Ericsson Lm Telephone Co Q4 FY2024 Earnings Call

Hello, everyone, and welcome to the presentation of Ericsson's Fourth Quarter 2024 Results. With me here in the studio today are Borje Ekholm, our President and CEO; and Lars Sandstrom, our Chief Financial Officer. As usual, we'll have a short presentation followed by Q&A. And in order to ask a question, you'll need to join the conference by phone. Details can be found in today's earnings release and on the Investor Relations website. Please be advised that today's call is being recorded and that today's presentation may include 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 the 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. I'll now hand over the call to Borje and Lars for their introductory comments.

Well, thank you, Daniel, and welcome everyone. And first of all, of course, thank you for joining us today. So we delivered solid Q4 results, and we made good progress against our strategic priorities in 2024 overall. Momentum around programmable networks and new ways to monetize them continues to build up. I'd like to start by focusing my comments today really on two key areas: first, the progress against our strategic initiatives; and second, how we position the business to succeed across varying market conditions. Beginning with our strategy that aims to build the network for the future through programmable networks and open API architectures. This will enable our service provider customers to deliver differentiated performance and new applications and new cases to monetize. The contract, you remember that we signed with AT&T last year, really paved the way for our newest agreement with MasOrange, which we signed during the quarter. I would say our agreement with MasOrange was really the first open programmable network in Europe, a key milestone for us and the European telecoms industry. With this agreement, Ericsson and MasOrange will collaborate to lay the foundation for open programmable infrastructure that will drive technological advances and growth moving forward. It will allow differentiated connectivity. And why is differentiated connectivity so important? Well, if you think about the whole radio stack and we are serving a massive number of different applications. We're serving anything from mobile broadband, fixed wireless access, mission-critical communication, but also AI eyeglasses or AI-driven new applications. We have AR/VR glasses; all of them will require differentiated connectivity. And here, programmable connectivity plays a very important role. That's why that's a key focus for us. But besides that, we also launched a number of enhancements to our portfolio, including more sustainable massive MIMO radio with more than 25% energy savings and new RAN software capabilities that significantly boost performance and programmability. On the enterprise side, the joint venture we announced in September with 12 leading service providers to aggregate and sell network APIs represents a key milestone in redefining the telecom industry by creating the supply of network APIs across several continents. We continue to see the momentum building for network APIs. During the fourth quarter, we also announced the name for the new venture, Aduna, and you can expect many more announcements to come in the future here. In Enterprise Wireless Solutions, our strategic ambition is to further build out the go-to-market engine. Last year, we combined the activities under the Ericsson brand and announced a new enterprise 5G portfolio, including neutral host solutions to enable full indoor connectivity. Overall, we saw very good traction in the new portfolio in Q4. So as you can see, we are not standing still. We're taking actions to execute our strategy to ensure that Ericsson remains well positioned for the future, while also laying the foundation to change the overall trajectory of the RAN market. Second, I'd like to provide some comments on the overall RAN market and how we're preparing ourselves for different market conditions. And you've seen that's been critical. In 2024, the overall market continued to be quite challenging and I would say continue to decline during the year. However, today, we are starting to see some very positive indications and we have further reasons to believe that the overall market is starting to stabilize. You saw in Q4, sales returned to growth for the first time in eight quarters, increasing by 2%. We continued strong growth in North America as well as growth in Europe. Growth in data and new applications, that's what's going to drive the market over the medium to long-term. Ultimately, and we've said this so many times before, the near-term market recovery is in the hands of our customers, but our confidence in the stabilizing market is growing, driven by positive customer discussions and interactions that we see a return to our largest markets, the U.S. and Europe. I think the frontrunner experience we have with the U.S. market can give us comfort that we are starting to see a change in sentiment. Regardless of the market conditions, we need to structurally improve our business through rigorous cost management, of course, but also improving our working capital and the capital we tie up in the business to strengthen our cash flow and balance sheet. For example, during the past few years, we've taken a lot of actions to structurally cut costs, and you can see the results in our gross margin increasing by more than 500 bps to 44.9%. Market mix, IPR licensing revenue, of course, and the focus on the profitable segments in enterprise all contributed as well. In 2024, total headcount, internal and external, fell by 9,400 or 8%. It's not just in our gross margin where we're structurally improving profitability. We're actually taking OpEx out as well. As you've all seen, the fourth quarter included significantly higher bonus provisions than last year, clearly above normalized levels during the quarter. Underlying OpEx developed well. Adjusted EBITA margin increased by 300 bps to 11%. We're not yet where we want to be here, but we're making progress towards our long-term goal. Going forward, we're going to continue to strengthen our business and focus on operational excellence, and we remain committed to our long-term EBITA margin target. Over the past 18 months, we have implemented actions to structurally lower our working capital, together with the change in business mix, following the completion of the large rollout projects in India that we had in 2023. We generated free cash flow of SEK 40 billion during 2024, which puts us in a very strong financial position. Turning to capital allocation. Our first priority is to invest in R&D to maintain and grow our technology leadership across networks and enterprise solutions and network APIs. Alongside R&D, we prioritize a strong balance sheet and attractive shareholder returns. I would also say that we actually have a very well positioned portfolio today. So we see the possibility to do some smaller add-on bolt-ons; it could be geographic or technology-wise. But what we have positions us really well to organically develop the business, and we're very satisfied with where we are. The Board proposed a dividend of SEK 2.85 per share, corresponding to a total amount of SEK 9.5 billion. I’d say this is a testament to the confidence the Board has in our strategy as well as the longer term. As you can see, it was a strong end to the year. But now let me comment more specifically on some of the market developments we saw in Q4. In North America, sales increased by 54%. In networks, sales increased by 70%, of course, driven by the rollout of our AT&T contract, but also strong year-end hardware demand and significant software traction with other large customers. Sales in Europe and Latin America increased by 2%. The strength in Europe, in particular, benefited from market share gains and strong deliveries. Sales decreased in all other regions, specifically Latin America, which continues to be a market with intense competition and lower customer network investments. In Southeast Asia, Oceania, and India, sales decreased primarily due to lower network sales in India after a record year 2023. Sales in Northeast Asia as well as the Middle East and Africa also slowed, primarily due to investment levels slowing down following the recent 5G build-out in the front-runner markets as well as some macro pressures in Africa that we're all aware of. At the same time, we had good customer success in all of these regions in the quarter. For example, we announced a multiyear contract extension for 4G and 5G RAN with Bharti. We also had a contract with a nationwide 5G deployment for VNPT in Vietnam. With that, I would like to hand over to Lars to go through the financial details.

All right. Thank you, Borje. Let me start by giving you some additional points on the group before discussing the segments in more detail. Net sales in Q4 amounted to SEK 72.9 billion and organic sales were up 2%. North America's growth was strong for the third quarter in a row, and we also had slight growth in Europe for the second quarter in a row. The other markets declined, particularly in India, where investment levels have normalized after a peak in 2023. Adjusted gross margin was 46.3% in Q4, an increase from 41.1% in the prior year. Margin improved with supply chain efficiency, focus on commercial discipline, and a favorable market mix. OpEx in the quarter was SEK 23.8 billion, up by SEK 1.7 billion compared to the prior year, mainly because bonus accruals were above target levels in '24, having been below in last year. The cost-out activities continued to deliver savings; these balanced out salary increases and part of the higher bonuses. Adjusted EBITA increased to SEK 10.2 billion with a margin of 14.1%, marking a significant expansion year-on-year. Cash flow was strong at SEK 15.8 billion. The improvements came from improved profitability and lower working capital. Let's move on to the results for the full year. Net sales amounted to SEK 247.9 billion and organic sales declined by 5%. Very strong growth in North America was offset by organic sales declines in all the other market areas. The sales decline, which gave a significant volume impact on gross income, was more than offset by an increase in gross margin. Adjusted gross margin was 44.9%, an increase from 39.6% in 2023. Margin improved with a favorable market mix, cost reduction initiatives, including supply chain efficiency, as well as higher IPR licensing revenues and the focus on more profitable market segments in enterprise. The result on gross income was an increase of SEK 7 billion to SEK 111.4 billion. Reported OpEx was up by SEK 15.2 billion compared to the prior year, mainly because of the intangible asset impairment of SEK 14.1 billion. Excluding impairments, total OpEx was SEK 88.4 billion, which is an increase of SEK 1.9 billion. This is mainly because of the higher bonus accrual levels compared to 2023. R&D investments continue to maintain technology leadership, for example, to accelerate delivery of some 5G features and to further improve operational resilience. Excluding restructuring, impairments, and the discontinuation of capitalization of development expenses in enterprise, impacts R&D increased by around SEK 1 billion in the year. SG&A costs excluding restructuring and impairments also increased slightly, primarily in segment enterprise, with the investments to improve operational effectiveness. Adjusted EBITA increased to SEK 27.2 billion. The margin was 11%, marking an almost three percentage point expansion year-on-year. Net income for the full-year was SEK 0.4 billion compared to minus SEK 26.1 billion in 2023. Net income in '23 was impacted by the impairment of goodwill of SEK 31.9 billion and in '24 by a noncash impairment charge of SEK 15.3 billion. The effective tax rate for 2024 was 28%, excluding the impairment charges. Cash flow was very strong at SEK 40 billion. The improvements came from improved profitability and working capital resulting from a favorable market mix, customer payments, and efficient supply chain management. I will cover this in more detail later. Let's comment on IPR licensing. Q4 marked the fourth quarter in a row that a new IPR agreement was signed. This means at the end of 2024, most of the top 10 smartphone vendors were licensed for 5G. IPR licensing revenues increased to SEK 14 billion in 2024, including retroactive revenue of around SEK 1 billion from just over SEK 11 billion in 2023. We are at a record run rate of SEK 13 billion in recurring IPR revenue going into 2025. There are further growth opportunities with a few additional 5G agreements remaining and the potential to expand into additional licensing areas such as automotive and IoT. With that, let's move to the financial trends. While the market conditions have clearly been challenging, we have been seeing a stabilization of sales in Q4. Rolling 12 months sales bottomed at Q3 '24. The gross margin trend shows that the focus on growing the patent portfolio, the improved utilization of supply chain, and cost actions are paying off. More favorable market mix has also contributed. We have seen a favorable development of EBITA, which ended up the year at SEK 27.2 billion, up by 27% compared to the prior year. The lower level of sales in the first three quarters as compared to the previous year and increased operating expenses moderated EBITA margin improvement. Let's move to the segments. In Networks, organic sales increased by 5% year-on-year. North America grew 70% from very low levels last year with contract wins and strong year-end software demand contributing. Sales in Europe grew slightly. In the other markets, customers continue to be cautious with their investments and the largest decline was in India, where investment levels have normalized after a peak in '23. Networks adjusted gross margin was 49.1% with a favorable market mix, cost actions, and operational leverage in the supply chain all contributing. IPR revenues increased from a further licensing agreement and contributed to the gross margin improvement. Networks adjusted EBITA increased to SEK 10.1 billion from SEK 7.4 billion in the prior year, and the adjusted EBITA margin was 21.6% in Q4 and 17.5% for '24 overall. EBITA improved due to higher sales and improved gross margins, partly offset by higher OpEx affected by the previously mentioned higher bonus accruals and investments in R&D. In the segment Cloud Software & Services, organic sales were stable, with sales growth in North America offset by sales declines in the other market areas. Adjusted gross margin was 39%, improving from the prior year and benefiting from the delivery performance and higher software sales. The strategy execution, with a focus on commercial discipline and accelerating automation, is paying off. The improvement in gross margin was offset by higher bonus accruals reflecting an above-target outcome in '24, which resulted in an EBITA margin of 9.3% in Q4 and 3.2% for 2024. In Enterprise, sales declined by 7% and Enterprise Wireless Solutions grew by 19%, with strong growth in private 5G and neutral host solutions. Sales in global communications platform declined 17% impacted by the decision to reduce activity in some countries and focus on more profitable markets than product segments. Adjusted gross margin increased to 54.3% and adjusted gross income increased by SEK 0.3 billion year-on-year despite the sales decline. The adjusted EBITA loss was minus SEK 1.2 billion, with a decrease year-on-year, mainly reflecting nonrecurring impacts related in part to the exit of certain businesses as well as increased investments to improve operational effectiveness. The focus on improving the financial performance in the current portfolio continues at the same time as we also invest for the future. Turning to free cash flow, which was SEK 15.8 billion before M&A in the quarter and SEK 40 billion for the year, we delivered a cash flow margin of 16% to net sales for the year, well above our 9% to 12% target. The increase in cash flow compared to '23 is due to earnings growth and very strong working capital, as I mentioned before. Working capital benefited from the structural actions we have taken to improve supply chain and cash efficiency and from market mix, particularly between India and the U.S. On top of this, strong collections and customer prepayments also contributed. This means working capital is now at historically low levels, and we expect this to partially reverse in '25. Net cash increased sequentially by SEK 12.3 billion to SEK 37.8 billion. The return on capital employed in '24 was 2.5%; this includes an over 7 percentage point impact from the impairments. Next, I will cover the outlook. Turning first to sales. For Networks, Q4 continued the strong trend from Q3, so the 2024 exit rate is high. Despite this, we still expect Networks Q1 to be broadly similar to the average three-year seasonality. We expect cloud software and services to be similar as well. In enterprise, sales will continue to be impacted by near-term decisions to focus on profitable markets and products. In terms of profitability and Networks gross margin, for Q1, the Networks gross margin is expected to be in the range of 47% to 49% with some initial impact from the timing of swaps in North America but still benefiting from a positive market mix. With significant revenue declines in some markets, restructuring is expected to remain elevated in 2025 as we continue to adjust the operating model and focus on operational excellence. With that, I hand back to you, Borje.

Thank you, Lars. The global RAN market continued to be challenged in 2024. But I would say we were well prepared for this, as we took actions early to adjust our business for more realistic levels of demand. North America returned to growth in Q2, and we saw a stronger end of the year broadly, as our networks revenue returned to growth in Q4. Looking ahead, we see further signs of the RAN market stabilizing. Our recent customer discussions indicate an accelerating interest in our programmable networks. In many markets, there is a need to invest to keep network performance at a competitive level. It's encouraging, but we recognize that the timing of investments that will be made, of course, those decisions are in the hands of our customers. We will continue to execute our strategy to capitalize on the evolving market dynamics. This strategy is focused on building the industry's best-performing programmable networks that enable differentiated services and increased monetization opportunities for our mobile operator customers through new use cases, including exposing network capabilities through network APIs. Additionally, we remain focused on the things we can impact, and that's, of course, how we run our business, including cost and working capital management, and naturally strengthening our product portfolio as well. This way, we ensure Ericsson continues to be well positioned to create value for its stakeholders when the market fully recovers. Our goal is to make Ericsson a more profitable company based on our leading position in mobile infrastructure and to develop new use cases and monetization opportunities. This will change the trajectory of Ericsson, but also the telecom market that, I would say, has flattened out over the last decades. By changing these dynamics, we're entering a situation where we'll see further investments in the network. To sum up, in 2024, we took several critical steps in our strategy, and we'll continue doing so in 2025. On that note, I actually want to thank all my colleagues in the company for their hard work. Thank you, team. With that, I think it's time for Q&A, Daniel.

Thank you, Borje. We'll now proceed to the Q&A session. If you're streaming the webcast, please mute the audio while asking a question to reduce feedback. As usual, I ask that each participant only ask one question so we can hear from as many of you as possible today. Operator, please open the line. Our first question this morning will be from Andrew Gardiner at Citi. Andrew, please go ahead.

Thank you, Daniel. Can you hear me?

We do, yes.

Good morning, guys. Thanks very much for taking the call. I had one on the dynamics in the North American market. If I go back to the commentary you were making at the time of the third quarter, you had a good result then, but you were expecting the sequential trend into Q4 was perhaps going to be a little softer seasonally off that stronger Q3. As it turns out this morning, you're showing us very good trends in the U.S. In particular, you're obviously highlighting the share gains. Lars, you briefly just mentioned swap outs as well. I was interested in a bit more detail in terms of what's happening in the market, what indeed drove that upside relative to your earlier expectations? Was it more share gain under the new contract? Was it sort of the broader market coming back, inventory replenishment? A little bit around that would be really helpful.

I can take that. Thanks, Andrew, for the question. It's a good question. What we have seen, and that's why you see us talk more optimistically and confidently about the market starting to recover. We actually have seen the investment levels coming up in North America. Part of it is, of course, to replenish from a very low inventory level that we've seen in the industry. Part of it is, of course, driven by the traffic growth and the need for connectivity. I feel that we saw a little bit broader base of purchases in Q4 than we maybe expected when Q4 began.

Thank you, Andrew. Moving to the next question, please. The next question is going to come from the line of Francois Bouvignies from UBS. Francois, your line should now be open. Please go ahead.

Hi, thanks very much for taking my question. I have a question, maybe more on the geopolitical side of things. We have seen, of course, Trump getting into elections and talking about the tariff potential. I was wondering, given your high exposure to North America, where your production is globally? Because when I look at your Annual Report on 20-F, I know you don't manufacture yourself, but you have like a significant portion of your revenue that's still in-house on the testing and assembly, which seems to be in China, but correct me if I'm wrong. And I mean outsourcing is through EMS, which I assume is mostly in Asia. So it seems that mostly your supply chain is coming from Asia. I was wondering how to factor the potential of tariff over time in your business? So if you can help on that? And does it change your strategy maybe doing more in local North America, that would be very helpful. Thank you.

I can start. If you look at our supply chain, as you mentioned, we have production today in North America. So, where we are made in America for America, we have in Latin America, we have in Europe, we have in Asia, we have in India. We have pretty broad-based production capacity that we are utilizing. We have the opportunity to move production between the different sites, both in our internal but also with the external manufacturing sites that we have. It depends a little bit on the product mix, et cetera, of course, but we have this opportunity to work with the supply chain depending on what kind of decisions that we will see ahead of us. Tariffs could have an impact going into 2025. But I think we are all waiting a little bit to see what is going to happen there. We are working on that continuously, trying to balance and utilize the system we have.

As you know, we built a factory in the U.S. I would just add that we commissioned it a few years ago, preparing for a different geopolitical situation. The world is moving from a cost-optimized supply chain to resilience. You need to factor in resilience in the supply chain. That's why we built up the U.S. factory. We're increasing the capacity in North America as well. We'll have to see just like Lars said how this looks in reality and then adjust as much as possible. We have to see with that question.

It's worth mentioning that on tariffs, it's normally not general tariffs. There can be different exemptions, et cetera. We have seen this in the past where critical products for a market have been exempted from tariffs, et cetera. It's too early to say what's going to happen. But of course, we are working and following this closely.

Very clear. Thank you. Can I have a follow-up? Or should I go to the queue?

If it's very brief, we can take it.

Yes. I mean just on the software dynamics side, you ended the year with a good software mix based on your comments. I was just wondering if you think that's going to continue in '25 or early '25? That's it. Thank you.

I think when it comes to a single quarter, especially the fourth quarter, we tend to have a higher software mix this year as well and maybe even a little bit exaggerated in the quarter. So to see it as a trend may be too early to talk about.

But I think we should add there. If you think about what's happening when we horizontalize the network, that's what we have been working on. That's the basis for the contract win in the U.S. as well as in Europe. It's an increasing amount of software that structurally is going to come. Q4 is, as Lars said, but structurally, we're going to go into a situation of more software as opposed to hardware.

Thanks, Borje. We're moving now to the next question. So Simon Granath from ABG. Your line should now be open. Do you hear it, Simon?

Yes, I do. Good morning, and thank you for the presentation. I'd like to expand a bit on the traffic growth here because you have acknowledged in your latest mobility report that it's continuously decelerating. One could potentially argue that this is weighing on the demand for your products. Nonetheless, data traffic is still growing, and you do also expect this to continue. But is it fair to assume that this shift is making you put even greater emphasis on margins over the longer term, particularly if this trend continues? Thank you.

Thanks, Simon. It's a very good question. Data traffic growth will be what's underlying the demand for our products. Once you build out coverage, it's truly only data traffic growth. And it's right, as you say, it is gradually declining a bit, and that's fair. However, what we expect to see—this actually is a different question—a bit. When you start to think about future applications, we come from a world where it's been mobile broadband to the consumer, demanding one type of traffic. What we see now in the future is a wide range of applications coming up. It's anything from AR/VR glasses, but I would single out one trend that's actually going to be very big for the traffic and start to impact network investments, and it's AI. So far, AI has been mostly on the training side, and that's fine. We're seeing that come into applications in enterprises. I’m sure there are going to be consumer applications. They may well be more voice controlled. In that world, we see changing requirements on the network. The network needs to be prepared for AI traffic. It's going to require more uplinks and different network performance. That may be more important in the next few years as a traffic definition. So, yes, overall traffic is probably going to continue to taper down. I think demands coming from these new applications will significantly impact the investments in the network. That's why we're quite excited about where we are on the demand for network equipment, but also the ability to monetize that through network APIs. I think they all are starting to come together, making us a critical component in how AI will be deployed. So I think we should look at the future; if you only look at consumer mobile broadband, you can get a bit negative. We need to look at the other side, which is starting to happen at a very different pace. I wouldn't rule out that starting to happen in North America, where we see demand picking up. The data traffic is growing at about the same rate as before, but the nature of the traffic is changing. I think the focus, anyway, needs to be on operational excellence. If we focus on that, we can say, okay, if the additional exciting data traffic growth takes 12 months, 24 months, or 36 months to become meaningful, at least we have a very solid core business. The focus on margin is essential. We cannot drop that. But the other part is equally important.

Thank you so much. May I have a follow-up?

Simon, I think we better just move on, just because we have quite a long queue. But thank you for the question. Feel free to join for a follow-up at the back of the queue. If we can move on now to the next question, Sebastien Sztabowicz from Kepler Chevreux. Your line is now open, Sebastien.

Yes, hello everyone. And thanks for taking my question. One question regarding the mix for the coming quarters. How do you see the mix evolving? Specifically attached to that, do you see any opportunities linked to the 5G Advance rollout going forward? It seems the U.S. operators are preparing for more rollout of 5G Advance. Is this something that could positively affect your mix in the coming quarters? Thank you.

If I start with the mix, from a geographical perspective, we will have quite a good growth in the U.S., as you know, in North America. The growth rate will come down as we more come into stabilized rollouts, but still a bit of support. With the very high growth rate you have seen in the past quarters, that will calm down. And if there are any stabilizing in the market, some recovery in some regions, that could have somewhat of a negative market mix, but also on the rollout mix as such within North America. 5G Advanced rollout, I think I'll leave that one.

Yes. I think it's a very good question. We're starting to see some traction on 5G Advance. So we're in very good discussions. I think that's the next step that's going to again provide high-performance networks for the future type of traffic. We're quite excited about that. However, if it impacts the next few quarters, I think that's too much to say, but we're encouraged by the traction we see.

Thanks for the question, Sebastien. Moving onto the next question, please. Next question is coming from Daniel Djurberg at Handelsbanken. Daniel, please go ahead.

Thank you, Daniel and good morning. Yes, a question on capital allocation, obviously, also a broad question, but the net cash increased to SEK 12.3 billion. You have a gross cash of SEK 76 million in Q3 and net SEK 38 billion. You will have iconectiv adding some SEK 10 billion or SEK 11 billion to this. You propose SEK 9.4 billion in dividends, hence, you will have a huge cash pile also after that dividend. So the comment on the question is really how you think of the capital allocation, the cash you need for the operation and the potential for any extra dividend, buyback, or so, or if you expect to do another quite a lot of acquisitions or anything else that we should bear in mind? Thank you.

When it comes to capital allocation, I think, as you know, our focus is—our first priority is to ensure solid R&D so we can continue our long-term technology leadership. We need to ensure that we continue to invest to maintain that leadership. So that is key for us. Yes, we're coming out with a good net cash position, but you can also argue it's coming back to more historical levels. When it comes to M&A, I think what we are looking at is where possibilities could be with bolt-ons within the product portfolio or geographical expansion, but not any major investments in that area. Going forward, the Board has proposed an increase in the dividend to show gradual improvements in or increases in the dividend capacity. In the coming years, I think that will probably be a question we address when looking at further dividends or allocation to shareholders.

I also want to take maybe another angle on this. We can organically develop our portfolio. We have a strong position on the mobile network side. On the enterprise side, we have a very solid base to develop that from. We are comfortable with our starting position. This means we may add some geographic coverage or technology components. However, we will not do any bigger acquisition for the reason that we need to deliver on the ones we've done. We need to create value for the shareholders and strengthen the company with the investments we've made. There is a lot of work to do before considering that question. We are focusing on smaller add-on bolt-ons and geographic expansions.

Thanks for the question, Daniel. Next question please. Next question is from Jakob Bluestone at Exane BNP. Jakob, your line is open.

Thanks, Daniel. Hopefully, you can hear me okay. I appreciate you haven't guided specifically for 2025. I presume that reflects some of the broader geopolitical uncertainties. But I was just hoping you could maybe give us a little qualitative color around some of the puts and takes for revenues and margins. You've mentioned potential risks around tariffs and market growth. Are there any other things that we should bear in mind for revenues? For example, the fact that you had a number of one-offs in '24. At the margin level, can you maybe just help us understand if you see your margins and broader cost control? You have your big cost savings in '24 as you cut back as revenues were under pressure. Does some of that go into reverse? Could we start to see some margin pressure coming as you start paying people more bonuses again, and perhaps some of the mix is a little bit different as places like India start to grow again? Just interested in anything you can say qualitatively on '25? Thank you.

You start on the top line, and I can walk down the margins and costs.

Yes. I think we see a more stabilizing outlook. The trend of falling sales feels like it has changed. It's always dangerous to say everything has changed, but at least we're getting more comfortable with the outlook of stabilizing and returning to some more historic patterns. A solid indication we are in a good spot. We have seen North America return to stronger growth, the numbers are significant, but focus on the broader recovery in North America. It’s not just one contract; it’s broadening to many operators. We're becoming more positive about Asia and Europe as well, but it is getting more choppy. On revenues, what may impact margins is the amount of rollout. A large rollout can hurt margins, and that's more important. Going forward, the U.S. has historically been the front market. Given the broad-based growth, we're seeing patterns in stability across the regions and improving trends.

Yes. We are still in a downward trend outside of the U.S. and Europe. We see challenges in Africa and competition in Latin America, and it's hard to predict the trajectory there. When it comes to margins, there's potential for pressure. There will be a mix-related strain on the margins. You'll see the underlying cost inflation. We're continuously working on cost reductions, and as we mentioned in the outlook, restructuring will remain elevated to manage cost inflation pressure.

Understood. Thank you.

Thanks, Jakob. Moving to the next question, please. Next question is coming from the line of Andreas Joelsson at Carnegie. Andreas, please go ahead.

Good morning everyone. I'd like to go back to Daniel's question on capital allocation, if I may. Just to ensure we understand everything, you have a strong cash position. You will have proceeds and free cash flow also for 2025, I guess, given that you see a stabilizing outlook. Philosophically, what is the argument for a company like Ericsson to have a net cash position? I recognize you've maintained it historically, but what's the reasoning behind that?

The firm commitment to ensure that we have the capacity to invest in R&D over time has been guiding us for years. We felt it has hindered our ability to invest when we haven't had the right cash position. Coming into 2025, we will assess what is the right capital structure and discuss it internally together with the Board, then communicate how we look upon this.

A philosophical point we rarely talk about: our customers care about this aspect. They typically make 10-year commitments when they adopt our networks. They prefer that we are solid from a financial perspective to make that commitment comfortably. To avoid discussions and customer interactions, being conservative about capital is better. It's important from the perspective of our customers. Customers do recognize our shift from being hardware-centric to software-centric. Having the right capital is less significant for them now, and we're seeing the benefits of our software business growth.

Thank you. Very helpful.

Thanks, Andreas. Moving onto the next question, please. Next, we have Sandeep Deshpande from JPMorgan. Sandeep, please go ahead.

Hi, can you hear me? I have a quick question for Borje about the stabilizing end market, particularly in North America. Is it share gains that are causing the improvement in the North American market, or is it 5G Advanced? What is the next product to drive growth from here? Given that 5G has been rolled out in the U.S. at this point and somewhat in other markets, clearly not as much as in the U.S. But do we need 6G to happen anytime soon? What's the timing for 6G? I'm trying to understand the timing of new products that'll drive continuous growth that you've seen in the second half of this year. Will we see a situation where, in the second half of the year when comps become more difficult, growth weakens again?

First of all, I think 2023 was a very low year. If you look at the percentage growth in North America, focus on that, but that's not going to be predictive going forward. If you look at Q4, part of the increase in North America comes from market share gained from that big contract. No doubt about that. That's an important driver that moved into deliveries during the second part of the year. However, as I said, it's also a broader-based recovery. 5G has not been fully built out yet. The demand for 5G comes from growing 5G traffic, and we're still early in that build-out. If you look at the North American market, the 5G stand-alone has not rolled out. Dynamic spectrum sharing is frequently providing the 5G icon without true coverage. We are early in the 5G build-out cycle. Traffic volume and the need for improved connectivity will drive new investments. The new growth primarily arises from this, and there are still many new applications emerging. Regarding 6G, it's likely to be introduced later in this decade, but 6G will evolve from 5G, and the focus will be on more efficient networking architecture. This dynamic will create smoother investments where traffic increases and won't produce drastic shifts for the OEMs.

Thank you very much. Moving to the next question. The last question is coming from Joachim Gunell at DnB. Joachim, please go ahead.

Thank you and good morning. In 2024, the progress in networks has really stolen the attention here, and there's been a stellar performance. However, in cloud software services, including the IPR catch-up payments, the margin levels on operating profit have been fairly flat. Can you comment on what you need to see to improve this trend going forward? In relation to the long-term 15% EBITA target for the group, where do you envision cloud software and services margins need to be in order to deliver on that?

In cloud, we see good underlying improvement. It doesn't have at all the same swings you have in the network business, which is quite different. It requires what we have done there, continued commercial discipline driving cost efficiency and the whole delivery that we have in cloud software and services. To improve margins further going forward and increase pace, we need to drive top-line growth within the segments. This work is currently underway. There are good plans and hard work going into that, and we should see signs of that in '25, I believe. They have also prioritized different parts of the group, reducing costs in others to make sure we end up at the right cost levels in different areas within cloud software and services. They should gradually continue this EBITA margin improvement journey, aiming toward mid-to-long-term double-digit levels.

Thank you very much.

Thanks, Joachim. Thanks everyone for joining. That now concludes the Q&A session. Thank you.