Telefonaktiebolaget LM Ericsson (publ) (ERIC) Q4 2025 Earnings Report, Transcript and Summary

Hello, everyone, and welcome to the presentation of Ericsson's Fourth Quarter 2025 results. With me here in the studio today are Börje Ekholm, our President and CEO; and Lars Sandstrom, our Chief Financial Officer. As usual, we'll have a short presentation followed by Q&A. [Operator Instructions] Details can be found in today's earnings release and on the Investor Relations website. Please be advised that today's call is being recorded and that today's presentation may include forward-looking statements. These statements are based on our current expectations and certain planning assumptions, which are subject to risks and uncertainties. Actual results may differ materially due to factors mentioned in today's press release and discussed in the conference call. We encourage you to read about these risks and uncertainties in our earnings report as well as in our annual report. I'll now hand the call over to Börje and to Lars for their introductory comments.

Thanks, Daniel. So good morning, everyone, and thanks for joining us today. It was a strong end of the year, as we executed with discipline and made solid progress against our strategic priorities. We are building a more resilient Ericsson. We expanded EBITA margins year-on-year for the ninth consecutive quarter, and we're getting closer to our long-term target of 15% to 18% EBITA margin and we ended the year with a net cash position of over SEK 61 billion. Our cost initiatives are just one component of our actions to structurally improve margins and cash flow. And you have seen that we have reduced the headcount, for example, by 5,000 over the past year. And we expect to continue reducing headcount going forward. And last week, we announced some initiatives we're taking in Sweden as part of a global effort we do to keep cost efficiency in our business. With the operational improvements we've implemented over the past few years, they are now getting increasingly visible in the P&L, and we had another 48% gross margin quarter now in Q4. The EBITA margin was 18%, both for the quarter and the full year, and that means that we are tracking very close to our long-term financial targets after normalizing for the about 3 percentage point benefit from the iconectiv gain. And now going forward, we expect to see improving operating leverage as our top line accelerates that we could see in Q4. Now that the underlying demand environment for mobile networks remain actually flattish. But it is encouraging that we had an organic growth of 6% during Q4. And the reason for this is that over the past few years, we have invested in a number of growth opportunities and growth initiatives like 5G core, mission-critical networks and enterprises, and I'll expand a bit more on this. In my view, we're actually entering a very exciting era of what we can call hyper-connectivity. So now we're starting to see everything being connected. I would say Ericsson is really well placed for this paradigm shift, and I believe we have the right strategy to win. To date, AI investments have been focused on models, semiconductors, data centers, et cetera. For sure, these are really critical, but the real economic value will actually come in AI applications and devices. So think about drones, humanoids, could be connected glasses, XR glasses, could be instantaneous or simultaneous translation services. You have a number of these things. All these new type of use cases, AI use cases, will really changed the nature of traffic with much more demand for uplink and low latency, and it has to be resilient and trusted. So when you think about this new world with AI is going into the physical world, if you call it a kind of a physical AI, those applications and use cases will be distributed, but more importantly, they will also typically be mobile. So they will require advanced wireless connectivity. So best effort connectivity, Wi-Fi, 4G, and I would even say 5G non-standalone, will simply not be enough. Instead, we will require 5G standalone today and then later on will require 6G. But this new world will also require better mid-band coverage to get the right performance of the network. And I'll take just 1 example, and you see China having a 10x denser grid than the rest of the world. And I would say that's one of the reasons why many are saying China is a formidable competitor in AI today as they are moving into AI applications. So at this point in time, it's a very exciting time. Our strategy is to lead in mobile networks with high performance, autonomous and programmable networks that are 5G native and at the same time, scale this mobile platform to new areas, like mission-critical enterprise solutions, but also providing tools to developers. So now let me go briefly through some of the progress we made against our strategic initiatives during the last year. Through our high-performing programmable and autonomous network, we're enabling our CSP customers to deliver differentiated performance and create new applications and use cases to monetize. And when you think about differentiated performance, it's actually creating dedicated performance for the application you have at hand. And during the year, we actually signed several key agreements with front-runner customers like Telstra, Vodafone, but we also made critical inroads in the important Japanese market with all leading operators. These advanced networks that we're building together with front-runner customers will be key to monetize and scale the AI opportunity. In parallel, we focused on scaling the mobile platform to new use cases and sectors, the most mature new use case is fixed wireless access, that during 2025, actually reached 150 million global subscribers. And typically, and most often, they have better customer satisfaction than other access technologies like fiber, for example. And now as you've heard me say earlier, we're also starting to see traction within mission-critical applications. And this, we think, is a key growth opportunity for us going forward. During 2025, we executed many new agreements in the public safety sector, and we're also targeting national security and defense operations. On the enterprise side, we're continuing to strengthen our position. The market for network API is actually starting to develop. In 2025, Vonage was first to offer aggregated access to network APIs across all 3 major U.S. carriers. And these advanced APIs included advanced fraud detection, and we have significant customer interest today. Our joint venture, Aduna, onboarded and achieved full coverage in 5 countries, including the U.S., Spain, Germany, Canada and the Netherlands. In enterprise wireless solution, we're seeing the market for private 5G starting to industrialize. It's still, though, early days. So we -- but we continue to see growth in our Wireless WAN solutions, but that was partly offset by lower sales in private 5G. So it's still a developing market here. So -- but before passing on to Lars to go through a bit more on the numbers, I'd like to take a moment to just go through our capital allocation strategy. Our top priority is to invest for technology leadership, and we expect this to be largely organic. We don't really see any need for large acquisitions going forward, as we believe we have the assets needed to execute on our strategy. However, we expect to see some smaller, potential tuck-ins, but that will be smaller in nature. So our current, very strong financial position offers scope for increased shareholder distributions. And as you have seen in this report, the Board is proposing an increased dividend to SEK 3 per share and the buyback program of up to SEK 15 billion. So that would be a total of SEK 25 billion to shareholders. This represents the largest shareholder distribution in our history and reflect our strong position and the Board's confidence in our strategy. So Lars will now go through this as well as our financials. So over to you, Lars.

All right. Thank you, Börje. I will begin with some additional comments on the group before moving on to the segments. Net sales in Q4 totaled SEK 69.3 billion, with organic sales growing 6% year-on-year and with growth in all segments. Sales grew in the market area, Europe, Middle East and Africa; and in market areas Southeast Asia, Oceania and India. Market area, Americas, was broadly stable impacted by intense competition in Latin America, offset by slight growth in North America, driven by higher software growth; and Northeast Asia declined. Reported sales decreased by 5%, impacted by a negative currency effect of SEK 6.8 billion. In Q4, adjusted gross income was SEK 33.2 billion, including a currency headwind of SEK 3.6 billion. Adjusted gross margin reached 48% as a result of our cost reduction measures and operational excellence in both networks and cloud and software and services. On the cost side, we made steady progress. Operating expenses, excluding restructuring charges, dropped to SEK 21.4 billion, around SEK 2 billion lower year-over-year. Of this, about half is currency and the rest is cost initiatives. Excluding FX, R&D remained broadly stable. Adjusted EBITA was SEK 12.7 billion, up by SEK 2.4 billion, including a negative currency impact of SEK 2.5 billion and the EBITA margin was up around 4 percentage points to 18.3. Behind this improvement is the good progress we've seen in terms of optimizing our operations and lowering our operating expenses. Cash flow before M&A was SEK 14.9 billion, driven by earnings and reduced net operating assets. As Börje has already highlighted, the Board will propose higher shareholder distributions following the good 2025 cash generation. Let's move on to the results for the full year. Net sales amounted to SEK 236.7 billion and organic sales grew by 2%. Growth in Americas and in Europe, Middle East and Africa was partly offset by declines in the other market areas. At the same time, reported sales decreased by 5%, impacted by a negative currency effect of SEK 13.9 billion. The sales decline, which gives a significant volume impact on gross income, was more than offset by higher gross margins. Adjusted gross margin was 48.1% with support from cost reduction initiatives and operational efficiency. The result on adjusted gross income was an increase of SEK 2.5 billion to SEK 113.9 billion, despite a negative currency impact of SEK 7.2 billion. Turning to operating costs, excluding restructuring charges and impairments. Operating expenses dropped to SEK 81.2 billion, which is SEK 7.4 billion lower than the prior year. Of these, about 2/3 come from our cost initiatives, mainly from SG&A and the rest is currency. Adjusted EBITA increased to SEK 42.9 billion, and the margin was 18.1% or 14.9% excluding the capital gain from iconectiv. Net income for the full year was SEK 28.7 billion, including the benefit from iconectiv -- the gain from iconectiv. Cash flow before M&A was SEK 26.8 billion, a reduction of around SEK 13 billion compared to the prior year. In 2024, a strong working capital reduction contributed to higher operating cash flow. I'll cover cash flow more in details here later. So let's move to the segments. In Networks, sales decreased by 6% year-over-year to SEK 44.2 billion, with a negative currency impact of SEK 4.4 billion, so organic sales increased by 4%. We saw organic growth in market area, Europe, Middle East and Africa, driven by Middle East and Africa. Sales also grew in Southeast Asia, driven by Vietnam. Sales declined slightly in Americas due to continued price competition in Latin America. Sales were broadly stable in North America with continued healthy investment levels. Sales also declined in Northeast Asia due to timing of network investments. And Networks adjusted gross margin increased to 49.6% despite the higher share of service sales. The margin benefited from cost reduction actions and operational efficiencies. Adjusted EBITA in Networks was stable at SEK 10.1 billion despite a currency headwind of SEK 1.8 billion. And adjusted EBITA margin was 22.8%, an increase of 1.2 percentage points compared to last year. And looking at the right-hand graph, the full year adjusted gross margin reached 50% and stabilized at the new level, and adjusted EBITA margin reached 20.7%. Moving on to segment Cloud Software and Services. Sales increased by 3% year-over-year to SEK 20 billion despite a negative currency impact of SEK 1.8 billion. Organically, sales grew by 12%, mostly driven by higher core sales across all market areas and timing of project deliveries. Adjusted gross margin came in at 44.3%, an improvement of around 5 percentage points compared to last year, driven by a high share of software sales and continued delivery efficiency. Adjusted EBITA increased to SEK 3.7 billion with a margin of 18.6%, supported by the effective implementation of our strategic initiatives. Looking at the right-hand graph, the full year adjusted gross margin was 43% and adjusted EBITA margin 11.4%. These are both new high levels. Enterprise sales stabilized on an organic basis in Q4, growing 2%. Reported sales decreased by 25%, and that's an impact of the sale of iconectiv and currency. Global Communications platform organically grew by 3%, driven by an expansion in CPaaS. And adjusted gross margin declined to 52.1%, driven by the iconectiv divestment. Adjusted EBITA landed at minus SEK 1.1 billion, improving by SEK 0.1 billion compared to last year despite the iconectiv impact. Turning to free cash flow, which was SEK 14.9 billion before M&A in the quarter and SEK 26.8 billion for the year. We delivered cash flow to net sales of 11% for the year within our 9% to 12% target. The decrease in cash flow year-on-year is due to very strong working capital reductions in 2024. Working capital in 2025 was broadly stable at historical low levels. And net cash increased sequentially by SEK 9.4 billion to SEK 61.2 billion. Return on capital employed in 2025 was 24.1%, including the iconectiv gain, while excluding it, it was around 19%. Then turning to capital allocation. During 2025, the Board has undertaken a review of the balance sheet and the capital allocation principles. On the balance sheet, we remain committed to an investment-grade credit rating and maintaining a solid net cash position. Turning next to the 4 capital allocation priorities. First, the top priority is to maintain a technology leadership through continued R&D investment to ensure customer confidence at all times. Second, we are committed to a stable, to progressive ordinary dividends. And third, as already -- as Börje mentioned, we remain selective with inorganic investments. And finally, any excess cash will be distributed to shareholders. So for 2025, the Board will propose an increased dividend of SEK 3 per share and a share buyback program of up to SEK 15 billion at the AGM. After adjusting for the total shareholder distribution of approximately SEK 25 billion, the 2025 net cash position is at a solid level, considering future investment needs and the business outlook. Next, I will cover the outlook. Global uncertainty remains with potential for further changes in tariffs and broader macroeconomic factors. The outlook assumes stable exchange rates and no tariff changes here. So for Networks, we expect Q1 sales growth to be broadly similar to the 3-year average quarter-on-quarter seasonality. For Cloud Software and Services, we expect Q1 sales growth to be below the 3-year average quarter-on-quarter seasonality. And we expect Networks adjusted gross margin to be in the range of 49% to 51% for Q1. And restructuring charges for the full year '26 are expected to be at an elevated level with proposed headcount reductions recently announced in Sweden and continued actions across other markets. With that, I hand back to you, Börje.

Thanks, Lars. So today, we have a very strong position and a very competitive portfolio. In many markets, there will be a need to invest to keep network performance at a competitive level. And as you've seen, we made critical inroads in many key markets during the year, for instance, in Japan. In 2026, we're planning for a flattish RAN market, but expect growth to come from new areas. This means we will need to continue our efforts on operational efficiency. And by doing so, we can strengthening our company for varying market conditions. This will enable us to continue with critical investments in technology leadership including increased R&D investments in defense and mission-critical, while at the same time supporting our margins and cash flow generation. Overall, as I mentioned before, we're entering a very exciting time where AI will move from a focus on data centers and large models to devices and applications. This will require advanced wireless connectivity, putting Ericsson in the middle of the next phase in the AI era. Our strategy is focused on making sure we capture this opportunity. We're doing it by providing the industry's best network for AI that enable differentiated services and new monetization opportunities. This includes both new use cases including by exposing networking capabilities through network APIs, but also new sectors, such as mission-critical networks. This will allow us to capture significant share of the value from connectivity and help drive growth for us as Ericsson. So if I draw this out a bit longer term, I believe we can have a model with a flattish mobile networks market, but with our investments in growth areas that we -- basically, we can see a modestly growing top line. So if you combine the operating leverage, actually improving profitability in the Enterprise segments as well as share buybacks, we should see a healthy growth in profit per share. So to wrap up, in 2025, we were laser focused on strategy execution and continue to take critical steps to position Ericsson for the future. We're unlikely to see growth in the RAN market this coming year, but our investments in mission critical 5G core and the enterprise will drive growth for the company. I would say it's exciting if you ask me. On that note, I also want to thank all my colleagues at Ericsson for a lot of great work. Thank you, team. With that, I think it's time for you, Daniel, to lead us through some Q&A.

Thanks, Börje. We'll now move to the Q&A. [Operator Instructions] Thanks. Okay. Operator, we're ready to open the line for the first question. The first question today is going to come from the line of Simon Granath at ABG.

Congrats team Ericsson for the solid results here. On OpEx, I'd like to push a bit on the medium-term trajectory and the R&D balance. With the RAN demand looking broadly flattish into 2026. OpEx growth largely reflecting salary inflation rather than volumes. If we assume a similar demand environment into 2027 with [indiscernible] still later in this decade, how do you think about the risk of managing R&D and were capabilities changes too early? So simply on the mid-term OpEx trajectory?

Mid-term. When you look at the OpEx levels that we have today, and the structure we have, it's a question about working and investing, and we are already in 2025 and back -- and going into this year, there are key strategic areas where we are investing and some other areas where we are taking other decisions. So I think that -- and that will also be how we will work going into 2027. Then of course, there is a continuous cost inflation that we need to drive through productivity to ensure that we keep the right level here going forward as well. So there will -- and when these big investment comes, we will see. I think you will have to comment as well from your perspective.

Yes. I think the -- given the flattish market we're in, we will have to work continuously on the, I call it, R&D efficiency. But there is also a question of making sure we allocate to the right areas. This is why new areas like mission-critical is actually critical to be part of as well as defense applications. So we believe that we can -- even in a flattish market, we can actually have the right R&D level with the program and with the efforts we have in place. But it's, as you know, it requires us to really be at the forefront of R&D efficiency as well. But you should not expect us to -- put it this way, we are not going to trade off technology leadership, and we believe we can have technology leadership at the spend level even into '27 and beyond.

Moving to the next question, please. The next question is going to come from the line of Erik Rojestal at SEB.

Congratulations on the results here. So just Börje, you mentioned increasing investment in defense in '26 and mission-critical was a key driver here in the quarter. I understand this is a good market for you right now, but can you please shed some light on how large the exposure is that you have currently in this area? And what the size of the opportunities that you see out there? How large are they?

We -- if we start in the end of discussing -- first of all, what we want to say here is, in reality, the investments we make in defense today is captured in the total R&D spend. And as we go forward where we see that, we probably need to increase that a bit. And the reason for that is we actually see the potential for a very sizable market in defense given what the spending in the U.S., of course, but it's also the increased European spending on defense will make this into a fairly sizable market. And we see that market moving from, what I would call, dedicated solutions, kind of proprietary technology solutions into much more 3GPP-enabled solutions. And the reason for that is simply that is more cost effective and it's going to be much better performance. So we see actually the communication market in defense to be a sizable opportunity that we want to make sure we're early on in. But there are also other applications. So think about defense from a broader perspective, the sensing capabilities of the solutions we have actually allows you to, for example, do drone detection. Think about where the usefulness of that and it can do detection of objects that are not connected. So it's basically maybe popular wording will be called the radar. These are major opportunities that we would say are really large that we want to position ourselves to go after. So when you see us increasing spending, it's not -- I think part of it will be offset with other efficiency gains, but we want to say that we actually go after an opportunity here that we think is rather sizable.

Thanks, Erik. Moving to the next question, please. The next question is going to come from the line of Jakob Bluestone at BNP.

I had a question around supply chain shortages. I'm wondering sort of broadly, are you seeing any issues that might hold back your ability to grow? And specifically, can you comment on the impact of memory price increases? So what share of your bill of materials relates to memory chips? Do you hedge these? Can you pass on any price increases to customers?

When it comes to the supply chain, I think we have worked for quite some time on resiliency. And when it comes -- that is including then supply chain, so to say, deliveries. So that is continuous work that we do. So -- but of course, when it comes to the memory side, it has been quite a bit of noise around that. But I think we are in a good position of handling that as it looks for this year here. And on the pricing side, it is a mix. Of course, there is some impact, but also here, it's really working close with our suppliers also together with our customers to make sure that we are not squeezed in the middle here. So it's both ends here to work with.

Can you maybe just expand how have you avoided shortages? Is this just by building inventories, just given the sort of...

It's part of the -- how we work, but also to have a good relation and long-term relationship with the different suppliers that we work with.

Thanks, Jakob. Moving to the next question, please. The next question is going to come from the line of Andreas Joelsson at DNB.

Moving from the splendid operations to the buybacks perhaps. And if we assume that you make SEK 25 billion in free cash flow on a sustainable level, that is equal to the total remuneration to shareholders. So should we say that around SEK 45 billion is a net cash that you feel -- that you and the board feel is needed for the -- to run the operations?

I think as we mentioned there, the view is that it's important to have a solid net cash position. And we're coming out here with SEK 61.2 billion in net cash and the total distribution of around SEK 25 billion. And adjusted for that, we have given the business outlook that we see now, we see that it is a solid net cash position coming out of 2025. Then when we come to next year, then we will have a look again, of course. But the capital allocation principles are there and that is guiding us also going forward.

And when you think about the business outlook, of course, you need to think about geopolitics, you think about whether it's the question before, tight supply chain, for example. And all of these factors reaches the conclusion that, that was the right level now.

And just as a follow-up, is there any thinking from the Board and from the management, given what you said before about growing EPS that you could -- that you would like to have a more long-term buyback program and making sure that you can achieve that?

I think this is the first time, Ericsson now announces buyback program. So it is clearly a part of the toolbox for the Board and the AGM and for the shareholders to decide upon.

Yes. I think you would also say, Andreas, that it's intentional that is launched as a buyback program and you also know the mandate for those are reviewed annually by the AGM. So this will be our hope and ambition and what is that this will be a recurring thing. Then the size will vary, of course, depending on how the outlook looks like.

Thanks, Andreas. Moving to the next question, please. The next question is going to come from the line of Sandeep Deshpande at JPMorgan.

My question is on the market in mobile networks, overall. Has the market changed at all? I mean, we've heard about the EU restricting some of the high-risk vendors, but at the same time, you are seeing a greater price competition in Latin America. Maybe Börje, you can make some comments on how this market overall is playing out in the world given the geopolitical situation?

Yes. If you -- a way to think about it, Sandeep, is we look at this market for the last 2 decades, right, and it's been flattish. So we like to think or plan for that type of market outlook. If it gets better, then we have a strong cost competitiveness, we get operating leverage. If it gets worse, we need to review that assumption, right? But that's kind of the way we think about the business. Then, of course, it varies what happens. So over the last few years, and I think we spoke about this a couple of quarters ago that we saw increased competition in Latin America, we see it from time to others in other parts of the world, Southeast Asia, Africa, et cetera. So that kind of comes and goes a bit. The thing that could be a positive is, of course, the high-risk vendor discussion in the EU. That's a sizable opportunity. If you think about the -- it's -- I mean we don't know exactly, but call the high-risk vendor market presence in Europe to be 1/3 to maybe up to 40%, but around that as a guideline, that would be a sizable revenue opportunity for trusted vendors. So that could change. At the same time, it's -- now it's a proposal. It has to go through the process. So this is something that's probably going to take 12, 18 months before we really know the impact. So we're not factoring that in. But of course, it is an upside opportunity. And of course, it is, I would say, the toolbox, the EU discussed or implemented quite some time ago, which is 5, 6 years ago, has been not been widely adopted. So it is a change in stance with the current proposal.

Thanks for the question, Sandeep. Moving to the next question, please. The next question is coming from the line of Sébastien Sztabowicz at Kepler Cheuvreux. Sébastien Sztabowicz: On Networks, how do you see the mix trending in the coming quarters? We are now seeing some stronger growth in Africa, Southeast Asia and lower deployments in the U.S. and maybe also in Japan and Korea. So just curious about the mix trend in Networks. And also at a broad level what would be the puts and takes to your gross margin in the coming quarters? Where do you see some upside or downward pressure?

I think single quarters will vary. But if you look a little bit on the underlying for '26, North America on healthy investment levels in the market. So -- and that we expect to continue during the year. And then when it comes to growth opportunities, there is an investment need in India and also in Japan, where we have also in both these markets, ensure that we have a good, solid market position. So when the customers decide to invest, we should be able to capture on that. Europe, rather stable. And then there are -- we will see what happens in Latin America. There is opportunities there, but still quite tough competition for sure, parts of Southeast Asia as well. So I think that's a little bit the balance act. In Africa, we have had a couple of good quarters now with 4G and 5G rollouts and modernization activities. And hopefully, we can see that continue also going into this year. So that's a little bit the balance act on the market mix. And then the puts and takes, there is a cost pressure in the group, in the flat RAN market and continuous cost pressure on us both in the people part, but also in material cost so that we need to continuously work with. That's why we talk about then somewhat higher elevated levels on restructuring, both -- that will impact both, so to say, OpEx, but also in the cost of goods sold. So that is necessary to offset this upward pressure on costs. So that is some of the puts and takes. Then you have the normal product mix, but that will vary between quarters as always.

Thanks, Sébastien. Moving to the next question, please. Next question is going to come from the line of Felix Henriksson at Nordea.

It's relating to IPR. I think in the report, you called out that you had a contract expiring with the Chinese smartphone vendor at the end of 2025. So I just wanted to ensure whether or not there are other significant contract cliffs in 2026 that we should be aware of? And as a quick follow-up to that, what is your level of conviction in being able to grow the SEK 13 billion annual run rate in IPR going forward?

Yes. Normally, we try to give you that guiding point around the run rate coming out of the year, around SEK 13 billion. When it comes to the contract, this is not a major impact. And we always -- when we negotiate, renew contracts, we are targeting the best economic outcome and that we will do as well this time. So that could be some impact here, but that is then normally coming back with a renewal. So it should not impact the full year, so to say. And then potential upsides are there. We are in settlement negotiations with one of our licensees. So that is hopefully coming into place this year. And then there is the underlying opportunities around the pure smartphones when it comes to IoT, automotive, et cetera, that should support growth coming into this year as well. So that's a little bit the balance -- the pieces that will drive some opportunities.

Thanks, Felix. Moving to the next question, please. Next question is going to come from the line of Ulrich Rathe at Bernstein.

My question is on the bigger picture of the revenue outlook. So you're guiding for a flattish market and highlight the growth opportunities in mission-critical and other areas. And now in the fourth quarter, you delivered mid-single-digit organic growth, which is taken with some excitement in the market today. Would you go as far as saying that something like mid-single-digit revenue growth is possible in a flattish run market with the growth opportunities in these new opportunity areas that you're highlighting? Or is this maybe a bit of a phasing effect here? I think you highlighted in particular in CSS, the delivery phasing. Just wondering what your bigger picture here is?

I think to -- if you think about it from a little bit longer-term perspective, and it's going to fluctuate, right? But the size of the mission-critical market and the enterprise opportunity as well as 5G core that contributes here, 5G core, by the way, you should remember, it's only about 1/4 of all networks that are upgraded to stand-alone today, so there is a rather sizable opportunity there. So when you look at those outlooks, those individual pieces, they are large enough to a drive pretty nice long-term growth. It's not going to be double digits, as you say. So that -- take that out, but it may be low- to mid-single digits. And I think the -- that's what makes me a bit excited is actually to think about it from that kind of at least some basic growth and you add on operating leverage on that, you add on what we're seeing on the enterprise that we're going to get that to profitability and you combine that with share buyback, you actually get a very healthy growth profile. So I think there is something here that I think from a little bit longer-term perspective is rather exciting.

Thanks, Ulrich. Moving to the next question, please. Next question is coming from the line of Sami Sarkamies at Danske Bank.

I have a question on your silicon strategy. Your competitor recently announced that they will start building products based on NVIDIA chips. We have also done some R&D work related to the use of chip use. What is your take on the situation? And do you see a role for NVIDIA in future RAN products?

We selected a strategy several years ago to basically disaggregate the software and hardware and actually allow our software to run on pretty much any architecture. And of course, here, we can run on, of course, the x86, but it can run on GPUs. It can run on our proprietary Silicon as well. And by the way, you could well see the TPU from Google. You could see what Qualcomm is coming with AMD, et cetera. So we wanted to be a bit independent of the selection of the hardware layer. The reason for doing that was that we felt it was the right strategy to give the customers the opportunity to choose what hardware layer they want to run on. And you know today, there are operators rolling out cloud RAN. That's on x86. In the future, it may be different. So I think the -- I cannot comment on Nokia's decision, that's for them to comment on. But from my point of view, I -- we wanted a very different strategy, not to select the infrastructure layer today, but rather do that as we come closer towards AI RAN realization and 6G, then we can make an intelligent choice together with our customers. And we feel good about that strategy, but that also means that we're going to continue to work with the x86 ecosystem and the GPU ecosystem.

Thanks for the question, Sami. Moving on to the next question, please. The next question is going to come from the line of Didier Scemama at Bank of America.

Sorry to come back to the point on memory and cost inflation. So I'm looking at your inventories, which are seasonally lower in Q4. You seem to suggest that you are -- you have adequate supply from new suppliers. So just can you elaborate a little bit? Have you signed like a 12-month supply agreement that makes sure that the pricing is not going to be a headwind to your gross margins? And -- or put it in a different way, what have you assumed in your gross margin in terms of cost inflation from memory over the course of '26?

I think margin -- inventory levels are coming down in the fourth quarter following the seasonality that we have, and that includes all inventories. So when it comes to that part, I think we are well positioned coming into the year when it comes to inventory levels on this kind of areas. Then of course, there is cost increases coming that we need to work with. But we don't share exactly how much that is, of course. But it will have some impact, but we will work together with our customers to ensure that we are, so to say, not stuck in the middle here, but there is an understanding that there is some sharing to be done here.

And sorry, again, to go back to the defense point, I think you sort of said, look, with the opportunities. Can you give us a sense of the size of your business today in defense? What sort of costs you're thinking about? Does that require any CapEx? Just elaborate a little bit so we've got something to work with.

Yes. I think you can assume -- we're not going into details exactly what our business is because we're working with a number of defense organizations. As you know, Ericsson exited all defense several years ago. So we haven't really had a presence. So today, we're working in partnerships as well as with defense organization. So we're not going into details there. But -- and I think when you look at the overall sizing, the revenue opportunity, there are a number of consultants out there talking about the size of that opportunity. We -- and some are very big numbers. I'm not sure it's going to be that. But we think it's compared to the rest of the opportunity we have is sizable. When we talk about it from an investment point of view, this is more saying that we will ramp up our presence in here and actually increase our investments. It's not going to be material compared to our overall SEK 50 billion we spent on R&D. So that's why we also say that it's part -- it can be -- well be offset, maybe not fully, but by the efficiency gains that we're going to do. So when you look at it from a total point of view, think about it as there is a big opportunity we will try to invest to get that. We're not going to materially impact our outlook with that. That's not the case. But we want to single it out as a growth opportunity.

And I think on your question there on CapEx, it's very, very limited.

Yes, that's fair. That will be -- you will not see that as a CapEx need.

Thanks, Didier. Moving to the next question, please. The next question is going to come from the line of Daniel Djurberg at Handelsbanken.

I have a question. If you could give any more color on the visibility in the North American RAN market in '26? Is it fair to assume a more back-end loaded year given some of your larger customers' spectrum asset holdings, for example, that could I expect to build upon in the latter part of the year?

I think it -- we don't -- I think we say that when it comes to the full year, we are coming out with healthy investment levels, and we expect that to continue. Then how it will pan out between quarters, it's actually rather, I think, difficult to say. It depends on what the capital investment needs that they have in different rollout phases, et cetera. So it's -- I don't think it's today, easy to say what will be the difference between the first and the second half.

No I think that -- we don't guide that way, we've elected to do it quarterly and I think that's why we do it quarterly. What I -- I do think it's fair to say that when we look at the North American market -- and by the way, this is actually a global phenomenon. But when you will hear, I think our customers talk a bit about being cautious on CapEx, the interesting thing is we also see a change in mix in our customers. So we believe we're -- the active components are going to be needed because that's driven by the traffic growth and the need to go 5G stand-alone as well as new use cases like fixed wireless access. So when you see that, you actually see, call it a healthy investment level, even though our customers most likely will guide for a bit lower CapEx without knowing they need to guide on their own, but it's given signals that you can hear and it's pretty clear, they will be cautious on CapEx.

Thanks for the question. Moving on to the next question, please. The next question is going to come from the line of Andrew Gardiner at Citi.

Just coming back to a point you made earlier in your presentation regarding the performance that you've had over the course of 2025. Your profitability has improved noticeably last year. You've had 2 good years of operational cash generation. And so that is putting Ericsson, as you point out, in touching distance of the long-term financial targets. That being said, these targets are some years old at this point. Are they still relevant and accurate targets for us to use in the market? Or given the changing state of your end markets and your strong execution, is there the possibility to do better, right? Do you have the ambition to perhaps outperform those somewhat old targets at this point?

I think it's right that they're old. We have not succeeded at reaching them, so that's a fair comment. But I think the -- we should remember, we also set the targets in a different environment geopolitically as well as business mix, to be honest. So we set them when iconectiv was part of our portfolio, we set them in a very different political environment. I think we -- I'm not too fan of changing targets easily. So we want to make sure that we reach that 15% to 18% first. Once we're solidly there, then I think we can start to talk about is that the right target after that. But right now, I think it's a good measure of what we should achieve with the current type of business we have.

Thanks for the question, Andrew. We just have time for a brief follow-up question from one of the analysts before we close. So if we can bring Daniel back in, Daniel Djurberg, Handelsbanken.

I would like to ask a little bit on the Cloud Software and Services. Sorry, if I missed the answer before. But could you help us to understand a little bit more on this impact of this large contract being in most -- in the quarter i.e., with the outlook comments on Q1 seasonality have changed to more of a similar view if the contract has been excluded in Q4?

It's a good question. Now as we said, we are coming out strong in Q4 here with -- and as you know, we have lumpiness when it comes to project deliveries, which are -- if you look at the full year, we are up around some 6% organically in Cloud Software and Services. And I think that has been a good underlying growth that we have seen, supported by the core business, and that is what we see as a healthy level coming into '26. Then, of course, if that single comment would bring us back to normal, I think that's a little bit -- it would, of course, bring us closer for sure. That is true. And then we should remember, I think you have all seen that, that we have a significant currency headwind coming in, in Q1 year-over-year as a comparison that you will see currency rates peaked somewhat in Q1 '25. So that headwind we also are facing here.

Look forward to see you in Barcelona.

Thank you.

Thanks.

Thanks, everyone, for joining. That concludes the call.

Thank you.