Ericsson Lm Telephone Co Q2 FY2025 Earnings Call

Hello, everyone, and welcome to the presentation of Ericsson's Second Quarter 2025 results. With me here in the studio today are Börje 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 in 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 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 Börje and to Lars for their introductory comments.

Thanks, Daniel, and good morning, everyone, and thanks for joining us today. So we delivered a solid Q2 with organic growth of 2% following the weak development in the last few years and a 3-year high in EBITA margin as we continue to demonstrate strong execution against both our operational and strategic priorities. Milestones included a fifth quarter in a row of positive EBITA in Cloud Software and Services. And we continue to have solid execution in Networks with good gross margin. We returned to sequential growth in Global Communication platform following the market exits, and Aduna has now signed up all three operators in Japan. We achieved these results despite the fluid geopolitical and trade environment. Let me give you some key financial and strategic takeaways before Lars dives further into the numbers. As I said, organic sales grew by 2%, with growth in market area Americas and in IPR, despite the temporary investment pause in India. We also saw increasing FX headwinds during the quarter, almost SEK 5 billion year-over-year. As I mentioned, we saw strong development in our margins. Gross margin came in at 48%, and we delivered an EBITA margin of 13.2%. Importantly, the margin improvement was broad based across all segments. The cost actions we took during the last year are now flowing through the P&L, and we continue to take actions to improve our cost base, which should provide benefits over time. While we expect the overall macroeconomic environment to remain fluid or dynamic, we expect the RAN market will broadly be stable for the remainder of the year. To return the RAN market to long-term growth, it remains clear that the industry needs new monetization opportunities. To that end, we continue to execute on our strategic initiatives to create new use cases for mobile networks. The first major use case is fixed wireless access, which now has more than 160 million subscribers. Interestingly, the Net Promoter Score is often higher than for fiber. To take full advantage of 5G, operators need to transition to 5G stand-alone networks because that will enable differentiated connectivity solutions. It is encouraging to see customers with 5G SA coverage actually offering service innovation like network slices for mission-critical applications. In addition to that, we see network APIs as one of the key monetization engines for the industry and for us. So far, revenues are small, but we see great interest in some initial API use cases such as fraud detection. In the quarter, our joint venture, Aduna, expanded to all three operators in Japan. We now cover major markets with Aduna. In parallel to executing on our strategic priorities, we focus on strengthening Ericsson to succeed across varying market conditions. This includes discipline on pricing and cost, which is reflected in OpEx coming down from last year as a result of all the cost actions we have taken. Over the last year, we have reduced our total number of employees by about 6% or 6,000 while maintaining organic growth. It's good to see that coming through the numbers. We see opportunities to further reduce costs following the structural actions like combining three market areas into two and expect substantial benefits from the use of AI. AI is one of the most important technologies we've encountered. It's a key part of how we design and operate networks. We're increasing our investments in this area. You might have seen this past quarter that we announced an AI factory consortium here in Sweden that will give us access to the latest chip and compute power. As we look ahead, AI will be a key driver for traffic in networks as AI applications move to the edge. This will require 5G stand-alone to fully support these new types of use cases, for example, low latency and guaranteed uplink performance. This is a fundamental area for us. It's critical that we continue to lead in AI. Before moving on, let me quickly comment on the market development we saw in Q2. In market area Americas, sales increased by 10% year-over-year with good growth in North America, which is encouraging as it is often a front-runner market. Both Networks and Cloud Software and Services grew, benefiting from previous contract wins. The strength in North America was partly offset by lower sales in Latin America, where we continue to see intense competition from both Eastern and Western vendors. Sales in Europe, the Middle East, and Africa declined by 1% year-over-year. In Europe, sales actually increased slightly supported by network modernization. Europe is also a market where we see high competition from all vendors. We're confident in our competitive portfolio and technology leadership; thus, we remain commercially disciplined as we approach the market. In Southeast Asia, Australia, Oceania, and India, sales decreased by 22% year-over-year, primarily due to the temporary pause in network investments in India related to specific market uncertainties. But Southeast Asia is also an area where we observed increased competition. Lastly, sales in Northeast Asia declined by 15%, attributed to reduced customer investments in some 5G front-runner markets. However, in the quarter, we have made strong progress on discussions with customers in the Japanese market. Accordingly, we announced that we will establish an R&D center in Japan. With that, I would like to hand over to Lars to go through the financial details more elaborately.

All right. Thank you, Börje. Let me start by providing some additional points to the group before discussing the segments. Net sales in Q2 totaled SEK 56.1 billion, with organic sales growing 2% year-on-year. Reported sales declined by 6%, with a currency impact of SEK 4.7 billion driven by the strengthening of the Swedish krona against the U.S. dollar and other currencies. IPR revenue increased to SEK 4.9 billion in Q2 from SEK 3.2 billion in Q1, mainly related to previously unlicensed periods. The run rate exiting Q2 is around SEK 13 billion. The adjusted gross margin for Q2 came in at 48%, up from 43.9% in Q2 last year, with margin improvements broad-based across all segments driven by IPR revenue, favorable product mix, and cost-reduction initiatives. It's worth noting that gross income experienced a negative currency impact of SEK 2.4 billion. Compared to Q1, gross margin was slightly lower, primarily due to lower gross margin in Networks, which was expected and which I will cover later. Operating expenses, excluding restructuring charges, totaled SEK 20 billion, approximately SEK 3 billion lower than last year. About half of this reduction stemmed from cost initiatives, while the rest is mainly currency-related. Even with the currency headwind of SEK 1.4 billion, adjusted EBITA rose by SEK 3.4 billion, reaching SEK 7.4 billion. This improvement was driven by lower operating expenses and higher gross income, bringing the EBITA margin to 13.2%. On the cash flow side, before M&A, we reported SEK 2.6 billion, down compared to last year. Last year's cash flow benefited significantly from reductions in operating working capital, thanks to the completion of large-scale rollout projects and substantially lower inventory levels. Now let's move on to the segments. In Networks, sales decreased by 5% year-on-year to SEK 35.7 billion with a negative currency impact of SEK 3.1 billion. Organic sales increased by 3%. In market area Americas, organic sales showed good growth. Organic sales also slightly increased in market area Europe, the Middle East, and Africa; however, sales in the other market areas declined, with the most significant drop in India. IPR revenues increased, supported by the settlement. The Networks adjusted gross margin came in at 49.5%, benefiting from IPR licensing revenue, cost-reduction initiatives, and favorable market mix, partially offset by tariffs. Compared to Q1, margins declined somewhat in Q2 as expected. The positive impact from higher IPR licensing revenue was offset by a less favorable market and product mix and, to some extent, tariffs. Networks adjusted EBITA increased by SEK 1.2 billion to SEK 6.5 billion despite a negative currency impact of SEK 1.3 billion. The EBITA margin improved significantly year-on-year, moving up to 18.2% from 13.9%, driven by increased gross income and lower operating expenses. Turning to the segment Cloud and Software and Services, sales decreased by 5% year-on-year to SEK 14.4 billion, including a negative currency impact of SEK 1 billion. On an organic basis, sales grew by 1%, with growth in market area Americas and IPR licensing, partially offset by declines in the other market areas. Adjusted gross margin came in strong in the quarter at 43.2%, resulting from a favorable sales mix with a higher share of software and increased IPR revenues, coupled with the continued focus on delivery performance and commercial discipline. Adjusted EBITA increased to SEK 1.4 billion, with a margin of 9.6%, supported by higher gross income and lower operating expenses, and including a SEK 0.1 billion negative currency impact. In Enterprise, sales decreased by 14%, and organic sales were down 6%. Organic sales in Enterprise Wireless Solutions grew by 5%, benefiting from higher product and subscription sales in enterprise networking. Global Communications platform declined by 9%, impacted by the decision taken last year to reduce activities in some countries. We expect Enterprise sales to stabilize during 2025 on an organic basis, excluding currency movements and the impact of iconectiv, which is expected to close during Q3. Adjusted gross margin increased to 54.9%, driven by the focus on more profitable market segments in Global Communications Platform and stronger product mix in Enterprise Wireless Solutions. Adjusted EBITA was minus SEK 0.5 billion. Moving on to free cash flow, which was SEK 2.6 billion before M&A, broadly in line with the previous quarter. Operating cash flow was also similar to Q1 at SEK 4.1 billion, with the benefit of higher earnings broadly offset by changes in other operating net assets. Investing cash flow outflow was SEK 10.9 billion, reflecting investments in interest-bearing securities. Net cash decreased by SEK 2.6 billion compared to the previous quarter. Dividend payments of SEK 4.8 billion more than offset the positive free cash flow in the quarter. Next, I will cover the outlook. Global uncertainty continues with potential for further tariff changes and broader macroeconomic factors, like currency and trade flows. This can affect customer behaviors and investment decisions over time. With that in mind, turning first to sales, we expect Networks Q3 to be below the 3-year average seasonality, primarily reflecting the mechanical impact of the higher IPR licensing revenue in Q2. In Cloud Software and Services, we anticipate sales growth to be similar to the average 3-year seasonality in Q3. Both of these indications assume current exchange rates and no tariff changes. Next, regarding Networks gross margin, we expect it to be in the range of 48% to 50% for Q3. And with that, I hand back to you, Börje.

Thanks, Lars. Our Q2 results demonstrate solid execution of our strategic and operational priorities. We continue to strengthen our competitive position in mobile networks and expect the Enterprise to stabilize during the second half of 2025, following Global Communications Platform returning to sequential growth. It's encouraging to see continued momentum in our strategy. In customer discussions, there continues to be strong interest in 5G stand-alone networks that provide differentiated connectivity. We're seeing new use cases to monetize network investments taking shape, including FWA, defense, mission-critical, and we begin to see various enterprise applications. Many enterprise use cases are now transitioning from proof of concepts to real industrial deployments. This is exciting, but it takes time to create these new markets. Ultimately, the exact timing of investment decisions will be in the hands of our customers, but we believe the mobile network market will remain broadly stable for the rest of the year. In this environment, we continue to invest in technology leadership while also structurally improving our business through rigorous cost management and enhancing working capital. This way, we're positioning Ericsson to manage short-term market fluctuations and drive margin expansion even in challenging markets. At the same time, we remain well-positioned for the long term to drive growth in our business. But before we turn to Q&A, I would like to thank all my colleagues for their hard work in making these results possible. With that, let's open up for Q&A. Over to you, Daniel.

Thanks, Börje. We'll now move to the Q&A section. The first question today is going to come from Sandeep Deshpande at JPMorgan.

My question is about your guidance on the gross margin in the Networks business. You're guiding to a robust gross margin for the next quarter. In the second quarter, you had some positive impacts from the Lenovo deal that you signed in the quarter. Are you expecting to sign more deals in the second quarter that can help the margin? Or is the mix shifting for particular reasons? I'm trying to understand the dynamics in the gross margin in Networks in the third quarter.

When it comes to the margin outlook, this is what we see regarding the product and market mix that we have at hand now coming into the quarter, and it's not related to IPR. It's more about the underlying margins that we see coming into the quarter. So that is what we expect.

Are you saying that India will remain weak in the third quarter, even though it was weak in the second quarter?

I think the pause we saw now is temporary. When it will restart is difficult to say. Thus, we have low expectations for Q3 concerning India.

One thing that is not an India comment. Over the last few years, we've worked a lot on reducing the sensitivity of our gross margin to different margins. We're in a better shape today than ever before, which makes it more predictable in that sense. Some markets may go up, some markets may go down.

Thanks, Sandeep. The next question is going to come from Sébastien Sztabowicz at Kepler Cheuvreux.

On the OpEx, it was a little below expectation in the second quarter. How do you see the OpEx trending in the rest of the year or for the full year? Are you still forecasting flattish OpEx for this year? Or is there a downside to the OpEx level?

As you saw, the result of the activities we have taken over the last year is coming through in OpEx here now in the second quarter. We are happy to see this. It takes time for these activities to materialize. Regarding the outlook, we anticipate a similar level in OpEx in the first and second halves. Normally, we have somewhat higher seasonality costs in the second half. That's the outlook we see moving forward. But it takes time for the cost reductions to reflect in the numbers, which is why we maintain this view on the second half for the year.

Thanks, Sébastien. The next question is going to come from Jakob Bluestone at BNP Paribas.

I was merely wondering if you could elaborate on any tariff-related effects during the quarter. You previously guided for a 100-basis-point margin hit. Was that what actually happened? I didn't see a number. Were there any pull-ins? Can you provide commentary on expectations for tariff-related effects in Q3?

Regarding tariffs, starting with the pull-ins, we had a bit of an impact in Q1 with some pull-ins and impacts on the product mix supporting the margin in Q1. This quarter has been more typical, you could say. As for the impact, we guided around 1 percentage point. We came out around this 1 percentage point, a little lower this quarter, and we expect similar levels going forward based on what we know today. Given the ongoing discussions about tariffs, we will see how this unfolds.

Thanks, Jakob. The next question today is going to come from Fredrik Lithell at Handelsbanken.

I was wondering if you could describe the trends in the North American market. Since Q3 of 2024, you started to ramp up with one of your large clients there. How does this project look? Is it going to ramp down gradually? Or are the other big clients in North America mitigating part of that? Could you elaborate a bit?

As you might recall, we started seeing a ramp-up during Q2 last year, and heading into Q3, it was increasing rapidly. Now coming this year, we're at a stabilized level on sales, so comparing it will be more challenging in the second half of the year. Overall, the pace is good. North America isn’t reliant on only one customer; there are at least three customers. They all show strong investment levels moving forward.

I think you summarized it well.

Thanks, Fredrik. The next question is going to come from the line of Andrew Gardiner at Citi.

Another one on the Americas, if I could, just following up from that last answer, Lars. Can you give us a sense of where customers are across all three main customers in terms of inventory replenishment? You had a significant drawdown impact in late '23 through most of the first half of '24. Do you have a sense of where their inventory levels are at the moment? Are we back at a more normal level? And also concerning the mix within the market, is there beginning swap activity? Or will that happen in future quarters? A bit of detail around that would help with the margin outlook.

Regarding inventory levels, among the different operators, they appear fairly balanced at present. They operate differently, but overall, they seem to be in a good position. As for the revenue mix, we anticipate seeing more service revenues and rollout activities in the mix moving forward, which reflects a difference we will observe. However, there can be shifts in margins between different quarters. Looking at a long-term view, we expect a steady, positive development through the year.

Understood. As you indicate, the mix may be changing, but your gross margin outlook remains steady from 2Q to 3Q?

Yes. That's the expectation. As you know, our industry is highly project-based, and product mix affects performance, but based on our current outlook, this is the guidance we expect.

Thanks, Andrew. The next question today is going to come from the line of Andreas Joelsson at DNB Carnegie.

A more forward-looking question regarding your comments on 5G stand-alone and the investments you're making in AI. I'm curious how you foresee that impacting your business in terms of product mix. Given that you are now, as you said, never been in a better position concerning gross margin, how do you view operational leverage going forward if we see more stand-alone business or more AI-related orders from your customers?

If we start on the 5G SA, I think this is an essential question, Andreas. It's one of the key promises of 5G. We've discussed low latency, high speed, and superior uplink performance, all relating to 5G SA. So far, it has seen limited deployments. About 25% of operators have any 5G SA network. Looking at broad-based rollout, it’s primarily in the U.S. and India, with a few others included. We need to prepare the radio network with mid-band coverage, needing significant improvements to reach broad coverage in Europe. The second part requires upgrading the core. These two elements are essential for fully leveraging the network's capabilities. We’re starting to see new types of devices emerging as well, such as AI glasses, which will need ultra-low latency and guaranteed uplink performance, driving interest. We're also noticing numerous network slicing opportunities where organizations need connectivity, such as police forces, event organizers, and other use cases. Therefore, while we aren’t witnessing massive revenues yet, we see a growing interest, necessitating better radio coverage and core infrastructure. AI is a fundamental technology for us, as we leverage it in several areas, including coding, operational efficiency, and network management. The complexities of future networks will drive the demand for AI-driven, fully autonomous networks, which is why we invested in the AI factory. AI's growth will also advance edge computing, impacting traffic demands and driving wireless consumption. Overall, while we’re early in our journey with AI and 5G applications, we believe they will significantly drive future business growth.

A lot to digest.

Yes, I'm sorry about that. But it's a very exciting time we're in, I think.

Thanks, Andreas. The next question today is going to come from Simon Granath at ABG.

Now that the U.S. market appears normalized and, as you highlighted in the report, Dell'Oro estimates suggest an overall stable market, I wanted to ask what other areas you might boost efforts to improve sales. In particular, what are you seeing in defense and 5G for such areas? You highlight defense in your annual report, but it hasn't been discussed recently. Could this be a needle mover, or what is needed for that to happen?

To address that, we're doing a couple of things. First, I believe the potential is quite significant. Defense benefits from connectivity, and 5G plays a crucial role in connecting everything, including equipment and sensors. With that said, there is a substantial opportunity for 5G technology in defense. We are engaged in discussions with several countries regarding this. Last year, we launched the Ericsson Federal Technology Group (EFTG) in the U.S., specifically to collaborate with the Department of Defense. Though revenues from these applications are still small, I see this as a potential growth opportunity. Increased defense spending in Europe is likely to be allocated to connectivity, which is vital for modern defense forces. This creates an excellent opportunity for Western vendors, as high-risk vendors may not be considered. Moreover, I see great potential in mission-critical applications, as numerous countries have antiquated communication systems for police and first responders. We're in extensive discussions worldwide about these applications, which have long sales cycles but may yield substantial wins. Connecting first responders and optimizing how they operate through real-time connectivity is changing the game for safety and operational efficiency.

Thanks, Simon. The next question comes from the line of Ulrich Rathe at Bernstein.

To follow up on Jakob's question regarding tariffs, I am interested in learning more about the concrete measures you're taking to mitigate this situation. Is this essentially low-hanging fruit now because the uncertainty is high, and you're hesitant to realign your supply chains given the tariffs are still in flux? Or are you already planning to realign your supply chain in anticipation of tariff changes?

Concerning that, it is indeed mostly about supply chain and sourcing. We have yet to make firm decisions given the uncertainty of the environment. However, we have been preparing for possible moves, which started last year, by assessing opportunities and planning for adjustments in production across various regions. So while we can make smaller changes now, any significant investments will depend on how the tariff situation ultimately unfolds.

I would only add that we already have a factory in the U.S., which became operational in 2020. We anticipated this scenario during the first Trump administration. That factory is fully operational now, providing us with more flexibility. We aim to mitigate the impact through our existing manufacturing footprint. Future decisions will depend on the final shape of tariffs.

Thanks, Ulrich. The next question is going to come from Felix Henriksson at Nordea.

I have a question about your confidence in gaining market share since a few years ago in your latest Capital Markets Day, you stated that in Networks, you targeted to gain 1 percentage point of additional market share each year. Now that you have the AT&T deal, how do you see your potential to gain further market share in the RAN market?

A few years back, we were all talking about high-risk vendors in Europe. As it looks now, those opportunities are limited. I think we need to acknowledge that. We view the world in terms of a few big home markets where we need to be strong, specifically the U.S., India, and Japan. We are making substantial investments to secure our position in these markets, hence our investment in an R&D center in Japan. Our manufacturing site in the U.S. and our significant presence in India underline our commitment to maintaining a leadership position. I am confident we can enhance our position in these essential markets.

Thanks, Felix. The next question comes from Sami Sarkamies at Danske Bank.

Can you elaborate on the strong results at Cloud Software and Services? You had almost a 10% EBITA margin in the second quarter. What is a reasonable assumption on the underlying level going forward? If you could also update us on the IPR run rate following the Lenovo settlement.

Starting with the IPR run rate, we're currently at SEK 13 billion, which is where we stand now. Concerning Cloud Software and Services, as you highlighted, we achieved a strong margin in Q2, primarily supported by IPR and a robust product mix with a higher software share. However, it’s also driven by the continuous improvement we've seen over several quarters in Cloud Software and Services. The underlying trend that we've seen suggests we aim for double-digit EBITA margins in the mid-term.

To add to that, when we implemented the turnaround plan for BCSS, it involved components like increasing the software share, maintaining commercial discipline, and reducing costs. The combination of these three factors drove today’s results. While we were aided in Q2 by the IPR, we should focus on the underlying trend, which continues positively. Additionally, much of our settlement is divided into two parts: the immediate outcome and future arbitration, meaning that the run rate will be influenced significantly by the arbitration rather than the past settlement. We will see.

Thanks, Sami. That concludes the Q&A session for today. So with that, thanks for joining us, everybody, and thanks for your time today. Thank you.

Thanks, everyone.

Thank you.