Telefonaktiebolaget LM Ericsson Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Strategy Focus: Focus on building programmable networks to enable new monetizable applications, moving beyond consumer mobile broadband to enterprise and mission-critical use cases.
• Q3 Results: Organic sales declined 1%, less than the prior quarter, with improvement in development. Cross margin was 46.3%, up from 39.2% last year. Free cash flow was SEK12.9 billion.
• Strategic Steps: Launched JV with 12 global CSPs for network APIs to accelerate network monetization, and developed enterprise wireless solutions with simplified architectures and neutral host solutions.

Segment Performance

• Networks: Organic sales flat, down 1% year-on-year. North America grew 80% due to increased investments and rollout activities, while other markets were cautious. Adjusted gross margin was 48.7%, and adjusted EBITDA increased to SEK8.1 billion from SEK5.2 billion last year.
• Cloud Software and Services: Organic sales fairly flat, down 1% year-on-year, mainly impacted by lower service sales. Adjusted gross margin was 38.7%, and EBITDA margin was 2.9%.
• Enterprise: Sales declined 3%. Global Communications platform saw declines, but Enterprise Wireless Solutions grew ~7%. Adjusted gross margin increased to 52.4%, but adjusted EBITDA loss was SEK0.8 billion due to higher operating expenses.

Guidance

• Q4 Outlook: Networks revenue expected to be sub-seasonal. Q4 gross margin expected in the range of 47%-49%. Restructuring costs expected to be around SEK4 billion for the full year.

Risks

• Market Challenges: Continued challenging market development with varying performance across geographies.
• Competitive Environment: Largely unchanged pressure from Chinese vendors and other competitive dynamics.
• Inflationary Pressures: Potential impact on operating expenses and the need for ongoing cost management.

Question and Answer

• Q: Alex Duval at Goldman Sachs on AT&T ramp and Q4 outlook: A: Borje Ekholm noted the AT&T ramp was intensive in Q3 but expected to normalize in Q4, with the ramp-up connected to customer collaboration.
• Q: Joachim Gunell from DNB on gross margin guidance: A: Borje Ekholm stated gross margin improvement came from cost out activities and productivity gains faster than expected.
• Q: Francois Bouvignies from UBS on geo mix and gross margin: A: Borje Ekholm explained main margin improvement came from long-term restructuring and productivity efforts, not just geo mix.
• Q: Andreas Joelsson at Carnegie on programmable networks impact: A: Borje Ekholm discussed programmable networks as a foundation for creating monetizable opportunities, linked to enterprise and network API growth.
• Q: Sebastien Sztabowicz from Kepler Cheuvreux on Enterprise Wireless Solutions slowdown: A: Lars Sandstrom mentioned product transition impacts, but new products like EP5G and neutral host show encouraging signs.
• Q: Erik Rojestal from SEB on margin target: A: Lars Sandstrom and Borje Ekholm noted ongoing cost actions to offset inflationary pressures and align with margin targets.
• Q: Jakob Bluestone at BNP Paribas on competitive environment: A: Borje Ekholm stated competitive dynamics were largely unchanged, with focus on commercial discipline in contract wins.
• Q: Rob Sanders at Deutsche Bank on North America operators: A: Borje Ekholm declined specific comments on other operators but noted North America growth was broader than one contract.
• Q: Sandeep Deshpande at JPMorgan on API monetization: A: Borje Ekholm discussed JV progress, API accessibility, and developer ecosystem leverage for new revenues.
• Q: Daniel Djurberg at Handelsbanken on fixed wireless access: A: Borje Ekholm highlighted fixed wireless access as a growing use case with commercial benefits, especially in India.
• Q: Andrew Gardiner at Citi on AT&T deployment: A: Borje Ekholm stated AT&T deployment would continue into next year, with Q4 expected to stabilize after Q3's high ramp.
• Q: Terence Tsui at Morgan Stanley on India performance: A: Borje Ekholm noted India's digitalization drive and long-term growth potential, but cautioned on near-term visibility.
• Q: Didier Scemama at Bank of America on margin and OpEx: A: Borje Ekholm discussed structural gross margin improvements from software trends and ongoing OpEx management to offset inflationary pressures