Hello everyone, and welcome to today's presentation covering the restatement related to our new organizational setup that will be implemented in our upcoming Q3 report. On this call today is Carl Mellander, our Chief Financial Officer. As usual, we will end with a question and answer session, and we will focus these questions only onto issues related to the restatement. Specific and detailed questions on the spreadsheet that you probably have received, we can handle those from the IR department later this afternoon. In order to ask questions, you will need to join the conference by phone. Details can be found in today's press release and on our website, ericsson.com/investors. Please be advised that today's conference is being recorded. During today's presentation, we will be making forward-looking statements. These statements are based on our current expectations 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 all to read about these risks and uncertainties in our earnings report, as well as in our annual report. With that said, I would like to hand over the word to, Carl. Please, Carl.
Thank you, Peter, and good morning or good afternoon, good evening to everyone. Thanks for participating in the call. As Peter said, the background to what we are publishing today is the reorganization that we executed here in Ericsson on the first of July this year. As a consequence of the reorg, we are also changing the reporting structure now from the Q3 earnings report and onward. If we look at the slides here, the new segment structure consists of the four segments: Networks, Cloud Software and Services, Enterprise, and Other. The largest segment is Networks, and that currently accounts for more than 70% of our revenue in the Ericsson group. This segment remains unchanged, and Fredrik Jejdling continues to head up the Networks part of our business.
The segment Cloud Software and Services is then a merger of the two previous segments, Digital Services on the one hand and Managed Services on the other hand. Here we will leverage the investments we do in R&D to increase the cloud-native expertise, and we'll build combined offerings for automation and AI for service delivery. The solutions here will help customers automate what is becoming an increasingly complex network for cost advantages and speed to market. Here, Mr. Per Narvinger is the head of this segment, Cloud Software and Services. The new segment, Enterprise, consists of three business areas, Enterprise Wireless Solutions, Technologies & New Businesses, and Global Communications Platform, and we'll come back in a minute to expand on that.
The business area heads here in Enterprise will report to our Chief Executive Officer, Börje Ekholm, as the segment head for Enterprise. Finally, we have the fourth segment called Other, which includes media business and one-offs. What we have published today, and you've seen it, most likely, is then the restated financials according to this new structure, and we published and restated full year numbers for 2020, and also quarterly numbers for 2021 and up to the second quarter of 2022. We will report net sales, gross income, gross margins, EBITDA and EBITDA margin, EBIT, and EBIT margin for these segments. We will also report profitability excluding restructuring charges. Let's move to the next slide, and let's then look at what the segments will consist of.
Starting again with segment Networks, which is unchanged, as I mentioned before. This is comprised of radio access networks, transport solutions, site solutions, network rollout and tuning, and also customer support. No change. Secondly, in segment Cloud Software and Services, we will help operators to succeed in the transition to cloud-native software and automated operations as they all prepare their networks for the future. We will do so through four main product groups, and I will explain a little bit more in this segment what is contained in the various parts. First, it's core network and automation. Here, I can say the background here is that core networks must support an evolution from today's deployments to cloud-native environment. Secondly, it must support several deployment options.
For example, central and edge deployments are needed to enable low latency and edge computing use cases. Automation is required also to handle the magnitude of tailor-made services, use cases, and network slices that will be introduced. That's the first one, core network and automation. Second, Managed Services. Here, as you know, we are continuing with the managed services business and here AI and data driven solutions will now actually benefit from the merger between the two units here from mutual development and evolution of services to create an even more efficient service delivery machinery. Thirdly, service orchestration, and this is about creating a programmable network open for the consumer and enterprise application ecosystems. The key capability here is secure and automated end-to-end management across multi-cloud, network domains, and even multi-vendor.
To succeed here, service automation is foundational to remove manual tasks in design, ordering, fulfilling, assuring services, et cetera, all to increase efficiency for our customers. Then the fourth part is telecom BSS or business support systems. Here the background for BSS is really monetizing new and different services for consumers and across industry verticals as well to serve enterprises. To do that, the BSS, the business support systems, must be agile and flexible, robust and resilient. Here, of course, digitalization is critical for the customers and as is the journey to cloud BSS in enabling operators to fully monetize investments in the networks. This is key also for our customer community.
With that, we can move to the segment Enterprise, here. A couple of parts, as I mentioned before. First one is Enterprise Wireless Solutions. That is comprised of the current Cradlepoint business, together with dedicated networks. Here, we develop solutions for enterprises, and we will create a dedicated go-to-market organization for enterprise customers, including, I should say, leveraging operator relationship, that we have. Here, George Mulhern is heading Enterprise Wireless Solutions. George was, as you know, the Chie Executive Officer of Cradlepoint, the company acquired a couple of years ago. Secondly, in Technologies & New Businesses, we will continue to focus on developing new business solutions to accelerate growth across Ericsson's core and enterprise businesses with the established incubator model that we have. Here, Åsa Thomson is heading up Technologies and New Businesses.
The newly acquired company, Vonage, will be reported here in business area Global Communications Platform. This is where we combine the communication API business, which is providing key capabilities such as messaging, voice, video, and conversational AI with, on the other hand, unified communication and contact center as a service capabilities. Here, Rory Read, Vonage's Chie Executive Officer, is heading up the business area Global Communications Platform. In segment Enterprise, we also have a program for the evolution and development of the Global Network Platform that we have talked about. This is about building a new market based on widespread utilization of advanced APIs in both 5G and 4G communication solutions.
The focus of this program then is to continue to develop the offerings that Vonage has, but also of course, develop new offerings to create a new value segment for open innovation to help ensure monetization and new value for the full ecosystem. Finally, segment Other than which includes the media businesses and one-offs, and also changes in holdings or evaluations and so on in our Ericsson Ventures portfolio will be reported in Other. Next slide, please. You have all the numbers in the PDF we published today, but let me comment some highlights per segment. First of all, as you see, we have a grouping here. We group Networks and Cloud Software and Services together to form mobile infrastructure business. And next to that, we have the Enterprise segment.
Again, starting with Networks, looking back then on this period, our top line has grown as a result of underlying growth in the RAN market. On top of that, we have increased market share, especially in Europe, in line with strategy. Our margin has over this period also improved as a result of operational leverage. I can also mention here that we made a provision related to Russia earlier in this segment, but we have moved that into segment Other. Other is not visible on the slide, but anyway since that was a one-off item caused by the Russian invasion of Ukraine and is really unrelated to the business in Networks as such. Lastly on Networks then, the IPR share that goes to Networks will continue to be 82%. As before.
Moving to Cloud Software and Services, here we have had declining sales in both Digital Services and Managed Services. In digital services, the decline is mainly due to lower sales in Northeast Asia, primarily related to Mainland China. In managed services, the decline is mainly due to reduced sales in a large contract in North America, and also rescoping and planned exits, primarily in Europe. All of these things we have communicated earlier. For the full year 2020, we were breakeven on an EBITDA level, including restructuring charges. Since then the margin has declined due to the higher R&D investment within 5G Core, that we decided to do, at the same time as sales declined. Lastly, we have the Enterprise segment. Again, sales and gross margin improvement has been driven by Cradlepoint.
Speaking about Cradlepoint, I wanted to say a few words on Cradlepoint and the accounting treatment here to comply with IFRS principles, which leads to a time gap between billing and revenue recognition. Because in Cradlepoint's business model, we invoice and get paid for 100% of the subscription services for the contract period up front. However, that revenue is then deferred and is recognized during the contract period, which is typically three to five years. That leads to a gap between invoice sales, so call it billings, on the one hand, and reported net sales. Consequently, this also impacts the timing of recognition of gross profit. Then we have Global Communications Platform, which includes Vonage, as mentioned.
Yeah, this is not part of the restatement here, of course, since we acquired this business on the July 21st, this year. I just wanna say also that going forward in the reporting here, we will be transparent about the performance of the parts of Enterprise segment to the extent permitted by the regulatory framework regarding segment reporting. This is the IFRS 8 part. We will come back to the final disclosure structure in the Q3 report. One more thing to mention here on slide eight in this presentation pack which we have published, we cite the numbers from Vonage's official SEC filings. This is for your reference. Obviously, these numbers are all from the period prior to Vonage being acquired by Ericsson. Vonage has, of course, been reporting per US GAAP.
Now that Vonage is part of Ericsson, we will apply IFRS in the accounting, and that impacts accounting treatment in several ways. For example, how lease arrangements are accounted for and how certain cost elements are, or rather are not, capitalized. Furthermore, the PPA or the purchase price allocation will impact, for example, the valuation of the deferred net sales balances. We will also have intangible assets here created, which will be amortized over the P&L. Those, of course, impact EBIT but not EBITDA. These, all of these numbers, of course, will be visible in the Q3 report once we publish that in October. My final slide is around the market area distribution, and here you see the chart here.
This is the sales split, year to date 2022, by market area. The market area structure is unchanged as compared to before, with top line breakdown into five geographical areas plus market area other. Here it could be good to know that the majority of our enterprise business will be reported in market area other, with some exception for sales related more to the geographical market area. Also our IPR revenues as well as the media business will be reported in market area other, which is really no change, since before. That is it from me for the moment. With that, we can open up for Q&A. Back to you, Peter.
Yes, thanks, Carl. It's now time for the question and answer session. As I said before, we will focus the questions only to issues related to the restatement, and detailed questions related to the spreadsheet, where you would find all the numbers going back in time. We can handle from the IR department later on this afternoon or whenever seems at your convenience. With that operator, we will open up for the first question, please.
Thank you. As a reminder to ask a question, you will need to slowly press star one and then one on your telephone and wait for your name to be announced. Once again, it's star one and one on your telephone and wait for your name to be announced. Please stand by while we compile the Q&A roster. If you're streaming the webcast, please mute the webcast audio while asking a question to minimize any audio feedback. Thank you. We are going to proceed with the first question. Please stand by.
Yes, I think we have the first question from Daniel Daniel Djurberg.
The first question comes from Daniel Daniel Djurberg from Handelsbanken. Please ask your question. Your line is open.
Hello, Daniel.
Good afternoon, this is Jasper Stugemo, on behalf of Daniel Djurberg and Fredrik Lithell.
Hi, Jasper.
Hello. I have a question regarding the amortization that has fallen from SEK 464 million as much in Q3 2021 to SEK 158 million in Q2 2022. It has been stable at Enterprise, lifting from SEK 81 million to SEK 88 million-SEK 89 million. Given Vonage consolidation, what is the guidance for Enterprise coming quarters? Thank you.
Yeah. I think as Peter said, some of the specific details, I think the Investor Relations team is well-positioned to answer. In general, we will have a significant intangible amount in the balance sheet coming from the Vonage acquisition, and we will amortize that over time. The exact amounts will be visible in the Q3 report, because we are in preliminary PPA territory here, so I'm not at a position to give you specific numbers of that right now. When it comes to your question on the historical numbers and how they have fluctuated, I actually think it's better for the IR team to really look into that and come back with a good prepared answer.
We will do that, Jasper.
All right. Thank you so much.
Thanks.
Thank you. I think the next question is from Alexander Petrec, from Société Générale.
Yeah, the next question come from the line of Alexander Petrek.
Yes, thank you for the question. I just.
Yes. Hi.
Hi, Alexander.
Thank you for the question. Hope you can hear me. Hi, can you hear me all right?
We hear you, Alexander. Yeah.
Good. Thank you. I just like to clarify, are you going to continue to disclose, or not continue, start disclosing Vonage separately also in terms of earnings at any level? I didn't quite understand the comment there. I understand it's part of Enterprise, but then it's bundled also with Cradlepoint and all of the startup businesses as well. You know, will we get a clear read on how you're doing on that front? Yes. Our ambition here is to be transparent with that and show specifics. We'll come back, however, to really the specifics on how we do it and on what level in P&L and so on.
We are looking at currently then, as I mentioned, 'cause you see IFRS stipulates how segments can and should be reported, and we have to consider that before we finally create the disclosure structure. We will come back to it in Q3. Our intention and desire is to be transparent with the sub parts of Enterprise.
Okay. That's helpful. Thank you. The second question, I think you mentioned the fact that you're gonna have a dedicated go-to-market team, so that probably also means more costs for wireless solutions. Is that how we should understand it? Are you going to see more SG&A in that area as a result?
There is a certain element of investment in SG&A, in the go-to-market. Yes, of course. That is part of the plan already in terms of the Cradlepoint business now in Enterprise Wireless Solutions. The go-to-market is a combination of resellers and various setups, indirect channels, also partly actually through the operators. We will set up that whole structure, of course, for maximum sales efficiency and so on globally.
Okay. That means initially a higher fixed cost base, but hopefully that will drive revenue higher as well, so you anticipate that to be accretive longer term.
No. Yeah, exactly, absolutely. The investment in sales R&D should give, I mean, that's the ambition, to fast returns of course in terms of sales volume as we expand on Cradlepoint. So far very successful portfolio into new markets. Yes.
Maybe just, I mean this is a far-fetched one, but, you know, where would you like to see the Enterprise business' gross margin, when it, you know, becomes a little bit more mature because there's a lot of stuff now that's in a startup phase. Where would you think that should land? What kind of business should it be in terms of gross margins?
Yeah. I think we should come back to that. I mean, you see some of the restated numbers here, but then of course we will add Vonage into the mix in Q3. Let's come back to that question when we see the first.
Okay
Actual, including all of the Enterprise components, if that's okay.
Okay. Well understood. Thank you very much. That's very helpful. Thank you. Bye.
Thank you. Thank you, Alexander.
Thanks.
Thanks. Operator, we're ready for the next question.
Sure. We are going to proceed with the next question. The question come from the line of Adithya Metuku from Credit Suisse. Please ask your question. Your line is open.
Yeah. Good afternoon.
Hi, Adithya.
Good afternoon, guys. Thank you for taking my questions. Just firstly, I just wanted to clarify, when I look at the sum of digital and managed services, there is a small difference between what is disclosed as CSS and, the sum of digital and managed services disclosed previously. Is there a slight change in the reporting structure? Are you moving something out of maybe digital services into Enterprise or something like that? Is there any color you can give around this? And then secondly, I just wondered, with this new reporting structure, can you give us some color on how this will affect your day-to-day operations, in addition to what you've already said on, having a dedicated go-to-market on the enterprise side?
Well spotted on your first question. It's true. We have moved. It's actually a smaller business that we have moved from what used to be Digital Services into the Enterprise segment. It's the mobile money business, mobile financial services business that we have. So that explains that delta. When it comes to a change of the daily work, as you said, I mean, I think, in general, of course, Ericsson's move now into Enterprise is significant for us. We build it to a large extent on completed acquisitions with Cradlepoint. Cradlepoint has managed their business very successfully, and that now continues, I would say, within Ericsson and in combination with the resources of Ericsson as well.
The same will be true for Vonage, which, of course, has just come into the group. I think I'm not sure if that is your question, but of course, for many of us who have spent, I mean, in group functions and so on, we are of course mainly dedicating time to the mobile infrastructure business so far. Now we are coming into the Enterprise segment as well, which sometimes has very different business models. There's quite a lot of change going on in the whole company, I would say, and as we adjust to this new reality.
It's going very well so far, and everyone here is very excited also about the opportunity within the Enterprise space as a second strong growth engine or as a new growth engine for Ericsson's business. I'm not sure if that's answered your question, Adithya.
It did on the first bit. Just on the second, I mean, I was just trying to understand the rationale behind changing the reporting structure. You know, is there something operationally changing? It doesn't feel like it, maybe with the exception of a little bit more investment into the go-to-market on the enterprise side. It doesn't feel like a whole lot is going to change. Am I right in my understanding?
No, but I think what we want to do with the restructure and the reorganization here and the new reporting structure is really to emphasize our strategic move into Enterprise and collect the Enterprise-related businesses into one segment so that can be followed up and understood. Because it has a different logic than the mobile infrastructure business, we want to separate it out and show it separated, including the growth that we expect there, et cetera. I mean, we've had an internal reorganization, which, of course, has brought in a couple of new members of the executive team as well, with Rory Read and George Mulhern, certainly providing a lot of new perspectives on the Enterprise business as well.
I mean, things are changing, and I think it signals and illustrates, underlines perhaps the strategic shift that Ericsson is undertaking now with more emphasis on the Enterprise side and really wanting to show also to you and the financial community how we perform over time in the Enterprise segment.
Understood. Thank you.
Okay.
Bye.
Thank you. We'll move to the next question, please.
As a reminder, ladies and gentlemen, if you have any questions or comment, please press star one on your telephone. Thank you. We are going to proceed with the next question. The next question comes from the line of Didier Scemama from Bank of America. Please ask your question. The line is open.
Good afternoon, everyone. Thank you for taking my questions. I've got two quick ones. Maybe related to the new divisional breakdown. First of all, thank you, it's very useful. Second, I wanted to ask you if you could give us a rough breakdown of the, in the non-network part of the business of the split between services and revenues. Because, you know, as Alex pointed out earlier, you know, those gross margins are probably much closer to a services business, to a software business, yet you've got a lot of software in there. Just trying to understand where we are in that journey from, you know, pruning services into, you know, higher gross margin software revenues. That's first question.
Second, maybe Carl, can you just remind us, you know, when you might or if at all need to take an impairment on Vonage? You know, is that just you do that when you close your books on an annual basis, or do you have a bit more leeway you can review that on a multi-year basis, you know, if and when those KPIs are met or not met?
Impairment testing is routine. Every quarter, of course, we have to go through all the assets to test the valuation, and we always do that, of course, even more emphasis in the fourth quarter. Obviously this is reviewed by auditors and so on.
Yeah.
Right now there's no indication of impairment and so on. Again, I mean, this we will do every quarter to test the business plan, the expected cash generation versus the value, that we sit on in the balance sheet.
Got it. On the Cloud Software and Services, is that something you can talk about?
Yeah, I mean, I think maybe we can come back to specific numbers and breakdown, but in general, I can say that, I mean, all our businesses are striving for an increased software proportion. I mean, if we back to 2017, one of the strategic changes there was to go for more product-led and less services-led offerings to customers. It doesn't mean that services is not something we pursue or something we want to get out of, but it's a matter of how you lead, not least in what used to be Digital Services, now Cloud Software and Services. But the demand is going and our offering is going towards more and more software, I would say, in all these businesses. Of course, that's something we...
That benefits the margins as well.
I think also overall, Didier, we have talked about being a little bit neutral on the business mix that we currently also have, sufficient margins in the hardware side and improved margins in the services side as well, which I think is important.
Got it. Then maybe one quick one, if I squeeze in one final one. At the CMD in December, do you think you could provide us for financial targets, either op margins or gross margins or revenue growth for each division, as you've done in the past or is it too early to talk about that?
We'll come back to that. I mean, there was, I think, a very good reason to break down the targets by segment earlier, because we were really in this turnaround phase. Let's see if the relevance is here now. We definitely stick to the 15%-18% EBITDA target for the long term that we have stated before. Let's see at the CMD if we want to expand on that or break it down.
Okay, brilliant. Thank you very much.
Yeah. Bye, Didier.
Thank you.
Thank you.
Operators, do we have any other questions?
We have no further questions at this time. Thank you. I hand back the call to you.
Yeah, thank you. Maybe, Carl, if you wanna say some final words before we close the call.
No, I just, thanks a lot for your interest and, great. We are now, of course, looking forward to reporting also in this new structure. Now you have the basics, here, the historical numbers to understand more or less where we have been in, where we would have been in the new structure historically. Of course, with Q3, you will get a dataset that provides actual data from which to draw conclusions and ask additional questions as well. Looking forward to that. That's the next occasion that we will meet. Except for one call, which will happen on Monday, which is really around the tutorial, if we call it that, on the Vonage business, or explain a bit more what Vonage is all about.
I think the invitation for that has been published as well.
Exactly.
for all of you.
That's it. Exactly.
Back to you, Peter.
Yeah. No, thank you all. I will speak to some of you on Monday, and then we have the report coming up on the twentieth of October. Then later on, clearly, as was mentioned by Didier, we have the capital markets in New York at December fifteenth.
Looking forward to seeing you there, hopefully as well. Thank you so much.
Bye-bye.
Bye.
This concludes today's conference call. Thank you for participating.
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