Ericsson Lm Telephone Co Q1 FY2022 Earnings Call

Hello, everyone, and welcome to today’s call covering the Q1 result in 2022. With me here in the studio in Siesta Stockholm, I have our CFO, Carl Mellander. And on a link from New York, I have our CEO, Börje Ekholm. So as usual, we’ll end this presentation with a Q&A session. So I will start with this message. During today’s presentation, we will be making forward-looking statements. These statements are based on our current expectations and certain planning assumptions, which are subject to risks and uncertainties. The actual result may differ materially due to factors mentioned in today’s press release and discussed in this conference call. We encourage you to read about these risks and uncertainties in our earnings report as well as in our annual report. With that said, I would like to hand over to our President, CEO, Börje Ekholm. So please, Börje, you can start.

Thank you, Peter, and good morning, everyone. I appreciate all of you for being here today as I share our solid quarter. We are achieving positive results from executing our strategy, both in our core mobile infrastructure business and as we expand into the enterprise sector. Before diving into the details of the quarter, I want to highlight a couple of new products we've launched: Interleaved AIR 3218 and Radio 4490, which are part of our leading 5G portfolio that is essential to our success. Let me start by discussing some key events from the quarter. First, I must address the tragic invasion of Ukraine by Russia, which has had devastating effects and represents a severe setback for the world. I am deeply saddened by the impact on those affected. Following the invasion in February, we recognized that our business in Russia could not continue, leading us to suspend all deliveries there. Recently, the EU removed the exemption for public telecom networks from its sanctions, prompting us to announce the indefinite suspension of our business operations in Russia. This situation is complicated since telecommunications are part of critical infrastructure, and many Western governments emphasize the need to maintain Internet access and communication for the people of Russia. We will keep a close watch on the circumstances and engage with authorities as we carry out this suspension responsibly. Consequently, we have accounted for a SEK 900 million provision related to Russia for asset impairment and other extraordinary costs in the first quarter. From a business standpoint, we remain dedicated to our strategy and are experiencing strong momentum with continued market share gains. In the quarter, our organic sales grew by 3%. The global supply chain situation remains challenging, but we are proactively investing in buffer inventory and diversifying our supplier base in light of geopolitical factors, which we expect will persist. While this diversification incurs some short-term costs, it enhances the company's resilience and improves our ability to serve our customers. Our actions have allowed us to meet our customer commitments this quarter, as we believe lost sales have more prolonged effects than carrying excess inventory for a few quarters. We continue our investments in R&D to bolster our market position and achieve further market share, evident in our recent performance. Gartner has recognized us as a leader in 5G network infrastructure in their Magic Quadrant, affirming our focus on increasing R&D investments to maintain a competitive edge. We're directing these investments toward Cloud RAN, next-generation ASICs, our Cloud-Native Core portfolio, and service orchestration. While these R&D expenditures promise strong long-term returns, they do impact short-term profitability since they have not yet generated revenue. Our gross margin stood at 42.3%, and the underlying performance was solid, although it was affected by a significant software contract usually recorded in Q1, which was deferred to Q2, impacting the gross margin by approximately SEK 0.9 billion. Networks' gross margin reported was 44.7%, also influenced by this software contract. Our Digital Services sector showed encouraging growth in the Cloud Native 5G Core portfolio with double-digit results, although we are not content with the overall quarterly performance. We must accelerate sales growth and enhance efficiency to boost profitability. The group's EBITDA margin was 11%, excluding a fair market valuation and the provision related to Russia. During the quarter, we were informed by the DOJ of a breach notice connected to our DPA, and we are currently in dialogue with them. Our current assessment is that the resolution will likely involve monetary and other corrective measures, although we cannot currently quantify this reliably due to the ongoing nature of the process. This limits our ability to discuss historical events tied to the Iraq investigation. Now, looking at customer interactions and market trends, we are seeing promising momentum. As we begin to move beyond the pandemic, I am eager to engage face-to-face with our customers again. These interactions energize us as they provide insights into the business and drive our improvements. Sales growth in Southeast Asia, Oceania, and India fell by 17% year-over-year, attributed to timing issues with orders and project milestones. In contrast, North America experienced strong momentum with a 9% year-over-year increase in sales, fueled by high demand for 5G solutions. Customers in the U.S. are leading the charge in 5G deployment, particularly in the emerging fixed wireless access use case. Sales in Northeast Asia declined by 20% due to project timing issues in Japan, though we still see good opportunities in that mature market. In Mainland China, sales increased, driven by order timing. In the Middle East and Africa, we experienced a 9% drop in sales due to lower 5G investments in the Middle East, though growth in Africa partially offset this decline. Overall, the African market shows promising momentum. Lastly, in Europe and Latin America, sales rose by 15%, with Europe showing an 18% increase driven by Networks and continued market share gains. It is encouraging to witness a return to strong growth in Europe. Regarding our strategy, we aim to solidify our leadership in mobile networks, highlighted by our competitive massive MIMO portfolio.

Yes, I think we lost Börje here for a few minutes. Let's see if we can reconnect with him. As I mentioned earlier, Börje is on a link directly from New York. Clearly, there are some challenges here. But let's try to reconnect with Börje in a moment.

Keep on going. So we look forward to hearing the continuation here of Börje to talk about strategy execution, both on the mobile network side, of course, and the core business that Börje was just talking about now, but then also which is so encouraging now the enterprise piece.

I can start hearing Börje in my ear. Now he is back. We saw him, Börje, you’re back.

Do you hear me?

Yes.

I’m not sure where the disconnect was, but let’s move on to our strategy execution. Our focused strategy remains centered on strengthening our leadership in mobile networks. For example, our investment in the massive MIMO portfolio has proven to be highly competitive and contributed to our market share gains. It's important to note that we anticipate a longer investment cycle in our core business compared to previous mobile generations, primarily due to the broad applications of 5G, which will drive an ongoing need to increase capacity as new applications shift to wireless access. It's worth mentioning that the operators' continued investment in CapEx is significant, although only a portion of that overall CapEx is directed toward active components. As the network densifies and capacity requirements grow, the share of active components we can provide within our addressable market is expected to increase relative to the operators' CapEx. This gives us a strong confidence in the positive outlook for the market segment we are operating in with 5G, and we are committed to investing in this promising and expanding market. Our ongoing research and development efforts have contributed to our gains in the RAN market share outside of China and boosted our profitability. We've introduced new RAN products and solutions, including next-generation ASICs, while making strides toward sustainability with minimal carbon footprints. For instance, our new RAN solutions utilize 25% less power than current offerings. We are also enhancing our position in the 5G core market, with 16 out of the 20 largest global operators using Ericsson’s 5G core. We’ve secured over 60 contracts and have 12 live networks, significantly ahead of our closest competitor. Sales are now on the rise as 5G networks are deployed globally, albeit from a low starting point. Our enterprise strategy hinges on Dedicated Networks and Cradlepoint, which is marking substantial growth, with 52% yearly subscription billings growth due to a strong 5G portfolio. Dedicated Networks is also gaining traction, with our Ericsson private 5G being fast, easy to deploy, and operate while offering a lifecycle assured solution. Through the Global Network Platform, we are setting out to create a new market for network APIs, enabling developers access to advanced network capabilities through 5G. The anticipated acquisition of Vonage has generated considerable interest and traction with clients as we expedite our network APIs execution. A recent highlight is our announcement of the End User Boost application, which improves network quality when needed, simply by pressing a button – ideal for important video calls or gaming. Interest levels are high, and our collaboration with a smartphone partner in Hong Kong attracted over 150 million unique visitors to our webpage. In summary, we believe the market for network APIs is poised to be substantial, and we are well-positioned to lead and develop this market. We are moving forward to close the Vonage acquisition within the first half of 2022. Now, I’ll hand it over to you, Carl, to discuss the financial details of our report.

Thanks, Börje, and good morning or good afternoon to everyone. I want to start by highlighting that we had a solid quarter, although there were some one-time items. The underlying business shows great momentum. Looking at the numbers, we achieved net sales of SEK 55.1 billion, which translates to an organic growth of 3%. Reported sales increased by 11%, aided by a strengthening dollar. Our geographic growth includes North America, which grew by 9% in constant currency, and Europe and Latin America saw a growth of 15%. We gained market share in Europe during the quarter, aligned with our strategy. IPR revenues hit SEK 1.4 billion, increasing by SEK 0.6 billion year-over-year, driven by renewed license agreements. This is consistent with the guidance we provided in the Q4 report, and we maintain our second-quarter guidance for IPR revenues between SEK 1 billion and SEK 1.5 billion. This guidance depends on the timing of renewals and the terms of new agreements. We remain confident in our strong position in 5G and our leading patent portfolio. The gross margin, excluding restructuring charges, decreased by 60 basis points year-over-year to 42.3%. We are actively investing in supply chain resilience, which has contributed to this drop, as well as a lower software mix. We will return to gross margin later. Our R&D investments increased to SEK 10.7 billion this quarter, a year-over-year increase of SEK 1.1 billion, largely due to foreign exchange impacts. Our investments focus on Cloud RAN and new ASICs for industry-leading radio performance and efficiency improvements. Additionally, there were two one-time items this quarter: a SEK 0.9 billion provision related to our Russia business and a SEK 0.3 billion revaluation of financial investments under Ericsson Ventures, totaling SEK 1.1 billion in other income and expenses. Excluding these one-offs, EBIT came out at SEK 5.9 billion, reflecting a SEK 0.6 billion improvement year-over-year. The effective tax rate for the quarter was 29%. The net income reported was SEK 2.9 billion, impacted by the provision related to Russia. Free cash flow before M&A showed a negative SEK 1.7 billion due to our decision to build buffer inventory for critical components. However, on a rolling four-quarter basis, free cash flow before M&A reached SEK 28.8 billion, representing 12.1% of net sales, which exceeds our long-term target of 9% to 12%. Looking at rolling four-quarter EBITDA margins, excluding restructuring, we stand at 14%, compared with our long-term target of 15% to 18%. In Networks, we saw a 4% organic growth this quarter and successfully met customer delivery commitments due to our supply chain resilience efforts. I want to reiterate that the SEK 1 billion in software revenue, which is a discrete contract, has shifted from the first quarter to the second third quarter, impacting Networks' gross margins significantly. The rolling four-quarter EBIT for Networks was 21.3% after Q1. In Digital Services, the gross margin, excluding restructuring, decreased by 70 basis points to 42.9%. This reduction is linked to initial deployment costs from 5G Core contracts, which we are executing for our clients. EBIT for this segment came in at minus SEK 1.4 billion when excluding restructuring charges. We are not satisfied with this overall performance, and achieving our target of limited losses for 2022 is challenging, especially given the increases in R&D for service orchestration and the Cloud Native 5G portfolio. We are thus intensifying our focus on accelerating sales growth and pursuing efficiencies through automation. In Managed Services, the EBIT margin, excluding restructuring, reached 11.8%, partly due to increased network optimization sales driven by 5G deployments. Timing of costs positively impacted Managed Services' margins, which achieved the highest EBIT margin since the segment's inception. Lastly, on Emerging Business and Other, we had a SEK 0.3 billion hit from Ericsson Ventures revaluation, but we saw good progress in underlying businesses like Cradlepoint and Dedicated Networks. In the last two quarters, Cradlepoint experienced record growth, and we launched a new version of Ericsson Private 5G within Dedicated Networks, which is designed for easy deployment and management, and is fully 5G ready, attracting many enterprise customers. Looking at our rolling four-quarter gross margin, it is currently at 43.3%. We believe this rolling view helps clarify the reasons behind margin changes, including software impacts and supply chain investments. As we analyze earnings in terms of free cash flow, managing working capital remains a key focus, particularly concerning supply chain investments and inventory buildup. Elevated inventory levels are expected to persist in the coming quarters. Nonetheless, this strategy is a valuable investment to ensure we meet customer commitments, and the costs involved are far less than the risks of missing these commitments. Additionally, we experienced cash outflows for accrued employee incentive expenses in Q1, which were somewhat balanced by strong cash collections and increases in contract liabilities related to customer contracts and IPR payments. Our free cash flow before M&A ended at a negative SEK 1.7 billion due to the inventory buffer, though our rolling free cash flow remains at SEK 28.8 billion, representing 12.1% of net sales. Post-quarter, we maintain a solid cash position in preparation for the planned Vonage acquisition, with net cash at SEK 65.2 billion and gross cash at SEK 104.2 billion following our recent Eurobond issuance. Thank you, and I will now pass it back to Börje.

Thank you, Carl. To summarize, we had a solid quarter with strong underlying performance, but we recognize that there is room for improvement. Despite the challenging environment, we remain well positioned to advance in our strategic journey. Moving forward, our focus will be on executing our strategy to enhance our leadership in mobile networks while also expanding into the enterprise market in a targeted manner. Mobile infrastructure will continue to be our core, and we will work diligently to strengthen our standing in this area. We experienced positive underlying performance this quarter, and we are optimistic about our future prospects. Our technological leadership will enhance our competitiveness, and we will keep investing in leading R&D to stay at the forefront. Presenting our new products, Radio 4490 and Massive MIMO Air 6428, we are pleased with the growth in North America and Europe driven by 5G momentum and market share gains. Our goal is to continue growing this business through both market expansion and capturing market share. On the IPR front, our strong position in 5G and leading patent portfolio puts us in a favorable spot to finalize the outstanding renewals. In terms of our Enterprise operations, we see similarly positive developments. Our collection of prepackaged enterprise solutions with Cradlepoint and Dedicated Networks is seeing significant traction. We are also working to finalize the Vonage acquisition in the first half of 2022 and begin developing the global network platform. We are confident that our investments in both our core business and the enterprise sector, along with our ongoing cultural journey, will strengthen Ericsson, making it a more resilient company while setting us on a path for higher growth. We have a solid business today and are on track to achieve our long-term target of an EBITDA margin of 15% to 18% within the next 2 to 3 years. Lastly, I want to express my gratitude to all my colleagues at Ericsson who have contributed to this success. Simply put, you rock. I will now conclude this part of the presentation and hand it over to Peter for your questions.

Thank you, Börje. I’m longing for the days when we will transform this on a 5G platform. Maybe once in the future. Let’s now move to the Q&A. So, Nash, we are ready for the Q&A session.

So, we’ll start here. I can’t really see a visible. Maybe, Nash, you could help me with the first question and who is that from?

Our first question comes from the line of Aleksander Peterc from Societe Generale.

I just have a couple of point of clarifications. First of all, given that you have SEK 1 billion of software sales in Networks slipping from Q1 into Q2, should we therefore assume that your second quarter sequential growth may come in ahead of the usual seasonality, I see like probably about 3 to 4 percentage point boost as a result of this slippage. Is this the right way of looking at it? Secondly, on the inventory. So I understand your investment there. Can you tell us if you’re now happy with your inventory levels? Or will this investment into resilience continue in the remainder of the year? And then just finally, a point of detail on your IPR revenue run rate, excluding the impact of delays in renewals, so your normal run rate. Should we think now there is a positive FX impact there given the current exchange rates or do the old levels that you have given previously still prevail?

Maybe, Börje, you can start with the software comments on...

Yes. No, you can take it Carl. You’re already gearing up, I see.

Thank you for the question, Aleksander. As you know, there are various factors to consider each quarter, and we generally don’t provide specific guidance on revenue but reference the 3-year average seasonality. It’s true that the SEK 1 billion in software revenue will be moved to the second quarter. There are always multiple factors affecting our results, and we need to perform consistently to achieve our final outcomes. I suggest looking at the overall seasonality and making your own calculations based on that. Regarding inventory levels, we view this as a valuable investment given the global supply chain situation. We are building a buffer stock to meet customer commitments. If the global component situation changes, we can reduce inventory levels and improve turnover. However, we anticipate that the elevated inventory levels will persist for the next few quarters. Concerning IPR, I don’t want to comment extensively on that right now, but it relates to renewals we currently have in the pipeline. While we cannot provide detailed updates at this stage, we are progressing as quickly as possible between both parties, and we will keep you informed when we have more to share.

Yes. I think it’s important to emphasize that we are focused on safeguarding the long-term value of the contract. We will take steps to protect the worth of our investments in a market-leading IPR portfolio that includes over 60,000 patents. This may involve legal processes, and we will keep you informed as we make progress, but we are confident in our current position.

Thanks, Aleksander. We’ll move to Predrag Savinovic from Carnegie.

So first, I’d like to ask about the higher R&D costs for the quarter. What can you say about this cost level generally for the remainder of 2022? Is this for Q1 alone? Or should we expect a new base effect for the rest of the year? And then secondly, thinking generally about cost inflation, what is your ability here to pass higher costs to customers? And I guess, Ericsson now you’d like to charge more for innovation and product launches. Börje you spent some time on talking about very nice launches in Networks in the intro. So question is, is general ability to pass costs excluding new products and also to what degree portfolio innovations receive uptake in orders within a year that would help you manage, say, logistics cost or input costs?

Yes, I can address both points. At the R&D level, if we assume that we will maintain a higher investment level, it's because we aim to be leaders in mobile infrastructure. You can see evidence of this in our Cloud RAN investments, our ASIC investments, and our 5G Core portfolio service orchestration. We intend to continue moving forward, as we believe the long-term returns on these investments are substantial. To draw a comparison to 2017, we're now exceeding SEK 10 billion in the run rate for R&D, which has significantly improved the company's profitability. While the returns from these investments may take a few years to manifest, they are significant, and we see the same potential with our current investments in Cloud RAN and service orchestration. We believe this approach is the correct execution strategy for a technology company to enhance gross margins in the long run. Our commitment to leading in technology remains strong, and we anticipate that this will positively impact our gross margins over time. Regarding cost inflation, it is indeed a challenge, as costs, particularly for salaries and components, are rising. We witnessed considerable increases in the first quarter, but the underlying performance remains solid. It's crucial to note that the introduction of new products is how we aim to protect or enhance our gross margins in the long run. In the technology sector, staying at the forefront and using product substitution is essential to define future gross margins. This is why we are investing in future ASICs, as they will help us achieve better performance and enable us to optimize pricing. Thus, your two questions are interconnected.

Thanks. Anything from your side, Carl?

No. I think Börje said it all.

Great. Then we’ll move to Peter Kurt Nielsen at ABG.

I’d like to turn to Digital Services, please. Over the past couple of quarters, your commentary on Digital Services and your confidence and outlook has been significantly more positive. Now we seem to be taking a step back. In addition to the increased R&D spend, can you elaborate a bit on what are the challenges there? And it sounds like you’re seeing some unanticipated challenges here also and unanticipated need for higher spend. Can you elaborate a bit for us to better understand why the outlook has now become a bit more cautious than it has been in the past, particularly given your positive commentary over the last couple of quarters, that will be appreciated.

Börje?

Yes, it's a great question. Thank you for that. We are noticing a somewhat softer top line, which is a reality we have to face. However, we are seeing very strong growth in our underlying 5G portfolio and good development in our BSS solutions. There are positives, but also some areas where we are falling short. We are being more cautious about our outlook and feel it is necessary to emphasize sales execution more to improve our top line compared to the first quarter. We believe our product portfolio is very competitive, as we serve 16 out of the 20 largest operators. Therefore, we feel we have a strong position, but we clearly need to improve our execution. This hesitation reflects our performance, not a change in the market outlook. We still see a robust market outlook for our solutions and our competitiveness, but we have not been able to execute as effectively as we should.

Thank you, Börje. And thank you Peter Kurt. We’ll move to Sébastien Sztabowicz from Kepler Cheuvreux.

One question on the business trends for the coming quarters. How do you see as a business developing in your main geographical markets for the coming quarters? Where do you see some specific growth opportunity? And where do you see some potential challenge taking into account maybe the contract or the underlying trend? The second one is on the specific annual contract slippage. What kind of visibility do you have to signing it in Q2? Is it something that is certain or there is still some uncertainty on the signing of this SEK 1 billion contract?

So I’ll take the second one, at least. We are certain that this will come in. It’s moved from first to second quarter. That’s specific.

You can start.

To start, the updated projections from Dell’Oro reflect strong momentum in 5G deployments. The growth for 2022 is now expected to be 5%, with 8% growth in North America. Börje has previously discussed the necessity for densification in North America, especially with the second part of the C-band spectrum becoming available in 2023, indicating preparations are already underway. The momentum in North America is likely to persist. Additionally, in India, 5G spectrum is set to become available later this year, representing a significant market opportunity with substantial potential for expanding our presence.

Börje, anything to add?

5G is increasingly being rolled out globally. In the U.S., we see an acceleration, and India and Europe are also starting to embrace it. This transition is happening now, and we are well positioned in this market with confidence in our growth outlook. We are currently the clear market leader outside of China and will continue to invest in this area. It’s important to note that 5G, as an access technology, is expected to be a higher level than previous generations and will involve a longer investment cycle. This is due to the onboarding of new use cases onto wireless access technology, such as fixed wireless access, which is driving rapid traffic increases in markets where it has launched, particularly in North America. Additionally, we are seeing new applications like enterprise use cases and private networks that integrate with the macro network, leading to more traffic on wireless networks. Augmented reality applications are now emerging, contributing to traffic that didn’t exist before. Consequently, we view 5G as becoming a more ubiquitous technology than 4G. This shift indicates a different investment pattern than in the past, making us optimistic about the future of wireless technology, which we believe will play an even more significant role going forward.

Thanks, Börje. And thanks, Sébastien. We’ll move to Francois Bouvignies at UBS.

Can you hear me okay?

Perfect.

Okay. Good. It’s actually perfect because Börje as I have a follow-up to your point. So when you look a bit beyond 2022 and maybe 2023 and the RAN market growth, when we listen to the U.S. operators, some of them are talking about maybe peak investment in 5G in 2022. At the same time, we see the Chinese operators that for 2022 are talking about lower investment in 5G because of some, say, lack of applications. So I mean how can we look at the U.S. market specifically in ‘23, given these comments, I mean, how it can be different than maybe the Chinese market? Maybe you can explain why we would not see the same trend than the Chinese market in the U.S., is there is any specific reason behind that? And the second thing is on the enterprise, how much do you estimate your enterprise channel is as a percentage of revenues today? And what is the growth rate? If you can give some color around your current exposure toward the enterprise business today as a whole would be very helpful?

Please, Börje.

Yes. Starting with the first question, it is a great one and reflects some uncertainty. However, there are a couple of developments to consider. First, China has established a robust network already. This means that to generate additional capital expenditures, it really needs to increase the traffic on that network. China is a few years ahead of the rest of the world in this regard. Therefore, we expect to see applications being developed on Chinese networks that will drive traffic, largely due to the capacity they already possess in their 5G network, putting them ahead of Western countries. Specifically for the U.S., we observe that the C-band build-out is continuing into 2023, which, as Carl mentioned earlier, will drive capital expenditures. Additionally, it is significant that there is a shift in the capital expenditure needs towards more active components for network densification. A large portion of capital expenditures, roughly three-quarters, is directed towards fiber, concrete, steel towers, and similar infrastructure. Our contribution is just a small part of that. Nevertheless, we believe that given the growth in underlying network traffic, our portion will continue to grow as well. In North America, as networks become increasingly loaded with new traffic, they will also continue to expand their capacity. This is why we still view 2023 as a strong year for wireless capital expenditures.

Good. Thanks, Francois. We’ll move to the.

We didn’t answer the enterprise, maybe Carl can take that.

Yes, Francois, thanks for the question. And no, I can just say, I mean, it’s a relatively small scale, of course, of Ericsson’s total business today, but it is a fast-growing sector. And that’s why we are obviously attracted into it and focus so much on the enterprise side as part of the strategy as well. And we have talked about the overall addressable market for our customers is growing very rapidly into the future. And we believe probably this is as large as the consumer side or as the CSP side as well going forward. Of course, it will take a little bit of time. And as Börje said, we are certainly working and engaging with many, many enterprise sectors, et cetera, to stimulate that demand and show what is possible with 5G. And we see great interest also from the enterprise side. So I would say today, rather small base, but high ambitions and a high growth rate in that market going forward, which is underpinning our statements that we believe that the fifth generation wave is going to be stronger for longer. This is what will come in, in addition to the traditional RAN business.

Thanks, Carl. Then we’ll move to Industry. So please.

Congratulations on the strong underlying performance. I have 2 questions, if I may. The first one regards to what Börje said earlier on in the call that the resolution of the DOJ matters likelihood result in monetary and other measures. I’m interested in what you can say about what other measures potentially could be? The second question is regarding Digital Services. You say that you’re happy with sort of what you have, but it’s a question of deliverance. So my question there is, do you see any need for possible changes in structure or leadership within Digital Services?

Maybe you’ll take the first card and I can answer the second one. The reality is we have been on a journey to execute in Digital Services. This is an area where we’ve had losses for a long period of time. So, of course, we need to look at what can we do to improve sales execution, what can we do to improve our delivery of competitive products to the market. But what I’m also trying to say is we have very strong portfolio today. The team has done an outstanding job of getting that portfolio onto the market. And when you look at winning 16 out of the 20 largest operators of 5G Core, for example, that’s a pretty good achievement. That’s actually something to be very proud of as a company. So what we see in the numbers is we needed to do further better than that, right? And that’s why we’re also signaling it’s a challenging target. But we’re also improving or increasing our efforts to improve sales execution even further. We have more to do also on the portfolio. We can invest in automation, service orchestration to have a competitive product portfolio. And here, we have more to do. But we will continue to do that and execute to the best of our ability. So the commitment on our side to reach a satisfactory margin out here in the next few years is the same as before. But we see a bit of need to improve that execution following Q1.

In response to your question about the DOJ, we are currently engaging with them to address and discuss these matters. However, we have limitations on what we can share at this time, so I cannot speculate on the measures the DOJ may take. We wanted to acknowledge in our report that it is likely the resolution will involve both monetary and possibly other measures. I cannot provide details on what those may be at this point, but we will keep you updated as much as we can when there's more information available.

Thank you. We’ll move then to Daniel Djurberg at Handelsbanken.

I would like to start with the Digital Service again because we observed double-digit growth in BSS and 5G Core, even though revenue is still down 2%. Is the significant drop mainly due to legacy sales or is there another reason? Additionally, regarding execution, is it primarily related to cost control or sales execution where you're not fully satisfied? Lastly, regarding Managed Services performing well with a 23% gross margin this quarter, should we consider this a new higher level or just a temporary positive impact for Managed Services?

If you take, Carl?

I can start by discussing Managed Services, which is currently at a good level and represents the highest we've seen so far. In Managed Services, there is a reliance on the timing of costs. We typically experience seasonally low costs, and this quarter we had particularly low costs that have been accounted for. I believe we will see this normalize over time. However, it's important to highlight the positive trend in network optimization sales, which serves as a significant margin driver for us and certainly helps improve margins. I encourage you, Daniel, and everyone to focus on the four-quarter rolling margin profile of Managed Services. This is relevant for all businesses, but particularly for Managed Services due to the cost fluctuations that occur from quarter to quarter.

Yes, your question is correct. We are experiencing double-digit growth in 5G Core, which is a strong point for us. We have discussed the number of contracts we have secured, and it's notable that out of the 20 largest operators, 16 are on our 5G Core path, which is an excellent achievement and enhances our offerings. However, we are in a transition phase between our older portfolio and new offerings. The 5G Core contracts come with initial costs, but revenues will follow later, as we have mentioned previously. This quarter, the growth is still at a relatively low level, and the majority of revenue will be generated as more networks go live and subscribers are migrated to them. Meanwhile, legacy sales are not keeping pace, which is why we want to focus more on driving the top line.

Thanks Börje. Thanks, Daniel. We have another minute. I had the last question actually coming from Alex Duval at Goldman Sachs. So please, Alex.

I’ll keep it quick. You talked about your product power consumption being 25% better than current products. I just wondered how that compares in your view to products from the competition? And you’ve obviously referenced R&D investments, so I just wondered if there are further improvements we should be thinking about that can help sustain your competitive position there?

Yes, the key to our long-term success is that while our power consumption is currently 25% better, it is expected to improve even further. This is what we are investing in. Staying ahead of the technology curve is crucial for us. We prioritize leading in power consumption, spectrum efficiency, and network performance, which helps us maintain a strong gross margin and operating profit. Our commitment to investing in advanced technologies has driven the company’s turnaround. As we continue to launch new products that meet customer needs, we see positive interactions from our customers. This focus will remain a priority for us.

Thanks Börje. And thanks, Alex, for that question. I guess before we end the call, you want to make a final remark, Börje?

Thanks, Peter. Thanks, everyone, for joining us for this call. We, as we said, put another solid performance or a solid quarter to the record. We feel the underlying performance in the business is strong. There are some one-time effects this quarter, it’s unfortunate. They happen in the business. But when you look at the real performance, it’s good on our execution on increasing our market share and footprint and we can grow top line, but we also have a good operating performance when you adjust for the one-time effects. So we are confident about our strategy, continue to extend the leadership in the core mobile infrastructure business and gradually build a presence in the enterprise space. And with those investments, we’re going to go to a higher margin profile as well as better growth profile in 2 to 3 years. So we’re very excited about that journey and look forward to executing on that. So thank you very much for joining the call.