Release Date: July 12, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Gross margin for the group expanded to 43.9%, supported by proactive actions and a competitive portfolio.
- New 5G licensing agreement positively impacted financial performance, contributing to the IPR revenue target of SEK12 billion to SEK13 billion for 2024.
- North America returned to growth for the first time since 2022, driven by the end of inventory adjustments and increased network investments by larger customers.
- Adjusted EBITA increased to SEK4.1 billion in the quarter with a margin of 6.8%, showing resilience despite market challenges.
- Free cash flow improved significantly to SEK7.6 billion before M&A, driven by better working capital management and reduced inventory levels.
Negative Points
- Organic sales declined by 7% in the quarter, primarily driven by a slowdown in the networks segment.
- Sales in Europe and Latin America decreased by 3%, with increased competition from Chinese vendors noted.
- Sales in Southeast Asia, Oceania, and India decreased by 44%, following a normalization in India after last year's rapid 5G rollout.
- Vonage impairment charges significantly distorted reported OpEx, with an increase of SEK1.2 billion year on year.
- Overall market conditions remain challenging, with customers being cautious with their investments, impacting sales outside North America.
Q & A Highlights
Q: Why is there a disconnection between the gross margin and EBITA margin since the beginning of the year?
A: Lars Sandstrom, CFO: We have a somewhat higher cost base compared to a couple of years ago, especially in R&D. The significant lower revenue base impacts the OpEx ratio. The difference also comes from the enterprise business impacting the overall margins.
Q: Should we take normal seasonality as a modeling purpose for the next few quarters?
A: Lars Sandstrom, CFO: For Q3, normal seasonality is a good indicator, including the growth rate in North America. However, overall market conditions remain challenging outside North America.
Q: Can you provide more flavor into the various regions on the network side?
A: Börje Ekholm, CEO: In the US, we had a big inventory adjustment, leading to normalization in sales. Outside North America, the industry faces challenges with return on capital employed under pressure, leading to reduced investments. India saw a rapid 5G rollout last year, now tapering off. Africa and parts of Latin America face macro challenges.
Q: What are the specific upward drivers of the Q3 gross margin in networks?
A: Lars Sandstrom, CFO: The improvement is driven by cost-out activities, geographical mix, and a bit of underlying improvement. However, the overall market remains in decline.
Q: What is the outlook for OpEx development for the rest of the year?
A: Lars Sandstrom, CFO: We see a stable cost development similar to H1, with cost-out activities offset by salary inflation and higher provisioning. The enterprise side had higher costs due to stopping R&D capitalization and increased investments.
Q: Why have you chosen not to raise the IPR licensing guidance despite being on track to reach SEK12 billion to SEK13 billion?
A: Lars Sandstrom, CFO: We aim to get the best economic outcome of any agreements. We keep the guidance at SEK12 billion to SEK13 billion for the full year and will announce any additional deals.
Q: What is the game plan for Vonage and the global communications platform?
A: Börje Ekholm, CEO: We need to manage the existing business better and focus on building a new marketplace for network APIs. The strategic rationale for acquiring Vonage remains, and we are investing in the global network platform for network APIs.
Q: Should we conclude that you are happy to give up market share to protect your gross margins?
A: Börje Ekholm, CEO: We need to deliver a healthy gross profit to invest in technology leadership. We will be disciplined in managing gross profit and market share, ensuring we get paid for our technology.
Q: How should we think about Ericsson's role in data centers in the future?
A: Börje Ekholm, CEO: We serve the data center market through access technology. Selling directly to data centers is unlikely for us, as we focus on leveraging cellular technology for new applications and driving new revenues.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
