Telefonaktiebolaget LM Ericsson

STO:ERIC B

Earnings Call Analysis

Turnaround Efforts Boost Company's Prospects

The company is making significant strides, evidenced by the swing from an EBITA loss of over SEK 1 billion to a positive trajectory. Encouragingly, the Vonage segment of the global communications platform has delivered positive EBITA in Q3. Despite a SEK 0.5 billion negative free cash flow before M&A due to big projects with longer cash cycles, the company anticipates a working capital reduction and gradual return to their target of 9%-12% of net sales. Cost reduction efforts have yielded SEK 10.5 billion in savings, contributing SEK 1.9 billion to the P&L in Q3. The ambition has escalated with a revised target of SEK 12 billion in savings. Looking ahead, the company has set Q4 guidance, forecasting a Networks gross margin within 39%-41%, and a group EBITA margin around 10%.

Company's Assertive Stance on Network Platforms and Ecosystem Growth

At the heart of the company's strategy lies the belief that network platforms hold exponential potential for growth and innovation. With developers and enterprises integrating enhanced services through network APIs, a virtuous cycle of mutual value creation and monetization opportunities for CSPs is fostered, fueling further investment and attraction to the ecosystem. This 'flywheel' effect signifies a transformational opportunity in the telecom industry, poised to centralize wireless networks in enterprise digitalization. The company acknowledges the importance of scaling their platform swiftly to capitalize on the opportune moment and is optimistic about their positioning.

Strong Q3 Performance and Upward Adjustment in Cost Savings Goals

The company's third-quarter results aligned with previous guidance, and they demonstrated resilience amidst an evolving telecom market. Even when factoring in significant impairment related to Vonage goodwill, the emphasis on underpinning business results remained robust. Notably, the company has successfully navigated through market challenges, with its efforts leading to a revised cost savings target of SEK 12 billion by year-end, up from the initial SEK 11 billion indication. This adjustment reflects effective cost management and operational efficiency, and stands as a testament to the company's strategic execution and internal assessment of cost-saving potentials and actions.

Q4 Outlook and Financial Guidance

For the fourth quarter, the company anticipates continued market trends from Q3 with additional support from its cost-saving initiatives. Gross margin in Networks is expected to fall between 39% and 41%, marking an improvement from Q3. Cloud Software and Services are projected to achieve at least breakeven EBITA for the full year. The company also projects a group EBITA margin of around 10% in Q4. These projections are made acknowledging the less-than-normal seasonality changes in top line revenue, particularly with India's sales expected to be flat sequentially from Q3 to Q4.

Long-Term Confidence and Strategic Focus Amid Market Uncertainty

Despite uncertain short-term market dynamics, the company maintains strong long-term confidence, directing focus on elements within their control. Initiatives to bolster mobile network leadership, business growth in the enterprise segment, and cultural evolution within the company remain uncompromised. The current investment caution from customers is seen not as a deterrent but as a precursor to a market recovery, upon which the company expects to leverage its operational efficiencies and cost control measures. This balanced approach dictates a strategy crafted to enhance profitability, cash flow targets, and innovation for the coming wave of network advancements.

Management's Insight on Market Recovery and Gross Margin Sustainability

Management believes in an inevitable market recovery, although the timing is uncertain. Anticipating growth in North America and a slowdown in India, the company's gross margins in networks are expected to be maintained or potentially improve due to extensive cost reductions. The significant cost-out program, totaling SEK 12 billion in savings, will further contribute to the resilience of the company's gross margins and profitability going forward.

Earnings Call Transcript 2023-Q3

[Peter Nyquist, executive]

Hello, everyone, and welcome to this Ericsson's Third Quarter 2023 Results. With me today, I have here in [ CEST ], our CFO, Carl Mellander; and direct from New York, I have our CEO, Borje Ekholm. Last week Thursday we preannounced our Q3 numbers as we announced the impairment of goodwill attributed to our acquisition of Vonage. Today, however, we will not only give you more details around the Q3 report and expectations going forward, we would actually also spend some time talking about our GNP strategy.So we'll start with Borje, summarizing Q3, and then we'll talk more about the GNP strategy. And then Carl will return back and give [ a ] more details around the Q3 results and expectations going forward. As usual, we will end the presentation with a Q&A session.In order to ask those questions, you need to join the conference by telephone. Details can be found at today's press release or at our website, ericsson.com/investors. Please be advised that today's conference is being recorded.But before handing over to Borje 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 expectations 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 earnings report as well as in the annual report.With that said, I would like to hand over the word to Borje. So please, Borje.

[Borje Ekholm, executive]

Okay. Thanks, Peter. First of all, welcome to our report presentation for the third quarter, and thanks, everyone, for joining us. As Peter mentioned, we will spend some more time now on GNP in this presentation. But first, let me hit on some key takeaways.So Q3 was in line with our previously indicated expectations, but with a bit softer top line in North America than we expected, but with better margins in the rest of the business. Despite the uncertain macroeconomic backdrop, we continue to execute against our 3 key priorities: strengthen our leadership in mobile networks built upon technology leadership, grow our enterprise business, and drive a continued cultural transformation. We're encouraged by the progress we're making, and it's truly a testament to the strength of our team, our strategy and the excellence of our products and our ability to execute.I would like to use this presentation to describe why we are excited about what we're creating with GNP and the value we believe it will deliver to our shareholders. Carl will take you through the more financials in detail, and outlook in greater detail.So in common with the rest of the industry, rising interest rates and changing demand trends have been headwinds to Vonage current core business, and the impairment we took last week is simply a consequence of this. And Vonage in itself remains key to our expansion into Enterprise and to the transformation of our business. We believe this is a massive opportunity that can redefine our industry by providing a new source of revenues to the whole industry.But first, let me touch on the market environment. Over the last 2 decades, we've seen that investments in the mobile infrastructure have had built-in cycles, and in aggregate, it's been overall flattish. We believe this pattern will continue.We don't believe the peak levels of 2022 will return, but we do believe that the investments will normalize from current levels. And the reason for this recovery is that data traffic continues to grow, and thus, more capacity will be needed as well as modernizations of the networks will be needed. So it's important to note that while data traffic continues to grow at a very high rate, this implies a market normalization, not an incremental market growth.So the reason for a flattish market for mobile infrastructure is really that the operator service revenues have only had very limited growth. And this is something we actually also see reflected in the operators' market multiples. So to achieve growth in our core infrastructure market, we need a catalyst to increase service revenue growth for the operators, and we need that by addressing new monetization opportunities, and this is what we've been driving with our Global Network Platform, and more on that later on.We remain committed to our long-term EBITA margin target of 15% to 18%, and we aim to get there as soon as possible. However, given that our customers are cautious on investments in the current uncertain market environment, we will not give guidance beyond Q4 of this year.We have started to see more positive discussions with operators about network investments, but it's clearly too early to call this a turning point. We are, though, confident that the recovery will come, but the timing is really in our customers' hands. And given that, we think it's prudent to plan for current market conditions to prevail into 2024.Therefore, that provides the basis for how we manage our business with a focus on cost control as well as operational efficiency. And with the actions we'll take, when the market recovers, we will actually see significant operating leverage in the business.So now, let me move over to comment on what we're building with Vonage. As you've heard us say before, we're on the journey to fundamentally reimagine our business. While this takes time, we remain confident in our long-term plans and trajectory and believe that Ericsson has a very exciting future ahead of us.Our enterprise strategy and positive outlook on the Global Network Platform remains unchanged. Positive interactions with customers have further strengthened our belief in the area. From a strategic lens, Vonage is developing how we saw it and how we envisioned it. So with Vonage, we're developing a platform business and have extended our growth trajectory in new and existing markets, adding to our total return profile for our shareholders. None of this would be possible without the acquisition.This quarter, we were also proud to announce that Vonage was recognized as a Leader in 2023 Gartner Magic Quadrant for CPaaS. But let me take a step back now and expand on our strategy for this area a bit more.So in the coming 5 to 10 years, we will see an acceleration of major trends such as electrification, the Green Revolution, resilient supply chain, increased efficiency, productivity in automation. These trends will not progress unless we fully leverage the mobile-first, cloud-first and AI-first work. Making this future a reality will require ubiquitous high-performance, differentiated networks, and a broad ecosystem of businesses and developers who can innovate and build upon the network's powerful capabilities.That's what we are doing through our strategy, making networks fully programmable and globally available, will open interfaces and open APIs that enable continuous business growth and innovation. This includes our investments into Cloud RAN. And in doing all this, we can drive a much needy transformation of the telecom industry.The Global Network Platform is a vital part in exposing the capabilities of the mobile network to the full ecosystem around us, including the developers. And at the heart of all this is 5G. With 5G, we have a technology that is 10x more powerful than previous generations and actually has a potential to revolutionize society.While the previous generation of mobile technology digitalize the consumer and gave rise to the app economy, it was based on best effort connectivity. However, best effort connectivity is no longer good enough. Rapidly digitalizing enterprises need more than consumers. They need predictable and reliable connectivity with predetermined SLAs.And 5G was actually designed to do justice with advanced capabilities such as speed, ultra-low latency and the ability to offer differentiated quality of service. 5G is a critical tool for transforming industries and consumers. To seize on this potential, we must redefine how telecom industry delivers and captures value.A few years back, we tested speed on demand with a push of a button and saw very strong interest from application developers. But we also realized, to commercialize this, it would require all developers to individually contract with operators around the world, and that was something that simply is not doable if we want to commercialize [ it ].What was needed was instead an easy way to expose these advanced network capabilities, in this case speed on demand, along with a strong developer community that actually can use the features to drive the next wave of innovation, and this is the underlying reason why we acquired Vonage.Vonage actually provides us with both the platform technology, CPaaS, and the developer community of today 1.4 million developers. We need to make our vision a reality. Vonage is actually critical to our journey to build the platform business. We recently took an important step toward this strategy and launched a Global Network Platform, which combines the power of Vonage and network APIs, enabling mobile networks and applications to talk to each other. This platform makes it easy to expose, consume and pay for advanced network capabilities.Last month, we announced a historic milestone in the network API journey together with Deutsche Telekom. So powered by the Global Network Platform, DT is able to offer a globally scalable one-stop shop for both communication APIs, such as voice, SMS, 2-factor authentication and enhance security as well as network APIs, location, device status and quality on demand. Through the Global Network Platform, we're creating a new market for exposing 5G capabilities, an opportunity that we believe is, or analysts estimate to be about $20 billion by 2028. And we aim to capture a sizable part of the market as we are the front runner today.We expect the first revenues from network APIs during 2023, although limited in scale. There is a change in the market now when we are discussing network APIs with all our customers today, and all of them see this as a major opportunity to monetize the network and the investments in 5G. With network as a platform, every contributor in the ecosystem adds value to the whole, basically creating a flywheel of exponential growth and innovation.It starts with the networks APIs that allow developers and enterprises to create enhanced services. These solutions, combined with performance-based business models, offer CSPs new ways to monetize their network. This attracts more CSPs to join the platform, which fuels network enhancements in order to meet growing demand for more advanced capabilities, and in turn, supports demand for our core business in mobile networks.We also start to see the interest from the developer community increasing as a function of network APIs, further reinforcing the flywheel. Wireless networks are truly transformative with its flexibility, broad and global availability and cost efficiency. We believe that by exposing them in an easy, scalable way, developers and businesses worldwide can use and build meaningful applications, making wireless networks the center of Enterprise digitalization and transformation.What excites me is that this is just the beginning of an extraordinary opportunity for our industry. This will truly transform the telecom industry. This is an entirely new opportunity that we're creating and developing together with leading CSPs. The winners will be the ones who scale their platform first. The time is now to seize on this opportunity, and we are very excited about our position.But now over to Carl for a review of the numbers for Q3.

[Carl Mellander, executive]

Thank you, Borje, and a very good morning to everyone. Thanks for joining us here. So, well, as you saw already last week, our Q3 results are in line with the guidance we issued back in the Q2 report. But I want to address some of the key items around the financials in the quarter. Before commenting on the underlying results, I just want to refer again to the impairment related to Vonage goodwill that we announced also last week. And just to add to what Borje already mentioned, this impairment of SEK 31.9 billion corresponds to 50% of the total amount of goodwill and other intangible assets attributed to Vonage. And the total goodwill in the group now post this impairment amounts to SEK 56.7 billion. And I can also mention that we have done a rigorous impairment testing of all of that, and that did not indicate any other impairment needs other than Vonage.Now, turning to the underlying business results. And first of all, if we have a look at the market and our top line then, I would say, much of the market development, the financial development we saw in the first and the second quarter continued into the third quarter. And as Borje outlined before, the telecom market outlook remains uncertain, but is expected to recover to more normalized levels over time.And we base this on the fundamentals. I mean, the operators need to continue to invest to manage data traffic growth, costs, energy usage, network quality for their customer experience. And -- but what we see now the sales mix shift in the networks, particularly that we have discussed many times where sales decrease in North America and increase in India with large rollout projects. That continued in a similar manner in the third quarter. And I would say, we have worked a lot on our resiliency to limit the sensitivity to geographical mix changes. But of course, we see an impact on group numbers from this mix change, both on sales, gross margin, EBITA and cash flow.So on top line -- and group organic sales declined by 10%, and I would say, primarily driven by a 60% drop in North America in the Networks business, where we continue to see operators adjust inventory, we've talked about this many times, but also slower deployment pace.I think it's important though to note that Q3 last year in 2022 was an absolute record quarter in North America with very large volumes of radio shipped and deployed. So that year-over-year comparison is very tough. But nevertheless, a 60% drop.The drop then in North America was partly offset by continued rollout in India, which continued at full speed, incredible speed and our sales quadrupled actually year-over-year to almost SEK 10 billion in the quarter. And we are talking here about large rollout projects, and therefore, working capital builds up, and that's quite significant. We'll come back to that in a minute.We also saw that some front-runner customers on 5G resumed investments. This is a bit of a second wave of 5G investments. It's encouraging, but I would say it's too early to see this as a trend, but nevertheless, a positive sign.We closed another IPR licensing agreement in the quarter. That's been announced earlier that positions us well to land additional agreements with previously unlicensed vendors and IPR now net sales landed at SEK 2.8 billion in the quarter, and we are on track to reach the levels that we have discussed before for the longer term. So that was top line.Secondly, gross margin then, we came in at 39.2%, excluding restructuring. Networks, I want to highlight again, which achieved a 39.9% gross margin, which was very much in the upper part of the range that we had guided for, 38% to 40%. And of course, it, again, is the market mix that we talk about, that continue to impact the gross margin in Networks.But however -- and I think this is important, actually. Achieving 39.9% gross margin is a strong proof point because it demonstrates the resiliency of our company. It's a sign of how -- the business transformation that we've been on to over the years, now has made us less sensitive to these swings between geographies.Third point regarding EBITA margin. We exceeded the previously mentioned expectations due to early positive effects of the cost-out ambitions. So for the group, we came in at 7.3%. That's a decline, of course, versus last year's 11.3%, again, driven by the gross income in Networks.Cloud Software and Services delivered actually well in the quarter. EBITA was SEK 0.4 billion. And here we continue to execute on the turnaround strategy that we launched actually at the CMD last year. We're talking about strict commercial discipline, improved software sales, accelerated service delivery automation as some of the key pillars there.But given the nature of the Cloud Software and Service business, results will fluctuate between individual quarters. So to assess how this business performs over time, my recommendation is to look more at the 4-quarter rolling basis. And if you do that, you will see a positive EBITA number. You find all those numbers in the back end of the report. And you can compare this positive number with the 4 quarters, 1 year earlier where we had an EBITA loss of over SEK 1 billion. So we are clearly on track, moving in the right direction.I would say, as you know, we have discussed a breakeven target for -- or at least breakeven for full year 2023. We'll come back to guidance a bit more later, but this quarter is, of course, a good stepping stone towards that ambition as well.On the Enterprise side, we are impacted by a weaker market, such as macroeconomic headwinds, just like other participants in this ecosystem. But it's encouraging, though, to see that the global communications platform -- And as you will remember, that's where Vonage resides, delivered a positive EBITA also in the third quarter.Fourth point, free cash flow before M&A came in at SEK 0.5 billion negative. And this we have also explained many times that this is really a result of this same business mix shift, which includes big rollout projects with a longer order to cash cycle.And maybe [ I ] [ which ] explain [ and ] to expand a little bit more on this. In North America and some of the other early markets, customers largely manage the installment of equipment themselves. So payment terms are mainly related then to timing of delivery, hardware and software rather than completion of sites and installment of equipment.But most of the large rollout projects, on the other hand, like in India, contracts are rather project-based, meaning that we have been assigned to build and install large-scale networks. And that leads, of course, to higher working capital in relation to sales volumes. But we expect the situation to taper off next year as the pace of these large rollouts will decrease. And when that happens, we expect to -- working capital to reduce and then gradually, over time, we will and should return to our long-term free cash flow target, as you know, 9% to 12% of net sales.Finally, as my fifth point on this slide, I wanted to highlight that we deliver on the cost-out efforts. Year-to-date, we have achieved run rate savings of SEK 10.5 billion, of which SEK 1.9 billion has impacted the P&L in the third quarter. It's about SEK 1.2 billion in cost of sales, SEK 0.7 billion in OpEx.The savings are primarily visible in the mobile networks business, less in Enterprise, because in Enterprise, we continue to increase investments for value creation in that business, both when it comes to the product, meaning competitiveness, but also go-to-market. We booked provisions for restructuring so far in the year amounting to SEK 5 billion, of which SEK 0.9 billion in Q3, and that's all in line with the cost-out plans.So now with this track record, we're slightly ahead of our internal plans for cost-out, and as such, we have raised the ambition now by SEK 1 billion to SEK 12 billion of run rate savings until the end of the year, and we will continue to take additional and decisive cost action -- cost-out action as needed over time.So we can move to the outlook for Q4. We are guiding basically for 4 key parameters. We expect gross margin in Networks to land within the range of 39% to 41% in Q4, so up from the guidance we had for Q3. Top line seasonality between Q3 and Q4 in Networks will be somewhat less than normal. And this is mainly actually due to a specific factor, and that's the fact that India is expected to be sequentially flat Q3 to Q4.In Cloud Software and Services, EBITA is expected to reach at least breakeven for the full year, as we have said before, but with a lower sales top line seasonality than normal between Q3 and Q4. And again, important here to know that given the characteristics of this business, we don't expect a linear result development quarter after quarter. Results will vary between quarters depending on software deliveries, project acceptance and so on.And then looking at group EBITA margin for fourth quarter, we expect to reach around 10%. We see similar market trends from Q3 continuing in Q4, but we will see increased support from the cost-out program. And here on the slide, you see a few other planning assumptions related to OpEx, amortization and restructuring. But as usual, please refer to the full -- to the report for the full set of planning assumptions.So with that, thank you, and I would like to hand back the word to Borje.

[Borje Ekholm, executive]

Okay. Thank you, Carl. So while near-term dynamics are uncertain, our long-term confidence remain undiminished. In the current environment, we focus on what's within our control and executing on our strategy to extend our leadership in mobile networks, grow our Enterprise business and drive a lasting cultural transformation. As we look ahead, we see that mobile networks investments intensity is on the lower end as our customers are cautious with investments. And this gives us good confidence that recovery will come. Until then, we will continue to take actions that position Ericsson in the best way to create value, which with the market recovery, of course, will create good operating leverage.I'm very confident in our team and the work they do every day. So our goal is to make Ericsson a more profitable company, returning to our cash flow target and capturing the next major wave of network innovation with a substantial platform business.With that, I think it's time for some Q&A, Peter.

[Peter Nyquist, executive]

That's correct, Borje. So we will now then start the Q&A session.

[Peter Nyquist, executive]

[Operator Instructions] So let's look at the queue here. I think I have the first question from Aleksander Peterc at Societe Generale.

[Alexander Peterc, analyst]

The first one will be just in broader terms. I know you don't guide on '24 now that we no longer have this 15% EBITA margin target. But could you give us a sense of whether you think Networks gross margins were -- [ plateau ] around 40% that you hold in the third quarter and also into the fourth quarter despite the adverse development in the U.S. market? So would you be able to hold us into next year or maybe improve it given the cost actions you're taking? And then just a very quick follow-up on India. Is that now leveling off at high levels and may roll off into declines next year? Or do you see further expansion there?

[Peter Nyquist, executive]

If Carl starts?

[Carl Mellander, executive]

Yes, I start. Yes, I think what we say here in the report is really that the tides will turn. The market mix is going to recover at some point. The timing is unclear. But if you look at the lower forecast, for example, North America is -- would grow by 15% next year. And India, to -- [indiscernible] now your last question, India will taper off, that's quite clear from this record year in 2022. So I think that could support our gross margin development in Networks. Combined with the other thing that you also mentioned yourself, the cost-out, which we have seen a part of the effect so far in the P&L. But of course, as we reach the end of the year, we will have completed all of that SEK 12 billion cost reduction, and that will play out also in cost-out sales. So those are some of the factors that will support going forward.

[Peter Nyquist, executive]

The next question will come from the line of -- let's see here. I think it's Joachim Gunell at DNB.

[Joachim Gunell, analyst]

So 2 questions from my side, starting off a bit where Andrew asked. Based on the positive -- your customer discussions here, but of course, low visibility, can you just comment on, to what extent you have very conservatism into your view of, call it 2022 -- 2024 market recovery other than walking away from the margin target?

[Carl Mellander, executive]

Borje, did you want to start this one?

[Borje Ekholm, executive]

I can start. I would say -- I think what we like to do is basically to say that there will be a recovery in the market. It's going to happen. Timing is unknown. And given that, we think it's just prudent to plan for the current market conditions to prevail. So that allows us to take the right actions on the cost side, the way we run the company basically for operational efficiency. And when we set ourselves up that way, so when the market recovery comes, we get the operating leverage. So we're kind of planning more cautiously in that sense, but rather saying when the recovery comes, let's talk about it at that point in time.

[Joachim Gunell, analyst]

And then one question for Carl. What in particular does the additional SEK 1 billion in cost savings pertain to? And can you also comment a bit on the timing of identifying this at this stage?

[Carl Mellander, executive]

Sure, Joachim. No, I would say this is also a learning from the last time around when we had a big cost-out effort, that once you start this machinery, you find more efficiencies, more possibilities to take out structural cost. That has happened also here, because every manager in the company is working on this since several quarters. We now see when we sum up the plans that exist that actually we will beat, well, first at SEK 9 billion that we had initially communicated and then up to SEK 11 billion, and we see that we can beat that as well and deliver SEK 12 billion of savings. So it's not about singling out a specific area [ and ] many contributing factors for us.And it's been a great momentum actually. As I said, we are slightly ahead of our internal planning as well. SEK 10.5 billion so far executed on out of the SEK 12 billion. So we clearly see the path to SEK 12 billion as well, and which we'll see the impact in the P&L more and more as we continue.

[Peter Nyquist, executive]

So we'll move further to the next question, and I have the next question from the line of Francois Bouvignies at UBS.

[Francois-Xavier Bouvignies, analyst]

So I have 2 quick questions. The first one is on -- more high level, but if we look at the current environment, especially in North America, quite extraordinary correction. I mean, with your sales back to 2018 level and with significant growth decline. And given the level of macro uncertainty and uncertainty around the recovery, how do you see the pricing evolving going forward? I mean, do you see any pressure from the operators given the challenges they are facing? So it would be very interesting to know your -- the pricing dynamic here and if you see any pressure?And maybe from a very high level, if we look at the past -- last 10 years, and you say -- in your past 2 decades, you said that the mobile network market has been flattish. And your top line is reflecting this dynamic, and yet level of investment remains very high. When you look at your R&D, SG&A, I mean, R&D is 18% of your sales, SG&A, double-digit percentage as well in the Network at least. So I'm just wondering, is there any thought process that maybe you can make it structurally much more efficient this investment related to the return you get? And you see that you have a couple of cost-saving programs and it's not new. We have been doing that for a few years now. But can you go a bit deeper maybe internally in terms of discussion on the level of investment compared to what you return in terms of revenues? In other words, managing the business more for margins or cash flow, if you like, rather than for top line growth. Is that makes sense?

[Peter Nyquist, executive]

Should we start with Borje?

[Borje Ekholm, executive]

And it's a highly relevant question you're asking. This is one of the areas we're looking at. We do believe -- and not focusing on the North American market here, but we actually face competitors in all other markets, or most other markets that actually where we will be evaluated based on technology leadership, on what type of solutions we provide. And therefore, we need to provide leading-edge solutions so that drives a bit of the R&D intensity in the industry, which then is very high. Having said that, there are areas where we can leverage much more, or improve the R&D efficiency in many ways. And one of the things we are working on is actually to get a more efficient R&D.We've been -- take, for example, BCSS, where we have gone from almost a hardware-centric model into a software model. And we see now that we can improve the software development efficiency, and we are working on that. And the same thing on the [Benu] side.So I do think there are opportunities, but I would also say that, given that we compete for global scale with vendors that are investing very heavily, we need to match that. So it's really a bit of a tricky question. If you would only have a market where technology would not matter, you could actually slow down a bit of the investments, but that would make us uncompetitive in most parts of the world.So I do think we should expect R&D intensity to be high, but we need to be more efficient in the way we develop our solutions. And that is -- you actually see part of the cost savings now come out of a bit of a reduction in R&D as well, and you will see that continue.

[Peter Nyquist, executive]

Maybe, Borje, you want to take the first question about the pricing discussions with customers as well, if you?

[Borje Ekholm, executive]

Yes, it is -- I mean it's actually a global industry. So when we think about prices, it's set in competition with other vendors, and that's kind of where the market environment is. So that's why -- I would say it used to be very competitive. It continues to be very competitive.

[Peter Nyquist, executive]

We will now move to the next question, and we'll have the next question coming from Daniel Djurberg at Handelsbanken.

[Daniel Djurberg, analyst]

And my question would be a little bit on the given CapEx constraints. I obviously understand it's tricky to forecast CSPs around spending in 2024. But if we see an improvement, or in the visibility, I should say, for example, Mobile World Congress or whatever, is it your ambition to return to guidance with regards to the ['24] adjusted EBITA range? Or is it -- should we forget about that also in a later stage?

[Peter Nyquist, executive]

Do you want to start, Carl?

[Borje Ekholm, executive]

Daniel, I think it's fair to say that let's take that discussion when we see the change in market sentiment. Right now, I feel we need to be prudent and plan for the current conditions to prevail, because then we take the right operating decisions. So when that changes, let's see where we are.

[Daniel Djurberg, analyst]

And I know that you don't want to speak on specific customers, but recent Mobile World Congress at Vegas, we heard from Verizon Executive Vice Presidents talking about that they have deployed 7,000 mobile sites with [ vRAN ] mainly with Samsung in last 1 month, but that they have started to deploy Ericsson [ vRAN ] right now. My question is, have you seen this kind of changes at the time that the project goes to someone else and then it's your turn back and forth, and should we expect to see an improvement coming from the U.S. given the statement from Verizon, for example?

[Borje Ekholm, executive]

We would never comment on specific customers. But the -- our investments, for example, into Cloud RAN has continued, and you'll see us launch or sign the MOUs here together with Telefonica, for example, to actually deploy Cloud RAN and Open RAN on an industrial scale. We believe networks in the future are going to be much more open and we're always better off leading that. And that's what we [ invest ] for. We see that to work with leading customers, including the U.S. operators as well. I don't want to go into specific customers because I think they ought to comment on that themselves.

[Daniel Djurberg, analyst]

Yes, I understand. And just super quick to Carl, the extra SEK 1 billion cost savings, is that -- the cost for that included in the SEK 7 billion restructuring charges? Or is it -- will it come in 2024?

[Carl Mellander, executive]

It's included. So we maintain the SEK 7 million -- SEK 7 billion restructuring charges as the full year number. So it's -- we have done SEK 5 billion so far, a bit more than coming in the second -- the fourth quarter, sorry. And with that, we will deliver the SEK 12 billion run rate saving.

[Peter Nyquist, executive]

So we will move further in the queue. And I have the next question coming from Erik Lindholm-Rojestal from SEB.

[Erik Lindholm-Rojestal, analyst]

So starting on the guidance for Networks seasonality here in Q4. You mentioned that you see India flat sequentially. But can you talk a bit what this means for North America and what you assume there? And is there any other market sort of standing out into Q4? And I'll follow up with another question.

[Carl Mellander, executive]

I would say, overall, we see that the average seasonality is representative on markets excluding India where we have a flat development. And of course, given the size now, the magnitude of India, the proportion of Indian total sales, it matters for the full seasonality calculation or development, you could say. So all other markets, I would say, no specific guidance other than normal -- India flat.

[Erik Lindholm-Rojestal, analyst]

And just a follow-up on that, I guess. I mean, I guess a key topic has been the inventory levels in the U.S. market. I mean, what are you seeing now in terms of inventory levels at the top telcos in the U.S. market? And do you see this inventory adjustments being done now in Q4? Is this still the case?

[Carl Mellander, executive]

Yes. So we saw a continuation in the third quarter, but it's starting to flatten out and even more so in the fourth. It's basically done. On the part of inventory that matters that has the larger value, we are really flattening out hiring in the fourth quarter. So that's, of course, a helpful fact for us as well.

[Peter Nyquist, executive]

And we'll have the next question from Andreas Joelsson at Danske Bank.

[Andreas Joelsson, analyst]

Just a question on reference that you made very -- in the beginning that you need a catalyst to see investments coming through from the operators over time. Just curious to understand if you are a little bit surprised by the 5G business models from the operators so far, because it hasn't really kicked off in terms of ARPU growth, et cetera? What do you see that they are missing from a 5G business model so far?

[Borje Ekholm, executive]

That's a great question. What we see so far with the 5G networks launched, it's kind of a little bit better mobile broadband. But to really get -- kind of deliver on the promise of 5G, we need to tap into new revenue pools. And that's where Enterprises come in and Enterprise digitalization. So we need to basically -- and there is an opportunity, I would say, to leverage wireless for Enterprise digitalization just because of the way -- think about the flexibility of the wireless network, think about the global availability of the network, and actually, that it has a very high level of security as well. So you -- when you start to put that, we can actually digitalize so many more Enterprise processes using 5G. That is an area that naturally lends itself, or we should enter Enterprises with 5G.We see that, of course, on Enterprise networks or dedicated networks, for example. We see that to be a very early market, but that's happening. It's -- we're using wireless networks to digitalize enterprises. And we see that some large automotive OEMs, for example, are deploying them now on their sites to drive new type of automation. But we also see this as the major -- this is the kind of starting point for our Global Network Platform.So if we can create the network into a horizontal platform that can make the features of the network easy to expose, consume and pay for, we have actually created something for a developer to drive, and we start to see this. We're launching some new network APIs with great interest from the developer community.And of course, we -- this is a market where we don't want to talk about it until we have launched basically, for competitive reasons, but we think it's actually a major opportunity to create this new type of revenue pool that the industry needs to drive more investments into the network.Otherwise, the network investments will just continue to be flat. If the service revenues for the operators are largely flat or very low growth, there is not going to be growth for network investments either. So we need to create this new type of monetization pool in order to drive investments.

[Peter Nyquist, executive]

Andreas, do you have a second question?

[Andreas Joelsson, analyst]

No, that's perfect.

[Peter Nyquist, executive]

So we'll move further on. We have the next question from the line of Janardan Menon at Jefferies.

[Janardan Menon, analyst]

I just want to follow up on the GNP business and Vonage. Can you give us some kind of an indication of timing when you will have developed the required number of 5G network APIs? Clearly, you have been on that process since the acquisition. Is that something that we can say by the end of 2024 you will have the required number? And by then, you would have signed up enough agreements, like the Deutsche Telekom agreement, with operators worldwide and with developers. And so we can -- at least, we can start seeing that revenue inflecting more sharply upwards. Is there some kind of a timing that you can give on when you expect that process to happen?And secondly, just on the India side, you're saying that the revenues are beginning to flatten out. You had said that the network rollout initial portion has lower margins because of -- and of course, higher cash intensity. Are we reaching the second phase of India from Q1 next year? And will that result in average India margins being higher in 2024 compared to 2023?

[Borje Ekholm, executive]

I'll take the GNP and you take the India question, Carl. So if you look at GNP, we actually started already in 2019 with customer trials of speed on demand. So this -- that was really the trigger point when we could see the customer interest. And we're thinking about the application developers here, both in the gaming side as well as in collaborative softwares. So there is -- there was a great interest. We saw that. Of course, to launch quality of service APIs, you need some network investments. We need a network exposure layer, et cetera. So it takes some time to get there. There are some other simpler network APIs that still rely on the network, but that can be presented over a CPaaS. Those will be the first ones. We'll come back to tell you what we're launching. But we expect to see some early revenues this year, small in scale. We're talking tens of millions of kroner this year, but they will start to grow into next year.Really to be meaningful, I think the fair thing is to expect that during 2025 in reality, because it -- we really need to get not only several operators involved, we need to get the industry and the developers to start using the APIs as well for this to scale. And it's hard for them, or actually impossible for them to use it before we've got the operator community signed on to a similar type of solution.We're not going to be alone with our GNP. There are going to be other platforms as well, but we are at least the front runner. So we should be able to run -- as long as we can run fast, we are going to be rather attractive to sign up with, but we'll face competition here as well. But I'm convinced we can outgrow where we are today. But don't expect this to be really meaningful until the '25 time frame.

[Peter Nyquist, executive]

India question, Carl?

[Carl Mellander, executive]

Janardan, thanks for the India question. I'll take that. So, I mean, I won't comment on specific margin profiles and different customers for obvious reasons. But of course, it's our job to deliver customer value and make sure that we make decent margins out of that. And I think that has been the case already. Other big rollout projects, or the pace of rollout, I should say, will be coming down. The more -- maybe more interesting fact is on the cash flow side because we tie up significant working capital because of the nature of this business with rollout. But that tide will turn as volumes come down. We will start to collect more and get a positive cash flow impact from that. So that we should see in 2024. Margin is an everyday job for us, of course, to make sure that we have the right margins, and that we will continue with.

[Peter Nyquist, executive]

So we'll move further in the queue here, and we have the next question coming from the line of Sandeep Deshpande at JPMorgan.

[Sandeep Deshpande, analyst]

My question is on the margin going into '24. I mean, clearly, you seem to be seeing some positive impact from the restructuring in CSS and possibly in the Networks business itself. If you say India is potentially flattish into Q4 and then potentially rolling off in 2024, U.S. should increase as a percentage of business as well as your restructuring should kick in. So theoretically, we should be assuming that your net worth margin and your CSS margins should be improving in '24. Is this the correct contention?And my second question is, are there any signs of any revival in demand in Europe? Europe has had very little 5G rollout. I mean, they have invested very little this year as well compared to where India has invested, which is about -- historically a much further behind market compared to Europe. So what are you sharing to the European customers at this point in regard to '24?

[Carl Mellander, executive]

Borje, do you want to take the Europe and I take the first one afterwards, so?

[Borje Ekholm, executive]

Yes. I'll take -- you can take, you can start.

[Carl Mellander, executive]

I go. Okay. [ Now ], the factors that you point to, they are relevant. And as you see in the report, we are not guiding for specific margins beyond Q4, where we say 39% to 41% in the Networks segment on gross margin. But the factors that you point to, of course, are the positive ones that could support gross margin. We have the cost-out that will be fully executed by year-end on the current SEK 12 billion that we have communicated. We are talking also about the market mix recovery, which is needed for us to improve margins going forward. And to the extent that, that happens, that should support gross margins, of course.And I mean, again, we are fully committed to the 15% to 18% EBITA margin target for the long-term. And of course, we will work very hard in Ericsson to reach that as soon as possible. I mean, that's a key message as well. And we are dependent on this market mix to improve. At some point, it will come. So I just want to repeat that again. That is what will drive the margins upwards when that happens.

[Borje Ekholm, executive]

We'll tie into your question about the global rollout of 5G. It varies a bit by region, but in average, it's about one in 4 that's upgraded for mid-band -- 5G mid-band. And so it's really -- compared to previous generations, we're still relatively early in the cycle. Investments in Europe have been slower than that in average, depending -- it varies a bit by market. But overall, the rollout of 5G, especially mid-band, have been very slow, and much slower than India. India basically have nationwide 5G coverage now, or at least of the metropolitan areas. In a way, kind of just second to China today. Very strong, have also a nationwide 5G stand-alone network. So we are likely to start to see applications now coming out of India as well, leveraging the very strong digital infrastructure.Europe is not on that map today. We see very limited build-out as several of the European operators are under pressure. And you know that in the capital markets as well. So it's a challenge. I -- Personally I worry a bit about Europe's future competitiveness. Infrastructure tends to be something that drives a nation's long-term competitiveness. And without the digital infrastructure in Europe, it's going to be a bit of a challenge. So I do think that -- or I hope that we will start to see investments come up because it's going to be needed for future long-term competitiveness of our industry in Europe.

[Peter Nyquist, executive]

We are then moving to the last question of this call, and that question will come from -- I see here, Sebastien Sztabowicz from Kepler Cheuvreux.

[Sébastien Sztabowicz, analyst]

One question on Vonage. You did this big write-off on Vonage because the business seems to be slowing down. Which part of Vonage business is really slowing down? And what kind of growth trajectory do you expect for the global communication platform segment for the next few years? Can you give us a little bit of indication there?And the second one is linked to Cloud Software and Services, which has been growing nicely over the last 4 quarters. Do you see finally 5G core deployments picking up? Or is there any different reason for this business to start to grow? And what is the outlook for the next few years for Cloud Software and Services?

[Peter Nyquist, executive]

Borje?

[Borje Ekholm, executive]

So if we look at -- start with Vonage, we see -- basically, it's a couple of reasons for the goodwill impairment that we took. There are, of course, a slowdown in the market that we've seen for -- kind of the demand trends have been softer, and we see much higher interest rates as well. When you put those 2 together, the impairment is the right thing to do, to take that. And by the way, it also led to -- a lot of the peers traded significantly lower in the market. So there's no doubt about that. And those trends have come down. We have so far grown in line or faster than competitors.But I would say it's fair to say that the market expectation is somewhat lower today than it was -- if you look a few years back. The growth trajectory on -- and we believe it's -- will be in line or slightly better than market going forward as well. But really, what we're investing for is not the core business in Vonage that we really did the impairment testing on. It is the Global Network Platform which will provide ample growth opportunities in the future and position Ericsson to be a completely different company in a few years' time.That's really the underlying strategy behind the Vonage acquisition. So in a way, the reason for taking the impairment relates to the core business, but that was not really our investment thesis when we acquired Vonage.So that -- so our strategy stands firm on developing Global Network Platform. The attraction we have with customers is very strong today and the inbound interest we get from basically all operators are very exciting and I think positions us well for the future. It's up to us to deliver. It's up to us to execute on that, and that's where we're focusing on 100%.Missed your second question.

[Carl Mellander, executive]

On Cloud Software and Services, the growth expected, 5G core, not least.

[Borje Ekholm, executive]

Yes. I would say we're still early in the 5G core deployments. It really needs to be 5G stand-alone to be widely deployed. And that's so far -- call it, it's maybe some 40, 50 networks around the world, very few. So we're not seeing the big ramp until that happens. So I would not hang it on there. We've seen some good developments in other areas of the business that actually has started to grow, and that's encouraging as well. But I would say the 5G core, the future is ahead of us.

[Peter Nyquist, executive]

So that concludes today's call. So I thank you all for listening to this Q3 earnings call for -- in 2023. So I'm looking forward to the next call here in January. With that, have a great day. Goodbye.

[Carl Mellander, executive]

Thank you.

[Peter Nyquist, executive]

Thank you.

[Borje Ekholm, executive]

Thank you.