Earnings Call: Q3 2021

Oct 19, 2021

Hello, and good morning, and welcome to the Ericsson Third Quarter 2021 Call. Today's call will be a little bit different from others. We will start with the normal procedures going through the Q4 numbers. The second part, we will actually spend a little bit on strategic topics. 1, addressing the Path to Profitability in Digital Services by Karl, and then we will address the opportunities that we see in Enterprise by Borje. And with me here today, as usual, I have our President and CEO, Borje Ekholm and our CFO, Karl Melander. So hopefully anyway, even though we'll have this little bit longer presentation, hopefully we can spend the second part of this hour on Q and A. And in order to ask these questions, you need to contact or connect to the conference via a telephone. And you can find all the details in the press release or on ericsson.com. 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 risks and uncertainties. The actual results may differ materially due to factors mentioned in today's press release and discussed in this conference call. We encourage you all to read about these risks and uncertainties in the our earnings report as well as in our annual report. With that said, I would like to hand over to our President and CEO, Borje Ekholm. Please, Borje? Thank you, Peter. And of course, welcome, Everyone and very happy to have everyone joining us for this call. So the Q3, we're very Happy about the performance that we can deliver based basically on us winning footprint across our portfolio, leveraging our strong 5 gs portfolio. And I would say that This ability to gain footprint is clearly based on our investments in technology leadership and the substantial We have made to growing our R and D efforts over the last few years. But I would say it's also a show of the commitment our people show to deliver a performance that actually are on the path to becoming a really strong performance in the future. Today, we have 95 live 5 gs networks. We have 149 commercial 5 gs agreements across our portfolio with unique operators, I should say. But you have also seen that we have decided to delay our Capital Market or postpone our Capital Markets Day, our Investor Update, to instead next year have a full Capital Markets Day with a full management team to participate and update you more sales of the plans we see going forward. We will spend, as Peter said, a little bit of time on updating you all on our strategic thinking at the end of this presentation. But Karl and I will focus the first part here on the Q3 performance and go through a bit more in detail. So if we look at the quarter, we continue to see very good momentum in the U. S. And it's underpinned by our recent signing of a 5 gs contract with AT and T, which now means that we have 5 gs contracts with all 3 Tier 1 U. S. Operators. And these contracts are, by the way, the largest in our history at Ericsson. We also continue to gain market share overall. However, it's quite clear that our market share in Mainland China has been reduced, and this is a consequence or follows the decision Sweden took to exclude Chinese vendors in the build out of 5 gs networks in Sweden, and this is fully in line with the guidance we have offered before. But we also see that we've been able to partly offset That loss of market share by growth in other markets during the quarter, we've seen good growth in Europe and Latin America as well as North America. But I also want to highlight that also Africa saw growth following a very difficult period during the pandemic. But of course, It's quite clear the loss of sales in China hurts our sales volume in total. And we have We need to invest even more to regain that loss of volume by growing in other markets. This quarter also, I would highlight the impact on disruptions to our supply chains that we, I would say impacts many companies across many different industry sectors alike. So for us, We have had very limited to no impact on our customers up until the end of the third quarter. We've taken very proactive efforts, and we have built inventory and created, in a way, a Flexible supply situation. But late in the Q3, we saw some impact on shortages of individual components. Basically that resulted to loss of some sales, but it resulted also in higher inventory. And this is a risk that we see can have a bit of impact also on the 4th quarter. Of course, or it's highly unlikely it would have no impact, but it will have some impact, we think it's likely. Despite the share gains we've had outside of China, the reduced market share in China and the Supply issues and lower sales in managed services led to a slight negative organic growth rate Overall, so we're minus 1%. But if we exclude China, we saw a 6% organic growth year over year. We also continued to deliver strong profitability. Gross margin improved sequentially as well as year over year, and it reached 44%, and our EBIT margin increased to 15.7%. On IPR, we saw also good progress, and we increased our IPR revenues to 2.6%. This was driven by new agreements as well as a dispute settlement, both have some retroactive financial impact, as we have said before. And what we see also is that the significant value of our product portfolio position in 5 gs. And that positions us very well to conclude on future well, ongoing as well as future patent license renewal. So we feel quite strongly about our position in IPR. However, You all know that timing of these license agreements may cause temporary gaps in our overall IPR revenues, but we will not waver from trying to maximize the value of our existing patent portfolio. We have very strong cash flow, And the free cash flow before M and A was SEK 13,000,000,000 during the quarter. And I would say this is Primarily a result of the investments and the commitment we have done in our strategy to improve flexibility, reduce sensitivity to business mix as well as lower our working capital needs. We have now built a robust cash position and gives us a strong foundation to grow by investing further in technology leadership, but also from inorganic moves. We have a strong commitment to sustainability, you all know that, And it continues to deliver good value for us, but also for our customers. And you saw that we just recently launched a new massive MIMO portfolio that has gains on energy efficiency. It's much less heavy and it It has a lower win factor, all in all, providing clear values to our customers. But we also saw that during the quarter, we signed a $2,000,000,000 sustainability linked revolving credit facility. And finally, I want to say our commitment to strengthening our ethics and compliance program continue. This is a longer term journey. We are committed to invest what it takes, and we have we are increasing and carrying significant costs in improving our ethics and compliance programs, but it's also a cultural journey for us as a company. And here we are firmly committed to ensuring that we have created a culture built on integrity as a fundamental value. So now let's move on to the market area performance. Sales in Northeast Asia fell by 33%. That is, of course, due to the significantly lower market share in Mainland China, but sales in other parts of the market area to improve during the quarter. And as a consequence of the loss of sales in China, we have to rightsize our sales and delivery organizations in China, and that will start in Q4, and we will have some structural cost or restructuring cost to that. In Southeast Asia, Cenae and India, sales decreased by 16%. This is really due to a lot of accelerated rollouts in the end of last year for network, but also some timing of orders and projects in digital Services. If we look at Middle East and Africa, sales declined by 8%. In Networks, we saw the primarily impact of timing of 5 gs contracts in Middle East. But I would also say that Africa clearly returned to growth. And we see primarily in digital services, we saw actually a strong software upgrades in the African market. In Europe and Latin America, we saw Europe or in total sales increased by 9%. And if we look at the parts here, Europe grew by 5%, basically on the back of market share gains. And the same thing in Latin America, we saw 29% growth. Of course, it's coming off a very difficult period in COVID, but it's still growing very strongly on the back of our share gains. And we see that in both networks as well as in digital services. 5 gs momentum in North America continued and sales increased by 13%. And clearly, this demand is driven by a demand for 5 gs solutions. So let's now move on to the business segments. So if we start with Networks, of course, sales was hit by China. But if we adjust for Mainland Now sales actually grew by 8% year over year. And this reflects clear gains in other markets That we that have been possible, thanks to a strong product portfolio. And we continue to see very good momentum in deployment of 5 gs around the world. Of course, the impact On the supply chain from the disturbances also, of course, hit networks. And we expect that to pose a challenge as well during the 4th quarter. Nevertheless, we saw gross margin strengthen to 47.8% compared to 46.7% last year. In digital services, it's very encouraging that we now are starting to see revenues from the 5 gs contract, and that's, of course, helping them to achieve some growth. We saw the segment grow by 1% in the quarter, And that's despite a significant reduction in Mainland China. If we exclude China, sales actually grew by 6% year over year. Gross margin was 42.3% compared to 43.5%. And going forward, we expect Profitability to improve gradually and is going to exceed our initial target of an EBIT margin of 10% to 12%. Sales in managed services fell by or decreased by 7% organically. And clearly, here Q3 was impacted by reduced variable sales, contract rescoping as well as some planned exits, mainly in Europe. We also saw that network optimization grew primarily in Europe, and we continue to invest in developing with AI and Automation to further strengthen our competitiveness. Gross margin decreased to 18.7% compared to 20.1% last year. In Emerging Business and Other, sales grew by 4% organically, And gross margin actually increased very strongly to 39.4% compared to 30.5% last year. Reported sales grew by 26%, and that's, of course, mainly due to the acquired Cradlepoint business. What I would say here is this strengthening of the gross margin actually came out of or is to a very large degree explained by Cradlepoint. And it's even encouraging to see that Craterpoint is one of the key drivers of the overall strength and gross margin for Ericsson, SG Group. With that, I want to go over to Karl to go through more details on the report and give some more perspectives on our path to profitability in digital services. Karl? Thank you, Borje. Thank you. And let's have a Closer look at the numbers then. So reported sales, SEK 56,300,000,000 negative organic Development then of 1%, as Perio described, and this is following 4 consecutive quarters of organic growth. And you saw the 2 largest market areas presented growth in the quarter and the remaining 3 ones saw a decline. We had some disturbances, of course, in the supply chain, as Borje also mentioned. But the big factor here when it comes to top line is clearly Mainland China and the reduced market And in addition to what Borje said, that we would have grown 6% in the quarter if we excluded Mainland China. The corresponding year to date number there is 10% growth if China is excluded. On IPR then, SEK 2,600,000,000 in revenue. Out of that, we have certain with benefits from the contracts or agreements that we signed in the quarter. It is an increase of 0 point 5 year over year in IPR revenue. So as you see here now on a rolling 4 quarter basis, our sales is now tracking around SEK 231 SEK 1,000,000,000. Borje showed gross margin numbers per segment. If we drill a little bit further into this, 44% on the group level, that's up 80 basis points, really based on continued improvements both in the networks and as well as the emerging business and other segments. And in Networks, pleased and encouraged to see continued operational leverage contributing to the margin here, but also the higher IPR revenues, as we said before. And gross margin in Networks then now at 47.8% compared with 46.7%. In Digital Services, Gross margin and excluding restructuring again declined 120 basis points, and this is really connected again to what we have discussed for the higher costs for initial deployment in the 5 gs core contracts. And Sales there, I must say, and again emphasize, sales in 5 gs core is really progressing well, and we'll come back to a little bit of a deep dive into that a bit later in the call. On Managed Services gross margin, again, excluding restructuring, declined by 140 basis points, And this mainly comes from a reduction of variable sales on a few customer accounts. And lastly then, emerging business up 9 percentage points and gross margin fueled by, to a large extent, development in Cradlepoint. Of course, Cradlepoint did not exist in our numbers a year ago. So OpEx, as you see, SEK 16 400,000,000 up from SEK 15,900,000,000 a year ago, again mainly related to the addition of Cradlepoint business, both in R and D and SG and A. When it comes to R and D, the increase there in addition to credit point comes from more investments into the 5 gs core portfolio in digital Services as we have reported on before as well. We there is one line not visible on the slide here, but So on other income and other operating income and expenses where we had a positive development in the Ericsson Ventures investment portfolio this quarter. And the net of that positive development and an impairment contributed with SEK 400,000,000 to EBIT. And this is all in Emerging Business and Other segment. So EBIT then ending up at SEK 8,800,000,000 or a margin of 15.7 percent in the quarter, which up 10 basis points year over year. And this, remember, is in spite of the lower sales volume. EBITA. As you know, our EBITA long term target is 15% to 18% of net sales. And we are now, if we look at the rolling 4 quarter basis, hitting 14% EBITA margin. Taxes, SEK 2,500,000,000 in the quarter and an effective tax rate of 30%. This is also effective tax rate for the full year to date. And now let's look into how these profits converted into cash flow. So operating activities Cash flow increased by SEK 9,400,000,000 to a total of SEK 14,700,000,000. And we can also remember that last year, Q3 was impacted by a SEK 2,000,000,000 contribution to the Swedish pension fund. But we work a lot with working capital in our company. We focus a lot on lead times and efficiencies. And you can see that also this quarter, the resulting free cash flow benefited from that working capital work that we put in. We had good collection from customers, including some prepayments as well. And As Burri also mentioned, we did increase inventory again. This is something we have talked about on previous calls also in order to create even higher resilience in the supply chain. But that was actually offset partially at least with higher trade payable. So the impact on cash flow was not that big. CapEx net and other investing activities was relatively stable year over year. So that all resulted in a free cash flow of SEK 13,000,000,000 up more than 200% year over year. And maybe again on the rolling 4 quarter basis, free cash flow before M and A was now SEK 31,300,000,000, kroner, which corresponds to 13.6%. And again, that's beating then our long term free cash flow generation target, which is 9% to 12% of net sales. This all meant that our gross cash and net cash increased by SEK 11,000,000,000 and SEK 12,000,000,000 respectively. Okay. If we move on to planning assumptions here finally on the quarter then. First of all, starting with the market that we operate in. Del Oro now expects the rand market to grow by 13% in 2021, which is up then from the 10% that was estimated in the May report. And if we break that down by region, some of the regions then, China, 13% North America, 15% Europe, 10%. And looking ahead into 2022, the Deloro forecast for the rand market is to grow by 2% or 3% if we exclude China. 2nd point on the supply chain. We see saw some disturbances in the Q3, as mentioned, including some individual component shortages, And we continue to see this as a risk going into the Q4 as well for networks sales. Over to IPR. We have a run rate in the current portfolio of SEK 7,000,000,000. This is the same number as we stated in the Q2 report as well. And it is the contract portfolio currently on an annualized basis. And again, as we have discussed many times before, as these key IPR contracts are approaching expiry, we may see an impact on revenues until those contracts are actually renewed. Lastly then on Digital Services, we expect to reach breakeven in the 4th quarter. So now having gone through the quarter as such, I would like to shift gear and say a few words about digital services and the road back to profitability in this segment. And to start with, as we communicated already in the 2nd quarter report. Now we expect a limited loss in 2022. One impacting factor is, again, the decreased market share in Mainland China. But the long term target, 10% to 12% remains, and of course, our ambition is to even exceed that over the longer term. Before diving in really, I just wanted to start here by reemphasizing again the strength in our 5 gs core portfolio. And the business momentum is really here. The stand alone 5 gs core market window is open. Customers now make long term commitments in their choice of vendors here. And we'll come back to our track record so far, but we are winning a lot of these deals. And this is really a cornerstone in our journey here in digital services, 5 gs core contracts and what we call attached sales around that and hence the investment in R and D in this area. If we look at the chart here, starting on the left side and with our investments in R and D. So earlier in this year, and we have talked about before we decided to really prioritize long term ambitions here rather than going for short term results. So we have increased R and D significantly when it comes to 5 gs core and orchestration. It adds expenses in the P and L, of course, short term, but builds value clearly for the mid- and long term, very similar to the development we've seen in networks as well. So we Also continue to make R and D investments in automation, and this is really more to drive efficiency in our delivery of software and to become more efficient in our own R and D. And thirdly, We also invest going forward now for the future in service orchestration and in involving now the portfolio to enable our customers to serve, not least, their enterprise customers, including 5 gs network slicing and edge solutions. Looking at gross margin, here are a couple of aspects. First, just to put in perspective, the packet core area, including 5 gs core that we talked so much about Now that represents about 20%, 25% of the total revenue in digital services. The other 75% or 80 Percent of revenue is delivered from the other areas, which all have a clear trajectory towards improved profitability. And this is underpinned by the transformation that we are driving toward more software based content and more industrialized solutions. One area which I think is worth to call out here is the BSS because we're actually pleased to see that the BSS strategy that we revised in 2018 is delivering. It's been executed and now the BSS area is delivering gross margins in line with group average levels. Another aspect impacting gross margin also positively now is that we are managing all of 45 critical contracts that we talked about and started to mention back in 2017. However, then the gross margin improvements that I just mentioned and the things we do coming out of technology investment are then partially offset by the initial 5 gs core deployment cost for new product introduction. And that's why we see an improved Gross margin up to 2022, but not yet enough. However, beyond 2022, we see then that We continue the transformation towards software based solutions to customers, and this is going to contribute to the improved gross margin that you can see here to the right on the slide. Software share will increase And the recurring element of software will also grow in our digital services business. And you can see here that this really the most significant contribution to our long term profitability target. Finally then, if we turn to net sales, The way the 5 gs core contracts work is that we start to see revenue in the P and L when the networks go live. And then the revenue from those contracts grow then with added subscribers to those and Networks. This means that revenue from those will start now start towards the end of the year and then continue to grow over time. So to continue then on The market on the sales piece, of course, the Mainland China reduction has cost us quite a bit of top line and that's what you can see in the The thin sales line leading up to 2022. But of course, our ambition here is to compensate that with market Gains in other markets and this we already saw actually in even in the Q3 that this is happening. Finally, when it comes to our ambitions then on CSP Enterprise and Service Orchestration Portfolios, We expect those to start to be visible in terms of revenue by 2023 and onwards. And this is then as things like dedicated networks start to scale up. Edge, as I mentioned, Slicing components are being commercialized. So next slide, and I will finish off with this, Shows a bit about the momentum in deals won. So far, we have landed 45 Standalone 5 gs core contracts, you can see that on the left here, and 15 of those are added since October last year, and 8 of them are live and generating revenue. And it's really based on our for containerized cloud native technology that we win these deals and we anticipate that we will continue to lead the 5 gs core market and more add more customers to this list as well. But as mentioned before, it's not only about 5 gs core. To the right here, you see examples from the other parts of the portfolio in digital services. Starting with BSS, we have 70 new deals in 2021, all in line with the BSS strategy that we have put in place. And actually, our customers need to modernize their BSS to become more agile in the consumer business, but also to meet the enterprise customers' requirements. 5 gs core, as said, drives attached sales as well. And a good example of that is here what you see on OSS where network orchestration is a good example. And last year, we celebrated more than 100 customers here in our Ericsson Orchestrator. And since then, we have added another 30 customers on top of that. Cloud communication, More than 160 customers have chosen our VoLTE solution for their voice offerings, of which about 20 new customers are new since last year. And then on cloud infrastructure, we have about 230 customers already and 29 new customers added so far in 2021. So I hope that gave a little bit more meat on the bone on DGS, our digital services segment and the road to profitability, essentially, it's about investing in technology leadership, winning us market share and improving the margins through a shift to higher software content. Thank you, and back to you, Borje. Thank you, Karl. So now I'd like to shift gear a bit and talk more about our overall strategy as well as what the opportunities we see that we can grow in enterprises. But starting here and really Saying as a result of the focused strategy we launched in 2017, we have now delivered in a way a Clearly improved performance, including cash flow performance, and it's all based on a very strong commitment to R and D to be technology leaders. But this has also established a strong platform to make strategic choices from going forward. The basis for our performance and the basis for us as a company is, of course, a competitive product portfolio. And that Today is built upon the leadership in Rand Core as well as management and orchestration, and we can deliver those at a very competitive cost. And for us, continue to drive the performance in the core business is going to be critical. And it's actually the fundamental, call it ingredients that allow us now to make strategic choices for the future. But I think it's also fair to recognize, and you all do that, that the 5 gs deployment curve, even though it's been growing sharply now and growing great now, it will flatten out or it's at least likely to flatten out. And you see that in the blue bars here, the darker blue bars on this chart. And we see that happening in the years ahead. And this is a pattern we've seen in other Gs before. But I would also say that the previous generations of mobile technology really only address the consumer market. What is actually different with 5 gs is that it's also addressing enterprise needs. And it was actually designed to fulfill enterprise needs. So we believe that is going to drive traffic into the networks and actually provide a much longer investment cycle in the networks. But it will also start to open up for new segments to be attacked with mobile communication. So we believe that focusing on maximizing the value in our Core mobile networks is the fundamental focus going forward, but we also see that we can Make a focused expansion into enterprises. This will open up higher growth markets as well as New value streams that we can realize here. What we see with the new future with 5 gs This is very different and we believe this opens up new markets for us that could be worth up to 25,000,000,000 U. S. Dollars by 2025. And this is maybe more importantly a market that is growing very fast already today achieving growth rates well above 20% per year. But it also offers Good gross margin as well as operating margin opportunities for us. The last 18 months, we have seen The importance of mobile network to manage during the COVID situation and mobile Works now play a key role in societies as well as allowing many people around the world to work remotely. But there is no question that with 5 gs, we're lifting the performance to a completely new level where we will have much higher bandwidth, lower latency and much higher capacity. And we think that also will offer new opportunities basically to specify quality of service that in addition to enterprise or consumer applications, we'll start to allow enterprises to take advantage of the wireless networks. We see that we're already Being able to unlock value for enterprises with 5 gs as we can adjust In a way, the digital infrastructure based on the needs, and Karl mentioned it already, we start to see network slicing, gaining momentum with the orchestration and edge clouds, and that is something we are developing together with leading partners in the whole ecosystem. And we see that we are only at the beginning of that development and the opportunities are clearly ahead of us. So we see that there is a long term value for us that can be captured by being an enabler as well as orchestrator of that ecosystem that's going to come. What we also know is that From the 4 gs experience is that really the developers that develop applications on top of the networks, They're actually realizing value. That's multiples of the investments that goes into the network itself. And we believe with 5 gs, that will be even more the case. So let me give a couple of examples. One is, for example, on quality of service, where you can have Network performance adjusted in real time. This basically enables us to differentiate the service to customers recognizing each customer may have different quality needs or performance needs. Think, for example, telemedicine or think, for example, a sensitive video conference where you need to adjust and rely on very high Quality performance or high quality networks. I think this is an opportunity for sustainable growth for us, And I'm very excited about driving this strategy into the future. We, of course, are going to see that we are already today starting to offer dedicated enterprise offerings. So we have our dedicated networks. We have mission critical networks, IoT, but we also have, of course, Network Near Solutions. And here, one that we're clearly investing in is Cradlepoint. It's a network near. It in a way is grow or it helps Not only does it provide us with a market opportunity, it actually generates revenues also for the CSPs because with every crater point installation, there is a network need as well. So we see this to be A win win together with our CSP customers, but we are also very encouraged about the performance we see in those to price applications where we can provide a very high growth. For example, we see Craterpoint growing very rapidly, following well on our plans. But most importantly, we're also seeing The gross margin performance of that business to contribute to us as a company now. And that shows that To succeed in the enterprise area, we know already that we need to, of course, build on what we have to develop them organically, but we also need to rely on inorganic opportunities. And with the capital situation we have, we have the opportunity to make the acquisitions we need to strengthen our offering in enterprises. But now let's move on to the summary slide. So I'm putting another, I would say, strong quarter to our track record. We continue to be well positioned to take advantage of the market opportunities as 5 gs continues to be deployed globally. We continue to take proactive steps to manage the supply situation, but we, of course, had some impact this quarter, and we think it could pose a risk for the Q4. The C band rollout continues in North America and that's a key opportunity for our customers and therefore also for us. But based on a very competitive 5 gs portfolio, we continue to see a path towards winning more 5 gs contracts as we move along both in North America and in the world. So when we look ahead, We do feel that we're in a good position where we are where we can take the next step strategically. But we're, of course, as an interim step, going to deliver on the 2022 targets as a long term as a group target, but we're also very committed to our long term targets for the group. With that, I give the word back to Mr. Niek Vist. Thank you, Mr. Ekholm, for that presentation, and thank you, Karl, for the presentation. Was more of a strategic focus. So with that, we still have 20 minutes and maybe a little bit more to answer your questions here. So I would like to give the word to Mark. Can you hear me? Thank And our first question comes from the line of Edward Schneider at Charter Equity Research. Please go ahead. Your line is open. Hello, Edward. Thank you very much. Good morning. How are you? Good. How are you? Good. Congratulations on the gross margin performance, which was very impressive. I believe that's the highest we've seen since we started covering Ericsson in 1999. So it's a lot to recommend your turnaround strategy. But I had a question on gross margin. As the mix of 5 gs deployment SKUs even further from China, especially towards North America. Why shouldn't we put an upward why shouldn't that put upward pressure on margins? Your 5 gs systems have a higher software content than past systems and your chip strategy has proven more successful than any of your competitors. So I'm just curious about why coverage projects wouldn't run close to these levels and then densification perhaps raise them further? And then I have a follow-up. Do you want to take it? Yes. No, I think we're seeing in the gross margin thank you for your comments, By the way, on the gross margin. And what we're seeing is the fruit of the whole strategy and the entire work we have put in actually since 2017, I would say. I mean, investing in leading technology, that's gaining us market share and that's also now translating in an ever improved gross margin. And I think our job is to obviously continue on that path and continue to design cost out of our product at the same time make it more and more attractive for customers to win further share. Yes, I would only say thanks again, as Karl said, for your comment first. No, we have spent quite a big effort in actually, in a way, removing the exposure to business mix a bit. But what you see our linear cycle is, of course, more hardware. So we do believe there is We're quite comfortable about the future gross margin development, I would say, and see that to be providing an attractive basis for our future performance clearly. Great. And then you've mentioned that the IPR annual run rate would be around $7,000,000,000 for existing contracts. Is it possible to get back to SEK 10,000,000,000 without China? Or should we expect this is the main word is until some other resolution? Sure. Could there? And then If we could please remind us of the foreign exchange impact or your exposure to the U. S. Dollar, if all else is held constant, what What should we expect for, say, a 10% decline in the dollar? What would that do to revenue and cost? If we start on the IPR and then Karl comments on the sensitivity to currency. We're Let's not speculate about how future contracts are going to look like. So we'll communicate once We know how they will be and when we have landed them. But clearly, we're very we have a strong portfolio. We have a good IPR portfolio. That allows us to negotiate with the licensed partners, and hopefully, we can realize a good value going forward. That's at least our ambition. But let's not go into the details yet. Right. And on FX, if we Just if we generalize a bit, our rule of thumb is that 10% change in the U. S. Dollar SEK rate Translates into about 5 percentage on 5% on top line and 1 percentage point on EBIT. Now this quarter, the impact was not that large from currency. Previous quarters, we have seen a quite more dramatic change, of course. Great. Thanks, Ed. Thank you very much. We'll move to the next question, which is from Alexander Petrik at Societe Generale. Hi, Alex. Hi, good morning. Good morning, Thordry. I just have a question on the supply chain risks that you see. I'd just like to understand what kind of visibility you have for the supply chain. Do you have good visibility for the next, let's say, 3 months and so? You might have some impact, but nothing really, really major. And then if you could maybe give you more detail on what you're missing exactly in terms of components Was it logistics rather that is a problem? And does that also lead to any tangible increase in your input costs? And if so, can that affect your gross margins or your pricing going forward? Thanks a lot. Now what we see during the end of the third quarter is actually it's individual components That's been missing. So that have in a way driven up our WIP inventory and resulted in some lost sales That's what happened. We think these are disturbances that could happen. I wouldn't exaggerate them because we have reasonably good visibility And we have quite good management of the supply chain. But these were late in the quarters the commits that resulted in this disturbance. I wouldn't exaggerate the risk going forward, but it poses some threat, put it that way. It's very hard to tell you exactly how Q4 is going to look now, but we feel quite comfortable about our supply situation going into the quarter. If you look at logistics costs, etcetera, we of course, you have some upward pressure there, but we also think those are Manageable as we see today. It's We're actually benefiting a bit from our supply chain, which we have created with some flexibility with some new facilities around the world to reduce our exposure a bit to logistics costs. But of course, we need to always be vigilant at how we manage our cost structure and manage our deliveries to customers. But so far that has had some but very limited impact on our margins. And we kind of absorb that in the margins actually. And you see they are developing quite well anyway. Thanks, Alex. That's great. Thanks a lot. Thank you. We'll move to Francois Bouvigny from UBS. Hello, Francois. Hello. Thank you very much. So my first question is on the Global run market that you expect or maybe Deloro expect to grow 2% in 2022 and 3% Excluding China. So what I wanted to ask you is how you feel Ericsson can be versus This target today and we saw a stronger market in the U. S. Obviously in the last 6 months with twice you upgraded your Numbers for 2021, so how much do you think is a pull in? Or is it something that also the strong market that you see toward the end of the year is also Going to translate into 2022. So just try to clarify a bit on the 2022 outlook and how Ericsson is comparing to. And my quick follow-up is on the IPO. Just a clarification. So you have like SEK 2,600,000,000 this quarter. So how should we think About Q4, because I don't understand how much is a one off or catch up amount, if you just clarify I'm sorry if I missed it. So how much we should think about Q4, please? Thank you. You take? Yes. Okay. Now on the Rand market, I think obviously, Del Oro expects now, as you said, 2% growth in 2022, 3% excluding China. Our ambition remains to grow faster than the market. And I think we have proven that in the past that we are gaining share. And of course, some of the deals that we have won, contracts that we have landed are yet visible in the sales numbers either. So that remains to be seen. U. S, of course, being a very big component here. There we have Very good momentum. And as Burri mentioned before, now with the C band build outs, we are seeing good CapEx levels from our customers, and we expect to continue as well. But we have decided to look at the Del Oro and talk about the Del Oro forecast for the future market development. So we'll stick to that and then try to grow faster than that number. IPR. On the IPR, yes, so and we haven't disclosed exactly the retroactive element there. But as you know, it's SEK 7,000,000,000 on an annualized basis. There is a certain retroactive element here in Q3, but I think that's as far as we can go. So the IPR revenue should come down a little bit from the Q3 numbers because of the retroactive development included in Q3 numbers? I know you I just want to comment on because I know everybody wants to know a lot More about the details on IPR. But there is a commercial element here that we also need to make sure that we maximize the value of the, call it, of our patent portfolio. So disclosing too many of the terms in individual contracts just simply gets too sensitive and may actually hurt our ability for the future. So that's why we're a bit restrictive here, but trying to provide a guidance that at least can make you form some sort of opinion about each quarter. I know it might be a bit unsatisfactory, but it's really to it's not for lack of willing, it's actually to try to run a better business. Makes sense. Thank you. And thanks, Francois. We will move to Morgan Stanley and Dominik Olejvinski. Hi, Dom. Hi, Peter. Hi, everyone. So two questions. Firstly, on Digital Services. Could you just talk about what drove better EBIT performance in Q3 specifically? Obviously, is it better than the comparable performance that you talked about when you're talking about Q2 and Q2 into Q3 being the rough same level of possibility? So what was the difference there? Anything in the customer portfolio or product side? And then second question is on Cradlepoint. Can you talk about the success so far you've had in basically immediately adding value to that acquisition? One of the elements I remember was going international and you acquired the company, I think 90% of revenues was in North America. So how much success have you had in actually growing that Into the rest of the world. And are you still expecting the 25% to 30% top line growth in that business and over 60% gross margins that you talked about before? I can should I tackle the Cradlepoint first and then give you the Digi Services? So if we look at Cradlepoint, we have started now to gain success in the international markets. It's still early in the days, but we're starting to see that to pan out. And the investments we made in SG and A have actually started to contribute today. The gross margin is actually better than what we predicted when we made the acquisition. So we are thereby feeling that we are delivering even a little bit better than We had in our own plans a year ago when we made the acquisition. We have not disclosed all details here. But as we build out the enterprise, we will, of course, see how we're going to disclose more and more of the activities we do in there. So bear with us a bit there. But at least you can we can see that we're going in the right direction, both on top line as well as the bottom line. Growth rates going forward should be at least in what we think the market is. If the market is 2020 We believe we should be able to grow a bit faster than that because we can add the value of international exposure as well. Good. And Dom, on digital services, why did it turn out better? It's a combination actually of higher sales volumes than expected. And as you saw, even after the decline in China, we actually grew in that segment with 1%. So that exceeded our expectation. And secondly, gross margin was stronger and that has to do with the software share of sales, which again is exactly in line with our to drive up software, but it came out stronger in this quarter. So therefore, we beat the expectations there. It's very encouraging, by the way. Great. You're happy with that, Dom? Yes, perfect. Thank you. We'll move to Daniel Juber at Handelsbanken. Good morning, Daniel. Good morning, and thank you for taking my question and also congratulations on the solid gross margin and cash flow, truly impressive. I would like to start again on the supply chain constraints that could pose a risk that you mentioned. My question is really if you expect the impact to be lost revenues or more of a deferred revenues into Future development or deployment, I should say. That is the first question. And then if I may on the digital services. You commented that 75% roughly lies outside Packet Core and also did you took good momentum here with 30 plus Deals on BSS and some 30 plus on OSS so far. But can you comment a little bit on the revenue model for those? Because I can't see the full impact from those quite high numbers to me at least. If you could comment more on What we should expect given the 75% sales being outside of Packet Core? And possibly also a comment on the Percentage of OpEx being tilted to those 75% of sales would be great. That is my questions. Thank you very much. I'll take the supply chain. Maybe you take the DGS question, Cor. I'll take that, yes. So on supply chain, yes, We have seen some disturbances. Our ambition is to work with the customer, of course, to make sure that we fulfill their needs. That's ultimately the only way for us to be successful. And if we can do that, it really will end up being delayed sales, we can realize it later on. So that's what we're trying to work towards. But it's always a risk when you have a supply disturbance that you can't satisfy the customer. But we're going to do what we can. And so far, we have not seen that we have lost sales. And our ambition is to keep it that way. Okay. And Daniel, on DGS or DGS Services, Yes, I would say when it comes to the revenue models and so on, it's really similar to the rest. Of course, it's a change towards It's a change versus what we had years ago where we went in, for example, in the BSS area with the services led scope, sometimes a little bit undefined. And as you know, we had more than 40 contracts of that nature that we have now Worked hard to get back to a decent profitability level. Now instead, of course, we lead instead with software with the product, and that goes for all of these categories. There's a certain element of system integration, of course, in there as well, and we charge as we go. But mainly, it's a software business now, and this is also what we're driving for in all of these areas. And that's also, as you saw on the graph before, what is going to improve our overall profitability the most. OpEx percentage, I don't have on top of my mind actually. So I think we can leave that for now. Maybe come back to it, sorry. Yes. May I give a short follow-up on the same topic just on your assumption? Thank you for giving this color. But can you comment on your run rate IPR assumption for digital services in 2022? Is it SEK 7,000,000,000 that you talked about? Or is it something else because of the litigation ongoing? On IPR, what we have I said earlier actually is that we assume IPR to stay flat in our business planning activities. Okay. Yes. Great. Thank you. Thanks, Daniel. And we'll move to The next question I know we're running over the hour, but I will take 2 more questions because we had a little bit of a longer presentation. So next one is from Peter Kurtenilsson at ABG. Hello, Peter Kurz. Thank you very much. Hello. Thank you for taking my question. Can I just Turning towards the sales side, the top line side, please? If we look at networks, even adjusted for the lower sales in China, The organic growth in Littborg appears to be a bit below the market growth forecasted for the WAN market Sort of overall and even for the regions, Europe and North America, and you are talking about gaining markets here. So could you level a bit on Why are we not seeing better sales momentum given the strong overall momentum in the market? And then just referring to your comments About the 3 large contracts in North America, should we expect to see a step up here from next quarter and next year or which, Please. And if I may add a follow-up on Dealers and Services. As was highlighted in the previous question, Q3 EBIT loss is significantly lower than you expected 3 months ago. You're still anticipating a breakeven in Q4. Why is that given the positive trends? Thank you very much. Should I start with the second one, Bergen? Yes, you can do that. I'll take the third one also. Okay. I can take Yes, on Digital Services, yes, we maintain the guidance there or anticipation on breakeven in the 4th quarter. And the way to look at it, I think, is to look at the second half then that will perform significantly better, thanks to the improvement now that we saw in Q3. But we still maintain the breakeven ambition and guidance for Q4. Look at the full 6 months and it's then substantially improved. And if you take the top line, I think it's a couple of different factors to keep in mind here. One is, of course, the supply chain disturbances we had that have had an impact on network sales in the 3rd quarter. But we should also remember that what we have tried to do is to or some part of the gain in footprint have been or have very limited attached services. So as we see going forward is that we will have a little bit less of attached services and thereby you're going to see sales maybe Not developing as fast as necessarily the growth in the underlying market. But at the same time, we do believe our product sales is Longer term, a much more attractive business than selling the services. When you look at the growth rate, you need to adjust for that as well. Great, Peter. Okay. Thank you for that. We will actually now move to the last question of this session, and that's Sebastian Stabanovich from Kepler Cheuvreux. Hello, Sebastian. Yes. Hello, everyone, and thanks for taking the question. One regarding China because your top line is dropping fast And you now plan to attack you a little bit because they are there to protect your margins. Do you see any opportunity to come back In the country at some point with some additional contracts? That will be the first question. And second one is regarding The rise of feed input cost everywhere in the market, chips, logistics and so on, do you see any room to increase the price of your base station In some specific contract in order to protect somewhat the margins? Thanks. I like to think when you lose a contract, the day after you start to fight to win it back. The same is the thing with China. I do believe we have a chance to win back the trust to deliver products in the future. So we're focused on regaining that. But of course, short term, we just simply need to adjust the cost structure to rightsize that as much as we possibly can. But we're going to try to be there. I think it's important to remember, yes, we see cost pressure upwards as you indicate. But what we are also seeing as we counterbalance that is actually that we this is an industry where it moves very fast on generations as well. And we're actually as well. And we're actually introducing new products at a higher pace than we have ever done. That's also a way to combat, call it input price increases. So we feel quite comfortable about our gross margin file and the way we run the business right now. Great, Sebastian. Okay. Thank you. With that, actually, we had that was the last question. I see you have more questions on the list area. Please contact the IR team and we will set up meetings and we can discuss those. But before closing, Borje, maybe a remark from your side. I just want to say that We continue to execute on our strategy. It is built upon winning in the core mobile network business. And here, we continue to have a very high intensity on our R and D. That helps us to do 2 things. 1 is to offer competitive solutions to our customers. But equally important, it also addresses the cost structure, and we can actually continuously become more efficient by investing in R and D. So we feel that With the targets we have committed to for 2022 as well as the long term targets, we're very comfortable about our ability to deliver on those. Thank you, Borje, and have a great day. Thank you, Arnd. Thank you.