Good morning, everyone, and welcome to today's presentation covering the third quarter in 2022. With me here today, I have Ericsson's CEO, Börje Ekholm, and our CFO, Carl Mellander. As usual, we will end the presentation with a Q&A session. In order to ask questions, you will need to join the conference by phone. Details can be found in today's press release as well as on the website, ericsson.com/investors. Please also be advised that today's conference is being recorded. Before handing over to Börje and Carl, I would like to say the following. During today's presentation, we will be making forward-looking statements. These statements are based on our current expectation and certain planning assumptions, which are subject to risk 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 release this morning, as well as in our annual report. With that said, I would like to hand over to Börje. Please, Börje.
Thank you, Peter. Good morning, everyone, and thank you all for joining us. I'm pleased to present another quarter with solid underlying performance, and we continue to see robust performance in our business as well as market momentum. Since 2017, we've been able to increase our RAN market share from about 33% up to 39% if we exclude Mainland China. We've taken market share from all competitors, including our European, and we have continued to add to our global footprint during the past quarter. We're really talking about here some massive gains in overall footprint for Ericsson. These achievements are really based on our focus on technology leadership. I would say technology leadership allows us to offer our customers leading technologies and highly competitive solutions. Equally important is that it allows us to do product substitutions to manage our margins.
In the quarter, we also took a key step in our enterprise ambition by closing the acquisition of Vonage. It's really an exciting step for Ericsson, as Vonage will be a critical building block in our enterprise strategy. It will underpin a full range of cloud communication solutions. We aim to transform the way advanced 5G capabilities, such as speed, latency, and network slicing, are exposed, consumed, and paid for. We believe this will ultimately help our customers to monetize the network. We expect the Vonage acquisition to be highly accretive, and it complements our enterprise wireless solution offerings with Cradlepoint and dedicated networks. Overall, we expect our enterprise offering to have a growth potential north of 20% per year. Let me go through some of the key takeaways from this quarter.
In the quarter, we saw organic growth of 3% with EBITDA of SEK 7.7 billion and margin of 11.3%. We saw gross income increase by SEK 3.4 billion and reach SEK 28.1 billion. This increase comes despite lower IPR revenues and was driven, of course, by the consolidation of Vonage, but also a strong performance in our network segment. Let me comment a bit on IPR. We believe we're in a very strong patent position with more than 60,000 patents. When we sign license agreements, there will be a retroactive compensation paid for the unlicensed period, and thus it's not really lost sales, but it has a delay. Here we will continue to seek to optimize the value of our portfolio, so it can always lead to some delays in revenue recognition.
Networks saw organic growth of 7% if we exclude IPR, and this was primarily driven by North America, where operators continue to be at the forefront of 5G development. Gross income increased by SEK 2 billion and reached SEK 21.4 billion. This result really shows the attractiveness of our leading portfolio built on technology leadership. This is something we will continue to invest in to strengthen our position and competitive advantage. As I already referenced, we took an important step in the quarter by closing the acquisition of Vonage. Vonage is really a key cornerstone in our expansion into enterprise. We expect the acquisition to help our customers accelerate their digital transformation while also shaping how 5G networks will be exposed, consumed, and paid for. In the 4G world, operators could largely only monetize the network through a subscription model.
5G features such as speed, latency, but also network slicing offer new and important revenue opportunities, but we don't see that they can be monetized through subscriptions. They have to be paid for as they're consumed. We believe that these new features will be paid for separately for that reason. The ability to do that will be through what we call network APIs. With Vonage, we have the ability to drive and develop this market. We're really creating a new market for us and for our customers. Here it's interesting to see that we're already working very intensively with frontrunner customers, basically to develop the APIs, but also to bring them to the market. Our customers recognize that this will be a very important monetization engine for them going forward so they can start to monetize the network investments that they're making.
Creating those new revenue sources for our operator customers actually is of course critical because if they can't monetize their investments in the network, they will ultimately not invest in the network. For us, we believe this will also increase the demand in our business for mobile infrastructure. We're excited about welcoming Vonage to the Ericsson family, and we look forward to working together now with them to generate value for both Ericsson but also for our customers, of course. Following the reorganization earlier this year, we today present the first quarter for Cloud Software and Services. As you know, this is a core part of the business, but we also see it's very attractive, but we have not yet realized the full potential in this business.
We have a very strong starting position, and by combining the two business areas when we form Cloud Software and Services, we believe we can create a stronger unit with clear synergies. The new management team is further accelerating the transition to profitability, and that includes, of course, a strong focus on driving costs down, but also to leverage and solidify our technology leading position as well as market leadership position. We expect this business to have gradual improvements, and we look forward to discussing more of the strategy and more of the plan to reach profitability at our upcoming Capital Markets Day. We continue to engage with the DOJ and the SEC in relation to the 2019 investigation report and the breach notices, and we're fully committed to cooperating with the government authorities.
We're also continuing to work to strengthen our culture as well as ethics and compliance program. This work remains one of our key strategic priorities and an area where we will continue to invest in to make sure that we are also a leader in that area. With that, let me give the word over to Carl Mellander, our CFO.
Yeah. Thank you, Börje. Thank you, and good morning to everyone. This is the first quarter then that we report in the new structure with the four segments, Networks, Cloud Software and Services, Enterprise, and Other. This is the first quarter where we consolidate in Vonage. The acquisition closed on the twenty-first of July, so we basically have two months and ten days or so in our numbers this quarter. Before I start to dive into the numbers, I want to say that I will refer to some growth numbers here, and they will all be adjusted for currency and comparable units. I call that organic for short. When I talk about profitability numbers, those will be excluding restructuring.
I just say it now, so I don't have to repeat that sixteen times through the speech here. Let's start then with the numbers. Net sales came out at SEK 68 billion. Organic growth in three out of five of the market areas. The organic growth then was 3%, for the group, and that's despite one point one billion less IPR licensing revenues compared to Q3 last year. Reported sales then grew 21%, of course, helped by large currency tailwind, and also the fact that we added Vonage, which contributed now with SEK 2.9 billion Swedish kroner in sales this quarter. IPR came out at SEK 1.6 billion.
This is in line with the guidance that we had provided in the Q2 report, where we said between one and 1.5. We do provide the same guidance for IPR now for the fourth quarter as well, between SEK 1 billion and SEK 1.5 billion. Gross income grew by some SEK 3.4 billion in spite of the lower IPR revenues that I mentioned. Growth of gross income really comes from sales increase in Networks, given footprint wins we have. Vonage contributed SEK 1.2 billion to the gross income number. Gross margin 41.4%, down from 44%. Key reasons there for that decline being, then, first of all, again, for the third time, the lower IPR revenues. It is about one percentage point on gross margin.
We also see supply chain cost in networks, as we have talked about before. Furthermore, a large share of services business, again, coming from the footprint gains that we have secured over time and that come out in the P&L now in the Networks segment, especially. Looking at R&D, the engine for value creation in our company, we grew that by SEK 1.7 billion in Q3. FX stands for about a third of that increase. What we actually invest in here is, in the network side, the Ericsson Silicon or the next generation ASIC, which enables industry-leading radio performance, of course, but also things like energy savings compared to previous generations. We also invest in the Cloud RAN portfolio, which gives our customers more flexible options for deployment in networks.
Thirdly, we also focus R&D money on what we call Enterprise Wireless Solutions. It's really Cradlepoint and dedicated networks to further extend or enhance the portfolio there and the offering. SG&A increased by SEK 3.2 billion. Again, big FX impact, about SEK 0.7 billion in this case. The increase here is mainly related to adding Vonage, consolidating Vonage into our numbers. Because Vonage impacted SG&A by SEK 1.8 billion, and that in itself includes intangible amortizations, which are then of course not included in our EBITDA metric, we'll come to that. Also one-offs and the combination of those intangible amortizations and one-offs is around SEK 0.6 billion of that 1.8 I mentioned.
Coming to EBITDA then, SEK 7.7 billion, decline of SEK 1.6 billion year-over-year, and this is an 11.3% EBITDA margin. Again, I wanna point out we did have some one-off costs here, including the M&A transaction costs that we talk about for the Vonage transaction. In essence, the increase we saw in gross income, which is the fruit of winning a market share footprint, increasing sales, was more than offset by the increase in OpEx, which I just described. Mainly for technology investments, adding Vonage into our Ericsson family and currency. That leaves us with a net income of SEK 5.4 billion. Here I can say this is supported by a lower income tax also.
The tax rate now for Q3 was at 25% compared with 30% a year ago. Finally here, the free cash flow came out at SEK 2.5 billion, and we continue to build buffers in inventory in order to meet deadlines of customer deliveries. I come back to that a little bit more when we talk working capital and cash flow. On a rolling four-quarter basis, our EBITDA margin was 12.8%, and that we can compare with our long-term target of 15%-18% EBITDA margin. From that, we can move to the next slide and drill in a little bit more into the segment numbers. Starting with the mobile infrastructure piece, which consists of Networks and Cloud Software and Services.
Networks. Börje already mentioned its organic growth of 4%, but excluding IPR, which is a special case as we all know, given renewal negotiations, the growth was actually 7%. Gross income SEK 2 billion added year-over-year following the added sales that we talk about. Gross margin 44.4%. That's impacted again by the lower IPR revenues, of course, of which Networks record 82%, as you know, but also some increased cost of components and supply chain investments there. In Cloud Software and Services, we decreased the sales organically by 5%, primarily again due to the lower IPR contribution, and here we have 18% of our IPR recorded in this segment.
We also saw some de-scoping of some of the managed services business that we have. Some of those contracts decreased, and that's what we see in the -5%. Gross income in this segment stable with a margin of 32.1%, and EBIT a SEK -0.7 billion in the quarter. On the Enterprise side, now the share of total sales in Enterprise has grown now to 8% in the quarter. The Enterprise sales has a total of Ericsson sales. We did see very strong growth here with 21% organic by successes in Cradlepoint. The reported sales of course up SEK 3.6 billion or so, and that has to do with adding Vonage of course contributing with SEK 2.9 billion, as I mentioned.
EBITDA here in Enterprise, I want to comment also, was -SEK 1.2 billion compared to -SEK 0.5 billion previous year. The decline here is mainly due to one-off acquisition costs and some of this accounting, the acquisition accounting that we talk about with sales step down, et cetera. Excluding these items, I wanna say also that Vonage was EBITDA positive in the quarter. Next slide, looking at the market areas a bit more. We do see strong traction as mentioned for the solutions, and that is resulting in increased footprint. We saw strong organic growth here in North America with 9%, but also Southeast Asia, Oceania and India, which is one of the five market areas as well with 13% up.
In Northeast Asia, we saw a decline of 6%, and in Middle East and Africa, sales grew by 3% organically. Europe and Latin America, sales were rather flat year-over-year. Finally on this slide, I just wanted to highlight that when we talk about the market areas, this is about our mobile network infrastructure business, of course. In addition, we have the enterprise piece, which we now book in market area other, just to make that clear. Okay, if we go to the next one and talk a little bit more about the cash flow side then. Key metric for us, of course, is free cash flow before M&A. SEK 2.5 billion impacted by the inventory build-up that we talked about, component inventory.
In comparison, Q3 2021 had higher than normal cash collection from customers, including rather large amount of prepayments, but also lower than usual payments to suppliers. This quarter, we instead saw good collection, but also impacted then by inventory, which is back to the proactive decision to safeguard delivery times to customers. Based on what we see now, current visibility, we expect this component inventory to come down towards the end of the year and into next year. At the same time, I want to mention in terms of being forward-looking here that given the market share gains or footprint gains that we have, we believe that working capital will remain on a rather high level as we roll out large volumes globally.
Gross cash position after this quarter now is SEK 45.8 billion and net cash is SEK 13.4 billion. I would say we have a well-balanced maturity profile here for resilience with the maturity profile of 4.1 years, which is a slight increase from a year ago. Maybe just final comment on this slide. When we look at again the rolling four quarter perspective, we have generated SEK 18.8 billion of free cash flow before M&A, and that's 7.3% of net sales. You can compare that again to the long-term target of 9%-12% of sales. Next slide, please. I wanted to spend a few minutes on the Vonage acquisition and how the purchase price actually translated into our accounts here.
Starting with the $6.3 billion that we announced when we closed the acquisition. I would like to guide you from that to the numbers that you can see then in our cash flow statement. First of all, we have a net debt, $7.1 billion deducted. Then there are some deferred considerations here, $2 billion that's mainly related to employee benefits and stock-based compensation. Finally, we had a benefit here from hedging, $3.7 billion. Well done by the treasury team in terms of setting this hedge up for this particular acquisition. That all results in the $51.3 billion paid, as you can see here in the bottom of the table and in the report.
Can also mention that during the quarter, during Q3, we repaid $5.9 billion of Vonage's existing debt. Both the debt side and these shares were paid by cash on hand. Before leaving this, I wanted to mention one item here, and I refer you to the other information in the report, because there we talk about a discussion between Vonage and the Federal Trade Commission, FTC in the U.S., around historic consumer practices. There is an estimated here already provided for in Vonage's book of $100 million. Depending on timing of this resolution, et cetera, and the specifics, we might see the cash outflow from that happening in the fourth quarter. Yeah, you also see we state the goodwill and intangible asset numbers here.
It's in line with what we have said before. Goodwill, according to the preliminary PPA, now SEK 43.7 billion and intangible assets, 21.9. Therefore, we expect amortization to be about SEK 2 billion per year. Move to my last slide for today. This is about the outlook for Q4 and also for next year, to some extent. This is reiterating what we are saying in terms of providing information forward. Starting with some specifics for the fourth quarter. IPR again, we estimate that to be between SEK 1 billion and SEK 1.5 billion IPR revenues in Q4. OpEx has a seasonality. It typically increases with some SEK 3.1 billion between Q3 and Q4.
For Q4, I think this could be a pretty good indication where we're heading. Of course, a bit of caution, there can always be some large variations between quarters. Regarding networks, after this record CapEx that we've seen and are seeing in North America in 2022, where we expect the RAN market to grow by 12%, we see that the investments are expected to hold up well during 2023, albeit at a slightly lower level or a lower level than 2022. We expect that initial adjustment of CapEx levels to materialize somewhat already in the fourth quarter.
At the same time, this is important, we see revenues from footprint wins in other geographies, accelerating during the fourth quarter, and we expect that this will compensate for potentially lower sales in North America in the fourth quarter. As mentioned on some of these footprint gains, as we have stated before also, in early stage and large scale projects, we might have a dilutive impact on the gross margin. Of course, as Börje mentioned earlier in his introductory remarks, we focus a lot on increasing the absolute SEK amount here in gross income. Looking at 2023, the global footprint gains lead to an expectation. We have that 2023 will imply additional growth. One more thing on networks then.
We state in the report that we now expect Networks to exceed for 2022 the financial target range that we had provided for Networks, which was 16%-18%. We expect them to exceed that somewhat. In Cloud Software and Services, we are now saying in the report that we expect full year 2022 result to equal 2021 full year results. Finally, just a couple of words before I hand back over to Börje. A couple of words on the inflationary environment that the world is experiencing now, and of course, we are taking action to respond to that situation. Basically three fronts. First of all, we are making pricing adjustments with customers, but we also leverage product substitution as a very important means to rebase our pricing.
Here, of course, technology leadership is key, again, through our R&D investments, with the idea to bring new value-adding products to the market. We are also, as Börje mentioned, but I'll repeat, simplifying operations in our company and reviewing our options to reduce cost. We talk in the report about redundancy or restructuring costs rather, which we have since earlier a guidance of 1% of net sales, and we will of course come back to that. All of these actions are, of course, to ensure that we secure our ability to deliver on the long-term financial targets for the group, which is, as you know, 15%-18% EBITDA, excluding restructuring. With that, I hand back it to our CEO, Mr. Börje Ekholm.
Thank you, Carl. To sum up, we've delivered another solid quarter with good business momentum. As you know, our strategy is based on leadership in mobile infrastructure and the focused expansion into Enterprise. Mobile infrastructure clearly remains our core, and we're fully dedicated to continue to invest in technology leadership to further strengthen our position. In line with our strategy, we're adding to our footprint, which strengthens our scale and competitiveness. The second leg of our strategy is a focused expansion into Enterprise. Here, we added a significant building block by closing the acquisition of Vonage, and we're now starting to have a meaningful presence also in the enterprise space. In Enterprise Wireless Solutions, we almost doubled our sales compared to last year.
I would say our strategy puts Ericsson in a position to continue to lead the industry as 5G is rolled out and transform every sector of our society. As you know, network development in North America has been very strong, and after expected record CapEx in 2022, operators are guiding for lower CapEx in 2023. We expect levels to hold up well in 2023, but they will be at a lower level than in 2022. Globally, we continue to further strengthen our position by increasing our footprint, and we expect to see lower sales in North America for Q4 to be compensated by growth in other regions. However, these contract wins will ramp up to full volume in 2023.
We expect our added footprint to give full effect next year, and we expect to see overall growth in networks globally in 2023. To add footprint, that's been a critical part of our strategy since 2017, and it will continue to be a priority. We know from experience that early stage, large scale rollout projects tend to be dilutive to gross margins. However, the increased volume will increase total gross income and thereby allowing us to continue to invest in technology leadership, which has been the core of our success over the last few years. If you look at the global 5G market, it's important to remember here that the 5G cycle is really just started. The fact is that less than a quarter of global LTE nodes have been upgraded to 5G mid-band so far.
As you all know, mid-band frequencies are critical to fully realize the potential, or for the performance of a true 5G network. I would say this shows that there is still a lot of growth potential in the market. I just pick one example, India, where we will see a rapid build-out of mid-band massive MIMO. India will likely have the strongest digital infrastructure outside of China, which will drive digitalization of India. Combined this with the new use cases for 5G, both for enterprises but also for consumers, and that includes, for example, fixed wireless access. We see that demand for network performance and network infrastructure will continue to be at a high level. We see the 5G cycle both to be longer and higher than previous cycles and previous mobile generations.
I'm convinced that with 5G, everything that can go wireless will go wireless. As we continue to navigate the very complex macro environment, and that includes, as Carl mentioned, clear inflationary pressures, but also geopolitical uncertainty. We remain very excited about our future, and we're dedicated to the execution of our strategy based on technology leadership. Regarding inflationary pressures, we're already taking actions, and this, of course, includes a focus on cost. Really making sure to have cost efficiency is the key way to allow us to continue to invest in R&D. Because again, technology leadership is really what makes the difference and will allow Ericsson to continue to grow. We're convinced that that also is the right focus to remain successful in this competitive market. We are super excited about our position in this exciting market.
One more thing, and that is we're very committed to continue to strengthen our culture. That, of course, includes the Ethics and Compliance program. This is one of our key strategic pillars and an area we will continue to invest in. Based on our strong position, we remain committed to reaching our long-term target of an EBITDA margin of 15%-18% no later than 2024. You know, in December, we'll host our first Capital Markets Day since the pandemic. We really look forward to welcoming you all in New York, and then we can discuss more in detail our strategy, market developments, and our plans to build the competitiveness and future value creation in many years to come. Finally, I would like to say a big thank you to Team Ericsson.
It's a lot of hard work and dedication that's gone into making our current position, really, and the strength of our current position. I'm proud to be part of this team, and thanks, everyone, for that. With that, over to you, Peter, for questions.
Thank you, Börje. We have now 30 minutes for a question and answer session. As a reminder, to ask question, you need to press star one and one on your telephone and wait for your name to be called out by me. If you're streaming the webcast, please mute the webcast audio while asking the question to minimize any sort of odd audio feedback. Those are the rules that you have to stick to for the Q&A session. I see here that we have our first question from Alexander Peterc at Société Générale. Hello, Alexander.
Yes, good morning. I hope you can hear me well.
Perfect.
Yeah, thank you for the question. The first question I would have really is on the development in Networks margin. We see that the software acquisition costs are back, so this may be good for your longer term growth, but near term, there's some pressure. Could you just give us an idea of the gross margin decline in Networks sequentially in the third quarter? Is that more down to this software acquisition push, or is it still higher inflationary cost pressures than those that you saw in the previous quarter? And then obviously in Q4, you have the usual down seasonality in your gross margins in Networks. From what I understand, this should be now compounded a little bit by these two effects.
Could you know, a little bit develop on that? Then just, secondly, very briefly, if you could, give us an idea of where the restructuring costs will be directed. Is it at COGS, R&D or SG&A, and in which division? Thanks.
Mm.
Want to start?
Okay. Thanks, Alexander. Regarding the Networks gross margin then, and you ask specifically about sequentially. I understand that, but I just wanted to repeat here. The year-over-year comparison is then impacted by the IPR difference. Quite a large amount on total group is SEK 1.1 billion, and 82% of that is in Networks. Otherwise, I would say there are a couple of factors impacting Networks here. One is the what we have talked about around the component and supply chain cost, where we are investing. It's also a higher cost, which we absorb in there.
The other part actually comes from something very positive, and that's the growth that we see and early stage, large scale contracts that we're executing on, where the services share is higher. That has an impact on gross margin. We have seen before that we might have that initial impact, but then of course, we recover over time as we roll out. I would say those are the key impacts there on Networks.
I would only add that you already saw these effects in the third quarter.
Yes.
We should say.
Mm.
The increased service share is visible in the result.
Yeah.
You asked about the
Okay.
You know, the restructuring.
Mm.
I like to think that what we are gonna do is to digitalize and actually simplify Ericsson. That's really our focus. It's more of a gradual improvement and we're gonna work on taking costs out. I would say it touches both COGS but also of course the G&A structure in the company.
Mm-hmm.
Exactly how the split is, let's discuss that at the Capital Markets Day.
Mm-hmm.
We are gonna tackle both of these sides because I think ultimately a leaner company will be a more agile company and will be better at responding. I would also say we kind of recognized this earlier, and that's why we launched the group function Global Operations, and you know that from the spring this year. The ambition with that function was actually to drive, you know, call it a better customer experience by simplifying our processes and digitizing them, and that's something that we will now more or less accelerate in light of the macro uncertainties.
Maybe I can add on the cost side as well.
Thank you.
If I can add one more thing. It's not only a defensive move because of inflation, it's also about competitiveness, of course, and we constantly work on improving our structural cost base to be really competitive, not only on technology but also on the cost side, of course, in the market.
Thank you, Alexander Peterc, for those two questions. Thank you. Now we are ready to move to the next question from the audience, and that one will come from Andreas Joelsson at Danske Bank. Good morning, Andreas.
Good morning, Peter, and good morning everyone else. I know that you will come back to this at the CMD, but I need to still ask about the Cloud Software and Services. We have seen these deployment costs for a while now, and can you just explain a little bit why there is a delay in the positive impact that we should expect? Has anything changed structurally in this that you see? Also, if we now have a weaker macro situation and the pickup of 5G is further delayed, how will that impact the unit going forward? If I may also on IPR, it's SEK 1.1 billion lower. There is FX in that, of course, but is the majority of that related to Apple and the litigation process that you're into right now? Thanks.
Should I take the first part?
Yeah, please.
You take the IPR part.
Yeah, sure. Yeah.
You know, the reality is we have higher costs for new product introductions, so it has a bigger service content, short term, and that's what you see impacting, call it the margins in Cloud Software and Services. And we knew that from before, and you've seen that before. That continues to be at a high level. We're still only seeing the early stages of deployment of the 5G Core, so revenue-wise, they lag these costs. They are impacting. That's no doubt about that. I think it's also fair to say that we don't really yet see a slowdown in the rollout of 5G, and I really don't expect to see that either, for the simple reason that traffic at the end consumer continues to grow at a healthy rate.
There will be a need to migrate customers over to 5G. We will see 5G networks increasingly carry traffic in the future. That's at least what we see as of now. I would say in order to restore profitability or reach profitability, which is really the you know, that's the first step, I think we have a much higher potential in this business than that, where we can capitalize on our leading position in a good way. In order to reach that, the first phase here, we need a tighter control on costs, and that's why we put together two earlier business areas into one, so we get a stronger focus on having cost control, but also get synergies on product development because we had overlapping product portfolios between the two.
As you can recognize, this takes some time to take out. That is what the team is working on to really, call it, become much leaner and much better cost structure in the combined entity, leveraging the synergies across the different offerings. That's where we're working. That will of course take some time to get the full benefit, but we should start to see that coming into next year and be in a much better position. We'll get helped by the ramp-up of 5G, but also that we're addressing our own, call it cost position.
Good. The last question was around IPR and the delta there. Yeah, I can say it's the big thing here is, of course, contracts under renewal negotiations. As you know, just as a reminder, when such contracts are entered into, we also have the retroactive effect of that in our P&L from the date of expiry, just so you know that.
Thanks, Andreas.
Perfect. Thanks.
Yeah. Thank you, Andreas, for that, those two questions. We are now ready to move into the next question from the audience today, and we have the next question from Francois-Xavier Bouvignies from UBS. Good morning, Francois.
Good morning, everyone. Can you hear me okay?
Perfect.
Great. Thank you. My two questions were first on the Vonage acquisition. Can you give us some light on the underlying performance of Vonage because you just acquired, so just wanted to, you know, reconcile the numbers in the early days of the integration. How should we think about the enterprise profitability trend going forward after a number of one-off maybe this quarter, just trying to understand the profitability trend that we should take into account in the next two quarters. My second question is, Börje, you talk about 5G use cases being a driver of the you know, growth and adoption specifically in India, for example, for next year where you see some contracts.
We asked you many times, I guess, in the past, the use cases for 5G that you seek that could be a game changer for the adoption. Can you list maybe, you know, some use cases that you see particularly interesting and how is it evolving there? Because when we talk to operators, it doesn't seem that obvious, you know, or in terms of use cases, especially like for example in China when they struggle to see, you know, much application or use cases. Wanted to have your perspective here, and how is it evolving. Thank you very much.
Yeah. Why don't you start with the other? I can go first with the 5G use cases.
Sure.
you take the other two.
Yeah.
Yeah. This is an interesting question. You know, the reality is when 4G was introduced, everybody would say if you ask operators that you don't really need 4G because you had 3G. That proved to be incorrect. The reality is with 5G we're starting to see a number of emerging use cases. Maybe the first one is that's actually already today commercial Fixed Wireless Access. We see that gaining traction quite fast, for example in North America. We also see what other operators around the world are doing like in India. We see that as a completely untapped revenue pool today will be captured by building out of course the 5G network, both in mid-band but also in millimeter wave in order to capture that.
We think that has a massive potential. That's one thing. Then I think the other where we're starting to see emerging use cases, for example, is the connectivity. Simple connectivity to an enterprise. In the 4G world it was typically fixed access. Today we are starting to see some SMEs de facto using wireless as the primary connectivity. That's what we're seeing is benefiting the growth in Cradlepoint, for example. Just to give you another cases of course within factories, private networks or dedicated networks. There we see a rather large amount of use cases, for example, for self-driving vehicles, self-guided vehicles, factory automation, et cetera, used in mines, enterprises. You're already starting to see that market shaping up quite substantially.
Part of that market will be captured directly from the enterprises of course, and that's why we're building up an enterprise presence. Part of that will be captured by the operators. I would say we don't know how that market's gonna shape up, but it will happen. The last element I think is equally important, is we're starting to see and here we have worked together with a number of application developers on how they need to use speed latency to drive new applications. Those are clearly where we believe our Vonage acquisition will fit perfectly in order to have a platform to present those. Here what are we talking about?
We're talking about collaboration software, we're talking about XR, VR applications that will start to come and we will very soon start to see devices that will need the speed latency ability for Mobile Edge Computing, et cetera. Those will actually spur demands for completely new use cases. I think when we talk about this, everyone looks for the, you know, the silver bullet, the magic killer application, so to say. I think we will start to see those emerge in one, two, three years as networks really get fully developed. That's when you start to see the benefit of 5G in society. What we see is still a very strong development and a very exciting development. If you only offer mobile broadband, I think then it's gonna be a different market.
It's only a call it capacity add-on to 4G. It's very different. We see those new use cases starting to develop now.
I think, Börje, you basically addressed the other question very well as well on the enterprise side, but maybe a few more words there on enterprise. Of course, for Vonage it's early days, honestly. We have two months and 10 days. As we said, and I think this is quite important during this period, Vonage underlying, if we exclude some of this acquisition accounting and one-offs and so on, they are EBITDA positive and also cash flow positive in the quarter. So that's a very good sign. I think very important, and Börje described this, is about growth here in the enterprise side. We see great growth in Cradlepoint, and we expect that in Vonage as well. On Vonage, of course, we're looking at this through three horizons or three lenses, right?
The existing Vonage business to boost that and continue growing that. Secondly, the synergies from Vonage offerings into Ericsson's global footprint of customers. Thirdly, of course, what Börje really talked about, the network API side of the business where we can create an entirely new market. Of course, all together, we see this as very value accretive for the group. At the CMD, I think we will come back for sure to the enterprise side and describe, lay out a bit more of the strategy and the expectations there.
Thanks, Francois.
Thank you, gentlemen.
Thank you, Francois. Hope you're happy with those answers. We'll move to the next question for today, and we will have that one coming up from, let's see here, Pierre Ferragu at New Street. Good morning, Pierre. Can you hear us?
Good morning. This is Ben Harwood standing in for Pierre. He's in a-
Okay
Noisy environment and can't speak.
That's okay as well.
We just had a couple of questions on your enterprise business. We just wanna know how you view the competitive landscape in the wireless enterprise network. What are your competitive advantages and how do you see yourself competing with companies that are partnering with either hyperscalers or enterprise companies that already have a fairly broad sales reach? Thank you.
Börje?
That's a great question. I think this is something that we'll spend a lot more time on in the Capital Markets Day. To give you a quick couple of comments, yes, you're absolutely right. This is a competitive space. We feel, though, that we're the market leader in the wireless Vonage today through Cradlepoint, so that we're well-positioned here already, and we have a very strong and growing presence in dedicated networks built upon some clear product advantages. We believe, you know, we are going to continue to develop this strongly. Of course, the space is going to be having a lot of competition coming in also from hyperscalers. We see that our solutions will be really run on hyperscalers as well.
Mm.
I think one should not only think of them as competitors. They're gonna be partners for us as well in order to reach the market.
Thanks, Börje.
That's great. Thank you, Börje.
Thank you for that question. We have still 10 minutes to go, so I'll move to the next question in the call, and that one is from Janardan Menon at Jefferies. Good morning, Janardan.
Hi. Good morning, Peter. Thanks for taking the question. Just wanted to go a little bit more into the outlook for gross margin into 2023 and into Q4, arising from the sort of shifting landscape of regions for the Networks division. You are saying that U.S. or North America will be down next year. Can you give us an idea of how much it will be down? At this point, I know that, you know, visibility for the full year may be low, but what is your initial feel since you've already said that it will be down? Just from a product mix point of view, I mean, sort of regional mix point of view, what can we assume is the sort of impact on gross margin?
Is it something that will be sort of a bigger hit in Q4 and maybe first one or two quarters of next year, and then as you go through the initial phase of deployment in places like India, the margin will rise, you know, into the second half of next year? What I'm saying is should the gross margin profile be one of a steady increase from a lower point, say, in the early part of next year all the way into Q4? Is that how we should look at it? I have a brief follow-up if I may. Thanks.
Wanna start?
Mm-hmm. Sure.
Okay. Yeah, exactly. What we talk about in the report is that U.S. will hold up, we think. North America, that is, but on a lower level. Exactly how what the amounts we're not providing detail on, but we think it's very key to realize that we also win business in other parts of the globe, across the globe, and that will compensate. How the gross margin will develop, we comment that by talking about some of these footprint wins where it tends to have a dilutive impact in the beginning, but that over time comes back. Of course it.
On your question, how it will develop during next year, it's a function of, when these projects are ramping up, when volumes in big rollout projects and so on, come in. Again, we focus a lot on this of course, and even more so on the gross margin or the gross income, sorry, delivery here, because in absolute money, that is what drives our ability to invest in technology. I think that's what we can say now.
Yeah.
Börje.
Remember, you're asking a question on a quarterly basis. Our contracts are rather long and it has a long rollout cycle. How it exactly hits each quarter will always be a bit subject to kind of what happens.
Mm-hmm.
We're trying more to give the overall sense where these type of developments will be next year.
Mm-hmm.
I would encourage you more to think about what is it we're trying to do? Yes, it's actually to strengthen our market position. Based on that, we will manage gross margins following a bit this guidance that Carl went through.
Mm-hmm.
I understand your desire to have this on a quarterly basis, but it's a bit, you know. In these large contracts, that's why swings between quarters are not inconsequential.
Mm-hmm.
Let's put it that way.
It's very true. I think on the big picture also, I think it's good to remember the 15%-80% EBITDA that captures all of this actually. As you know, we said in fourth quarter 2021 that we will reach that point, that range within two-three years. Now we specify that we're talking 2024. That's our ambition. That's what we're going for as a company. Of course, we will manage quarterly swings and so on to get to that longer-term position.
Thank you, Carl.
Understood.
You had a follow-up as well, Janardan.
Just very quickly. On the 2024 target, you know, what would be the key factor in that jump? I mean, is there an increasing amount of confidence that the previous sort of digital services business, so the current cloud and software business will reach that critical mass and be a bigger jump into 2024? Or is it more coming from the enterprise business where those profit margins, including on Cradlepoint and Vonage, will become bigger? I agree that you probably give us more color on that at your Capital Markets Day. Just as an initial view, you know, what would be the moving parts on that would be very useful.
Clearly, you know, we think we sit with a very good business in Cloud Software and Services, and that clearly will be a big part of the contribution to reaching these long-term targets. That's for sure, and especially swinging from a loss into a profitability. That's one part. Of course, the rest is what we see is really on the Enterprise side, where we're gonna continue to grow and strengthen our position. It's all about the mix of those two contributing. We'll go into this in greater detail when we meet in December.
Understood. Thank you very much.
Yeah.
Thanks, Janardan. We will now actually move into the last question for today's session. We will have the last question coming up from Sandeep Deshpande at JP Morgan. Good morning, Sandeep.
Yeah. Hi, good morning. Sorry, I might have missed a question, so if this was asked, please excuse me. My question is on the Cloud Software and Services. I mean, this business, in its previous incarnations always was underperforming as well. As part of its restructuring, what will be done in this business to make it better performing? And what has changed in the business this year that the guidance is now given to be flat with last year in EBIT? Something has deteriorated here, so we'd like to understand that. Thank you.
You know, Sandeep, if we start with the business promise, or if we look at it from a. You're absolutely right. We have underperformed in this area for a long time. We have also seen a relatively strong improvement compared to 2017, when losses were running much bigger than today. It's always a journey. Of course, we got to this level, and we're not happy at this level. We need to fix this. It should be a profitable business. With our market position and the technology we offer, this has all the potential to be profitable.
If you look at the improvements over the past couple of years, a lot of it comes from basically turning around parts of the business, you know, like our BSS offering, for example.
Mm-hmm.
Where we now have challenges, I would say, is of course on our 5G Core, and that has taken a bit longer to get to market than we expected a year ago. It has carried a lot more system integration costs and early, call it, service costs than we anticipated a year ago. We have also a lot of geopolitical developments that you are well familiar with, and that also impacts the business volume in Cloud Software and Services, very detrimentally so. That has also hurt the business this year. It's a multitude of factors. What we said here is that given that backdrop, that's why we also felt we need to get more synergies out in the investments we make for the future.
That's why we combined managed services and digital services, so we can start to create those type of offerings that leverages the synergies between the two. Of course, there is a G&A synergy by removing one business area.
Mm-hmm.
There are other synergies on the R&D side as we invest in AI and machine learning.
Mm-hmm.
Actually, the distribution of those software to our customers, that's where we get the big benefit. That will take some time to get out, but that's where the team is really focused on getting the benefits out.
Thanks, Sandeep, and thanks, Börje, and thanks, Carl, for good answers in this session. Before concluding, I just wanna repeat what Börje said that we will have the Capital Markets Day in New York, December fifteenth. There will be possibilities to register upcoming week here for all of you that want to participate. By that, thank you all for participating in today's call.