's why we never discuss backlog in our industry because it is a relatively short delivery cycle on those type of contracts where you buy capacity.

Thanks, Börje. Did you have a follow-up, Andrew?

No. That's fine.

Thank you, Andrew for that question. We will then move to the next question, and I would have Daniel Djurberg at Handelsbanken.

Two questions, if I may. And starting -- coming back to the market recovery and the North America again. Would it be fair to assume that this recovery that you anticipate will come back a bit earlier for some of your peers, including your neighbor issuing a profit warning today. And is this because of it that you have more wins into the urban areas versus the rural areas that might come a bit later?

Börje?

I think you're better off asking our customers about that. The way -- I mean, we -- I think we started to talk about this situation in North America already in the end of last year. So it's developing a bit like we have predicted and actually assumed. And that's why we said also early on that we need to take the cost items -- the actions on the cost side. So we have tried to -- not predict, this is a bit to exaggerate, but at least plan for this type of market situation we're seeing in North America. Then I would also say, of course, they are going to -- they have built out networks in urban areas first. But I would also say that's where traffic growth is the fastest as well. So how that is going to ultimately pan out, I think that's a bit difficult to predict. But what we see, and that's what gives me comfort, is that there is a need for network capacity. There is also a need to deal with the energy cost challenges that comes out. Simply you need more modern equipment to lower your energy bills for the operator. You will need more -- newer equipment to deal with the CO2 challenges and the CO2 commitments. So ultimately, when I put that together, it gives me comfort that it will come back. If you then extrapolate to historic experience, we've seen this happen in the past. It's been tough and then a very quick recovery. So we -- does the future always look like the past? No, it doesn't. But at least when you put all of those factors together, it's a reasonable assumption that we said already in the end of last year that we would see a recovery during the second half. And that's what we think is still a reasonable assessment. Then does it look the same for our competitor or not? I mean I don't know their business mix. I don't know their situation. So I'll let them speak for that themselves. But from my point of view, we saw this coming and plan for it.

Fair enough, I agree there. And a question also, if I may, coming back to the Enterprise. And you talked about the Open Gateway initiative with your quality on demand that you showcased in Barcelona. Is it -- have you come any further in terms of monetization and the revenue models on both things and the progress there? If you could be a little bit more specific.

Yes. We continue the very deep engagement with a number of front-runner customers around the world. So we work very intensively on that. What is -- call it, one of the things that needs to happen is we need to have an abstraction layer in the network that basically allows a CPaaS to call up functionalities from the network. And that is not a surprise. So that's -- but that's where we have a lot of work to be done. And we continue that work and that's why when we'll get the first revenues, we -- I think we have said that we should have a network API more in the market by year-end. That still would be my best estimate. Will it be Q4? Hopefully. But it could, of course, slip into early next year. But that's the time frame we're working on. And it's a lot of groundwork that needs to happen here before we are at the situation of creating a launch. But we'll hopefully here going to come back and talk much more in detail about this towards the end of the year.

Thanks, Börje. Thank you, Daniel. So we are actually now moving into the last question of this Q&A session and that question is from Sandeep Deshpande at JPMorgan.

Can you hear me?

We can hear you.

My question is, Börje, you talked about the buildup into an improvement in sales. And one of the points you made on the buildup of improvement is that there will need to be further densification of the base stations. Given that we are seeing that the U.S. telcos are cutting spending at the moment, have you had conversations with them that gives you any confidence that they're going to actually densify their 5G cells going forward? And then I have one more quick follow-up on the Software business.

I'm not going to go into the details about the customer engagements. But what we see is we are -- an increasing amount of discussions is on the network quality and the need for network quality. And that is what gives me the comfort that at some point in time here, we will see that recovery coming back. And in reality, it's back to consumer satisfaction. The consumer, the user. And we often think about it as a device for a smartphone. But the reality is in the future will be many new type of applications. Enterprise applications. If it is AI use cases, they will all require connectivity and reliable -- always available connectivity. So we see quite a lot of use cases here that will drive network traffic. So I think it is here. We're in a phase where, of course, if you're a customer, you're facing uncertainty right now. You're going to adjust accordingly. But I'm also convinced that at the end of the day, the end user will need a certain service and that's what's going to create the market. Is it uncomfortable now? Yes, it is uncertain, right? And I think it's fair to say that. But the reality is connectivity is a need. So if you go today to a sporting event, I don't -- as far as I know, in many parts of the world, I cannot upload a picture because it's simply capacity constraints. So we need to put more capacity in stadiums, more capacity indoors, in shopping malls, in office buildings, et cetera. Those are massive use cases that will be deployed over the coming several years. And they will be needed in order to digitalize society, digitalize enterprises and further digitalize the consumer.

You had a final sort of Software question, Sandeep, as well.

Yes. Just a quick follow-up on your Software and Services business. Where are we now in terms of the restructuring? I mean, you've taken some charges in the first half of the year. You've seen some improvements in terms of the earnings in that business. Have all the actions being taken and the results waiting to be seen? Or are there certain more results -- I mean, are there certain more actions need to be taken in the second half to reach your goals there?

Yes. Sandeep, I can say, of course, actions are ongoing. We have exited from some subscale businesses, we talked about that before. We took some charges for that earlier. We are focusing on automating service delivery. We are taking out costs as part of the overall cost reduction effort. And we have commercial discipline to make sure that the new contracts are well scoped and well priced. And all of that is happening, of course, continuously. But we see clearly that breakeven, as we've had as a target or commitment for the year, is what we reach. And we say, as you saw, at least breakeven for 2023. Then, of course, 2024, we expect to see improved profitability coming out of all of these actions that the current leadership there in Cloud Software and Services are undertaking.

Thank you, Sandeep. And thank you, Carl, and thank you, Börje. So we're coming to the end to this Q&A session. So I would like to thank you all for the good questions. And for those who are going on summer vacation, I wish you all a nice vacation, and we'll see each other again during autumn. So thank you, and goodbye.

Thank you.

Thank you.