Ericsson Lm Telephone Co Q4 FY2022 Earnings Call

Hi everyone and welcome to the Fourth Quarter and Full Year Result of Ericsson 2022. Before starting, I just want to say that we have some issues with the streaming of this conference call, so we are focusing on the audio right now. So, everyone joining on audio, you will be able to listen in now, but we might have some issues with the streaming. With that said, I will also welcome our CEO, Börje Ekholm and our CFO, Carl Mellander. As usual, we will have a presentation and then we will have a question-and-answer session. In order to ask a question, you will need to join the conference by audio, as I said, and the details for that are to be found on our press release or on ericsson.com. But before handing over to Börje and Carl, I would like to read 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 would like to encourage you to read about these risks and uncertainties in the earnings report itself, as well as in the annual report. With that said, I would like to hand over to our CEO, Börje Ekholm. So please, Börje.

Thank you, Peter, and good morning, everyone, and thank you all for joining us. Today we're excited to present another quarter of good progress towards our strategic and financial goals that we have outlined to you at our Capital Markets Day about a month ago. From a financial perspective, 2022 was one of our best years in the company's history. With our fourth quarter results, we're on track to deliver on our long-term EBITA target of 15% to 18% by 2024. Target achievement is supported by cost savings, growth in our IPO revenues, portfolio changes, which include reaching breakeven on cloud software and services, but also to exit some loss-making businesses, and we are executing on these initiatives. We made significant progress despite macroeconomic headwinds during the quarter. I am truly excited about Ericsson's future as we continue to execute on our strategy and we have full confidence in our long-term development. As we said during our Capital Markets Day last month, we expect and plan for the overall mobile networks market to be flattish in the next few years, and the latter now predicts a slight growth outside of China. However, we also expect 2023 to be rather choppy with near-term uncertainties and macroeconomic headwinds that are likely to impact operator CapEx. As expected, during Q4, we've seen some operators slowing the pace on network investments, including front-runner customers in many markets. We expect operators to continue to sweat their assets in response to these macroeconomic headwinds. Additionally, we expect the operators to adjust inventory levels as the supply situation eases. These trends started to impact networks in Q4 and, as we expected, it impacted sales in North America. We expect and plan for these trends to continue during the first half of 2023. After that, we believe the inventory adjustment cycle will start to progress and development will normalize again. However, in addition to this, growth in data will drive network investments, and data growth remains at very high levels, which will return the mobile networks market to more of the flattish development that we're predicting over the next several years. Looking ahead, it's important to remember that we're still in the early stages of the 5G rollout and the cycle of widespread enterprise digitalization. To address the near-term outlook, we're taking several actions. Most notably, we're implementing cost-saving initiatives that we expect will take full effect by the end of 2023, with impacts starting to show in Q2 of 2023. In cloud software and services, we're executing on our revised strategy. Of course, there is seasonality in that business, but we expect to see and plan for breakeven operating profit for the full year of 2023, with gradual improvements in profitability thereafter towards much more attractive levels. As a company, we are at the epicenter of a very powerful trend, which is that anything that can go wireless will go wireless. We are investing to maintain our leadership in 5G, while also working to shape the future industry structure and how the industry will expose, monetize, and consume advanced network features that 5G networks can provide. This will allow us to transform into a platform company. Going forward, our enterprise business will be a major driver of our long-term growth and profitability. I would like to take a moment to thank all my colleagues for their efforts at delivering on our long-term plans and creating long-term stakeholder value. Our achievements would not be possible without them. Now I will go through some highlights for 2022. With our fourth quarter result and what we have executed during the quarter, we're on track to deliver on our long-term EBITA target of 15% to 18% by 2024. As we conclude the year, we have established a clear leadership position in mobile networks and taken important steps towards building a high-growth enterprise business. Based on technology leadership, we have increased our market share in RAM from about 33% in 2017 to 39%, excluding Mainland China. We have established a global leadership position in 5G core. Our strategy is to extend our leadership in mobile networks and expand into the enterprise segment with the objective to maximize value across all stakeholders. The Vonage acquisition, which we completed last year, gives us the foundation to transform Ericsson into a platform company, and executing on this strategy remains a top priority for us. In 2022, organic sales grew by 3%, driven by a 4% increase in Networks and a remarkable 16% in Enterprise. EBIT margin, excluding restructuring charges, was 10.1%. However, if we exclude Vonage and the previously announced charges during the year, EBIT margin was 12.9%, reaching our 2022 target of 12% to 14%, as we promised upon the announcement of the Vonage acquisition. We remain fully committed to continue building a culture of accountability and integrity, and we continue to invest heavily in those areas. We recognize that we can only be a true industry leader if we are both a technological leader and a leader in how we conduct our business. As you saw during the quarter, we decided to extend our monitorship. This is the right decision to ensure that integrity is fully embedded into our culture. I believe that a best-in-class compliance program will give our company a competitive advantage and establish us as a true industry leader. Let me now outline some key events during the quarter. In December, we announced the signing of a multi-year IPR agreement. This contract is strategically important to our 5G licensing program. This positive outcome positions us well to capture further 5G license agreements, including among previously unlicensed handset manufacturers, as well as in new areas such as consumer electronics and IoT. Based on this, we expect significant IPR revenue growth over the coming 18 to 24 months, as mentioned at our Capital Markets Day. Group organic sales grew by 1% year-over-year, of which IPR revenues contributed by five percentage points. We recorded an EBITA of SEK9.3 billion, corresponding to a margin of 10.8%. During the quarter, we focused on breaking the curve on inventory development, and we executed that successfully, managing to significantly lower our inventory levels, which contributed to cash flow before M&A of SEK16.9 billion. In the quarter, our Networks business grew in India due to substantial market share gains. As we mentioned in Q3 and at our Capital Markets Day, growth from share gains in several markets could not fully compensate for reduced operator spending and inventory reductions in other markets, including North America. As we've noted in the past, market share gains result in higher service revenues from large rollout contracts. These contracts are profit-accretive, but initially margin dilutive. They are crucial for us, and we pursued them consciously because they strengthen our strategic market position and build the scale to be competitive long-term. Gross margin came in at 44.6%, largely due to the change in business mix. We expect gross margin to be 40% to 42% in Q1 of this year, due to the changing business mix. In Cloud Software & Services, we saw sales growth in North America, primarily from 5G core contracts; however, this was offset by declines in other market areas. The historical performance in this segment has not been satisfactory. At our Capital Markets Day, we introduced an updated and revised strategy to turn the segment around, which includes priorities to limit subscale software development, accelerate automation to lower deployment and maintenance costs, and shift focus from market share gains to profitability as well as realizing cost synergies from combining the two prior segments. So, during the quarter, we began executing this strategy, which included exiting some subscale businesses. We're confident that the business is on track to reach operating profit breakeven for the full year of 2023. Simultaneously, in our core mobile infrastructure business, we're continuing to execute on our enterprise strategy. This is organized around two pillars, each leveraging our strength in mobile networks. The first pillar, Enterprise Wireless Solutions, focuses on capturing the multibillion-dollar enterprise market opportunity for 5G optimized networking and security solutions. The second pillar is the global communication platform business, which will allow us to monetize 5G in new ways by transforming how network features such as speed and latency are globally exposed, consumed, and paid for. During Q4, sales in the Enterprise segment represented 8% of total sales. The Enterprise segment is a growth engine for Ericsson, and we continue to fine-tune our portfolio to maximize profitability. This includes an agreement to divest our loss-making IoT business. After this divestiture, our emerging technology area is expected to be profitable. We are investing in building a robust go-to-market organization for enterprises and broadening our product offerings, including bringing network APIs to market. These investments lay the foundation for profitable growth after 2023 but will weigh on profits in the coming year. During the quarter, we announced a SEK2.3 billion provision related to a potential resolution with US authorities regarding previously announced deferred prosecution agreement breaches or breach notices. The provision also accounts for costs associated with the extension of the compliance monitorship that we announced in December. While we're now in a position to reliably estimate the financial penalty related to ongoing discussions with the DOJ, we have not yet reached a resolution on this matter. Separately, regarding the past matters described in the company's 2019 Iraq investigation report, we are continuing to conduct thorough investigations in full cooperation with the DOJ and SEC to assess the merits of the allegations. However, it is not appropriate for me to comment further as this remains an ongoing investigation at this time. Furthermore, we will continue to focus on cultivating a culture of ethics and integrity throughout our business and company. This includes the Board of Directors and remains a top priority for Ericsson. I will now share more details on the development in our market areas. This high-level summary highlights significant sales increases in market areas Southeast Asia, Oceania, and India. In Europe and Latin America, sales remained stable, while we observed declines in other market areas due to reduced operator CapEx driven by macroeconomic pressures and the operators' slowdown of rollout plans. Moreover, supply chain easing has enabled some operators to optimize their inventories. Taking a closer look, sales in Southeast Asia, Oceania, and India grew by 21%. We are extremely pleased with this, primarily driven by 5G market share gains in India. However, we did experience a slowdown in investment in certain other countries in Southeast Asia, which negatively impacted sales. In the Northeast Asia market, sales declined following elevated 5G investment levels in the first three quarters of the year. In North America, we saw a 7% decline year-over-year, as previously stated in our Q3 report and at our Capital Markets Day. Throughout the year, we have observed accelerated CapEx investments, but we've also seen customers holding relatively large inventories. During Q4, our operator customers signaled a reduction in CapEx investments, compounded by the necessity to optimize inventories as supply constraints ease. The other market primarily comprises IPR revenues and a major part of our enterprise segment. Growth here was mainly driven by the acquisition of Vonage, contributing SEK4.1 billion in the quarter and retroactive IPR licensing revenues for unlicensed periods. I would now like to give the word to Carl, our CFO.

Thank you, Börje. I'm glad your voice has recovered as well. Good morning, everyone, and thank you for joining the call. I wanted to start by addressing some of the one-offs recorded in the quarter. First, we secured this major IPR agreement, which resulted in retroactive revenue from the expiry of that agreement, which was in early January 2022. All of that revenue was recorded in the fourth quarter, leading to IPR totaling SEK6 billion in revenue for Q4. Secondly, we reached an agreement to divest our IoT business, which incurred a related charge of SEK1 billion in the quarter impacting the Enterprise segment. Regarding Cloud Software & Services, as per our strategy to turn this business around, we decided to exit certain subscale businesses, leading to a recorded charge in Q4 amounting to SEK0.8 billion. Lastly, as Börje mentioned, we announced last week that we could reliably estimate the financial penalty from the DOJ regarding DPA breaches. Consequently, we made a provision of SEK2.3 billion in the quarter for that, which includes costs tied to the extended monitorship. I also wanted to reiterate our observations regarding market shifts. We discussed the mix shift anticipated in Q4 and continuing into the first half of 2023 during our Q3 report, as well as at the Capital Markets Day in December. We clearly see, and I'm echoing Börje's comments, that some CSPs in particularly front-runner markets are reducing their CapEx from previously record levels, and some are adjusting down their inventory levels. At the same time, we are ramping up in other markets where we have gained notable market share, which frequently comes with a large services share in significant rollout projects. Collectively, we anticipated this to impact both our top line and gross margin in Networks. This was indeed reflected in our Q4 numbers. Now, let's delve into the numbers for the quarter and then a review of the full year. In Q4, we achieved sales of SEK86 billion, marking the highest sales ever recorded for Ericsson in a single quarter. Organic growth was 1%, boosted by catch-up IPR revenue, contributing approximately 5 percentage points to total IPR revenue. Growth was driven by significant increases in Southeast Asia, Oceania, and India, as illustrated in the market area slides we presented. In Europe and Latin America, growth was stable, while the other three market areas declined notably, particularly in North America as expected. Gross income, excluding restructuring charges, grew by SEK4.6 billion year-over-year to SEK35.7 billion, bolstered by the growth in IPR revenue, which saw a rise to SEK6 billion from SEK2.4 billion in Q4 last year, alongside the integration of Vonage into the Ericsson family. However, the EBIT margin excluding restructuring charges shrank by 200 basis points to 41.5% year-over-year, primarily due to the business mix shift discussed, as well as charges related to contract portfolio exits in Cloud and Cloud Software & Services. R&D increased since investment in technology leadership is crucial for Ericsson, rising to SEK13.2 billion. Approximately 45% of this increase results from foreign exchange impacts. Aside from foreign exchange, the rise is largely due to our decisions to invest in our 5G portfolio and offerings across the company, including investments in Enterprise Wireless Solutions. Other operating income was negative SEK2.8 billion, attributing to provisions and charges regarding DOJ monitorship and IoT. Overall, EBITDA, excluding restructuring charges, declined by 27% to SEK9.3 billion, translating to an EBITDA margin of 10.8%. This drop was a result of charges of around SEK4 billion, along with increased expenses, particularly in the enterprise sector, stemming from the full inclusion of Vonage in our business. Now, let's focus on the segments, beginning with Networks, where Q4 organic sales grew by 1%, also supported by IPR revenues. We saw double-digit growth in market areas such as Southeast Asia, Oceania, and India. Gross income in Networks, excluding restructuring expenses, rose, primarily fueled by retroactive IPR licensing revenue. The gross margin demonstrated a similar pattern to the group level, declining to 44.6%, again due to the anticipated shift in business mix, as referenced during our Capital Markets Day. EBIT in Networks was SEK12.5 billion, corresponding to an EBIT margin of 21.4. Moving on to Cloud Software & Services, we achieved 2% organic growth in this segment. North America saw growth, as noted by Börje, while other market areas faced declines—primarily due to timing of project milestones and related contract adjustments on managed services. Gross income increased thanks to higher sales volume but was still impacted by previously mentioned charges. The EBIT for Cloud Software & Services stood at SEK0.7 billion, maintaining a stable EBIT margin of 3.4%, also affected by one-off charges. Finally, for Enterprise, this segment accounted for 80% of total Ericsson sales in the quarter. We experienced robust increases across various areas of this business. Organically, we grew by 15%; however, reported growth was substantially higher at 65%, primarily due to the addition of Vonage, which boosted sales by SEK4.1 billion in the quarter. Gross income in this segment rose by SEK2.1 billion to SEK2.9 billion, again driven mainly by the Vonage acquisition. Consequently, we recorded an EBITDA of negative SEK1.7 billion in Enterprise, a stark contrast to the previous year's figure of SEK0.6 billion, primarily due to charges linked to the IoT divestment and rising investments in R&D and SG&A, especially within enterprise wireless solutions. Now that we've discussed the quarter, let's take a step back to analyze the full-year figures for 2022. Total sales reached SEK271.5 billion, a jump of nearly SEK40 billion year-over-year. If we adjust for comparable units and currency, growth was 3% year-over-year for the full year. Gross margin, excluding restructuring charges, declined to 41.8% due to the same factors previously discussed, so I won't repeat them here. R&D expenses increased by SEK5.3 billion, one-third of which is linked to foreign exchange movements. For Networks, our R&D investments are targeted at cloud-run areas and enhancing our Ericsson silicon offerings. The Enterprise sector has also seen an uptick in R&D initiatives. The EBIT margin, excluding non-organic elements like the Vonage acquisition, settled at 12.9%, within the stated target range of 12% to 14% for 2022. Many industry observers pay close attention to gross margin, so let's review its development starting from Q1 2020. We decided to reference this period, although earlier figures indicated margins from 2016–2017 when we saw numbers around 30%, and we remember that time clearly. We have been above 40% for some time now and are currently reporting a rolling four-quarter gross margin of 41.8%. The improvements you see in this area are driven by investments in technology leadership and overall competitiveness. Nonetheless, we've observed a certain decline in gross margin as a result of inflationary pressures and business mix shifts, and I noted that these anticipated impacts were reflected in our fourth-quarter figures. Regarding inflation, I would assert that we've managed effectively to counteract that during the quarter through commercial initiatives such as product substitution. Without inflation, we could argue that operational leverage resulting from technology leadership would have further bolstered gross margin. In this quarter, we've succeeded in managing inflation. Apart from those factors, we must emphasize the one-off charges we've mentioned, which are vital to understanding the underlying business dynamics. The impact of these one-off charges on gross margin amounted to 0.6 percentage points at the group level. They should not be overlooked. Moving on, let’s consider how our earnings have translated into cash flow. Free cash flow before M&A is a key metric for us. In the quarter, we reported SEK16.9 billion in free cash flow and SEK22.2 billion for the entire year, which represents 8.2% of total net sales. Our long-term target stands at 9% to 12% of net sales, so we were slightly below that range for the full year in 2022. We should remember that this is a year that faced significant global challenges, particularly regarding supply chains, and that exerted pressures on our working capital. It's essential to keep this context in mind when evaluating our year-over-year free cash flow development. In contrast, 2021 showcased outstanding cash flow, where free cash flow before M&A hit 14% of net sales. This creates a challenging comparison for 2022. However, averaging the two years reveals that we've generated free cash flow of SEK27 billion across both years. We observed that, as the global supply chain situation improves, we managed to reduce inventory as anticipated, which is a positive development, both for component and project inventory. This decrease in inventory, coupled with exceptionally strong cash collection—including collection from IPR licenses—yielded a positive contribution from working capital, resulting in strong free cash flow for the quarter. It's worth mentioning that there are currency impacts between quarters and annually. However, if we analyze the reported figures, this cash flow of SEK16.9 billion represents the highest level achieved in at least the past seven years in Ericsson's history. We continue to prioritize working capital management as a crucial driver for our company, maintaining our focus on this endeavor moving forward. It bears repeating that large rollout projects we are delighted to have won tend to build up working capital initially, which is normal and expected with this nature of business. We predict this trend will persist. Despite this, we believe inventory should continue to decline. In light of robust free cash flow performance, we increased our net cash position by SEK10 billion; our current net cash now exceeds SEK23 billion, after accounting for the second dividend installment of SEK4.2 billion, and our gross cash amounts to SEK56.2 billion. The proposed dividend from the Board of Directors stands at SEK2.70 per share, totaling SEK9 billion, with a suggestion to distribute it in two installments, similar to previous years. Before handing back to you, Börje, I wanted to provide some key data points regarding our outlook for the first quarter and also the full year of 2023, to some extent. To begin with, let's discuss the top line for the first quarter. Regarding historical seasonality for networks and cloud software and services, we typically see declines of about 23% for networks and 35% for cloud software and services when comparing Q4 to Q1. For networks, we anticipate this seasonal decline from Q4 to Q1 to be pronounced this quarter, even when adjusting for the retroactive IPR licensing revenue recorded in Q4. For cloud software and services, we expect the typical seasonal pattern to play out in the first quarter once again when factoring in the retroactive IPR. So next, concerning gross margin for Networks, we provide guidance for Q1; we expect a gross margin in the range of 40% to 42% due to the anticipated change in business mix resulting from market share gains. Additionally, for Q1, operating expenses historically decline by about SEK3.3 billion from Q4 to Q1, which we believe will be a good indicator again this time, but large variations can occur across quarters. Lastly, the amortization of intangibles is expected to settle around SEK0.9 billion per quarter for the Ericsson Group in 2023, with SEK0.8 billion earmarked for the Enterprise segment. For Q1, we expect group EBITDA to be somewhat below last year's level during the same period, followed by an improvement throughout the rest of the year, given our guidance for declining margins in networks due to the shifting business mix. That wraps up this segment, and I now hand it back to you, Börje.

Thank you, Carl. To summarize, we undertook several important steps during the quarter to achieve our strategic and financial goals. In a choppy world, we focus on managing what we can control. This includes implementing cost savings initiatives of SEK9 billion that will take full effect by year-end 2023, with the benefits expected to begin appearing in Q2 of 2023. Additionally, we are executing our plan for cloud software and services, which will enhance profitability and drive us to breakeven for the full year of 2023. We are witnessing substantial traction in our enterprise expansion and will keep investing to diversify our product portfolio while establishing a solid enterprise go-to-market organization. These investments will create a robust platform for profitable growth ahead, although they will weigh on costs in 2023. We expect to showcase the potential of our global communication platform in upcoming quarters; hence, I encourage you to stay tuned for our presence in Barcelona this year. Our foundational premise remains that anything that can go wireless will go wireless. I am genuinely excited about Ericsson's future as we continue executing our strategy. Looking ahead, the investments in and growth from our enterprise business will be a major driver of long-term growth and profitability for Ericsson. We remain committed to reaching the lower end of our long-term EBITDA target of 15% to 18% by 2024. I would like to express my gratitude to each of our customers, partners, and employees. This achievement has been a team effort. Thank you. Lastly, I would like to welcome you all to our Annual General Meeting at the end of March. As Carl described, the Board is proposing a dividend of SEK2.70 per share, to be distributed in two installments as in previous years. With that, I would like to conclude this segment of the presentation and hand it back to you, Peter.

Thanks, Börje. Since we're running a bit late, I will give you five extra minutes for Q&A. It is now time for the Q&A session. Let's see who has the first question. I would like to welcome Andrew Gardiner from Citi to ask the first question. Hi, Andrew.

Good morning, Peter. Thanks very much for taking the question. My question is really about the unusual approach you're now taking, or at least unusual for you guys, in terms of providing near-term guidance. You have quantified details regarding Q1 margins, particularly, which I believe many on the call will appreciate. It has been a long decade since Ericsson has done that. I hope this helps us find a floor for our estimate revisions here, considering the near-term difficulties. But for that to be a floor, the estimates must be conservative enough. Could you provide color around how you set those near-term targets? Thank you.

Should I start, Börje? Thank you for the question, Andrew. We wouldn't express our guidance in this manner if we did not have confidence in it. We have provided a range of 40 to 42 to account for different scenarios. Based on our visibility regarding customer demand, project rollouts, and our cost situation, we believe this is the level we can expect for the quarter. Thus, we have confidence in these estimates.

We understand there have been repeated inquiries regarding near-term guidance, Andrew. This is why we felt it was the right action to take. Our aim is to help. As Carl mentioned, we are providing these estimates under the assumption of inventory adjustments in networks. It's essential to remember that we are taking a conservative viewpoint here, so I feel good about the estimates we're providing.

Thank you, Börje. Thanks, Andrew.

That's helpful. I have a quick specific follow-up; regarding the first quarter EBITDA guidance, indicating it will be somewhat below last year, just to clarify the reference point. I mean you are referring to the SEK5 billion EBITDA reported in Q1 2022. That is correct? Are there any one-offs or elements we should be aware of, or is it simply below SEK5 billion you are guiding to?

Yes, that's correct. There is nothing specific related to one-offs or other factors that require comment.

Thank you, Andrew. That was the first question. We are ready for the second question, which comes from Aleksander Peterc from Societe Generale. Hello, Aleksander?

Yes. Hello, good morning, and thank you for taking my question. I hope you can hear me well.

Yes.

Great. I would like to revisit margins again, particularly following up on Andrew's earlier question. Can you provide insight as to whether margins will find a bottom in Q1 within the 40% to 42% range, or should we project a similar range for the second quarter? Additionally, do you believe that networks can comfortably return to a 44% to 46% gross margin range in the future, or is this range expected to remain somewhat artificially high in light of more challenging business mixes?

I can start. As we have indicated, the first half is where we anticipate sizable inventory adjustments, primarily from front-runner markets around the globe. We expect these effects to be evident through the first two quarters. From there, we anticipate a gradual improvement in the market environment, led by healthy underlying traffic growth, which has historically driven similar cycles in CapEx. Following significant adjustments, operators typically cannot maintain reduced investments for long given the strong underlying traffic growth. Thus, we foresee an improvement in the second half of the year.

Thank you very much for that. I have one more quick follow-up.

Yes.

Could you provide an annual run rate for IPR, as well as a quarterly run rate now that your main deals have been renegotiated? Are estimates feasible at this stage?

Currently, our portfolio is around SEK9 billion. This includes the 10.4% recorded in 2022. Moreover, as we communicated at our Capital Markets Day, we anticipate significant growth for IPR, as there are many device players in the ecosystem that remain unlicensed - particularly for 5G. We will pursue these players following the large agreements we've recently executed, and we also anticipate growth opportunities in consumer electronics and IoT, as previously noted. While we cannot discuss timing, we expect IPR to experience growth over time.

Thank you, Carl. Thank you very much. We are moving forward to the next question from Andreas Joelsson at Danske. Hi, Andreas.

Hi, and good morning. I have a question regarding Vonage, please. Could you elaborate on how the business model operates? Is it subscription-based? Is it license-based for accessing the APIs? How does that work?

Currently, in Vonage's business model, we have a subscription-based model for UCaaS and CaaS solutions, as well as a transaction-based model for CPaaS. In time, as we progress with launching network APIs, we still need to work on the business model. So for now, our focus is to technically address existing issues and present network APIs on the CPaaS platform. I mentioned earlier that you'll see announcements during the year, and we hope to demonstrate the business model we'll pursue in this area. For now, we must continue our collaborations with operator partners to launch these APIs and showcase them to the market. So stay tuned for forthcoming announcements, Andreas.

Perfect. Thank you.

Thank you, Andreas, for that question. Let's proceed to the next question from Sebastien Sztabowicz from Kepler Cheuvreux. Hello, Sebastien.

Yes. Hello everyone, and thank you for taking my question. I have one question regarding the market mix, as I am aware that Dell'Oro reports RAN market in the US has started to decline in the mid-single-digit range this year. Do you see any capacity for upgrading cycles building up in some advanced markets, including the US? How do you foresee your mix shifting in coming years, particularly with capacity upgrades and potential rollouts in emerging markets? The second part of my question pertains specifically to the RAN market. It appears to be steadily slowing, and I'm interested to know if there have been any noticeable changes in the competitive landscape or pricing conditions in that market to date.

Addressing the overall RAN market, as we indicated at our Capital Markets Day, we foresee a flattish mobile network and RAN market over the next few years. This remains unchanged. Dell'Oro is currently forecasting slight growth outside of China, while there's a slight decline expected when including China. We are now witnessing inventory adjustments, which we need to prepare for, as we've seen operators working through the supply chain. That is influencing our inventory levels as well. This transition will likely unfold over the next couple of quarters, specifically Q1 and Q2. The anticipated growth in the US and comparable front-runner markets will hinge on two primary factors. The first is the increasing underlying traffic growth that we are already witnessing, which remains strong. We expect a normalization of conditions in the RAN market as we head beyond 2023. The second vital aspect involves new application launches. We are beginning to see some foundational use cases emerge, with fixed wireless access as the prime example. This application utilizes mid-band in the present, but we anticipate a shift toward millimeter waves over time, which will also help stimulate the market. Projections indicate that individual years will show positive or negative variations, but overall, we maintain our expectations of a flattish market over time. Regarding the pricing environment, while we operate in a competitive industry, we are concentrated on technological leadership. By leading in technology, we enable customers to enhance network performance and reduce operational costs. Our competitive stance allows us to win contracts with attractive gross margins, which is demonstrated in our ability to adjust our business mix effectively and maintain profitable margins.

Thank you, Börje. Thank you, Sebastien. We will now move to the last question of today's session. The final question comes from Terence Tsui at Morgan Stanley. Hello, Terence.

Thank you. Good morning, everyone. I have a question on networks, specifically about your strong growth in India. Could you provide us with a sense of the margin profile in India compared to other regions? Additionally, how do you anticipate profitability evolving as revenues increase in that region? I also have a quick follow-up regarding a topic we haven't covered so far, concerning the provision made for the DOJ. Are there any updates regarding the investigations being conducted by other authorities? Can we expect a single settlement that encompasses all ongoing investigations in the future?

Concerning the provision, yes, we allocated funds for breach notices. This was possible because we could reliably estimate the financial consequences. Besides that, as you know, we haven't reached agreements with them or any other entities at this time. Ongoing investigations and discussions are still underway, so we can't provide updates on that front. Regarding India, we won't comment on individual markets or our margin profiles there. However, I will highlight that in our guidance for Q1 regarding gross margin in Networks, we anticipate a significant decline, particularly in the US, along with increased market share contracts—this is not exclusive to India, but rather encompasses various region contracts. Although these contracts result in temporary lower margins necessary due to initial service content increases, they all carry positive margins. This dilution factor has been taken into account in our anticipated gross margin of 40% to 42%.

Thank you, Börje. That concludes our last question. I noted there are still questions in the queue; IR is open, and you're welcome to call in for inquiry. Carl Mellander will be meeting with some investors on Tuesday in London, so that's another chance to engage. Additionally, as Börje mentioned earlier, we have the event in Barcelona coming up, and many of you will travel there to meet us. These are immediate opportunities for management engagement. With that, I would like to conclude this call. Thank you all for dialing in and participating with your questions.

Thank you.

Thank you.