Telefonaktiebolaget LM Ericsson (publ) (NASDAQ:ERIC) Q4 2023 Earnings Call Transcript

Telefonaktiebolaget LM Ericsson (publ) (NASDAQ:ERIC) Q4 2023 Earnings Call Transcript January 23, 2024

Telefonaktiebolaget LM Ericsson (publ) beats earnings expectations. Reported EPS is $0.16, expectations were $0.14. Telefonaktiebolaget LM Ericsson (publ) isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello, everyone, and welcome to Ericsson’s Fourth Quarter and Full Year Results of 2023. With me today, I have, as usual, our CEO, Börje Ekholm; and our CFO, Carl Mellander. And we will end this presentation as normal with Q&A. And in order to ask questions, you will need to join the conference by phone. Details can be found on today’s press release or on our website, ericsson.com/investors. Please be also advised that this conference is recorded. But before handing over to Börje, I would like to read 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 risks and uncertainties.

The actual result 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 an earnings report today as well as in the annual report. With that said, I would like to hand over the word to Börje. So please, Börje.

Börje Ekholm: Thanks, Peter, and good morning, everyone. Thanks for joining us today. So in 2023, we navigated a difficult mobile networks market marked by persistent headwinds and an unprecedented slowdown in the North American market, which really saw customers reducing CapEx significantly. With the rapid growth in India, we saw a dramatic change in business mix. But overall, the total mobile networks market really fell in size. Notwithstanding these challenges, we continue to execute on our strategy, and I’m pleased to say that we concluded 2023 with a solid quarter, and we succeeded in generating an EBITA of SEK 21.4 billion for the full year. Through our strong focus on gross margin that we’ve had for many years, as you know, we generated almost 40% gross margin for the year.

While our actions to improve performance are paying off, we’re not satisfied with our profitability. So we have clearly much more work to do. As we look ahead, 2024 will be a difficult year, and market conditions will prevail. And so we currently expect the current market outside of China to further decline as our customers remain cautious and the investment pace normalizes in India. With that in mind, we remain laser focused on managing what’s in our control. We are consistently driving operational efficiency while keeping the investments critical to our future growth intact. We remain firmly committed to our long-term goals of 15% to 18% EBITA and 9% to 12% free cash flow. And we are seeking to maximize the value for all our stakeholders.

Let me now walk you through some of the key takeaways from the past year and how our strategy is critical to the industry’s long-term success. So next slide, please. As expected, 2023 was a difficult year for the mobile network market with an overall decline combined with a dramatic change in market mix. Group sales declined organically by 10%, driven by an overall decrease of 15% in networks with North America being down by almost 50%. We work relentlessly to strengthen our performance and cost management. We recognized already in – more than a year ago, the need to take costs out. And during 2023, we’ve implemented efficiency improvement, including reducing internal and external headcount by more than 9,000. And this has actually enabled us to deliver against our cost savings target of SEK 12 billion gross out.

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Q&A Session

About half of that came into effect in 2023 and the remainder will come during 2024. Because of our efforts that we’ve done in the past few years and you know the importance we place on gross margin, we were able to deliver gross margin of 39.6% and an EBITA margin of 8.1% for the year. I would say given an almost unprecedented market environment with volume declines as well as business mix change, I think this was a very solid performance by the team here. Across our business areas, we also took critical steps in building a stronger, more profitable Ericsson. In Mobile Networks, we continue to extend our technology leadership. Our leading technology empowers customers to build high-performance, differentiated and programmable networks while also leading the shift to open cloud-native networks.

The contract with AT&T is a key proof point demonstrating how our technology is leveraged to advance the network architecture of the future and deliver a reduced total cost of ownership for our customers. This deal will create significant value, both for our customer and for Ericsson, and we expect it to start to ramp up in the second half of 2024. In Cloud Software and Services, we executed on the turnaround plan, and we’re happy to have reached that target. So for the full year, we delivered an EBITA of SEK 1.7 billion. I really want to thank the full team for their efforts. From now on, we’ll continue to increase commercial discipline, automation and delivery efficiency, focusing on long-term profitability. In Enterprise Wireless solutions, we continue to build out offerings, including the acquisition of Ericom and we further strengthened our position in private networks.

During Q4, we saw slower growth due to macro headwinds. And through our global network platform, we continue to work with front-runner customers to reshape the industry by transforming the network into a platform for innovation. In parallel, we’ve continued to drive our cultural transformation as we focus on building a culture of integrity and strengthening our governance, risk management and compliance. All these initiatives, of course, come with a short-term cost, but I will say they’re essential to our long-term competitiveness and success. As I said, going forward, we expect the RAN market outside of China to decline further as our customers remain cautious and the investment pace normalizes in India. However, we expect our market share in North America to be helped by the AT&T contract in the second half of 2024.

It’s important to note that looking historically large declines in the mobile network market are followed by a rebound. So operators can sweat the assets up to a point, but eventually, we’ll need to invest to manage the data traffic growth, cost, energy usage and of course, network quality and give the customer experience that the customer demands. And that is actually something we see will happen this time as well. So we fully anticipate the market will recover to more normalized levels. However, the timing is very difficult to predict. Ultimately, this will be in the hands of our customers, and the investments will vary by customer and by market and their competitive position. We also see a – somewhat slower growth in enterprise due as well to macroeconomic headwinds.

So again, with that outlook, we will continue to prudently manage our balance sheet while keeping sight of investments critical to our long-term strategy. So as we focus on driving fundamental improvements to our cost structure, and we expect to take additional actions, including reducing headcount as we pare back some investment areas and focus our portfolio where we really can win. As you saw today as well, the Board has proposed a dividend of SEK 2.70 per share, corresponding to a total amount of SEK 9 billion. This is proposed to be paid out in 2 equal installments as in previous years, while recognizing the near-term challenges, I would say this is a testament to the confidence the Board has in the longer-term outlook for us as a company.

But let me now take a step back to put our achievements in the perspective of our strategy. So next slide, please. While the mobile network market is challenged, it actually provides real value to the economies around the world from regular communication for consumers to advance digitalization for enterprises and society. But the problem is that the return on capital has been stagnant and many operators today fight to earn cost of capital. I think to change this, there are two things we can do. We can passively wait for market just to improve or regulation to change or we try to address the issue head-on by changing how networks are consumed and monetized. As you know, we’ve chosen the latter route. We’re actively working to reshape the industry by transforming the network into an innovation platform, leveraging cellular connectivity in new areas.