Telefonaktiebolaget Lm Ericsson (publ) (ERIC) Q3 2024 Earnings Call Transcript

Telefonaktiebolaget Lm Ericsson (publ) (ERIC 13.13%)
Q3 2024 Earnings Call
Oct 15, 2024, 3:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Daniel Morris — Head of Investor Relations

Hello, everyone, and welcome to the presentation of Ericsson’s third quarter 2024 results. With me here in the studio today are Borje Ekholm, our president and CEO; and our CFO, Lars Sandstrom. As usual, we’ll have a short presentation followed by Q&A. And in order to ask a question, you’ll need to join the conference by phone.

Details can be found in today’s earnings release and on the Investor Relations website. Please be advised that today’s call is being recorded and that today’s presentation may include 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 to read about these risks and uncertainties in our earnings report as well as in our annual report. I’ll now hand the call over to Borje and Lars for their introductory comments.

Erik Brje Ekholm — President, Chief Executive Officer, and Director

Thank you, Daniel. Good morning, everyone, and welcome to this earnings call for third quarter. So, we delivered a solid Q3, marked by a period of intense focus on strategic and operational execution. But let me start by commenting on our strategy, which aims at building the networks of the future, which will deliver differentiated performance through programmable networks.

So, these programmable networks will enable applications that can be monetized in new ways where differentiated performance matters. This means creating new use cases for mobile technology, expanding beyond the best-effort consumer mobile broadband. And that would include new use cases as enterprise and mission-critical. And this will also enable our operator customers to add new revenue streams beyond the current best-effort consumer broadband offerings.

I think this is crucial for the industry’s long-term growth. Many analysts predict a slow market over the next few years, but this is largely only taking the consumer mobile broadband business into consideration. However, we see a significant untapped market opportunity in new use cases that are often overlooked, as they today require differentiated performance and have largely not generated revenues to date. So, our strategy is focused on leveraging these opportunities to drive growth in the mobile networks market.

And we’re increasingly seeing momentum with many customers around the world on high-performance programmable networks. And I would say that’s very encouraging. Of course, the contract we signed last year with AT&T was the first proof point. And it also created the initial groundwork for the accelerating interest that we’re seeing now.

But the interest in differentiated performance has also increased following our announcement of the JV with 12 global CSPs to aggregate and sell network APIs. And I think this is a critical step for the industry to realize the benefits of the full capabilities of 5G, but I’ll come back to these strategic steps in a little bit more of details. But let me first touch briefly upon the Q3 results. So, we continue to see a very challenged market development.

The market is ultimately decided by our customers. So, in that context, it’s critical that we focus on what we can impact, and that’s really how we run our business. So, we saw in Q3 organic sales declined by 1%. That’s less than it was the quarter before.

So, you can gradually see an improvement in our development. And that was really a strong performance in North America that helped in the quarter. Of course, we had negative developments in most other geographies. When we look at gross margin, we delivered a solid performance, coming in at 46.3%, reflecting significant momentum from our 39.2% in Q3 last year.

This is driven by, of course, the market mix shift with North America coming in strong, higher IPR sales, but I would also say key contributor is how we continuously optimize our business. And these are efforts that we started to implement a few years back, and it takes some time to get it through. And now, in Q3, we start to see the results of this. And we see it in lower scrap levels, better inventory levels, better efficiency in how we run the company.

So, with these improvements, of course, driving higher gross income, EBITA grew to 7.8 billion compared to 4.7 billion last year. But I think another good indicator is, of course, the free cash flow, which came in at 12.9 billion. I will say in summary, these results show a strong underlying business we have as well as the effects from the strategic actions that we’ve been taking. Lars will go through these numbers shortly in much greater detail, but let me first comment briefly on the market development.

So, in Q3, the global RAN market remained challenged as we have said; however, we continue to leverage our technology leadership, and we have seen contract wins in India and Vietnam, among others. North America continued to be very strong and grew by 55% year over year, driven by and helped by strong deliveries related to our recent AT&T contract win that’s now coming into a delivery phase, but we also see selective network investments by other large customers. In Europe and Latin America, sales increased slightly and grew by 1%, as growth in Europe was partially offset by a decline in Latin America, where we had some footprint losses. In Southeast Asia, Australia, and India, sales decreased by 43% following a normalization and the following, I would say, even an expected normalization in India compared to the record pace 5G rollout of last year.

And finally, trends in Northeast Asia, and Middle East and Africa weakened during the quarter due to a significant slowdown in customer investments. Let me comment some more on the recent strategic steps we’ve been taking in our enterprise business. As I said, our strategy aims at creating additional use cases and monetization for the networks and we’re pursuing multiple opportunities that will open the network for new revenue streams and think about them here as fixed wireless access, mission-critical, but also of enterprise applications. We see enterprise as a key opportunity, as they will require high performance and differentiated connectivity to fully digitalize.

And despite the near-term pressure on our enterprise sales, which we’re working proactively to address, we remain focused on strengthening Ericsson for the long term. In Q3, we have taken some key steps to execute on this part of the strategy. Maybe just as a short step back, we also agreed the sale of iconectiv during Q3, which is subject to regulatory approval now. And the reason for that divestiture as it will allow us to streamline the business focus on the core opportunities at hand and really maximize the strategic positioning of our portfolio.

But I would also say one of the most important announcement for the creation of our enterprise area was the JV that we announced together with some of the largest operators in the world to aggregate and sell network APIs. And here, Vonage will play a key role. We see network APIs as one of the best opportunities to enable additional network monetization, as we will basically open up the network and its unique features to innovation in a completely new way. So, for example, here, think about increased security and financial transaction or 3D positioning in the logistics chain.

These are just two examples, but there are going to be a number of new potential use cases for network APIs. And we’re going to see some early and followed by many more over time. But in order to scale the network APIs, it’s really critical to solve the supply side or the availability of network API. And if we look pre the JV, so in the — call it the current shape, each developer in the world would have to integrate and contract with hundreds of individual CSPs around the world.

And that’s — of course, that’s not even practical and it’s not going to be economical. And when it’s neither practical nor economical, it will basically not happen. So, with the JV, we actually remove a key hurdle in order to speed up the pace of digitalization and to accelerate the growth of network APIs globally because this will allow the global developer community access to network features similar to the way they access communication APIs today. So, now, it will be much easier for the developers to use and start to leverage and implement the network APIs and the capabilities that only the network can allow.

So, from a strategic point of view, I think, this is a critical step for us to take. In the history, a developer actually needed to be a network engineer as well. They needed to understand how a network works, what it can do, and how it can be kind of accessed. That’s not needed anymore.

Now, it becomes a much easier to use a very simple access. So, it’s easy to use, easy to consume, and easy to pay for network API. We think this is a massive opportunity. External estimates say the API market could be $10 billion to $30 billion opportunity in a few years out.

I think it’s still too early to properly size the opportunity, but it’s encouraging to see the growing momentum and the growing interest and we’re starting to see in some frontrunner markets and emerging interest for the network APIs. So, this is a market that’s shaping up, and we have the opportunity to shape that, but we can also see there are many opportunities here to drive an enterprise digitalization in new ways where we can leverage the capabilities of the mobile network. And that will allow our operator customers to basically a new type of market for enterprise digitalization that’s outside of the consumer mobile broadband market, and that’s for sure going to be multiples of the network API market in totality. But now, let me also comment very quickly on the strategic steps we’ve taken in the Enterprise Wireless Solutions.

In this area, we’re developing easy-to-use solutions, so enterprise can capitalize on the security, efficiency, and flexibility of using cellular connectivity instead of Wi-Fi. These dedicated networks are transitioning now from, what I would call, a POC or proof-of-concept market to commercial-scale deployments. And over time, this will help reaccelerate the growth in Enterprise Wireless Solutions. You know also that we recently launched our new and latest enterprise 5G portfolio, which has a simplified and scalable architecture compared to the previous one so it will offer attractive total cost of ownership for enterprises.

Other examples include our neutral host solution, enable one company to allow one or more operators to serve their customers through a single indoor network, enabling full indoor connectivity. And there are many use cases here to provide that indoor connectivity, which I think will be critical. With that, let me move over to Lars to go through the numbers in some greater detail.

Lars Sandstrom — Senior Vice President, Chief Financial Officer

All right. Thank you, Borje. All right. Let me start by giving you some additional points on the group before discussing the segments more in detail.

Net sales amounted to 61.8 billion and organic sales were flattish, very strong growth in North America for the second quarter in a row with some customers selectively increasing investments. Also, slight growth in Europe, but other markets declined. The largest decline was in India, where the investment levels are normalizing after a peak in 2023. IPR licensing revenues increased to 3.5 billion from 2.8 billion in the third quarter last year, and this was the third quarter in a row that a new 5G IPR agreement was signed.

And the current run rate is around 12 billion coming out of Q3. And the expected — IPR revenue is expected to reach at least 13 billion for 2024 and there are further growth opportunities with additional 5G agreements and the potential to expand into additional licensing areas as well. And as a reminder, the IPR revenue is reported in Networks and Cloud Software and Services. As Borje already mentioned, adjusted gross margin was 46.3% in Q3, an increase from 39.2% last year.

Margins improved with favorable market mix, focus on commercial discipline, cost-out activities, and higher IPR licensing revenues and also the improved usage and the whole supply chain here. There was also a one-off contribution from a customer settlement here in the quarter. Reported opex was up by 1 billion compared to last year, mainly because of restructuring costs, which increased by 800 million. The cost-out activities continued to deliver savings that are largely offsetting salary increases and higher bonus provisions.

For R&D investments, they are continuing, and this is to maintain technology leadership and further improve operational resilience. On SG&A, cost decreased slightly overall but increased in enterprise with investments to secure operational effectiveness. Adjusted EBITA increased to 7.8 billion with a margin of 12.6% marking a significant expansion year on year. On cash flow, this was strong at 2.9 billion.

The improvements came from improved profitability, but also lower working capital resulting from a strong focus on inventory and supply chain management in combination with a favorable market mix. With that, let’s move to the financial trends. While market conditions have clearly been challenging over time, the sales stabilizing in Q3 is, I think, encouraging. The gross margin trend proves that the focus on growing the patent portfolio, the improved utilization of supply chain, and the cost-out activities are paying off.

The market mix was also more favorable in Q2 and Q3 this year. And with the lower top line, EBITA has also been challenged in 2024, but also here, there is a favorable development in Q3. So, let’s then see on the segment here. In Networks, organic sales were flattish with a slight decline of minus 1% year on year.

North America grew 80% from very low levels last year with increased investments by some customers and of course, also rollout activities. But in other markets, customers continue to be cautious with their investments. The largest slowdown was in India following the rapid 5G build-out last year. And the network-adjusted gross margin was 48.7%, with a favorable business mix, cost actions, and operational leverage in the supply chain, all contributing to the margin.

IPR revenues and nonrecurring settlements with the customer also contributed to the gross margin improvement here in the quarter. Networks adjusted EBITA increased to 8.1 billion from 5.2 billion last year, and EBITA margin was 20.3% and 16% on a rolling-four-quarters basis. In segment Cloud Software and Services, organic sales were fairly flat with a year-on-year decline to minus 1%, mainly impacted by lower service sales. Adjusted gross margin was 38.7%, improving somewhat from last year.

And here, the strategy execution with focus on commercial discipline and accelerated automation is paying off. There was also a small benefit from IPR revenues and the customer settlement also here. EBITA margin was 2.9% and 3.6% rolling four quarters. In Enterprise, sales declined by 3% and sales in Global Communications Platform declined as expected, impacted by the decision to reduce some activities in some markets and focus on more profitable market segments.

Enterprise Wireless Solutions, here, we grew about 7% with somewhat slower growth in Wireless WAN. And as Borje mentioned, the first enterprise 5G neutral host solutions were launched in the quarter. Adjusted gross margin increased to 52.4% with improved margins across the business in enterprise. The adjusted EBITA loss was 0.8 billion, impacted by higher operating expenses mainly in Global Communications Platform.

And this is for two reasons. First, the noncash impact from a lower rate of capitalization of R&D expenses that we started in Q1 this year, and this impact opex for the full year of around 1 billion. And secondly, investments for operational effectiveness that we do. And also worth mentioning, I think, is that as Borje mentioned here, the investments in the global network platform for network APIs also continue.

The focus on improving the financial performance in the current portfolio continues at the same time as we also invest for the future here. Then turning to free cash flow for the group, which was 12.9 billion before M&A in the quarter. The increase compared to last year is mainly working capital improvement and comes from a strong focus on inventory and supply chain management all the way out to our customers. And of course, there was a strong contribution from EBITA and the favorable market mix here.

That resulted in net cash that increased sequentially by 12.4 billion to 25.5 billion. And return on capital employed in Q3 was 14.9%. Then let’s look at the outlook. First, on sales for Networks, Q3 delivered above seasonal pattern here.

So, the starting point is a bit high. So, given the strong Q3, Q4 is expected to be below-average seasonality. On Cloud Software and Services, here, we declined sequentially by 1% between Q2 and Q3, and Q4 is also expected to be below average due to timing of project deliveries. And in Enterprise, sales is expected to be further impacted in Q4 by the decision to focus on profitable markets and products.

And then next, turning to profitability. Here in Q3, Networks gross margin benefited from retroactive IPR licensing and the customer settlement in Q3. So, for Q4, the gross margin is expected to be in the range of 47% to 49%. And then finally, restructuring is expected to be around 4 billion for the full year.

With that, I hand back to you, Borje.

Erik Brje Ekholm — President, Chief Executive Officer, and Director

Thanks, Lars. So, despite the continuing challenges in the overall RAN market, our Q3 results really shows the underlying strength in our business. And we’re, of course, encouraged by the continued delivery strength we saw in North America. We expect our network sales to stabilize year over year during Q4, driven by the continued good growth and progress we’re making in North America, but we anticipate further pressure in enterprise near term as we focus on the more profitable segments.

Ultimately, investment decisions, and we said this a number of times, and the overall market developments will be in the hands of our customers. So, in that, meantime, we’ll continue to be laser-focused on what we can control, specifically on operational excellence and optimizing our business to further strengthen our technology leadership through dedicated investments, R&D and achieve overall strong financial results. And you know this is something we want to do irrespective of market conditions. For longer term, for the industry to really return to growth, it’s essential to find new revenue streams for our customers, i.e., they need to go beyond consumer, mobile broadband subscriptions.

And here, we’re noticing a change in the current customer discussions. The interest in our programmable networks is clearly accelerating. This is, of course, an effect of the increased monetization opportunities that our customers see through differentiated connectivity. Network APIs remains one of the best opportunities for us as well as the industry to make true of the progress of 5G, and we’re making good progress on this part of the strategy.

But as you have heard, we are pursuing other opportunities as well to broaden the use cases of mobile networks in the future. Of course, creating a new market and new monetization models take time but at least we’re very encouraged by the traction we’re starting to see. The foundation for this strategy is and will remain our mobile network solutions. And here, we will take every action needed to ensure we maintain our leadership position.

With that, I think we’re ready with — to take your questions instead and move on to the Q&A. Daniel?

Daniel Morris — Head of Investor Relations

Thanks, Borje. Thanks, Lars. We’ll now move to Q&A. [Operator instructions] Thanks, everyone.

With that, we will move to the first question. The first question today is coming from Alex Duval at Goldman Sachs. Alex, your line should now be open.

Alexander Duval — Analyst

Yes. Hi, everyone. Many thanks for the question. You talked today about the AT&T ramp having started in the quarter, and revenues overall were clearly stronger than expected.

I wondered could you please clarify why then you gave this Q4 outlook for subseasonal quarterly Networks revenue growth? How should we think about the effects of that AT&T contract ramp on revenue seasonality in the next couple of quarters? And what does that mean for group margins? Thanks.

Lars Sandstrom — Senior Vice President, Chief Financial Officer

All right. Thanks, Alex. I think the ramp-up, when it comes to North America there, we saw already signs, as you might remember, in Q2 and here in Q3, it has been also quite an intensive quarter with quite high ramp-up level, so impacting net sales and what we see and expect this a little bit that this will come down and normalize a little bit going into Q4 and then also in for next year. So, that is a little bit what we see.

And to exactly estimate ramp-up, it is very much connected to our ability, but also a close work with the customer, so we get the right level there for their end as well. So, in that sense, yes, it has been a little bit better than we might expect when we came into Q3.

Alexander Duval — Analyst

Thank you very much.

Daniel Morris — Head of Investor Relations

Thanks, Alex. Moving on to the next question. The next question comes from the line of Joachim Gunell from DNB. Joachim, your line is now open.

Please go ahead.

Joachim Gunell — DNB Markets — Analyst

Thank you, and good morning. So, you’ve guided quite conservatively here in six out of your seven previous next quarter outlooks on gross margin here. Even if we struck out IPR catch-ups, can you just comment a bit? I mean, is this in, any sense, a visibility issue, or what continues to consider go so much better than your internal expectations?

Lars Sandstrom — Senior Vice President, Chief Financial Officer

Yeah. I think to some extent, as you mentioned, there are some impacts. But fundamentally, I think it’s underlying that the cost-out activities and the productivity improvements and improvements in the whole supply chain has maybe come a little bit faster than we expected. So, I think that is part of the explanation.

And then, of course, there is always some product and market mix impact. But if we look a little bit over time, I think some of this improvement has come, I’m happy to say, a little bit faster than maybe we expected when we did the forecast and guidance in previous quarters.

Joachim Gunell — DNB Markets — Analyst

Understood. And very briefly, if I can just squeeze in. The iconectiv sale here corresponds to roughly one, call it, annual dividend yield for you and you are well capitalized, and we see strong cash flows coming out of 2024. I know this is a board decision, but perhaps Borje, being on the board, you can comment whether you prefer to pursue extraordinary dividends, buybacks, or M&A at this stage.

Erik Brje Ekholm — President, Chief Executive Officer, and Director

Yeah. I think it’s a discussion for the board. And you also know, if you want to do share buybacks, for example, it’s truly a decision for the shareholders. So, we’re focused on really what we can impact, and that’s an area that I think fall in other shares.

But I would, though, say that you’re right. We’re we are generating a solid cash flow. Now, we have a strong financial position that I think gives the board and the owners a decision to take.

Joachim Gunell — DNB Markets — Analyst

Thank you.

Daniel Morris — Head of Investor Relations

Thanks, Joachim. Moving on to the next question. The next question will come from the line of Francois Bouvignies from UBS. Francois, your line is open.

Please go ahead.

Francois Bouvignies — UBS — Analyst

Thank you very much. You delivered a very strong gross margin, and you mentioned some cost-saving programs impacting as well as the profitability, IPR, but when I look at the gross margin and look at history, last time, you had 46% gross margin. It was when North America was very high in terms of mix, like 40% of your revenue plus, which is the same today. So, I have the feeling when I look at the past that basically, the geo mix is like almost all of the gross margin moving so high.

Of course, you have cost savings, but geo mix seems to be like an important factor. How should we think about the mix into next year when you have the contract normalization maybe in the U.S. and other regions? And is it fair that the North American mix is the main contributor of this very strong gross margin?

Erik Brje Ekholm — President, Chief Executive Officer, and Director

If you look at Q3 here, it is a contributor, yes, but it’s not the main contributor. The main contributor is actually coming from the improvements we have done not yet, short term, but over quite a long time. We have done quite a bit of restructuring activities also impacting gross income, but also the productivity and the better utilization of the whole supply chain. So, I think there is where you have a bigger part of the margin improvement actually going — coming out of Q3 here and coming into next year.

Of course, we are happy with the market mix, but it’s not the main contributor.

Francois Bouvignies — UBS — Analyst

Thank you.

Daniel Morris — Head of Investor Relations

Thanks, Francois. Time to move to the next question, please. So, the next question will come from the line of Andreas Joelsson at Carnegie. Andreas, your line is open.

Andreas Joelsson — Carnegie Investment Bank — Analyst

Thank you, and good morning. Question on the strategy and maybe for Borje. It’s a bit hard to sort of grasp the potential in programmable networks. How do you see this impacting you, Ericsson going forward? I mean, if the operators earn more money and can grow better? Do you think that the main impact from you will be directly from having to these APIs? Or do you see it more from an indirect effect the operators having to invest more in the networks and make them programmable? Thank you.

Erik Brje Ekholm — President, Chief Executive Officer, and Director

Thanks, Andreas. That’s a very good question. And I will also be honest to say we don’t know how the world is going to shape up. But the way we think about when we launch the opportunity of going into enterprise is that the enterprise needs to stand on its own feet.

So, when you think about network APIs, of course, that needs to be a profitable business, and we see that opportunity in itself. Same thing with Enterprise Wireless Solutions, etc. But you should think of the programmable network as building a foundation to create a network that actually can dynamically bring up new network slices, i.e., giving the opportunities to be monetized. So, it’s, of course, tightly linked.

So, if we see the market for network API is taking off for enterprise connectivity taking off, it’s going to stimulate the demand for programmable networks. So, for us, I think, ultimately, we can separate the two. But when we assess the areas, I think we need to think of them independently. So, that’s the first comment.

The second is I think when we look at the enterprise, it’s a fundamental shift in the industry, and it’s away from consumer mobile broadband sold on largely around-the-world monthly subscriptions. What is the problem or maybe not — I shouldn’t call it a problem, but it’s an issue in the business model. And that is if you add marginal capex in the network, you don’t create new revenues. And of course, that doesn’t lend itself to normal investment calculation.

You need to think about customer retention, you need to think about network performance. So, it’s a bit of a softer link what we are trying to do in enterprises, but we’re trying to do that with mission-critical with fixed wireless access is to create specific investment cases for the customers, where they can generate new revenues. So, if I invest in a more capable network, I can actually start to sell those capabilities and get new revenues. So, you get a much more normal investment calculation.

And that, I think, is the major opportunity. The interesting thing is we’re seeing a lot of traction here. That’s why now when we — of course, AT&T stimulated, but with the launch of the JV a few weeks ago, we see much more interest coming from customers saying, “Can I now monetize the network, I need these capabilities, so I better build the capabilities, and we prepared for that monetization?” So, I think they move in parallel, although a little bit different, but we need to keep them apart a bit. I hope that helped.

Andreas Joelsson — Carnegie Investment Bank — Analyst

Absolutely. Thank you.

Erik Brje Ekholm — President, Chief Executive Officer, and Director

Thanks.

Daniel Morris — Head of Investor Relations

Thanks, Andreas. Time to move on to the next question, please. The next question will come from the line of Sebastien Sztabowicz from Kepler Cheuvreux. Sebastien, your line is now open.

Sebastien Sztabowicz — Kepler Cheuvreux — Analyst

Yeah. Hello, everyone, and thanks for taking my question. One on Enterprise Wireless Solutions where the growth has significantly slowed down in the third quarter, and you also see soft trends continuing in the near term. Can you help us understand what is the reason for this temporary slowdown in Enterprise Wireless Solutions? Is it linked to macro condition or other specific topic? And when should we expect a kind of recovery, in Enterprise Wireless Solutions? What do you need exactly to see this business going back to growth? Thank you.

Lars Sandstrom — Senior Vice President, Chief Financial Officer

Well, I think there is somewhat lower growth rate that is impacting but also, as we mentioned there, focus on profitable markets and product segments that is impacting to some extent here in the quarter. And then in Enterprise Wireless Solutions, we also have what we mentioned here going in more into the private network side, that is there. But that growth has not really taken off yet fully. So, that is what we expect to support the growth going forward here.

I don’t know if you want to add.

Erik Brje Ekholm — President, Chief Executive Officer, and Director

The only thing I would add is that we also launched actually new products in Enterprise Wireless Solutions. So, for the whole dedicated networks, what we call EP 5G as well as neutral host during the quarter. That led to a bit of a — I guess it happens often when you make a product transition that the old portfolio slows down before the new one picks up. That’s why you see also Q3 being impacted a bit more.

We start to see some very encouraging signs on the dedicated enterprise is connectivity. So, the EP 5G, a neutral host, and we actually expect that to move much more into commercial scale deployments now. So, we feel it’s too early to project on this, but at least we have some very encouraging customer interactions that we start to see this to be a real market now.

Daniel Morris — Head of Investor Relations

Thanks for the question, Seb. Moving on to the next question, please. The next question will come from Erik Rojestal from SEB. Erik, if you hear me, please go ahead.

Erik Rojestal — Skandinaviska Enskilda Banken — Analyst

Yes. Good morning, Lars and Borje. Thank you for taking my question. I mean, North America clearly turning around here, but the market in general remains weak and your rolling 12 months EBITA margin is around 10% here in Q3.

I mean, in the light of your margin target of 15% to 18%, do you think you have to do more actions on cost into 2025 to reach this target? Or can you deliver sort of continued contract wins and a better market to take you there? Thank you.

Lars Sandstrom — Senior Vice President, Chief Financial Officer

I think coming into — we are — as we see already in the numbers this year, we have taken cost actions, and that has been offset by salary inflation and some bonus provisioning as well. And we see that will continue. There will be salary increases also next year. And with, what we say, a flattish market, of course, we need to also think about how to adjust our cost base accordingly.

So, that will probably continue when we come into next year as well to ensure that we have the right cost base.

Erik Brje Ekholm — President, Chief Executive Officer, and Director

Yeah. I would just add. I literally — if you work in a flattish market, and I think you will have cost increases from inflationary pressures, call it that, just like Lars said, we will continuously review our costs. That’s what we’ve done in the past, that we will have to do in the future as well.

So, that’s no doubt. But I — what I do hope is that we can make it more a part of our normal business.

Erik Rojestal — Skandinaviska Enskilda Banken — Analyst

Thank you.

Daniel Morris — Head of Investor Relations

Thanks for the question, Erik. Moving to the next question, please. The next question comes from Jakob Bluestone at BNP Paribas. Please go ahead, Jakob.

Jakob Bluestone — BNP Paribas Exane — Analyst

Thanks for taking the questions. I just had one question. I was hoping you could give us a little bit of an update on the competitive environment that you’re seeing specifically in the RAN market. So, any updated thoughts on pressure from Chinese vendors or any other particular things you want to highlight? Thanks.

Erik Brje Ekholm — President, Chief Executive Officer, and Director

It’s largely the same over the last few years. So, it’s no real change in that sense where we have some footprint losses, and we have some gains. I think that’s what you will see. What I think is important is that in that market environment, we will continue to have the commercial discipline to be thoughtful about the contracts we win, and not chase every piece of footprint we have.

So, I wouldn’t say there is a change to the worse or to the better today.

Jakob Bluestone — BNP Paribas Exane — Analyst

Thanks.

Daniel Morris — Head of Investor Relations

Thanks, Jakob. Moving to the next question. Next question from Rob Sanders of Deutsche Bank. Please go ahead, Rob.

Rob Sanders — Deutsche Bank — Analyst

Yeah. Good morning. Could you just talk a bit about the other two operators in North America? And what kind of visibility have you seen in terms of a pickup there? Are they responding perhaps to AT&T’s modernization program by investing more next year? And have you got line of sight into a spending recovery next year at those other two operators?

Erik Brje Ekholm — President, Chief Executive Officer, and Director

Thanks, Rob. That’s a very interesting question that I think we will not comment on specifically for the simple reason that it’s a competitive market, and we should also try to be neutral in any comments about the market. But what I will say is that — and I think we’ve tried to make that point that the increase in North America is broader than just one contract. So, I think then you — unfortunately, you’ll have to make your own interpretations.

Daniel Morris — Head of Investor Relations

Thanks for the question, Rob. Moving on to the next question, please, which is coming from the line of Sandeep Deshpande at JPMorgan. Sandeep, please go ahead.

Sandeep Deshpande — Analyst

Yeah. Hi. Thanks for letting me on. I’d like to just quickly go back to that contract you’ve signed to create this new company for monetization of API.

Could you talk about the time frame in which you expect this company to be operating with the API? And how the monetization will proceed? How will Ericsson get paid for the contribution of the API into this company?

Erik Brje Ekholm — President, Chief Executive Officer, and Director

So, we can talk about it a bit principally because it’s a regulatory process, and we said that. So, that’s going through. But we are, in the meantime, of course, building up the company to get the platform in place, etc. So, all of these things are progressing.

And hopefully, it’s in subject regulatory approval, going to be launched in the next few months here. So, that — I can’t really go into more comments. But what’s important with this venture is that we make the network APIs available, makes them easy accessible. Then they have to be sold to — so that’s, of course, what the JV will do.

So, it’s, in that sense, an aggregator platform. This is something that exists for communication APIs today, but not necessarily or doesn’t for network APIs on a broader scale. So, that’s what we are creating here. And the interesting thing, and that’s what’s exciting for us is, of course, we kind of think of it as quarterbacking the creation of this.

It’s, of course, truly important to get that first step because unless we have global availability of network APIs, we have really nothing, right? So, the first step here was really to make that happen. That’s going to be one thing, that’s going to create new type of revenues for our operator customers, and they will, of course, start to resell those network APIs. That’s where Vonage actually comes in. So, what we will do in Vonage is to leverage the developer ecosystem and create a unique developer experience to start to use the network APIs.

So, if you’re a developer that works on creating new secure financial transactions, you can call up certain network features in an easy-to-use API and that’s where we will make money as Vonage. So, we will resell the aggregated network APIs from the JV and of course, we will open those network APIs up for other companies as well. But here, it will also be the key for us, is to lead the development here. We’re starting to attract developers that will start to use this type of new APIs in a new way.

That may not be the same developers we had for communication APIs. There may be others because they are going to know a certain vertical better. So, I think when we create that developer experience and developer interaction, we will get a lot of feedback, maybe this network API is not the most important, maybe this is better. So, we will start to adjust the offerings as well, and that’s where we will play in the value chain.

I actually think that’s — it moves Ericsson up to another attraction or another layer in the stack call it that. Of course, I cannot show the proof point today. And I think that’s — your question is, ultimately, when will this get revenues in your P&L? So, let me come back to that question. But it’s a very encouraging momentum we’re starting to see on the side of the operators, but also on the side of the developer community, application users, system integrators, how they can leverage the networks in a new way.

Sandeep Deshpande — Analyst

Thank you.

Daniel Morris — Head of Investor Relations

Thanks for the question, Sandeep. Moving to the next question. Next question is coming from the line of Daniel Djurberg at Handelsbanken. Daniel, your line is open.

Please go ahead.

Daniel Djurberg — Handelsbanken Capital Markets — Analyst

Thanks so much, and good morning, Borje and Lars. And my question would be on fixed wireless access. That has been a positive trigger for network build and almost a killer app. If you can comment a little bit on the progress you see in various markets, U.S., for example, but also elsewhere.

We know, for example, that Bharti has reformed mid-band for use of fixed wireless access. That would be my question. Thank you.

Erik Brje Ekholm — President, Chief Executive Officer, and Director

Thanks, Daniel. It’s a good question. And you’re right. This has actually been a key use case so far.

So, far, I would say, it has not driven a lot of network investments. But it’s been a very interesting use case as it shows that — it shows a couple of benefits. You can get — it’s almost — it’s a similar performance to fiber. Fiber will always be the gold standard.

So, we shouldn’t kid ourselves there. But there are a number of use cases where fixed wireless access becomes attractive. It becomes very high performance. It becomes very fast to roll out.

It becomes very easy for the consumer to use. As a matter of fact, in markets where it’s been rolled out, the Net Promoter Score is typically higher for fixed wireless access than fiber because of the ease to use, for example. So, I think there are a number of commercial benefits that’s actually driving a use case and generating new revenues for our customers. And as network utilizations start to go up, they will also start to invest more in network gear that’s needed to support that use case.

So, I’m actually rather optimistic about fixed wireless access, although the direct contribution is small. The front-runner market was clearly North America. Most growth in broadband subscriptions over the past 18, 24 months have been from fixed wireless access. So, they’ve been early, but we’re starting to see very good progress with our customers in India.

We start to see other markets where it — maybe it’s more of a complement to other type of connectivity. But I think many will start to look at India as actually a very interesting case because if this can commercially be rolled out in India, it means that CPE prices have come down now to make it very competitive with fiber in other markets. And the reality is for — if you look out in the future, expensive fiber build may not be the cheapest way to connect consumers, right, or enterprises for that matter. Leveraging wireless connectivity is a smarter way and probably more capex-wise longer term.

So, it’s — I think it’s a very interesting development we’re seeing there. But so far, it’s not the broad market as fiber is, at least not in Europe. Europe is still a fiber continent, I’d say. It’s built of glassworks.

Daniel Djurberg — Handelsbanken Capital Markets — Analyst

Yeah. Thank you, Borje. And I’ll get back in the queue.

Daniel Morris — Head of Investor Relations

Thanks, Daniel. Moving to the next question. Next question is going to come from the line of Andrew Gardiner at Citi. Andrew, please go ahead.

Andrew Gardiner — Analyst

Thank you, Daniel. Good morning, all. So, I was wondering if I could try the AT&T question another way. I mean, you said last quarter, you started to see some revenue.

It’s clearly built very nicely into the third quarter, but it feels like it’s still fairly early in this deployment — in this network migration for them. Can you give us a sense as to where we are in the deployment phase and what your visibility is, given that this is a unique contract in terms of the technology? Do you feel like you’ve got better visibility than you normally would? And perhaps sort of final one, why wouldn’t you see growth in this contract into next year?

Lars Sandstrom — Senior Vice President, Chief Financial Officer

I think the pace that we now had in Q3 was a bit high, and then that will calm down a little bit in Q4. But then we are more on the level that is because it’s also the rollout pace of our customer together with the customer that is determining the value, so to say, on the revenue side. So, I think that is why we are saying that it’s stabilizing, and then that will continue, of course, for quite some quarters for the full contract rollout. So, that is also worth to remember, I think.

Andrew Gardiner — Analyst

Yes. So, you do have visibility into next year in that way.

Lars Sandstrom — Senior Vice President, Chief Financial Officer

Yes. It will continue into next year, for sure.

Andrew Gardiner — Analyst

Thank you.

Daniel Morris — Head of Investor Relations

Thanks, Andrew. Moving to the next question. Next question is from the line of Sami Sarkamies at Danske Bank. Sami, please go ahead.

Sami Sarkamies — Danske Bank — Analyst

OK. Thanks. I would actually like to continue on the same exact topic, your Q4 guide. Based on gross margin, I guess, we can read that you’re also seeing below-normal seasonality in other markets than North America.

We have seen a number of deals announced in the third quarter. Why aren’t these translating into revenues in Q4?

Lars Sandstrom — Senior Vice President, Chief Financial Officer

I think we have deals every quarter and the announcement of this every quarter and the pacing of this and the rollout are somewhat different depending on the different contracts we have, of course, and having that, that is our best judgment of what we can see for the near term here in the fourth quarter, given in the guidance that we have given this time that we are coming out on a high note in Q3, and that’s why we bring a little bit lower seasonality compared to the average of the last three years. So, that is what we are trying to say here.

Erik Brje Ekholm — President, Chief Executive Officer, and Director

And just remember, the AT&T contract was announced, I believe, in November last year and started to be impacting late Q2 and into Q3. So, I think when you see an announcement in Q3, that we expect that to impact Q4 is — it takes also normally a bit longer, to be honest.

Sami Sarkamies — Danske Bank — Analyst

OK. Thanks for the clarification.

Daniel Morris — Head of Investor Relations

Thanks, Sami. Moving to the next question. Next question is going to come from Felix Henriksson at Nordea. Felix, please go ahead.

Felix Henriksson — Nordea Capital Markets — Analyst

Hi. Thanks for taking my question. I have a couple of quick ones on cost and margin. And firstly, on opex, can you please provide any color on opex developments heading into the fourth quarter of the year? And do you still expect the H2 opex to be roughly stable when you compare it to the first half of the opex? And secondly, on the gross margin side, could you please confirm and quantify the benefit for Q3 from these one-time items related to the new IPR deal as well as the commercial settlement? Thanks.

Lars Sandstrom — Senior Vice President, Chief Financial Officer

Yeah. Let me start then with opex. We mentioned after last quarter report here that the second half of the year would be similar to the first half. And that remains.

It might be slightly higher but depending on — we had a bit of a better result. So, it depends a bit on the provisioning on bonuses here, but reasonably in line with what we said after Q2 and gross margin here in Q3. When we look at the impact from the retroactive part of the IPR and the customer settlement, it is around a percentage point, so to say, adding to the margin here in Q3.

Felix Henriksson — Nordea Capital Markets — Analyst

Thank you.

Daniel Morris — Head of Investor Relations

Thanks, Felix. We have time for a couple more questions. So, next question, please. So, the next question will be coming from the line of Terence Tsui at Morgan Stanley.

Terence, please go ahead.

Terence Tsui — Morgan Stanley — Analyst

Thank you, Daniel, and good morning, everyone. My question is just on India, please. Can you elaborate on how you see performance in this region developing? Obviously, 2024 has been quite tough with sales declining quite sharply after a very strong 2023. But now you’ve got some new contract agreements on Vodafone Idea and also Bharti.

So, do you see sales rebounding materially in 2025? And can you add just how you see gross margins and how they’ve been evolving in the region as well? That would be really useful. Thank you.

Erik Brje Ekholm — President, Chief Executive Officer, and Director

Thanks, Terence. I think it’s fair to say that we try to guide for ’25 when we have better visibility. So, we’ll come back in that in the Q4 setting. So, wait a quarter on that.

But what I can say about India from two aspects. The first one being, of course, we have — it’s encouraging when we have contract wins and footprint wins. So, those are important. I would also say that India is in a heavy phase of digitalization.

The digitalizing the country, the use of the networks are growing very fast. The rollout of fixed wireless access is happening, driving up need for capacity. So, what I do see is that longer term, the market, of course, was heavy in ’23 with all the rollouts and the large part of that being a service revenue for us into ’24, where it’s been much more cautious, and it will — whether that’s normalizing. But I think longer term, it’s going to grow from this level because that’s what’s going to be needed then if it happened in one quarter versus another, that is ultimately in the hands of the customers.

But we see it’s a very important market for us, and we think it’s going to be bigger in the future than we see just now. If you look at the margin, I’m not going to comment on because you get into almost specific customer margins, so I don’t want to do that, and we’ve never done it before. So, we’ll not do it now. But the one thing that we have worked on a lot over the past is actually the past several years but even more so since it was clear that India would roll out is to make sure that we have a global track on our products as much as possible.

So, what’s happening now is that we could actually bring — and that didn’t happen in January 1 of ’23 when we started. But over time, it did where we actually could bring that more harmonized track. So, we have a lower mix sensitivity today than we’ve had before. So, without commenting specifically on India’s margin, it does help in the overall setting.

And I will say in the end of last year, if this would have been 10 years ago, we would have been struggling on gross margin. So, I think we’ve created more resilience in that sense into our business, and that’s what we expect to help us in the future as well.

Terence Tsui — Morgan Stanley — Analyst

Thank you.

Daniel Morris — Head of Investor Relations

Thanks, Terence. We’ve got time for one final question. So, moving to the last question, please. The final question today is going to come from Didier Scemama at Bank of America.

Didier, please go ahead.

Didier Scemama — Bank of America Merrill Lynch — Analyst

Good morning. Thank you for taking my questions. I’ve got two very quickly as a follow-up to the previous question, and it’s maybe for Borje. Clearly, the gross margins have improved to your point, structurally, but I think it’s hard to deny that the quarter was clearly benefiting from a very good geographical mix.

And to the previous question, obviously, India is going to come back next year. So, I just wondered, could you give us a sense Borje of what you think your, like, let’s say, normalized range of gross margin is going forward, given the structural improvements you’ve made? And I’ve got a quick follow-up on opex. Thank you.

Erik Brje Ekholm — President, Chief Executive Officer, and Director

I think we need to think about how we also guide going forward, right? So, let’s come back on that when we talk about a much more longer-term development. I do think that we put the company on a very different structural gross margin. If you compare it to before 2018 and go earlier, I think we’re substantially up and that we’re up because of investments in technology into driving — actually using technology to drive down costs on our side and increasing the software content. These are trends that’s not going to stop.

They will continue and exactly what’s the right target. Let’s come back to that. But I think it’s — I think we, as a company, should do a better job explaining also how we think about this because it also relates to softwarization of the network. We will be selling more software in the future and software content of our products will go up, right? And that will structurally help gross margins, may structurally hurt top line a bit but will help gross margins.

So, I think we’re in that transition, and that’s why it’s a bit hard to be specific now, but let’s come back to it.

Didier Scemama — Bank of America Merrill Lynch — Analyst

OK. Thank you. I can really speak for myself, but I think if you could be more — let’s say, give a more quantified guidance on revenue and margins, if not for the quarter, at least for the year, I think that would be incredibly helpful. And then my follow-up quickly is going back to a comment you made earlier on the call on opex.

I think you said there will be some inflationary pressures because you need to invest in the business, etc., in calendar year ’25. Is the right base to compare? Is it like low 80 billion of opex, the sort of right way to think about it for next just, like sort of the base to grow? Or is there any sort of restructuring costs also — or cost savings initiatives that need to come out or impact the P&L in a positive way?

Lars Sandstrom — Senior Vice President, Chief Financial Officer

I understand your question, but as we mentioned, we don’t want to guide. But the inflationary pressure we’re going to continue to work to — with offsetting. And then there might be dedicated investments in part of the R&D portfolio, etc. So, that’s a little bit how we look upon it.

But that will require probably more activities to reduce the cost base during — also during next year. So, those are, I’d say, the three things to think about.

Didier Scemama — Bank of America Merrill Lynch — Analyst

OK. Just one quick one, sorry, if I may. Just the disposal of the — announcement of the disposal of the iconectiv business in the U.S. Can you tell us the revenue contribution as this business gets sold off? I think you said first half ’25.

Erik Brje Ekholm — President, Chief Executive Officer, and Director

No, we have not shared that. It’s part of the agreement we have done, but we have given some indications. And I think our team at the IR can support you on that as well. And then when we do — the divestment is finalized, then we can share more clearly what the numbers would look like.

Didier Scemama — Bank of America Merrill Lynch — Analyst

OK. Borje, thank you.

Daniel Morris — Head of Investor Relations

Thanks for the question. That’s all we have time for today. So, thanks, everyone, for joining the call, and that concludes today’s conference call.

Erik Brje Ekholm — President, Chief Executive Officer, and Director

Thanks, everyone.

Lars Sandstrom — Senior Vice President, Chief Financial Officer

Thank you.

Duration: 0 minutes

Call participants:

Daniel Morris — Head of Investor Relations

Erik Brje Ekholm — President, Chief Executive Officer, and Director

Lars Sandstrom — Senior Vice President, Chief Financial Officer

Borje Ekholm — President, Chief Executive Officer, and Director

Alexander Duval — Analyst

Alex Duval — Analyst

Joachim Gunell — DNB Markets — Analyst

Francois Bouvignies — UBS — Analyst

Andreas Joelsson — Carnegie Investment Bank — Analyst

Sebastien Sztabowicz — Kepler Cheuvreux — Analyst

Erik Rojestal — Skandinaviska Enskilda Banken — Analyst

Jakob Bluestone — BNP Paribas Exane — Analyst

Rob Sanders — Deutsche Bank — Analyst

Sandeep Deshpande — Analyst

Daniel Djurberg — Handelsbanken Capital Markets — Analyst

Andrew Gardiner — Analyst

Sami Sarkamies — Danske Bank — Analyst

Felix Henriksson — Nordea Capital Markets — Analyst

Terence Tsui — Morgan Stanley — Analyst

Didier Scemama — Bank of America Merrill Lynch — Analyst

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