Ericsson Lm Telephone Co Q4 FY2025 Earnings Call

Hello, everyone, and welcome to the presentation of Ericsson's Fourth 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. 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. Actual results may differ materially due to factors mentioned in today's press release and discussed in the 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 the call over to Börje and to Lars for their introductory comments.

Thanks, Daniel. So good morning, everyone, and thanks for joining us today. It was a strong end of the year as we executed with discipline and made solid progress against our strategic priorities. We are building a more resilient Ericsson. We expanded EBITA margins year-on-year for the ninth consecutive quarter, and we're getting closer to our long-term target of 15% to 18% EBITA margin, and we ended the year with a net cash position of over SEK 61 billion. Our cost initiatives are just one component of our actions to structurally improve margins and cash flow. You have seen that we have reduced the headcount, for example, by 5,000 over the past year, and we expect to continue reducing headcount going forward. Last week, we announced some initiatives we're taking in Sweden as part of a global effort to maintain cost efficiency in our business. With the operational improvements we've implemented over the past few years, they are now getting increasingly visible in the P&L, and we had another 48% gross margin quarter now in Q4. The EBITA margin was 18%, both for the quarter and the full year, and that means that we are tracking very close to our long-term financial targets after normalizing for the approximately 3 percentage point benefit from the iconectiv gain. Going forward, we expect to see improving operating leverage as our top line accelerates, something we could see in Q4. Now, the underlying demand environment for mobile networks remains flattish, but it is encouraging that we had an organic growth of 6% during Q4. The reason for this is that over the past few years, we have invested in a number of growth opportunities and initiatives like 5G core, mission-critical networks, and enterprises, and I'll expand a bit more on this. In my view, we're actually entering a very exciting era of what we can call hyper-connectivity. We're starting to see everything being connected. I would say Ericsson is very well placed for this paradigm shift, and I believe we have the right strategy to win. To date, AI investments have been focused on models, semiconductors, data centers, etc. For sure, these are critical, but the real economic value will actually come from AI applications and devices. Think about drones, humanoids, connected glasses, XR glasses, and instantaneous or simultaneous translation services. All these new types of AI use cases will really change the nature of traffic with much more demand for uplink and low latency, and it must be resilient and trusted. So when you think about this new world with AI entering the physical realm, if you will, those applications and use cases will be distributed, but more importantly, they will also typically be mobile. They will require advanced wireless connectivity. Best effort connectivity, Wi-Fi, 4G, and I would even say 5G non-standalone, will simply not be enough. Instead, we will require 5G standalone today, and later on, we will require 6G. But this new world will also need better mid-band coverage to achieve the right performance of the network. Take just one example: China has a 10x denser grid than the rest of the world. That is one reason why many people are saying China is a formidable competitor in AI today as they move into AI applications. So, at this point in time, it is very exciting. Our strategy is to lead in mobile networks with high-performance, autonomous, and programmable networks that are 5G native, while also scaling this mobile platform to new areas, like mission-critical enterprise solutions, but also providing tools to developers. Let me briefly go through some of the progress we made against our strategic initiatives during the last year. Through our high-performing programmable and autonomous network, we're enabling our CSP customers to deliver differentiated performance and create new applications and use cases to monetize. When you think about differentiated performance, it essentially means creating dedicated performance for the application you have at hand. During the year, we signed several key agreements with front-runner customers like Telstra and Vodafone, and we also made critical inroads in the important Japanese market with all leading operators. These advanced networks we're building with front-runner customers will be key to monetizing and scaling the AI opportunity. In parallel, we focused on scaling the mobile platform to new use cases and sectors. The most mature use case is fixed wireless access, which during 2025 will actually reach 150 million global subscribers. Typically, these customers have better satisfaction compared to other access technologies like fiber, for example. As you've heard me say earlier, we're also starting to see traction within mission-critical applications, which we think is a key growth opportunity for us going forward. In 2025, we executed many new agreements in the public safety sector, and we're also targeting national security and defense operations. On the enterprise side, we're continuing to strengthen our position. The market for network API is starting to develop. In 2025, Vonage was the first to offer aggregated access to network APIs across all three major U.S. carriers. These advanced APIs included advanced fraud detection, and we have significant customer interest today. Our joint venture, Aduna, onboarded and achieved full coverage in five countries, including the U.S., Spain, Germany, Canada, and the Netherlands. In enterprise wireless solutions, we're seeing the market for private 5G starting to industrialize. It's still, though, early days, but we are seeing growth in our Wireless WAN solutions, partially offset by lower sales in private 5G. So it's still a developing market here. But before passing on to Lars to go through a bit more on the numbers, I'd like to take a moment just to go through our capital allocation strategy. Our top priority is to invest for technology leadership, and we expect this to be largely organic. We don't see any need for large acquisitions going forward, as we believe we have the assets needed to execute our strategy. However, we expect to see some smaller potential tuck-ins, but that will be smaller in nature. Our current very strong financial position offers scope for increased shareholder distributions. As you've seen in this report, the Board is proposing an increased dividend to SEK 3 per share and a buyback program of up to SEK 15 billion. This represents the largest shareholder distribution in our history and reflects our strong position and the Board's confidence in our strategy. So, Lars will now go through this as well as our financials. Over to you, Lars.

Thank you, Börje. I will start with some additional comments on the group before discussing the segments. In Q4, net sales reached SEK 69.3 billion, with organic sales growing by 6% compared to the previous year, and growth across all segments. Sales increased in the Europe, Middle East, and Africa market area, as well as in Southeast Asia, Oceania, and India. The Americas market area experienced stable performance, affected by intense competition in Latin America, though slightly counterbalanced by growth in North America due to an increase in software sales; however, Northeast Asia saw a decline. Reported sales fell by 5%, impacted by a negative currency effect of SEK 6.8 billion. In Q4, adjusted gross income was SEK 33.2 billion, accounting for a currency headwind of SEK 3.6 billion. The adjusted gross margin reached 48%, supported by our cost reduction measures and operational excellence in both networks and cloud, along with software and services. On the cost side, we made steady progress. Operating expenses, not including restructuring charges, reduced to SEK 21.4 billion, about SEK 2 billion lower than last year. Approximately half of this reduction was due to currency effects, with the remainder from cost initiatives. Excluding currency effects, R&D expenses remained largely stable. Adjusted EBITA was SEK 12.7 billion, an increase of SEK 2.4 billion, including a negative currency impact of SEK 2.5 billion, with the EBITA margin rising by approximately 4 percentage points to 18.3%. This improvement is attributed to our effective operation optimization and reduced operating expenses. Cash flow before mergers and acquisitions was SEK 14.9 billion, driven by earnings and lower net operating assets. As Börje pointed out, the Board will suggest higher shareholder distributions due to strong cash generation in 2025. Now, regarding the full-year results, net sales totaled SEK 236.7 billion, with organic sales increasing by 2%. Growth in the Americas and Europe, the Middle East, and Africa was partially offset by declines in other markets. Meanwhile, reported sales decreased by 5% due to a negative currency effect of SEK 13.9 billion. Despite the sales decline, which significantly affected gross income, higher gross margins more than compensated. The adjusted gross margin was 48.1%, supported by cost reduction initiatives and operational efficiencies. Adjusted gross income increased by SEK 2.5 billion to SEK 113.9 billion, despite a negative currency impact of SEK 7.2 billion. Looking at operating costs, without restructuring charges and impairments, operating expenses fell to SEK 81.2 billion, down SEK 7.4 billion from the previous year. About two-thirds of this decrease came from cost initiatives, primarily in SG&A, while the rest related to currency effects. Adjusted EBITA rose to SEK 42.9 billion, with a margin of 18.1%, or 14.9% if excluding the capital gain from iconectiv. Net income for the year was SEK 28.7 billion, benefiting from the iconectiv transaction. Cash flow before mergers and acquisitions was SEK 26.8 billion, down approximately SEK 13 billion year-on-year, while a strong working capital reduction led to higher operating cash flow in 2024. I will provide a more detailed overview of cash flow later. Now, let’s discuss the segments. In Networks, sales declined by 6% year-over-year to SEK 44.2 billion, with a negative currency impact of SEK 4.4 billion, resulting in a 4% organic sales increase. We observed organic growth mainly in the Europe, Middle East, and Africa market area, particularly from the Middle East and Africa, and also in Southeast Asia due to strong performance in Vietnam. Sales in the Americas saw a slight decline due to ongoing price competition in Latin America. In North America, sales remained broadly stable with continued strong investment. Northeast Asia's sales also experienced a decline because of the timing of network investments. Adjusted gross margin in Networks rose to 49.6%, despite the increased share of service sales, benefiting from cost reduction initiatives and improved operational efficiencies. Adjusted EBITA in Networks remained stable at SEK 10.1 billion, despite a currency headwind of SEK 1.8 billion, leading to an adjusted EBITA margin of 22.8%, up 1.2 percentage points year-over-year. Looking at the year-end results, the full-year adjusted gross margin hit 50% and stabilized at this new level, with the adjusted EBITA margin at 20.7%. Moving to the Cloud Software and Services segment, sales grew by 3% year-over-year to SEK 20 billion, despite a negative currency effect of SEK 1.8 billion. Organically, sales rose by 12%, driven by increased core sales across all market areas and the timing of project deliveries. Adjusted gross margin was 44.3%, marking an improvement of around 5 percentage points compared to last year thanks to a high proportion of software sales and ongoing efficiency in deliveries. Adjusted EBITA rose to SEK 3.7 billion, with a margin of 18.6%, aided by the effective execution of our strategic initiatives. As reflected in the full-year figures, adjusted gross margin was 43%, with the adjusted EBITA margin at 11.4%, both representing new highs. Enterprise sales stabilized organically in Q4, increasing by 2%. Reported sales fell by 25%, influenced by the sale of iconectiv and currency fluctuations. Global Communications platform sales organically increased by 3%, bolstered by CPaaS expansion. Adjusted gross margin declined to 52.1% due to the impact from the iconectiv divestment. Adjusted EBITA stood at minus SEK 1.1 billion, with an improvement of SEK 0.1 billion compared to last year, despite the effects of the iconectiv sale. Moving to free cash flow, which amounted to SEK 14.9 billion before M&A in the quarter and SEK 26.8 billion for the year. The cash flow to net sales ratio was 11% for the year, aligning with our target of 9% to 12%. The year-on-year decrease in cash flow is attributed to substantial working capital reductions in 2024, while working capital in 2025 was stable at historically low levels. Sequentially, net cash rose by SEK 9.4 billion to SEK 61.2 billion. The return on capital employed in 2025 was 24.1%, including the gain from iconectiv, and approximately 19% if excluding it. Regarding capital allocation, the Board conducted a review of the balance sheet and capital allocation principles during 2025. We remain dedicated to maintaining an investment-grade credit rating and a solid net cash position. Next, our four capital allocation priorities: First, we prioritize sustaining technology leadership with ongoing R&D investments to ensure customer confidence at all times. Second, we are committed to stable and progressive ordinary dividends. Third, as Börje highlighted, we will be selective with inorganic investments. Finally, any excess cash will be allocated to shareholders. The Board will propose increasing the dividend to SEK 3 per share for 2025 and implementing a share buyback program of up to SEK 15 billion at the AGM. After factoring in a total shareholder distribution of approximately SEK 25 billion, the net cash position for 2025 remains strong, considering future investment needs and business outlook. Now, let’s discuss the outlook. Global uncertainty persists, with potential changes in tariffs and broader macroeconomic influences. Our outlook is based on stable exchange rates and no changes to tariffs. For Networks, we anticipate Q1 sales growth to mirror the three-year average quarter-on-quarter seasonality. In Cloud Software and Services, we expect Q1 sales growth to fall below the three-year average quarter-on-quarter seasonality. We predict that the adjusted gross margin for Networks will be between 49% to 51% in Q1. Restructuring charges for the entire year of 2026 are expected to remain elevated, with proposed headcount reductions recently announced in Sweden, along with continued actions in other markets. With that, I will hand it back to you, Börje.

Thanks, Lars. Today, we have a strong position and a very competitive portfolio. In many markets, there will be a need to invest to keep network performance at a competitive level. As you've seen, we made critical inroads in many key markets during the year, for instance, in Japan. In 2026, we're planning for a flattish RAN market but expect growth to come from new areas. This means we will need to continue our efforts on operational efficiency. By doing so, we can strengthen our company for varying market conditions. This will enable us to continue with critical investments in technology leadership, including increased R&D investments in defense and mission-critical, while at the same time supporting our margins and cash flow generation. Overall, as I mentioned before, we're entering a very exciting time where AI will move from a focus on data centers and large models to devices and applications. This will require advanced wireless connectivity, putting Ericsson in the center of the next phase in the AI era. Our strategy is focused on ensuring we capture this opportunity by providing the industry's best network capabilities for AI that enable differentiated services and new monetization opportunities. This includes both new use cases by exposing networking capabilities through network APIs, but also new sectors, such as mission-critical networks. This will allow us to capture significant share of the value from connectivity and help drive growth for us as Ericsson. If I project this out a bit longer term, I believe we can have a model with a flattish mobile networks market, but with our investments in growth areas, we can see a modestly growing top line. When you combine the operating leverage, the improving profitability in the Enterprise segments, as well as share buybacks, we should see a healthy growth in profit per share. To wrap up, in 2025, we were laser-focused on strategy execution and continue to take critical steps to position Ericsson for the future. We're unlikely to see growth in the RAN market this coming year, but our investments in mission-critical 5G core and the enterprise will drive growth for the company. I would say it's exciting, if you ask me. On that note, I also want to thank all my colleagues at Ericsson for the fantastic work. Thank you, team. With that, I think it's time for you, Daniel, to lead us through some Q&A.

Thanks, Börje. We'll now move to the Q&A. Thanks. Okay, Operator, we're ready to open the line for the first question. The first question today is from Simon Granath at ABG.

Congrats to the team at Ericsson for the solid results here. On OpEx, I'd like to push a bit on the medium-term trajectory and the R&D balance. With the RAN demand looking broadly flattish into 2026, OpEx growth largely reflecting salary inflation rather than volumes. If we assume a similar demand environment into 2027, with some delays still later in this decade, how do you think about the risk of managing R&D and potential capability changes too early? So, simply on the mid-term OpEx trajectory?

Mid-term, when you look at the OpEx levels that we have today and the structure we have, it's a question about working and investing. We are already in 2025 and going into this year, there are key strategic areas where we are investing and some other areas where we are making different decisions. That will also dictate how we will work moving into 2027. Of course, there is continuous cost inflation that we need to address through productivity to ensure we maintain the right level going forward as well. There will be challenges, and when these significant investments come, we will see. I think you will have to comment as well from your perspective.

Yes, I think, given the flattish market we're in, we will have to continuously improve our R&D efficiency. But there is also a question of making sure we are allocating to the right areas. This is why new areas like mission-critical are critically important as well as defense applications. Even in a flattish market, we believe we can maintain the right level of R&D spend while achieving efficiency in our program. But you should not expect us to trade off technology leadership; we believe we can maintain leadership at the spending level even into 2027 and beyond.

Moving to the next question, please. The next question is going to come from the line of Erik Rojestal at SEB.

Congratulations on the results here. Börje, you mentioned increasing investment in defense in '26, and mission-critical was a key driver here in the quarter. I understand this is a good market for you right now, but can you please shed some light on how large the exposure is that you have currently in this area? And what the size of the opportunities that you see out there? How large are they?

If we start at the end of the discussion, first of all, what we want to say here is, in reality, the investments we make in defense today are captured in the total R&D spend. As we move forward, we probably need to increase that investment a bit. The potential for a sizable market in defense is significant, given the spending in the U.S., and the increased European spending on defense will make this a fairly sizable market. We see that market moving from dedicated solutions, kind of proprietary technology solutions, into much more 3GPP-enabled solutions. This is because it's more cost-effective and offers much better performance. We see the communication market in defense as a sizable opportunity that we want to ensure we're early on in. There are also other applications; for example, the sensing capabilities of our solutions could allow for drone detection. Consider the usefulness of that capability, especially for detecting objects that may not be connected. These are significant opportunities we want to position ourselves to pursue. So when you see us increasing spending, part of it will be offset with other efficiency gains, but we want to emphasize that we are pursuing an opportunity here that we believe is quite sizable.

Thanks, Erik. Moving to the next question, please. The next question is going to come from the line of Jakob Bluestone at BNP.

I had a question around supply chain shortages. I'm wondering sort of broadly, are you seeing any issues that might hold back your ability to grow? Specifically, can you comment on the impact of memory price increases? What share of your bill of materials relates to memory chips? Do you hedge these? Can you pass on any price increases to customers?

Regarding the supply chain, we have worked for quite some time on resiliency, including ensuring supply chain deliveries. That's continuous work we do. But of course, when it comes to the memory side, there has been quite a bit of noise around that. We are in a good position to handle it this year. In terms of pricing, there is a mix. There is some impact, but we are working closely with our suppliers and our customers to make sure that we are not squeezed in the middle. It involves collaboration on both ends.

Can you maybe just expand? How have you avoided shortages? Is this just by building inventories, given the sort of...

It's part of how we work, but also to maintain good relationships and long-term partnerships with the various suppliers we collaborate with.

Thanks, Jakob. Moving to the next question, please. The next question will come from the line of Andreas Joelsson at DNB.

Moving from the splendid operations to the buybacks, perhaps. If we assume that you make SEK 25 billion in free cash flow on a sustainable level, that is equal to the total remuneration to shareholders. Should we assume that around SEK 45 billion is the net cash that you and the board feel is needed to run the operations?

As we mentioned, the view is that it's important to maintain a solid net cash position. We are coming out with SEK 61.2 billion in net cash and the total distribution of around SEK 25 billion. Adjusted for that, we see that it is a solid net cash position coming out of 2025. When we reach next year, we will review this again, of course. The capital allocation principles are there, guiding us going forward.

When you think about the business outlook, you need to consider geopolitics and tight supply chains. All of these factors contribute to the conclusion that our current level is appropriate.

As a follow-up, is there any consideration from the Board and management about implementing a more long-term buyback program to support the growth of EPS?

This is the first time Ericsson has announced a buyback program. It is clearly part of the toolbox for the Board and the AGM and for the shareholders to decide upon.

I think you would also say, Andreas, that it is intentional that we have launched this buyback program. The mandate for these programs is reviewed annually by the AGM. Our hope and ambition are for this to become a recurring matter, though the size will vary depending on outlook.

Thanks, Andreas. Moving to the next question, please. The next question is going to come from the line of Sandeep Deshpande at JPMorgan.

My question is on the market in mobile networks, overall. Has the market changed at all? We've heard about the EU restricting some of the high-risk vendors, but at the same time, you're seeing greater price competition in Latin America. Börje, could you comment on how this market is playing out globally, given the geopolitical situation?

A way to think about it, Sandeep, is we look at this market for the last two decades, and it's remained flattish. We like to plan for that type of market outlook. If it improves, then we have strong cost competitiveness and can achieve operating leverage. If it worsens, we need to review that assumption. But, this is how we think about the business. Over the last few years, we've seen increased competition in Latin America and other parts of the world, such as Southeast Asia and Africa. This kind of competitive landscape comes and goes. A potential positive is the high-risk vendor discussion in the EU, which presents a sizable opportunity. If we estimate the market share of high-risk vendors in Europe to be around 30% to 40%, this represents a significant revenue opportunity for trusted vendors. However, this is still a proposal and will take 12 to 18 months before we fully understand the impact. So we're not factoring that into our current outlook. But it could transform the playing field.

Thanks for the question, Sandeep. Moving to the next question, please. The next question is coming from the line of Sébastien Sztabowicz at Kepler Cheuvreux.

On Networks, how do you see the mix trending in the coming quarters? We are now seeing some stronger growth in Africa and Southeast Asia and lower deployments in the U.S., Japan, and Korea. I'm curious about the trend in network mix. Also at a broad level, what would be the puts and takes to your gross margin in the coming quarters? Where do you see some upside or downward pressure?

I think single quarters will vary. But if you look at the underlying for 2026, North America has healthy investment levels in the market, and we expect that to continue during the year. Concerning growth opportunities, there is investment potential in India and Japan, where we have a solid market position. When customers decide to invest, we should be poised to capture that demand. Europe appears relatively stable. We will assess the situation in Latin America; there are opportunities, but tough competition remains in parts of Southeast Asia as well. We have had successful quarters in Africa with 4G and 5G rollouts and modernization activities, and we hope to see that continue into this year. That's a bit of the balance on market mix. Concerning gross margin, we are experiencing cost pressure, consistent with the flat RAN market, along with continued cost pressure in both workforce and material costs, demanding that we continuously work on efficiencies. This necessitates somewhat elevated restructuring levels, impacting both OpEx and cost of goods sold, which is crucial to mitigate this upward cost pressure.

Thanks, Sébastien. Moving to the next question, please. The next question is going to come from the line of Felix Henriksson at Nordea.

It's relating to IPR. I think in the report, you indicated that you had a contract expiring with a Chinese smartphone vendor at the end of 2025. I wanted to know if there are any other significant contract cliffs in 2026 that we should be aware of? As a quick follow-up, what is your level of conviction in being able to grow the SEK 13 billion annual run rate in IPR going forward?

We typically provide guidance around the run rate coming out of the year of approximately SEK 13 billion. Regarding the contract, this is not a major impact. We always aim for the best economic outcomes when we negotiate and renew contracts. That is also the case this time. There might be some impact, but normally, we come back with a renewal. Thus, it should not impact the full year significantly. Upside opportunities remain; we are currently in settlement negotiations with one of our licensees, which we hope will finalize this year. The underlying opportunities surrounding pure smartphones and markets like IoT and automotive should support growth in this area moving forward.

Thanks, Felix. Moving to the next question, please. The next question will come from the line of Ulrich Rathe at Bernstein.

My question is on the bigger picture of the revenue outlook. You're guiding for a flattish market and highlight growth opportunities in mission-critical and other areas. Now in the fourth quarter, you delivered mid-single-digit organic growth, which is taken with some excitement in the market today. Would you go as far as saying that something like mid-single-digit revenue growth is possible in a flattish run market with the new opportunities you're highlighting? Or is this maybe a bit of a phasing effect that you're observing? I think you particularly noted in CSS, the delivery phasing that could play a role.

If you think about it from a longer-term perspective, it will fluctuate. But the size of the mission-critical market, the enterprise opportunity, as well as the 5G core market contributes to this. Keep in mind that currently, only about 25% of all networks are upgraded to stand-alone, so there's a substantial opportunity there. Looking at the outlooks for these individual sectors indicates they are large enough to drive growth in the long term. It's unlikely to be double digits; I would say maybe low- to mid-single digits. What excites me is the prospect of attaining at least some degree of basic growth, combined with operating leverage and profitability improvements in enterprise, along with share buybacks, yielding a very healthy growth profile overall. So I believe there's something quite promising in the long term.

Thanks, Ulrich. Moving to the next question, please. The next question is coming from the line of Sami Sarkamies at Danske Bank.

I have a question on your silicon strategy. Your competitor recently announced they would start building products based on NVIDIA chips. We have also done some R&D work related to the use of chip technology. What is your take on the situation? And do you see a role for NVIDIA in future RAN products?

Several years ago, we selected a strategy to disaggregate software from hardware and allow our software to run on virtually any architecture. We can run on x86, GPUs, or our proprietary silicon. You may also see Google's TPU or offerings from Qualcomm and AMD. Our intention was to provide customers with the freedom to choose their preferred hardware. Currently, operators are rolling out cloud RAN on x86, but future developments may differ. I cannot comment on Nokia's decision; that is theirs to address. But our strategy aims for independence in hardware selection today and allows making informed choices as we approach AI RAN realization and 6G. We feel positive about this approach, and it means that we will continue to collaborate with the x86 ecosystem and the GPU ecosystem.

Thanks for the question, Sami. Moving on to the next question, please. The next question will be coming from the line of Didier Scemama at Bank of America.

Sorry to come back to the point on memory and cost inflation. I'm looking at your inventories, which are seasonally lower in Q4. You seem to suggest that you have adequate supply from new suppliers. So could you elaborate? Have you signed a 12-month supply agreement that ensures that pricing will not be a headwind to your gross margins? Or put differently, what have you assumed in your gross margin about cost inflation from memory over 2026?

Inventory levels are coming down in the fourth quarter, following our typical seasonality, and this includes all inventories. We are well positioned regarding inventory levels for this type of situation coming into the year. Nevertheless, there are cost increases that we have to work with. We don’t disclose specifics regarding how much impact these have, but there will be some effect. However, we'll collaborate with our customers to ensure that we are not adversely affected, and that there is an understanding that some sharing will need to take place.

Regarding defense, could you elaborate a bit on the size of your business today in the defense sector? What sort of costs are you projecting? Does that require CAPEX? Please provide some information so we have a clearer picture.

We are not disclosing specific details about our business as we are currently collaborating with various defense organizations. Ericsson exited the defense sector several years ago, so we don't have a direct presence. Today, we're working in partnerships with defense organizations. Though we are not providing specific details, consider the market potential; industry consultations suggest a substantial opportunity exists. However, we believe it may not be as large as some forecasts. Compared to our other opportunities, it is indeed sizable. From an investment standpoint, we want to increase our presence in this area but not materially impact our overall SEK 50 billion spent on R&D. Therefore, these increases could be offset by efficiency gains; overall, we think of it as a significant yet manageable growth opportunity.

Regarding your question on CAPEX, it is indeed very limited.

Thanks, Didier. Moving to the next question, please. The next question is coming from the line of Daniel Djurberg at Handelsbanken.

I have a question. Could you provide any more visibility on the North American RAN market in '26? Is it fair to assume a more back-end loaded year, given some of your larger customers' spectrum asset holdings, for example, could I expect to build upon in the latter part of the year?

We don't provide guidance in that manner. We've chosen to do it quarterly, which is why we approach it this way. However, I think it’s fair to say that when we look at the North American market – and by the way, this trend is global – our customers have shown some caution towards CapEx. The interesting aspect is we have seen a shift in the mix among our customers. We believe that active components will be necessary, driven by traffic growth and the need for 5G stand-alone, along with new use cases like fixed wireless access. Despite customer caution, we observe healthy investment levels.

Yes, I think we won’t guide in such a manner, we’ve opted for quarterly guidance. It’s important to keep an eye on the overall market impact, even if customers signal caution regarding CapEx.

Thanks for the question. Moving on to the next question, please. The next question will come from the line of Andrew Gardiner at Citi.

Just returning to a point you made earlier regarding the performance you've had in 2025. Your profitability improved noticeably last year. You've experienced two good years of operational cash generation. That puts Ericsson, as you mentioned, within touching distance of the long-term financial targets. That said, these targets are several years old at this point. Are they still relevant and accurate benchmarks for us to consider? Or might you be looking to do better moving forward, given the changing state of your end markets and your strong execution? Is there a possibility to outperform those somewhat dated targets?

It's true these targets are old, and we have not succeeded in reaching them yet; that's a valid point. However, we should also remember that they were set in a different geopolitical environment and with a different business mix. We set these targets when iconectiv was a part of our portfolio, and obviously in a very different political climate. Personally, I'm not a huge fan of changing targets easily; we must first reach the current targets of 15% to 18%. Once we're solidly there, we can begin to discuss if those are still the right targets in light of our current business landscape.

Thanks for the question, Andrew. We just have time for a brief follow-up question from one of the analysts before we close. Can we bring Daniel back in, please? Daniel Djurberg from Handelsbanken.

I would like to ask about the Cloud Software and Services. Sorry if I missed an earlier response, but could you help us understand a bit more about the impact of this large contract being included in the quarter and if the outlook comments on Q1 seasonality would change if the contract was excluded in Q4?

It's a good question. We are coming out strong in Q4, and as you know, we have lumpiness regarding project delivery, and if you look at the full year, we are up around 6% organically in Cloud Software and Services. This underlying growth looks good for us, supported by our core business as we move into '26. If that single contract were excluded, it would indeed bring us closer to what is considered normal. That is true. We also have a significant currency headwind coming in Q1 year-over-year as compensation; currency rates peaked somewhat in Q1 '25, so we have that headwind to deal with.

Look forward to seeing you in Barcelona.

Thank you.

Thanks.

Thanks, everyone, for joining. That concludes the call.

Thank you.