Ericsson Lm Telephone Co Q3 FY2022 Earnings Call

Good morning everyone and welcome to today's presentation covering the Third Quarter in 2022. With me here today I have Ericsson's CEO, Börje Ekholm and our CFO, Carl Mellander. As usual we will end the presentation with a Q&A session and in order to ask questions you will need to join the conference by phone. Details can be found in today's press release as well as on the website, ericsson.com/investors. Please also be advised that today's conference is being recorded. But before handing over to Börje Ekholm, I would like to say the following. 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 results may differ materially due to factors mentioned in today's press release and discussed in this conference call. We encourage you to read about these risks and uncertainties in our earnings release this morning as well as in our annual report. With that said, I would like to hand over the word to Börje. Please, Börje?

Thank you, Peter. Good morning everyone and thank you all for joining us. I'm pleased to present another quarter with solid underlying performance, and we continue to see robust performance in our business as well as market momentum. Since 2017, we've been able to increase our RAN market share from about 33%, up to 39% if we exclude Mainland China. We've taken market share from all competitors, including our European peers, and we have continued to add to our global footprint during the past quarter. So we're really talking about some massive gains in overall footprint for Ericsson. These achievements are really based on our focus on technology leadership, and I would say technology leadership allows us to offer our customers leading technologies and highly competitive solutions. Equally important is that it allows us to do product substitutions to manage our margins. In the quarter we also took a key step in our enterprise ambition by closing the acquisition of Vonage. It's really an exciting step for Ericsson, as Vonage will be a critical building block in our enterprise strategy, and it will underpin a full range of cloud communication solutions. We aim to transform the way advanced 5G capabilities such as speed, latency, and network slicing are exposed, consumed, and paid for, and we believe this will ultimately help our customers to monetize their network. We expect the Vonage acquisition to be highly accretive, and it complements our enterprise wireless solution offerings with Cradlepoint and dedicated networks. Overall, we expect our enterprise offering to have a growth potential north of 20% per year. So let me go through some of the key takeaways from this quarter. In the quarter we saw organic growth of 3% with EBITA of SEK 7.7 billion and a margin of 11.3%. We saw gross income increase by SEK 3.4 billion and reached SEK 28.1 billion. This increase comes despite lower IPR revenues and was driven, of course, by the consolidation of Vonage, but also a strong performance in our network segment. Let me comment a bit on IPR. We believe we are in a very strong patent position with more than 60,000 patents, and when we sign license agreements, there will be a retroactive compensation paid for the unlicensed period, and thus it's not really lost sales, but it has a delay. And here we will continue to seek to optimize the value of our portfolio. So it can always lead to some delays in revenue recognition. Networks saw organic growth of 7% if we exclude IPR and this was primarily driven by North America, where operators continue to be at the forefront of 5G development. Gross income increased by SEK 2 billion and reached SEK 21.4 billion. This result really shows the attractiveness of our leading portfolio built on technology leadership. And this is something we will continue to invest in to strengthen our position and competitive advantage. As I already referenced, we took an important step in the quarter by closing the acquisition of Vonage, and Vonage is really a key cornerstone in our expansion into enterprise. We expect the acquisition to help our customers accelerate their digital transformation while also shaping how 5G networks will be exposed, consumed, and paid for. In the 4G world, operators could largely only monetize the network through a subscription model. 5G features such as speed latency, but also network slicing offer new and important revenue opportunities, but we don't see that they can be monetized through subscriptions. They have to be paid for as they're consumed. We believe that these new features will be paid for separately for that reason, and the ability to do that will be through what we call network APIs. And with Vonage, we have the ability to drive and develop this market. We're really creating a new market for us and for our customers. And here it's interesting to see that we're already working very intensively with front runner customers, basically to develop the APIs but also to bring them to the market, and our customers recognize that this will be a very important monetization engine for them going forward, so they can start to monetize the network investments that they're making. And creating those new revenue sources for our operator customers actually is of course critical because if they can't monetize their investments in their network, they will ultimately not invest in the network. So for us, we believe this will also increase the demand in our business for mobile infrastructure. So we're excited about welcoming Vonage to the Ericsson family, and we look forward to working together now with them to generate value for both Ericsson, but also for our customers, of course. Following the reorganization earlier this year, we today present the first quarter for cloud software and services. And as you know, this is a core part of the business, but we also see it's very attractive, but we have not yet realized the full potential in this business. We have a very strong starting position, and by combining the two market areas that we, or business areas that we've done when we formed cloud software and services, we believe we can create a stronger unit with clear synergies. And the new management team is further accelerating the transition to profitability and that includes, of course, a strong focus on driving costs down, but also to leverage and solidify our technology leading position as well as market leadership position. We expect this business to have gradual improvements, and we look forward to discussing more of the strategy and more of the plan to reach profitability at our upcoming Capital Markets Day. We continue to engage with the DOJ and the SEC in relation to the 2019 investigation report and the breach notices, and we're fully committed to cooperating with the government authorities. We're also continuing to work to strengthen our culture as well as ethics and compliance program. This work remains one of our key strategic priorities and an area where we will continue to invest in to make sure that we are also a leader in that area. With that, let me give the word over to Carl Mellander, our CFO.

Thank you, Börje, and good morning to everyone. This is the first quarter we are reporting under the new structure with four segments: networks, cloud software and services, enterprise, and others. It's also the first quarter where we include Vonage in our financials; the acquisition was completed on July 21st. Therefore, we have two months and ten days of Vonage's contributions in our numbers for this quarter. Before I delve into the figures, I'd like to clarify that I will use some gross numbers, all adjusted for currency and comparable units, which I will refer to as organic. Profitability numbers will exclude restructuring costs, and I mention this now to avoid repetition later on. Now, regarding the figures, net sales totaled SEK 68 billion. Organic growth was seen in three out of five market areas, with the group showing 3% organic growth, despite SEK 1.1 billion less in IPR licensing revenues compared to Q3 last year. Reported sales grew by 21%, aided by favorable currency conditions and the contribution from Vonage, which added SEK 2.9 billion in sales this quarter. IPR totaled SEK 1.6 billion, in line with the previous guidance we provided in the Q2 report, where we estimated between SEK 1 billion and SEK 1.5 billion. Gross income increased by approximately SEK 3.4 billion, despite the lower IPR revenues I mentioned earlier. This growth came primarily from sales increases in networks, supported by footprint wins, along with SEK 1.2 billion contributed by Vonage. Gross margin was 41.4%, down from 44%, primarily due to lower IPR revenues impacting it by about 1 percentage point, as well as supply chain costs in Networks. Additionally, we have seen a significant share of services business reflected in the Networks segment, stemming from our secured footprint gains over time. In R&D, which is crucial for value creation in our company, we increased investment by SEK 1.7 billion in Q3. Currency exchange accounted for about a third of this increase. Our focus in network investments includes Ericsson Silicon and next-generation ASICs for superior radio performance and energy savings. We are also investing in the Cloud RAN portfolio, providing our customers with more flexible deployment options in Networks, and enhancing our enterprise wireless solutions, particularly in Cradlepoint and dedicated networks. SG&A rose by SEK 3.2 billion, with around SEK 0.7 billion attributed to currency effects. This increase is primarily due to the consolidation of Vonage, which added SEK 1.8 billion to SG&A, including intangible amortizations that are excluded from our EBITA metric, along with one-off costs. The combination of these intangible amortizations and one-offs amounted to approximately SEK 0.6 billion of the aforementioned SEK 1.8 billion. Regarding EBITA, it was SEK 7.7 billion, reflecting a year-over-year decline of SEK 1.6 billion, resulting in an 11.3% EBITA margin. This decrease includes one-off costs related to the Vonage acquisition. Essentially, the growth in gross income, driven by gaining market share and increasing sales, was overshadowed by rising operating expenses, primarily due to technology investments, the addition of Vonage, and currency fluctuations. This resulted in a net income of SEK 5.4 billion, supported by a lower income tax rate, which was 25% for Q3 compared to 30% last year. Finally, free cash flow stood at SEK 2.5 billion, as we continue to increase inventory to meet customer delivery timelines, which I will discuss further when we examine working capital and cash flow. Over a rolling four-quarter period, our EBITA margin reached 12.8%, compared to our long-term target of 15% to 18%. Now, let's move on to the segment numbers, starting with mobile infrastructure, which includes Networks and Cloud Software and Services. In Networks, we reported organic growth of 4%, and when excluding IPR, growth was 7%. Gross income increased by SEK 2 billion year-over-year, following the sales growth we mentioned earlier, with a gross margin of 44.4%. This margin was affected by lower IPR revenues and increased component costs. In Cloud Software and Services, organic sales fell by 5%, mainly due to reduced IPR contributions, representing 18% of this segment. There were also some decreases in the volume of service contracts. Despite this, gross income remained stable with a margin of 32.1%, and EBITA was a negative SEK 0.7 billion for the quarter. On the Enterprise front, this segment now makes up 8% of our total sales. We saw strong growth of 21% organically, primarily driven by success in Cradlepoint. Reported sales were up about SEK 3.6 billion as a result of including Vonage, which contributed SEK 2.9 billion. However, EBITA in the Enterprise segment was negative SEK 1.2 billion, a decline from negative SEK 0.5 billion a year prior, largely attributed to acquisition-related one-off costs and accounting effects from the acquisition. Nonetheless, it's worth noting that Vonage was EBITA positive during the quarter.

Thank you, Carl. So to sum up, we've delivered another solid quarter with good business momentum. As you know, our strategy is based on leadership in mobile infrastructure and the focused expansion into Enterprise. Mobile infrastructure clearly remains our core and we're fully dedicated to continue to invest in technology leadership to further strengthen our position. In line with our strategy, we're adding to our footprint, which strengthens our scale and competitiveness. The second leg of our strategy is a focused expansion into Enterprise. Here we added a significant building block by closing the acquisition of Vonage, and we're now starting to have a meaningful presence also in the Enterprise space. In Enterprise Wireless Solutions, we almost doubled our sales compared to last year. I would say our strategy puts Ericsson in a position to continue to lead the industry as 5G is rolled out and transform every sector of our society. As you know, network development in North America has been very strong, and after expected record CapEx in 2022, operators are guiding for lower CapEx in 2023. We expect levels to hold up well in 2023, but they will be at a lower level than in 2022. Globally we continue to further strengthen our position by increasing our footprint and we expect to see lower sales in North America for Q4 to be compensated by growth in other regions. However, these contract wins will ramp up to full volume in 2023. We expect our added footprint to give full effect next year, and we expect to see overall growth in networks globally in 2023. To add footprint that's been a critical part of our strategy since 2017 and it will continue to be a priority. We know from experience that early stage large scale rollout projects tend to be dilutive to gross margins. However, the increased volume will increase total gross income and thereby allowing us to continue to invest in technology leadership, which has been the core of our success over the last few years. And if you look at the global 5G market, it's important to remember here that the 5G cycle is really just starting. The fact is that less than a quarter of global LTE nodes have been upgraded to 5G mid-band so far. And as you all know, mid-band frequencies are critical to fully realize the potential or the performance of a true 5G network. So I would say this shows that there is still a lot of growth potential in the market. I'll just pick one example, India, where we will see a rapid build out of mid-band Massive MIMO. India will likely have the strongest digital infrastructure outside of China, which will drive the digitalization of India. Combined with the new use cases for 5G, both for enterprises but also for consumers and that includes, for example, fixed wireless access, we see that the demand for network performance and network infrastructure will continue to be at a high level. So we see the 5G cycle both to be longer and higher than previous cycles and previous mobile generations. I'm convinced that with 5G, everything that can go wireless will go wireless. So as we continue to navigate a very complex macro environment and that includes, as Carl mentioned, clear inflationary pressures, but also geopolitical uncertainty. We remain very excited about our future and we're dedicated to the execution of our strategy based on technology leadership. Regarding inflationary pressures, we are already taking actions, and this of course includes a focus on cost and really making sure that our cost efficiency is the key way to allow us to continue to invest in R&D because again, technology leadership is really what makes the difference and will allow Ericsson to continue to grow. So we are convinced that that also is the right focus to remain successful in this competitive market. And we are super excited about our position in this exciting market. One more thing, and that is we are very committed to continue to strengthen our culture, and that of course includes the ethics and compliance program. This is one of our key strategic pillars and an area we will continue to invest in. Based on our strong position, we remain committed to reaching our long-term target of an EBITA margin of 15% to 18% no later than 2024. And, in December, we'll host our first Capital Market Day since the pandemic and we really look forward to welcoming you all in New York. Then we can discuss more in detail our strategy, market developments, and our plans to build the competitiveness and future value creation in many years to come. Finally, I would like to say a big thank you to Team Ericsson. It's a lot of hard work and dedication that's going to make our current position really and the strength of our current position. So I'm proud to be part of this team, and thanks everyone for that. With that, over to you, Peter, for questions.

Thank you, Börje. We now have 30 minutes for a question-and-answer session. Our first question comes from Aleksander Peterc at Societe Generale. Hello, Aleksander.

Yes, good morning. And I hope you can hear me well.

Perfect.

So yes, thank you for the question. So the first question I would have really is on the development in Networks margin. So we see that the footprint acquisition costs are back, so this may be good for your longer-term growth, but near-term that some pressure. So could you just give us an idea of the growth margin decline in Networks sequentially in the third quarter? Is that more down to this footprint acquisition push or is it still higher inflationary cost pressures than those that you saw in your previous quarter? And then obviously in Q4, you have the usual down seasonality in your gross margins in Networks, but from what I understand, this should be now compounded a little bit by these two effects. Could you a little bit develop on that? And then just secondly, very briefly, if you could give us an idea of where the restructuring costs will be directly is at COGS, R&D, or SG&A, I mean which division? Thanks.

Carl, do you want to start?

Okay. So thanks Aleksander. Regarding the networks gross margin then and you ask specifically about sequentially. I understand that, but I just wanted to repeat here. The year-over-year comparison is then impacted by the IPR difference. So quite a large amount on total group is SEK 1.1 billion and 82% of that is in Networks. But otherwise, I would say there are a couple of factors impacting networks here. One is the, what we have talked about around the component and supply chain cost where we are investing, but it's also a higher cost, which we absorb in there. And the other part actually comes from something very positive and that's the growth that we see and early stage large scale contracts that we're executing on where the services share is higher and that has an impact on gross margin. And we have seen before that we might have that initially impact, but then of course we recover over time as we roll out. So I would say those are the key impacts there on Networks.

I would only add that you already saw these effects in the third quarter.

Yes.

Then you asked about the restructuring and I like to think that what we are going to do is to digitalize and actually simplify Ericsson that's really our focus. So it's more of a gradual improvement and we're going to work on taking costs out. I would say it touches both COGS, but also of course the G&A structure in the company and exactly how the split is. Let's discuss that at the Capital Markets Day. But we are going to tackle both of these sides because I think ultimately a leaner company will be a more agile company and will be better at responding. So I would also say, we kind of recognized this earlier and that's why we launched the group function global operations, and you know that from the spring of this year. And that the ambition with that function was actually to drive a, call it a better customer experience by simplifying our processes and digitalizing them. And that's something that we will now more or less accelerate in light of the macro uncertainties.

I can also mention that our efforts on the cost side go beyond just being a defensive strategy against inflation; they are also about maintaining our competitiveness. We are continually working to enhance our structural cost base to ensure we remain competitive in both technology and pricing in the market.

Thank you, Aleksander for those two questions. So thank you. And now we are ready to move to the next question from the audience. And that one will come from Andreas Joelsson at Danske Bank. Good morning, Andreas.

Good morning, Peter and good morning everyone else. I know that you will come back to this at the CMD, but I need to still ask about Cloud Software and Services. We have seen these deployment costs for a while now, and can you just explain a little bit why there is a delay in the positive impact that we should expect? Has anything changed structurally in this that you see? And also if we now have a weaker macro situation and the pickup of 5G is further delayed, how will that impact the unit going forward? And if I may also on IPR it's SEK 1.1 billion lower is that, there is FX in that of course, but it's the majority of that related to Apple and the litigation process that you're into right now? Thanks.

Should I take the first part, the IPR part?

Yes.

The reality is we have higher cost for new product introductions. So it has a bigger service content short-term, and that's what you see impacting, call it the margins in Cloud Software and Services. So we knew that from before, and you've seen that before, that continues to be at a high level. We are still only seeing the early stages of deployment of the 5G Core. So revenue wise, they lag these costs, so they are impacting that's no doubt about that. I think it's also fair to say that we don't really yet see a slowdown in the rollout of 5G, and I really don't expect to see that either, for the simple reason that traffic at the end consumer continues to grow at a healthy rate, so there will be a need to migrate customers over to 5G. So we will see 5G networks increasingly carry traffic in the future. That's at least what we see as of now. Then I would say in order to restore profitability or reach profitability, which is really the, that's the first step, I think we have a much higher potential in this business than that where we can capitalize on our leading position in a good way. But in order to reach that, the first phase here, we need a tighter control on costs. And that's why we put together two earlier business areas into one. So we get a stronger focus on having cost control, but also gets in, this on product development because we had overlapping product portfolios between the two. As you can recognize, this takes some time to take out, but that is what the team is working on to really call it become leaner and much better cost structure in the combined entity, leveraging the synergies across the different offerings. So that's where we are working. That will of course, take some time to get the full benefit, but we should start to see that coming into next year and be in a much better position. So then we'll get helped by the ramp up of 5G, but also that we're addressing our own call it cost position.

Good. And the last question was around IPR and the delta there. And yes, I can say it's, the biggest thing here is of course contracts under renewal negotiations. So and as you know, just as a reminder, when such contracts are entered into, we also have the retroactive effect of that in our P&L from the date of expiry. Just so you know that.

Thanks.

Good morning everyone. Can you hear me okay?

Perfect.

Great, thank you. My two questions were first on the Vonage acquisition. Can you give us a bit some light on the underlying performance of Vonage because you just acquired, so just wanted to reconcile the numbers in the early days of the integration, and how should we think about the enterprise profitability trend going forward after a number of one of maybe this quarter, just trying to understand the profitability trend, that we should take into account in the next few quarters? And my second question is, Börje, you talk about 5G use cases being a driver of the growth and adoption specifically in India for example, for next year you already see some contracts. And we asked you many times, I guess in the past the use cases for 5G that you see that could be a game changer for the adoption. Can you list maybe, some use cases that you see particularly interesting, and how is it evolving there? Because when we talk to two operators, it doesn't seem that obvious, or in terms of use cases, especially like for example, in China when they struggle to see much application or use cases just to have something, to have your perspective here and how is it evolving? Thank you very much.

Yes. Why don't you start with the other, I can go first with the 5G use cases and you take the other two.

Sure. Yes.

Yes, this is an interesting question. The reality is when 4G was introduced, everybody would say, if you ask operators that you don't really need 4G because you had 3G. That proved to be incorrect. And the reality is with 5G, we're starting to see a number of emerging use cases. Maybe the first one is that's actually already today commercial is fixed wireless access. And we see that gaining traction quite fast, for example, in North America. But we also see what other operators around the world are doing, like in India. So we see that as a completely untapped revenue pool today will be captured by building out, of course, the 5G network, both in mid-band, but also in millimeter wave in order to capture that. We think that has a massive potential. So that's one thing. But then I think the other, where we're starting to see emerging use cases, for example is the connectivity, simple connectivity to an enterprise where in the 4G world, it was typically fixed access. Today, we are starting to see some SMEs, the fact they are using wireless as the primary connectivity. And that's what we're seeing is benefiting the growth in Cradlepoint for example. And just to give you another case is of course within factories so private networks or dedicated networks, there we see a rather large amount of use cases. For example for self-driving vehicles, self-guided vehicles, factory automation, et cetera used in mines, enterprises and you're already starting to see that market shaping up quite substantially. Part of that market will be captured directly from the enterprises of course, and that's why we're building up an enterprise presence. Part of that will be captured by the operators. And I would say we don't know how that market is going to shape up, but it will happen. And the last element I think is equally important is we're starting to see, and here we have worked together with a number of application developers on how they need to use speed, latency to drive new applications. And those are clearly, where we believe our Vonage acquisition will fit perfectly in order to have a platform to present those. And here, what are we talking about? We're talking about collaboration software, we're talking about XR, VR applications that will start to come and we will very soon start to see devices that will need the speed latency, ability for mobile edge compute, et cetera. And those will actually spur demands for completely new use cases. So I think we need, when we talk about this, everyone looks for the silver bullet, the magic killer application, so to say. I think we will start to see those emerge in one, two, three years as networks really get fully developed, that's when you start to see the benefit of 5G in society. So what we see is still a very strong development and a very exciting development. If you only offer mobile broadband, I think then it's going to be a different market, then it's only a, call it capacity add onto 4G, then it's very different. But we see those new use cases starting to develop now.

I think Börje you basically addressed the other question very well as well on the enterprise side, but maybe a few more words there on enterprise. Of course for Vonage it is early days. Honestly, we have two months and 10 days. And as we said, and I think this is quite important during this period, Vonage underlying, if we include, exclude some of this acquisition accounting and one-offs and so on, they are EBITA positive and also cash flow positive in the quarter. So that's a very good sign. I think very important and Börje described this is about growth here in the Enterprise side. We see great growth in Cradlepoint, and we expect that in Vonage as well. And on Vonage of course, that we're looking at this through three horizons or three lenses, right? The existing Vonage business to boost that and continue growing that; and secondly the synergies from Vonage offerings into Ericsson's global footprint of customers; and then thirdly, of course, what Börje really talked about the network API side of the business where we can create an entirely new market. And of course, all together we see this as very value accretive for the group. At the CMD, I think we will come back for sure to the Enterprise side and describe layout a bit more the strategy and the expectations there.

Thanks Francois.

Thank you, gentlemen.

Thank you, Francois. Hope you're happy with those answers. So we'll move to the next question for today, and we will have that one coming up from I see up here, Pierre Ferragu at New Street. Good morning, Pierre. Can you hear us?

Good morning. This is Ben Harwood standing in for Pierre. He is in a new environment and can't speak?

That's okay as well.

We just had a couple of questions on your Enterprise business. So we just want to know how you view the competitive landscape in the wireless enterprise networks, and then what are your competitive advantages and how do you see yourself competing with companies that are partnering with either hyperscalers or enterprise companies that already have a fairly broad sales reach? Thank you.

That's a great question. I think this is something that we'll spend a lot more time on in the Capital Markets Day. But to give you a quick couple of comments, yes you're absolutely right. This is a competitive space. We feel though that we're the market leader in the wireless Vonage today through Cradlepoint, so that we're well positioned here already. And we have a very strong and growing presence in dedicated networks built upon some clear product advantages. So we believe, we are going to continue to develop this strongly. Of course this space is going to be having a lot of competition coming in also from hyperscalers. And we see that our solutions will be really run on hyperscalers as well. So I think why should not only think of them as competitors, they're going to be partners for us as well in order to reach the market.

Thanks, Börje.

That's great. Thank you, Börje.

Thank you for that question. So we have still 10 minutes to go, so I'll move to the next question in the call. And that one is from Janardan Menon at Jefferies. Good morning, Janardan.

Hi, good morning, Peter. Thanks for taking the question. Just wanted to go a little bit more into the outlook for gross margin into 2023 and into Q4 arising from the sort of shifting landscape of regions for the Networks division. So you are saying that the U.S. or North America will be down next year. Can you give us an idea of how much it will be down? At this point I know that visibility for the full year may be low, but what is your initial feel since you've already said that it will be down? And just from a product mix point of view, I mean, sort of regional mix point of view, what can we assume is a sort of impact on gross margin and is it something that will be sort of a bigger hit in Q4 and maybe first one or two quarters of next year, and then as you go through the initial phase of deployment in places like India the margin will rise into the second half of next year? So what I'm saying is, should the gross margin profile be one of a steady increase from a lower point say in the early part of next year all the way into Q4? Is that how we should look at it? And then I have a brief follow up if I may thanks.

Okay. Yes, exactly. So what we talk about in the report is that the U.S. will hold up with things so North America that is but with on a lower level, exactly how, what the amounts we we're not providing data alone. But we think it's very key to realize that we also win business in other parts of the globe, across the globe, and that that will compensate how the gross margin will develop. We comment that by talking about some of these footprint wins where it tends to have a dilutive impact in the beginning, but that over time, then that comes back. So of course, it on your question, how it would develop during next year is a function of when these projects are ramping up and volumes in big roll up projects and so on and come in. But again, we focus a lot on this of course and even more so on the gross margin or the gross income sorry, delivery here, because in absolute money, that is what drives our ability to invest in technology. So I think that's what we can say now.

Yes and remember the, you're asking a question on a quarterly basis. Our contracts are rather long and it has a long rollout cycle. So how it exactly hits each quarter will always be a bit subject to kind of what happens. So we are trying more to give the overall sense where these type of developments will be next year. So I would encourage you more to think about what is it we're trying to do. Yes, it's actually to strengthen our market position and based on that we will manage gross margins following a bit this guidance that Carl went through. But it's all way, and I understand your desire to have this on a quarterly basis, but it's a bit in these large contracts. That's why they are a bit swings between quarters are not inconsequential, let's call it that.

It's very true. And I think on the big picture also, I think it's good to remember the 15% to 20% EBITA that captures all of this actually and as you know, we said in the fourth quarter of 2021 that we will reach that point, that range within two to three years. Now we specify that we're talking 2024, that's our ambition. That's what we're going for as a company. And of course we will manage quarterly swings and so on to get to that longer term position.

Thank you, Carl.

Understood.

You had to just follow up as well, Janardan?

Yes, just very quickly. So on that 2024 target, so what would be the key factor in that jump? I mean, can we have, is there an increasing amount of confidence that the previous sort of Digital Services business so the current Cloud and Software business will reach that critical mass and be a bigger jump into 2024, or is it more coming from the Enterprise business where those profit margins including on Cradlepoint and Vonage will become bigger? I agree that you'll probably give us more color on that at your Capital Markets Day, but just as an initial view what would be the moving parts on that would be very useful?

Clearly we think we sit with a very good business in Cloud Software and Services, and that clearly will be a big part of the contribution to reaching these long-term targets, that's for sure and especially swinging from a loss into profitability. So that's one part, but of course, the rest is what we see is really on the Enterprise side where we're going to continue to grow and strengthen our position. So it's all about the mix of those two contributing, but we'll go into this in greater detail when we meet in December.

Understood, thank you very much.

Yes hi, good morning. Sorry, I might have missed a question. So if this was asked, please excuse me. My question is on the Cloud Software and Services. I mean, this business in its previous incarnations always was underperforming as well. As part of this restructuring what will be done in this business to make it better performing? And what has changed in the business this year that the guidance is now given to be flat with last year in EBIT something has deteriorated here. So we'd like to understand that. Thank you.

You know Sandeep, if we start with the business promise or if we look at it from a, you're absolutely right. We have underperformed in this area for a long time, but we have also seen a relatively strong improvement compared to 2017 when losses were running much bigger than today. So it's always a journey. So of course, we go to this level and we're not happy at this level. We need to fix this. It should be a profitable business. With our market position and the technology we offer, this has all the potential to be profitable. So if you look at improvements over the past couple of years, a lot of it comes from basically turning around parts of the business, like our BSS offering, for example. But where we now have or have challenges I would say is of course on our 5G Core, and that has taken a bit longer to get to market than we expected a year ago. And it has carried a lot more system integration costs and early, call it service costs than we anticipated a year ago. But we have also a lot of geopolitical developments that you are well familiar with, and that also impacts the business volume in Cloud Software and Services very detrimentally so and that has also hurt the business this year. So it's a multitude of factors. So what we said here is that given that backdrop, that's why we also felt we need to get more synergies out in the investments we make for the future. And that's why we combined Managed Services and Digital Services, so we can start to create those type of offerings that leverage the synergies between the two. Of course, there is a G&A synergy by removing one business area, but there are other synergies on the R&D side as we invest in AI and machine learning and actually the distribution of those software to our customers, that's where we get the big benefit. That will take some time to get out, but that's where the team is really focused on getting the benefits out.

Thank you, Sandeep and thanks Börje and thanks Carl for good answers in this session. But before concluding, I just want to repeat what Börje said, that we will have the Capital Market Day in New York, December 15 and there will be possibilities to register upcoming week here for all of you that want to participate. So by that, thank you all for participating in today’s call.

Thank you.

Thank you.