Ericsson Lm Telephone Co Q4 FY2021 Earnings Call

Hello, everyone. And welcome to today's Ericsson's Fourth Quarter Result as well as the Full-Year Result for 2021. With me here today, I have our CEO, Börje Ekholm, and our CFO, Carl Mellander. So, as usual, we will start with a presentation from Börje Ekholm followed by a Q&A session. More information on that you will find on our website, but you have to join the call via telephone to ask questions. 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 report or 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. Today, we're not only presenting, as I said, the fourth-quarter result, but we're also presenting the full year of 2021, an eventful year for Ericsson. But before starting the presentation, I would like to ask a question to both Börje and Carl, what is the event that stays in your mind when you think about 2021? So, I'll start with you, Börje, what's the situation or event that you will think about when reflecting on 2021?

I think of a couple of things actually. The first one is really the accelerated rollout we've seen on 5G around the world. Cell phone technology has been a fast-scaling technology. 5G is the fastest scaling cell phone technology so far, and it's quite impressive to see. I think that's an important part. We have seen our investments in technology and R&D actually paying off and gaining market share as well. The next part, which I think is equally important, is the step we took with the announced acquisition of Vonage, which will allow us to build an enterprise business where we can monetize together with our customers to CSPs on the capabilities of the 5G network by providing the developer community with exposure to the APIs we can actually develop in the 5G network. I think that's very exciting for the future.

An eventful full year. So, no opportunities to improve your golf handicap, I guess. Carl, what do you think about if you think about 2021?

I think it's a great testament to the collaboration efforts. The whole team, 100,000 employees in the company, actually delivered on all the things that Börje talked about. And the outcomes are so strong. Everything from top line, pleasing the customers and so on, the improved profitability, but also cash flow, of course, which I think is maybe the ultimate testimony here to performance in the business, a record high cash flow for the year, the best we've seen in the history of Ericsson. So, I think that it's strong and it's a great team effort in Ericsson.

Great. Thanks, Carl. Thanks, Börje. With that starter, I will actually leave the word to you, Börje, to start your presentation. So please, Börje.

Thanks, Peter. And I hope your golf handicap has improved more than mine. Anyhow, good morning, everyone. And welcome to this presentation. I'm very happy that so many of you could join. So, thanks for being with us. I am very proud to present a good ending of 2021 as well as a very strong fourth quarter. I would say today's report is really a direct result of executing on the strategy we put in place to focus on extending our leadership in the mobile infrastructure business. We do that by investing in R&D for technology leadership, but also that we can leverage this position we have in the mobile infrastructure business to establish and grow into an enterprise business. But more on that later on in the presentation. I also want to take this opportunity to thank all my colleagues at Ericsson for a very strong job done this past year. We faced pandemic challenges, but we've also faced supply chain challenges as well as inflationary pressures. But I must say it's a true testament to their ability to execute, basically great achievements on their part. 5G, as I said before, is the fastest scaling mobile technology we have seen, and deployments around the world have truly accelerated this past year. And we have been able to achieve a leadership position. So, today, we have 109 live 5G networks, we have 170 agreements or contracts with customers on 5G networks. We have been able to capitalize on this leadership position to gain market share as well. We can also see that the investments we made in technology leadership actually result in the performance of the network, of the deployed networks for our customers, and we have recently seen basically in three different independent benchmarks that the winners in each of the benchmarks have one thing in common: they rely on Ericsson for their primary vendor relationships. So, it shows that while the measurements always vary by benchmark and the standards vary by benchmark, we can see that we can deliver network performance that's second to none. And that's ultimately what's going to drive our business going forward. Now, let's hit on a couple of key benchmarks from the fourth quarter. The momentum in our core mobile infrastructure business continued throughout the quarter. This is, of course, something that's basically the cornerstone of the company. We're not going to lose focus on that even as we expand into enterprises. We offset the impact from the reduced market share in Mainland China by growing elsewhere. So, organically, total growth was 2%, but if we exclude China for just comparisons, our organic growth was 5%. For the whole of 2021, we saw an 8% growth if we exclude China. Profitability remained very strong. And we had the gross margin in the fourth quarter of 43.5% versus 40.6% the year before. And basically, that's the result of improvements in all segments. EBIT margin reached 17.3% and free cash flow before M&A was SEK 13.5 billion. For the full year, our gross margin was also 43.5%; EBIT margin, 13.9%; and free cash flow, SEK 32.1 billion. I will say all of them are indicators of the resiliency and strength of our underlying business. In our Q3 call, I shared a little bit more about our thoughts on our growth plans into enterprise. Of course, I'm delighted about the step we took during the fourth quarter with the announcement of our intent to acquire Vonage. Based on learnings from our past acquisitions, Vonage will remain a standalone entity in Ericsson and operate with limited integration. This is the model we deployed for Cradlepoint and the integration of Cradlepoint. There, we have been able to execute in line with our investment case. That's despite supply challenges as well as a relatively slow pickup of 5G modems in the beginning of the year. The light integration will allow Vonage to continue to execute on growing the business as well as on the financial performance. But in parallel, with that, we will also start to invest in our global network platform that will allow CSPs as well as ourselves to monetize the features of the 5G network, or call it the performance characteristics or APIs of the 5G network. By developing the APIs, we can expose the APIs to the Vonage developer ecosystem to drive completely new applications onto digitalizing enterprises, but also for consumers. In addition to Vonage, our enterprise business consists of our dedicated networks, as well as Cradlepoint and IoT. That's part of the more wireless mobile networks that we are focusing on as well. We expect Vonage to close during Q1 or possibly into Q2, depending on regulatory approvals and shareholder votes. I would also just touch upon the correspondence that we received from the DOJ during the fourth quarter where there is a breach in the deferred prosecution agreement as Ericsson failed to provide certain documents and factual information. I'm sorry to say, but at this point in time, we will have no further information to share. However, I will say that we will update the market as soon as we have additional information about the matter and we will share it, of course. In the meantime, I would also say that we continue to invest very heavily in building a world-class compliance program and a culture of integrity at the company. We're taking significant investments and took them already last year, and we will continue to do that during 2022. Our commitment to be world-class in compliance stands firm. We reached our financial performance targets for 2022 of 12% to 14% EBIT margin, basically one year early. I remain very confident about the future growth of our core business, the core mobile infrastructure business. For 2022, we see the targets to remain in place, i.e., 12% to 14% if we exclude the Vonage acquisition. However, we also see that when we determined the target for 2022 – that was back in 2018 – our business mix looked a bit different and our investment mix looked a bit different. What we see now, while we are, of course, committed to the target, we see an opportunity to develop a very strong enterprise business. We see this allowing us to also improve profitability over time. Our focus is now, therefore, to accelerate the achievement of what we said would be the long-term target of 15% to 18% EBITDA margin, and we should be able to do that no later than two to three years out. We're very excited about the opportunities we see in enterprise, but it's also important that we ensure to accelerate to reach the long-term target, as I think that will put us on a very different growth trajectory as well as profitability development. In the last few years, we've also taken steps to improve the capital efficiency of the company. We see today that we can operate the company with much less capital than we could before. That allows us to pay cash for the Vonage acquisition. At the same time, it does not impede our ability to invest in growing the rest of our company and the rest of our business. When we take all these factors into account, the Board has decided to propose a dividend of SEK 2.50 per share. That's an increase of 25% compared to last year, and it reflects the confidence that we have and stability we see in our business. Now, moving on to market area performance for the fourth quarter, starting with Europe and Latin America, sales increased by 12%. Breaking that down, we can see that Europe grew 11% and Latin America 17% in organic growth. This strong development was driven by growth in both networks as well as digital services, and it's really on the back of market share gains. 5G momentum continues in North America where we saw very good development. Sales increased by 15%, driven by strong demand for 5G. It’s worth remembering that during the year, we've signed now 5G contracts with all tier 1 operators, representing the biggest contracts in our company's history. That's been done in North America, of course, or in the US. In the Middle East and Africa, sales increased by 5%, being largely driven by growth in Africa where digital services, in particular, saw strong demand for software upgrades. Sales in Northeast Asia decreased by 22% year-over-year, and that's on the back of materially lower market share in Mainland China. Finally, in Southeast Asia, Oceania, and India, sales decreased by 13% versus 2020. That's a tough comparison in the fourth quarter, primarily for networks. Networks actually shrank, but we saw good development in digital services instead. Let's look now at the market segments or business segments. If we start with Networks, sales adjusted for comparable units and excluding Mainland China grew by 6%, with double-digit growth in North America, Europe, and Latin America. Gross margin increased to 46.4% compared to 43.5% year-over-year, and that's really due to operational leverage. In Digital Services, sales adjusted for Mainland China increased 3%. Gross margin increased to 43.4%, driven by increased software sales, which is in line with the strategy we have for digital services. Digital Services continues to develop according to the plan. What we are starting to see, though, is that as 5G core starts to go live with customers, we are starting to see revenues being generated from those contracts. For 2022, we expect a limited loss for Digital Services, but the improvement is tilted towards the second half of the year, due to 5G networks increasingly starting to carry traffic throughout 2022. Managed Services sales declined year-over-year, as new deals could not fully offset lower customer demand. We also had contract rescopes as well as planned exits. To grow profits, we will accelerate the ongoing transformation towards a more software-driven offering with higher margin potential. In Emerging Business and Other, we're seeing increasing momentum for our 5G portfolio in dedicated networks as well as Cradlepoint. Both sales and gross margin improved with Cradlepoint as the main contributor. The development of Cradlepoint is well in line with our acquisition plan. With that, I'm going to leave the word over to Carl to go through a little bit more of the details in the report.

Thank you, Börje. So, good morning, everyone. And thanks for joining. First, I just wanted to echo what Börje said earlier. We're very proud of this result, and it's really the result of strategy execution. But let's have a look at the numbers then. So, net sales were SEK 71.3 billion with an organic growth of 2% for the group. If we adjust for the drop in Mainland China, where we have lost market share, we have an organic growth of 5%, just as a reference then. As you saw in Börje's graph of market areas, of course, this growth is underpinned by our two largest market areas: North America growing at 15% currency adjusted and Europe and Latin America at 12%. This is a clear result in these cases by market share gains with the customer. It's encouraging to see. Börje also alluded to the global supply disturbances that remained during the quarter, but really thanks to the supply organization and all the hard work we managed to continue to build resilience in the supply chain and deliver to customers according to their demand. If we look at 2021, we have managed to increase the number of delivered radios every quarter sequentially. In Q4, that's also true year-over-year. IPR revenues were SEK 2.4 billion in the quarter, including a portion of retroactive revenue from one contract that we signed, a somewhat smaller contract that we signed during the quarter. Next quarter, IPR revenues will be impacted by several expiring patent renewal discussions and 5G license negotiations. So, assuming we don't sign those during the quarter, we estimate IPR revenues to be between SEK 1 billion and SEK 1.5 billion in the first quarter of 2022. Börje showed us earlier the graph on gross margin numbers, the rolling four-quarter profile there. As you saw, gross margin, excluding restructuring charges, amounted to 43.5%, which is an improvement of 290 basis points year-over-year with improvements in every segment. In Networks, we saw continued operational leverage. In Digital Services, the share of software as a portion of total sales increased. And, of course, both of these are fully in line with strategy. In Digital Services again, the 5G core sales started to progress well and we saw revenues increasing in the quarter as we deliver on these contracts. To date, we have landed 50 5G core contracts. R&D expenses were SEK 11.7 billion, up from SEK 1.5 billion, following our decisions to invest across the group in the 5G portfolio, as well as the addition of Cradlepoint when we make the year-over-year comparison. EBIT was at SEK 12.3 billion, representing an improvement of 12% versus last year. This represents an EBIT margin of 17.3%, as Börje mentioned as well, which is a 150 basis point improvement year-over-year. I wanted to point out strong growth for net income, up 41% year-over-year to SEK 10.1 billion. This improvement is a result of the improved earnings as such, but also reduced taxes. We'll come back to taxes when we look at the full year performance in a moment here and free cash flow as well. So, let's do exactly that. Let's turn over to the next slide and look at the full year in numbers. Reported sales, as you see were SEK 232.3 billion, which is rather flat compared with last year. But organically, it's a growth of 4%. Again, if we were to exclude China, it's a growth of 8%. Hardware now actually consists of 46% of the sales mix in the group. That's up from 41% in 2020, which is strong as well. It shows the demand for our offering. Gross margin improved 290 basis points again to 43.5%. Continued improvements across the board, despite the drop in IPR revenues of about SEK 1.8 billion less than last year. In Networks, continued operational leverage was observed. The gross margin in Networks was 47%, improvement of 320 basis points. Digital Services had a gross margin of 42%, impacted, of course, by the initial costs for 5G core contract deployment. During the year, we have seen good increases in revenues from the 5G core contracts, and we expect that to continue as the traffic in the 5G network grows. OpEx was SEK 68.8 million. SG&A remained rather flat. We continued to focus on efficiency and tight cost control throughout the organization. R&D, on the other hand, grew as we are investing in the 5G portfolio. We invested SEK 2.6 billion year-over-year. This investment is focused on our cloud-native 5G portfolio in Digital Services and in Networks, of course, in our 5G portfolio, plus the Cradlepoint acquisition which also contributes here. The EBITDA margin came out at 14.6%. This is the metric we use for the long-term target. As Börje now said, this is an important piece of the report today that we say that the long-term target is now going to be reached. That's our expectation and ambition within two to three years. Continuing down the P&L and EBIT margin here, excluding restructuring, we achieved SEK 32.3 billion, up from SEK 29.1 billion. This results in an EBIT margin of 13.9%, which is just at the upper part of the range for the 2022 target, which is reached one year earlier, as Börje said already. Also, a few comments on tax: as our profitability grew, we were able to utilize more of the tax assets we have, the withholding tax assets. The effective tax rate now came out at 21% compared with 35% in 2020. There was a one-off benefit from impaired withholding tax assets that we were now able to utilize in the fourth quarter. If we add that back as a one-off, the effective tax rate would be at 25%, still down 10 percentage units then from 2020. Earnings per share fully diluted reached SEK 6.81. I also wanted to mention return on capital employed, which came out at 18.4%, an increase from 17% last year. Both of these numbers include the cash position to the full extent. We can also calculate excluding cash, and then our OCE would have been 37%. Moving from P&L metrics into cash flow, let's look at how the earnings translated into free cash flow. The cash flow from operating activities increased to SEK 15.2 billion in the quarter, leading to a full-year outcome of SEK 39.1 billion. This is about SEK 10 billion better than 2020. We put a lot of focus on working capital in our company end to end, and we have seen the curve improve since 2017. Of course, in this quarter, the working capital was helped by certain prepayments also by customers. Another important factor in working capital is the increased investments in inventory levels to manage the supply situation. But on the other hand, that was offset partly by an increase in accounts payable during the quarter. Continuing down this table, you see the free cash flow of SEK 13.5 billion. This is really the key metric for us, free cash flow before M&A. It led us to a free cash flow before M&A for the full year of SEK 32.1 billion, an increase of SEK 10 billion from the year before. This translates to a free cash flow as a percentage of net sales of 13.8%. Our long-term target on this metric is between 9% and 12%, and we clearly beat that target in 2021. On the back of the strong cash flow generated during the year and in the quarter, we managed to increase our net cash position by SEK 10 billion. It now amounts to SEK 65.8 billion, and the gross cash position is SEK 97.6 billion, which is up around SEK 26 billion if you compare with a year ago. The majority of that increase comes from cash flow generated in the business, with a smaller part coming from net activities from long-term debt. We have checked the history books of Ericsson, and so far, we haven't found a higher net cash position than SEK 65.8 billion in the history of the company. Vonage – mentioned already by Börje – is expected to close in Q1 or Q2, and that's, as you know, a US$6.2 billion acquisition. We have continued to build up this cash position compared with when we announced the acquisition, and we will be able to fund this with cash on hand, so that's good. Before handing back to Börje, I wanted to point you to page 13 in the report where we included certain key data points, including the Dell'Oro market forecast and some data on seasonality. But with that, thank you. I hand back to you, Börje.

Thank you, Carl. So to sum up, we're proud to report a solid quarter to complete a very strong year for Ericsson. We continue to be well-positioned to take advantage of the market growth opportunities as 5G continues to ramp globally. The business momentum remains very strong. With a strong core mobile infrastructure business, we can now take advantage of growth opportunities in the enterprise segment. Our expansion into the enterprise market is focused on leveraging our capabilities from the core mobile infrastructure business. In a few years, we will have fundamentally shifted our business mix towards a higher portion of revenues coming from enterprises, with a higher growth potential as well as profit potential. Our strategy is on track. We invest in R&D to deliver technology leadership, which can drive incremental growth in our core business. In wireless enterprise growth, we're committed to closing the Vonage transaction, allowing us to continue the excellent work already begun by Rory and the rest of the Vonage team. We expect they will join us very shortly. In the longer term, we will also leverage the platform we get through Vonage to create new, very valuable APIs for wireless communication and network capabilities. That will be delivered through our global network platform. All of this means better monetization potential for both our customers to CSPs as well as Ericsson by providing the 5G APIs to the Vonage global developer community. I'm truly excited about what lies ahead as we gear up for growth. We expect the enterprise segment, as I said, to provide higher growth potential as well as profitability than our core infrastructure business. This makes it now our key focus to really achieve the long-term target of an EBITDA margin of 15% to 18%, and we should be able to do that no later than two to three years out. At that point in time, we will have a better profit potential or profit mix as well as growth potential in the company. With that, I would like to conclude this part of the presentation and give the word back to you, Peter, for questions.

Thank you, Börje. So we will now enter the second part of this session, which will be the Q&A. So, operator, can you please kick off that session?

.

The first question is from Alex Duval at Goldman Sachs.

Congrats on the strong results. Firstly, you delivered another quarter of very strong gross margins, both in the quarter and on a trailing four-quarter basis. I understand you talk about investment in product quality. But I'm just curious to what extent this could be due to having less of a position in China and how much of a structural benefit that is? More broadly, what are the key drivers of your strong gross margins and how sustainable should we expect that to be in 2022? A lot of investors are interested in that, just given one of your competitors appears to be executing better on product quality.

I can start, for sure. I think what we see now when it comes to gross margin, first of all, it's across the board. So, we see improvement in all segments. That's encouraging for us. Not just one part, but all parts. When it comes to the key drivers for gross margin, I think it's really the technology level that we are able to offer to customers in combination with a constant improvement of the cost position of the product or the offerings. I think our R&D team is doing a great job in improving the product, designing it for a better cost position, but also actually better serviceability, installability in the field, which means a lot as well for customer satisfaction, of course, for lead times, but also for our gross margins. I think therein lies the key drivers of gross margin. Anything to add, Börje?

I would only say that the reality is also that we have actually taken market share, which we should remember. It’s more than dilutive in the short term, but very margin enhancing long term. If you look at the numbers, you see actually quite a lot of headwind coming that way. So, we feel quite comfortable about the gross margin going forward, to be clear on that.

Let's move forward to Aleksander Peterc at Société Générale.

I have actually two questions. One is just in terms of regions. Very strong growth in Europe and Latin America. You commented on that already in your opening remarks. But could you perhaps tell us where you are now in terms of market share gains, momentum there? Is there still more to come in this region due to geopolitical shifts? Where are we in terms of 5G rollouts? Have we seen the peak here? Or do you still see strong growth going forward? The second question is more on targets. So, on meeting or exceeding them nearly on all counts. But don't you think there's now time to have a new set of comprehensive and more relevant targets beyond just the EBITDA 15% to 18% goal? When do you intend to update us comprehensively on that front?

We think we're still relatively early in the 5G rollouts if you look on the globe. We will continue to see good demand for 5G going forward. That's for sure. I would also say one more thing – and that's on market share gains. Your question hinted toward the geopolitical situation being a key driver of the market share gains. I will say it's not. In the markets where we have gained footprint, part of it can be explained by geopolitics, but most of it actually is from competitive markets and open markets. The market share gains come more from our product portfolio and the investments we made in R&D to ensure we are at the forefront of performance. We see very high performance rankings, wherever we do them across the board. That's something we invest for, and we are committed to delivering to our customers. You take the goal question on targets.

Yeah, exactly. Aleksander, you asked about the targets. First of all, we exceeded – or sorry, we reached the 2022 target one year early. We do have a different mix, and we are investing in enterprise in a way that was not visible back in 2018 when we set the 2022 target. This makes it a little less relevant. The message we want to send today is that we increased our ambition when it comes to the long-term EBITDA target to 15% to 18%, and we’ve moved it closer in time, saying that we will have the ambition to reach that already in two to three years, as opposed to a more abstract long-term time horizon. I think that's the key here; we haven't broken down the specific parts of the 2022 targets. Now we look ahead, it's the 15% to 18% EBITDA that will guide us going forward.

We'll move to Dominik Olszewski at Morgan Stanley.

Two of them. The first one is on the Networks outlook. Looking at Dell'Oro, they've recently upgraded the outlook for RAM spending out to 2025 by about 4%, and roughly half of that is from improving pricing. Could you comment specifically on your ability to price favorably and maybe tie that into what sounds like limited supply chain disruptions you’ve seen recently? The second question is just more briefly, the margin performance in 2021 is strong given that you have a 5% increase in the hardware mix. Could you give us a perspective on how the mix shift between hardware, software, and services for 2022? Let's exclude Vonage from our conversation?

I can start with the second question on the mix. It’s right; we saw an increase in the hardware mix, which is good because it means we are shipping a lot of 5G equipment to customers as they build out the networks. Of course, this is fully in line with what we want to do and our strategy. At the same time, over time, software will increase its share in Networks capacities. We see that in Digital Services as well as in managed services, moving towards more of a software-like model. The overriding strategy is to increase the software share, which we also see, for example, in Digital Services in this quarter. On the market and Dell'Oro outlook, I think we can repeat: for 2021, the market outlook has constantly increased. Dell'Oro is looking back at 2021 with 13% growth, and now it's at 3% or 4% for next year depending on if China is included or not. The momentum is very good; we see very high demand from customers.

Just to comment on the mix question, one thing we have worked on is to improve resilience in the company. One part of that is reducing exposure to business mix and geographical mix. We feel more comfortable about operating the company with a lower capital or cash position going forward. I think that's essential to keep in mind.

We'll move further to the next question. It's from Francois Bouvignies at UBS.

I have two quick questions, if I may. First, on your 2022 targets, what's the IPR run rate do you assume for the full year 2022? When you look at your EBITDA target in two to three years' time, what is the IPR in this forecast? Do you take the recent negotiations into account or not? The second question is on the OpEx. Maybe Carl, we have many questions around inflation and the impact on the supply chain. Can you help us understand what the OpEx run rate in 2022 may be?

On the OpEx side, as you know, we refrain from guiding on specific individual lines too much on the P&L. It's about the bigger value-creation picture. There are inflationary pressures going on. Our job when it comes to SG&A is, of course, to maintain cost discipline and efficiency to counter that, including salary increases and other inflationary factors. There are investments we decide to make in compliance and security, and we're also investing in R&D. If we see long-term value in R&D investment, we'll certainly do that. For IPR, I don't want to specify too much. We have certain renewals going on, so I’ll refrain from talking about amounts. We strive for SEK 10 billion, historically, and that level is essential to reach and exceed over time.

When you say your mid-term target is to reach SEK 10 billion or so on the IPR, is it what you assume for your long-term targets of EBITDA of 15% to 18%? Or do you assume – just trying to understand your long-term forecast?

We haven't broken down the 15% to 18% into components. We see it as what we as a group will achieve in two to three years from now. There’s a desire and ambition to grow the IPR revenues, but margins in other parts of the business are expected to improve. It will be a mix, and we don't single out individual components at this stage.

We'll move to Sebastien Sztabowicz at Kepler Chevreux.

One question around China. How do you see the revenue trending in the coming quarters in China? Also, could you make an update on the actions you've taken in the country to system profitability, so far where we are staying right now? The second question would be on the US market. I'm looking at Dell'Oro's forecast for the US, calling for only 3% growth in North America in 2022. But when I'm listening to management of AT&T and Verizon, they seem much more bullish than that in terms of mobile investment for the coming quarters with C-band spectrum deployment picking up. What is your personal view on the US market outlook for the coming quarters?

On China, we see that the reduced market share that was announced is the one we have basically in the business. We had some uptick in the fourth quarter, but that's more related to seasonality. We can expect that we will keep this level, around 3% market share. Our ambition is to stay close to customers to regain business and market share. For planning purposes, assume we will stay on that level for now. We have taken actions in China to reduce costs and right-size the organization in relation to this new volume, which has already been addressed.

If we look at the Dell'Oro forecast, it’s hard to predict how the ramp up of a new technology will look like, and that's true for 5G as well. The reality is strong demand for 5G arises from consumers and enterprises wanting to deploy the technology. We see a growing interest across various industry sectors, including mining, manufacturing, and logistics. Demand for 5G is picking up. I’m more optimistic about the growth forecast for 5G, as well as the longevity of the investment cycle. We will see longer investment cycles compared to previous technologies because 5G opens up a completely new field for enterprises.

We'll move to Frank Maaø at DnB.

My question is really, first, how should we think about the target range that you will drive this for in Networks? I appreciate what you say about the 2022 targets for the group no longer being very relevant due to changes in the business mix. But focusing on Networks for a moment, there's a discrepancy between the target range and what you actually delivered. Are there key reasons for any margin erosion year-on-year in 2022? For instance, raw material inflation, or do you expect that to be offset by the efficiencies pursued in design and R&D? My second question is a quick clarification: did you say that there has been a DPA breach, or was that a misunderstanding?

Regarding the DPA, we received correspondence from the DOJ that there is a breach, and they have made that determination. It would be inappropriate to discuss details at this moment.

On the question of the target, the focus should be on the long-term two to three-year-out EBITDA targets. We haven’t broken that down into segments. Some point, we might come back with that. However, we are committed to delivering profitability and growth in Networks for this year, as well as into the future.

We'll move to Daniel Djurberg at Handelsbanken.

Congratulations. Two questions, if I may. The first to Carl, on the tax rate effective at 25%, can you give any guidance or some kind of ballpark for 2022, given the mix you expect? To Börje, except for this cellular enterprise private networks opportunity, a difference between 3G, 4G, and 5G is this fixed wireless access and first responder network, etc. Can you comment on your view of these markets, and if it can also help to prolong the five-year cycle?

I would say the 25% reflects our current mix and profitability levels. It’s a fair assumption to use going forward as well. Tax rates may change over time with geographical mix. Currently, this is a solid baseline.

You're right; we were brushing away some significant opportunities, like fixed wireless access and first responders. In 4G, where fixed wireless access has been rolled out, we see rapid uptake, and this will be even more prominent with 5G networks. Wireless is a much quicker way to build broadband coverage than fixed networks, allowing us to provide true broadband coverage in a shorter time at a lower cost. We believe fixed wireless access will become a large submarket in the 5G consumer market. The enterprises will take longer to materialize, but we see increasing interest in transitioning from 4G to 5G. Several new segments are not yet factored into the market forecast for 5G, so we are optimistic about a longer growth cycle.

We will end this session's last question. I see I have a line here, so please reach out to the IR team or media team, so we can answer those questions. The last question is from Peter Kurt Nielsen at ABG.

A question on Digital Services, please. You reiterate your expectations for 2022, with a positive tilt towards the second half of the year. Your comments on long-term margins potentially exceeding those in Digital Services would lead us to interpret your view that once the business turns breakeven, positively impacted by growing 5G core revenues, the curve towards profitability targets will be steeper than initially thought. Would that be a correct interpretation?

The turnaround of Digital Services will be on the back of better software revenues. My prediction is that as soon as we reach breakeven with sufficient software volume, the development towards higher margins will be smoother and quicker. It requires us to gain volume and software revenue to reach breakeven, which may take some time, especially with our loss in China. However, we are beginning to see revenues generated from the rest of the world, especially as we progress through this year.

Before ending today's Q&A session and presentation on the Q4 results for 2021, a closing remark from you, Börje.

Thanks, Peter. Thanks, everyone, for listening in. We feel we continue to execute on our strategy to extend the leadership in the core mobile infrastructure business, where we see very strong demand for 5G, as we've discussed. However, we also see a great opportunity to pivot the company towards an enterprise business, which will establish over the coming few years. In two to three years, it will meaningfully contribute to reaching the long-term target of an EBITDA margin of 15% to 18%. We expect to achieve this within the next two to three years. We are extraordinarily excited about the outlook for the 5G market and what we can do in enterprise fields.

Thank you.

Thank you.