Categories Earnings Call Transcripts, Technology

Ericsson (ERIC) Q4 2022 Earnings Call Transcript

ERIC Earnings Call - Final Transcript

Ericsson (NASDAQ: ERIC) Q4 2022 earnings call dated Jan. 20, 2023

Corporate Participants:

Peter Nyquist — Vice President, Head of Investor Relations

Borje Ekholm — President and Chief Executive Officer

Carl Mellander — Senior Vice President, Chief Financial Officer

Analysts:

Andrew Gardiner — Citi — Analyst

Aleksander Peterc — Societe Generale — Analyst

Andreas Joelsson — Danske — Analyst

Sebastien Sztabowicz — Kepler Cheuvreux — Analyst

Terence Tsui — Morgan Stanley — Analyst

Presentation:

Peter Nyquist — Vice President, Head of Investor Relations

Hi everyone and welcome to the fourth quarter and full year result of Ericsson 2022. Before starting, I just want to say that we have some issues with the streaming of this conference call. So we are focusing on the audio right now. So everyone joining on audio you will be able to listen in now. But we might have some issues with the streaming.

With that said, I will also welcome our CEO, Borje Ekholm and our CFO Carl Mellander. As usual, we will have a presentation and then we will have a question-and-answer session. In order to ask question, you will need to join the conference by audio, as I said, and the details for that is to be found on our press release or on ericsson.com. But before handing over to Borje Ekholm, I would like to read the following.

During today’s presentation, we will be making forward looking statements. These statements are based on our current expectations and certain planning assumptions, which are subject to risks and uncertainties. The actual result may different material due to factor mentioned in today’s press release and discussed in this conference call. We would like to encourage you to read about these risks and uncertainties in the earnings report itself, as well as in the annual report.

With that said, I would like to hand over to our CEO Borje Ekholm. So please, Borje.

Borje Ekholm — President and Chief Executive Officer

Thank you, Peter. And good morning, everyone and thank you all for joining us. So today we’re excited to present another quarter of good progress towards our strategic and financial goals that we have outlined to you at our Capital Markets Day about a month ago.

From a financial perspective 2022 was one of our best years in the Company’s history. With our fourth quarter results, we’re on track to deliver on our long term EBITA target of 15% to 18% by 2024. Target achievement is supported by cost savings, growth in our IPR revenues, portfolio changes and that includes of course, reaching breakeven on cloud software and services, but also to exit some loss-making businesses. And we are executing on these initiatives.

We made significant progress despite macroeconomic headwinds during the quarter. I am truly excited about Ericsson’s future as we continue to execute on our strategy. And we have full confidence in our long-term development. As we also said during our Capital Markets Day last month, we expect and plan for overall mobile networks market to be flattish in the next few years and the lower now predicts a slight growth outside of China. But as we also said, during the Capital Markets Day, we expect 2023 to be rather choppy with near-term uncertainties and macroeconomic headwinds that will likely impact operator capex. So as expected, during Q4, we’ve seen some operators slowing the pace of network investments and that includes front-runner customers in many markets. We expect operators to continue to sweat asset in response to the macroeconomic headwinds.

In addition, we expect operators to adjust inventory levels as supply situation eases. These trends started to impact networks in Q4 and as we expected, it impacted sales in North America. We expect and plan for these trends to continue during the first half of 2023 and after that we believe the inventory adjustment cycle starting to get through and development normalizes again. But in addition to this, longer term growth in data will drive network investments and data growth remains at very high levels and that will return mobile networks market into more of a flattish development that we’re predicting over a number of years.

Looking ahead. It’s important to remember that we’re still in the early stages of the 5G rollout and actually of the cycle of widespread enterprise digitalization. To address the near-term outlook, we are taking several actions. Most notably we are taking cost savings initiatives that we expect to take full effect by the end of 2023 and with the impact starting to show during Q2 of 2023. In cloud software and services we are executing on our revised strategy and, of course, there are seasonality in that business, but we expect to see and plan for breakeven of operating profit for full year of 2023 and with gradual improvements in profitability thereafter towards much more attractive levels.

We as a company are at the epicenter of a very powerful trend and that’s really that anything that can go wireless will go wireless. And we are investing to retain our leadership in 5G. But we’re also working to shape the future industry structure and how the industry will expose, monetize and consume advanced network features that 5G networks can provide. And this will allow us to transform into a platform company.

Going forward, our enterprise business will be a major driver of our long-term growth and profitability. I would already now like to thank all my colleagues for their efforts at delivering on our long-term plans and create long term stakeholder value. Our achievements would not be possible without them.

But let me now go through some highlights for 2022. With our fourth quarter results, and what we have executed on during the quarter, we’re on track to deliver on our long term EBITA target of 15% to 18% by 2024. As we conclude the year, we have established a clear leadership position in mobile networks and we’ve taken important steps towards building a high growth enterprise business. Based on technology leadership, we have increased our market share in RAN from about 33% in ’17 to 39%, excluding Mainland China. And we’ve established a global leadership position in 5G Core.

Our strategy is extending our leadership in mobile networks and expand into the enterprise segment with the objective to maximize value across all stakeholders. The whole Vonage acquisition, which we completed during last year, gives us the foundation to transform Ericsson into a platform company and executing on this strategy remains a top priority for us.

In 2022, organic sales grew by 3% driven by a 4% increase in networks and 16% in enterprise. EBIT margin, excluding restructuring charges, was 10.1%. However, if we exclude Vonage and the previously announced charges during the year, EBIT margin was 12.9%, reaching our 2022 target or 12% to 14% as we said, and we committed to when we announced the Vonage acquisition. We remain fully committed to continue building a culture of accountability and integrity and we continue to invest heavily in those areas. We recognize that we can only be a true industry leader if we’re both technology leader, but also leader in how we conduct our business.

As you saw during the quarter, we took the decision to extend our monitorship. This is the right decision to take to ensure that integrity is fully embedded into our culture. I’m convinced that a best-in-class compliance program will give our Company a competitive advantage and establish ourselves a true industry leader.

Let me go through some key events during the quarter. In December, we announced the signing of a multi-year IPR agreement. This contract is of strategic importance to our 5G licensing program. This positive outcome positions us well to capture further 5G license agreements. And that’s of course among previously unlicensed handset manufacturers, but it’s also in new areas such as consumer electronics and IoT. Based on this, we expect significant IPR revenue growth over the coming 18 to 24 months as we said at our Capital Markets Day.

Group organic sales grew by 1% year-over-year of which IPR revenues contributed by five percentage points and we saw an EBITA of SEK9.3 billion corresponding to a margin of 10.8%. During the quarter, we had a strong focus on breaking the curve on the inventory development and we executed on that and we were able to significantly lower our inventory levels. This contributed to cash flow before M&A of SEK16.9 billion. In the quarter, our Networks business grew in India on the back of significant market share gains.

As we said that Q3 as well as our Capital Markets Day the growth from share gains in several markets could not fully compensate for reduced operator spending and inventory reduction in other markets, including North America. As is always the case and we’ve said in the past, market share gains results in higher service revenues from large rollout or higher share of service revenues as a result of large rollout contracts. These contracts are profit accretive. However, they are initially margin dilutive. And of course, these contracts are important for us and we took them consciously because it’s strengthening our strategic market position and build the scale to be competitive long term.

Gross margin came in at 44.6%, which is mainly due to the change in business mix. And we expect gross margin to be 40% to 42% in Q1 of this year due to the changing business mix. In cloud software and services we saw sales growth in North America, mainly from 5G Core contract. But this was offset or was more than offset by declines in other market areas. The performance in this segment has clearly not been satisfactory historically and at our Capital Markets Day, we introduced an updated and revised strategy to turn this segment around which included priorities to limit subscale software development, accelerating automation to lower deployment and maintenance cost, and changing focus from market-share gains to profitability as well as realizing cost synergies from combining the two prior segments.

So in the quarter, we started to execute on this strategy and that included to exist some sub scale businesses and we are confident that the business is on path to reaching operating profit breakeven for the full year of 2023. In parallel in our core mobile infrastructure business we’re continuing to execute on our enterprise strategy. This is organized around two pillars, each leveraging our strength in mobile networks. First, enterprise wireless solutions focused on capturing the multi-billion dollar enterprise market opportunity for 5G. So first of all, enterprise wireless solutions focused — so enterprise wireless solutions, it’s focused on capturing the multi-billion dollar enterprise market opportunity for 5G optimized networking and security solutions. And the second pillar is the global communication platform business, where we will be able to monetize 5G in US by transforming how network features such as speed, latency are globally exposed, consumed and paid for.

During Q4 sales in the enterprise segment represented 8% of total sales. Enterprise is a growth engine for Ericsson and we continue to fine tune our portfolio to maximize profitability. And this included an agreement to divest our loss-making IoT business. After this divestiture, our emerging technology area is expected to be profitable.

We are investing in building up a strong go-to-market organization for enterprises. And we’re investing to broaden our product offerings, as well as bringing network APIs to the markets. These investments are a foundation for profitable growth after 2023, but they will way clearly on profits in the coming year. In the quarter, we also announced a SEK2.3 billion provision related to a potential resolution with the US authorities regarding the previously announced Deferred Prosecution Agreement breaches or breach notices. The provision also includes cost associated with the extension of the compliance monitorship that we announced in December.

While we are now in a position to make a sufficiently reliable estimate of the financial penalty, we have not yet reached a resolution with the DOJ and discussions are ongoing. Separately, and with respect to the past matters described in the company’s 2019 Iraq investigation report, we continue to thoroughly investigate the fact in full cooperation with the DOJ and the SEC to determine if there is any merit to the allegations. But it’s not appropriate for me to comment further as this is an ongoing investigation at this point in time. We continue to focus on building a culture of ethics and integrity throughout our business and our Company and that includes the Board and remains a top priority for Ericsson.

I will now share a little more detail about the development in our market areas. So this high-level summary slide highlights how sales increased significantly in market area South-East Asia, Oceania and India. In Europe and Latin-America sales remained stable. We saw a decline in other market areas as operator capex were reduced due to macroeconomic pressures, but also from operator slowdown or rollout plans. And in addition, we’ve seen supply chain easings that enable some operators to optimize their inventories.

Digging a little bit deeper into this, I would like to highlight a couple of things. As you can see in market areas Southeast Asia, Oceania and India sales increased by 21%. Of course, as you’re aware, this was primarily driven by 5G market share gains in India which, of course, we are extremely happy with. We did though experience a slowdown of investment in certain other countries in Southeast Asia, which negatively impacted sales. In market area Northeast Asia sales declines after the elevated 5G investment levels we’ve seen for the first three quarters of the year.

In market area North America we saw a 7% decline year-over-year. And as stated in our Q3 report, as well as at our Capital Markets Day, we have during the year seen accelerated capex investments but we have also seen customers holding relatively large inventories. During Q4, our operator customers guided around reducing the capex investments. This is further compounded by their need to optimize inventories as supply constraints actually eases. Market area other primarily includes IPR revenues — IPR licensing revenues and a major part of our segment enterprises and growth here was mainly driven by the acquisition of Vonage impacting the quarter by SEK4.1 billion and the retroactive part of the IPR licensing revenues for unlicensed periods.

With that, I’d like to give the word to Carl, our CFO.

Carl Mellander — Senior Vice President, Chief Financial Officer

Thank you. Borje. And I’m glad your voice recovered as well. I’ll try to do the same here. So good morning, everyone, and thank you for joining the call. I wanted to start by coming back to some of the one-offs that we have recorded in the quarter. First of all, of course, we landed this major IPR agreement which meant retroactive revenue from the expiry of that agreement, which was in early January 2022. And all of that revenue was recorded in the fourth quarter which brought IPR as a total up to SEK6 billion of revenue in Q4.

Second of all, we agreed as a buyer or a acquirer to divest our IoT business. And we took a related charges there SEK1 billion in the quarter related to that and that impacts the enterprise segment. Then in cloud software and services, we decided also part of the strategy that we have in turning around this business, we decided to exit certain sub scale businesses. And here, we also recorded a charge in the fourth quarter amounting to SEK0.8 billion. And then finally, also as Borje mentioned, last week we announced that we were now in a position to reliably estimate the financial penalty from the DOJ regarding DPA breaches and hence we made a provision then amounting to SEK2.3 billion in the quarter for that including the extended monitorship cost.

I also wanted to reiterate around what we see happening in the market and the markets. So in the Q3 report, the call back then, but also even more in this Capital Markets Day in New York in December, we discussed this mix shift that we expected to start in the fourth quarter, but also continuing to the first half of 2023. And we really see, and I’m reiterating a bit what Borje had explained. But I think it’s a valid point here that some CSPs in especially frontrunner markets are now taking down their capex, in some cases from record levels previously, and some are also adjusting down their inventory levels. At the same time, because we ramp up in other markets where we have gained significant market share, which often comes with a large services share in big rollout projects and all together we expected this to impact both top line but also gross margin in the networks. And this came through as anticipated in the Q4 numbers. But with this overall intro, I like to dive into the numbers a bit more then for the quarter to start with and a bit later into the full year.

But in Q4, we reached sales of SEK86 billion, which is actually the highest sales for Ericsson in a single quarter ever. And the organic growth here, as you see, is 1% supported by catch-up IPR revenue, which drove growth by about five percentage points, if you look at the total IPR revenue. And we saw Southeast Asia, Oceania and India grow and you saw the market area slide that Borje presented before. This is a result of those market share gains that we talked about. Europe and Latin-America flat and the other three market areas declined, notably then North America as expected.

Gross income, excluding restructuring charges, grew by SEK4.6 billion year-over-year to SEK35.7 billion, of course, supported also again by the IPR revenue growth to SEK6 billion from SEK2.4 billion in Q4 last year, but also the addition of Vonage into the Ericsson family. But the margin and gross margin, of course, again, excluding restructuring charges, while supported by IPR, declined still by 200 basis points then to 41.5% year-over-year primarily due to the business mix shift that we talked about in the networks but also related to this previously-announced charges for contract portfolio exits in cloud and cloud software and services.

R&D increased, you know that investments in technology leadership is absolutely key for Ericsson, increased to SEK13.2 billion. The FX effect year-over-year is approximately 45% of that increase, quite big impact from FX. But other than FX the increase is really a result of the decision or decisions we make to invest in our 5G portfolio and offering across the Company, but also includes investments in enterprise wireless solutions as well to enhance the offering there and bring 5G into that list but also the addition of Vonage of course.

Other operating income just to highlight that was negative SEK2.8 billion. And there is where you find provisions and charges related to DOJ monitorship and IoT. So all in all, EBITA then again, excluding restructuring charges, declined by 27% to SEK9.3 billion. That corresponds to a margin of 10.8% again as a result of the charges of around in total SEK4 billion but also increased expenses not least in the enterprise side, which in turn comes from bringing Vonage full quarter into our business. Obviously, they were not part of Ericsson in Q4 2021.

So from that overall view on the Group, let’s look at the segments. Here we can start with networks, where Q4 organic sales grew by 1% supported by IPR, of course, again and the double-digit growth that we saw in market area Southeast Asia, Oceania and India.

Gross income in networks, excluding restructuring, increased, primarily driven by retroactive IPR licensing revenue and gross margin then similar pattern on the as on the Group level, of course, decreased to in this case 44.6%, cost, by again this business mix shift that we talked about, and that we had anticipated and mentioned at the CMD not least. EBIT came out at SEK12.5 billion. This is an EBIT margin of 21.4%.

Then moving over to cloud software and services. Organically we grew by 2% here. North America grew, as Borje said, while sales in other market areas were down. And that has mainly to do with the timing of project milestones and similar, but also some contract descoping in the managed services part of that business. Gross income increased following the higher sales volume. But again, of course, negatively impact by the charges that we have talked about several times already.

EBIT in cloud software and services SEK0.7 billion, stable EBIT margin of 3.4%, again, impacted by one-off charges. Finally, then enterprise on the right side here, the total share of total Ericsson sales at enterprise stands for now is 8% in the quarter. We saw strong growth here in several parts of this business. Organically we grew by 15%. Of course reported much more to 65%. But that obviously has to do with the addition of all Vonage contributing with SEK4.1 billion in sales in the quarter. Gross income increased by SEK2.1 billion to SEK2.9 billion in total. And that’s again driven mainly by the Vonage acquisition. That leads to an EBITA level and the price, excluding restructuring of negative SEK1.7 billion. You can compare that with point SEK0.6 billion the previous year, mainly due to the charges related to the IoT divestment that we talked about but also growing investments in R&D and SG&A, not least in enterprise wireless solutions.

That’s about the quarter and now if we zoom out and look at the 2022 full year numbers instead. Sales of SEK271.5 billion which is up close to SEK40 billion year-over-year if we look at the reported numbers, not considering currency in this case. But if we do adjust for comparable units and currency growth was 3% year-over-year for the full year. Gross margin excluding restructuring declined to 41.8%, impacted again by the same items. I will not repeat all of those again. And here you can also see the R&D expense increase is about SEK5.3 billion in increased R&D and one third of that is FX movement related. In networks, where we add investment is really in the cloud RAN area, but also in what we call Ericsson Silicon or our ASICs. Also enterprise, saw an increase in R&D.

So EBIT margin here as you can see — you can see the numbers here. But excluding the one-offs and the non-organic, so the Vonage acquisition, we came out at 12.9% in EBIT margin, again within the range for 2022, the target range that we had put up earlier of 12% to 14%. Gross margin is a metric that many following our industry and let’s look at that here. You can see the gross margin development from Q1 2020 and we decided to start this graph there. But, of course, earlier we have shown also development from 2016 and 2017, when gross margins were at 30% and we remember that time as well.

Now we have surpassed 40% since sometime. And now on a rolling four-quarter basis gross margin is 41.8%. So the improvement you can see in the blue line here from 2020 is really driven by the investments in technology leadership and competitiveness. And as you know this — the improvement you see there in the blue line is really also accompanied by market share gains over the same period. Now, we see a certain decline in gross margin and it comes as a result of course inflationary pressure and this business mix shift that we talked about in the networks and specifically in the fourth quarter and I mentioned this already we saw that this shift, as expected, impacted our gross margin.

When it comes to inflation, I would say that we have managed well to offset that in the quarter with commercial initiatives like product substitution. And of course, without inflation, you could say that this, call it, operational leverage coming out of technology leadership as well would have contributed to a stronger gross margin. But in this quarter now, we have managed to offset that inflation. So aside from those effects that I talked about, of course, we again have these one-off charges that we should not forget when we look at this to better understand the underlying business and the one-off charges here affecting gross margin amounted to 0.6 percentage points on Group level.

So from there let’s move into how our earnings have converted into cash flow. And of course, as you know free cash flow before M&A is a key metric for us. We came out at SEK16.9 billion in the quarter and SEK22.2 billion for the full year, which is 8.2% of net sales. As you know we have a long-term target of 9% to 12% of net sales. So we came in just below that range now for the full year 2022. But there I think we should remember that this was a year with significant global challenges when it comes to supply chain and of course that has impacted our working capital. And I think it’s in this context, we should see, the year-over-year development of free cash flow. 2021 was a very strong cash flow quarter for us where free cash flow before M&A reached even 14% of net sales. So that creates a bit of a tough comparison when we look at ’22. But we can also see this over the two years and then in average, we have generated free cash flow of SEK27 billion between the two years on average per year. So what happened in the quarter was that now as the supply chain situation globally is easing up,

We were able to reduce the inventory just as we said would happen exactly that happened as well. So that’s good both in component but also in project inventory. And so this improvement in inventory together with very strong cash collection, including the collection from the IPR licensees, where we have the new agreement, delivered a positive contribution for working capital and therefore generated a strong free cash flow in the quarter.

I can add also that, of course, there is an impact from currency between quarters and over the years. But if we look at reported numbers, this cash flow of SEK16.9 billion is actually the highest that we have delivered, at least during the last seven years in Ericsson’s history. We continue with the focus on working capital, of course. It’s a big important drive in our Company. And we continue that with full force.

I said before, though, the large rollout projects that we are happy to have won tend to build up working capital, initially at least and that’s normal and expected as an effect of winning a business of that nature. That we believe will continue, however, the inventory side should still continue down.

So on the back of the strong cash flow then, we managed to increase the net cash position by SEK10 billion. Now it’s a bit more than SEK23 billion of net cash. And this is after having paid out of course, the second the dividend installment of SEK4.2 billion. Gross cash now SEK56.2 billion. And then the proposed dividend from the Board of Directors at SEK2.70 per share corresponds to total amount of SEK9 billion and is proposed to be paid out in two installments, just like previous years as well.

Now, before I hand back to you, Borje, I just wanted to present a couple of key data points for the future. So my last piece for today here covering the outlook for the first quarter, and also the full year 2023, to some extent. But first, some specific comments regarding first quarter then starting with top line. And we look at average seasonality for networks and the cloud software services. For networks, this is minus 23% on average historical numbers. And for cloud software and services this is minus 35%. I’m talking now about the delta, the difference between Q4 and Q1. And for networks, then we expect that the seasonal decline Q4 to Q1 will be more pronounced in Q1, even when adjusting then for the retroactive EPR licensing revenue in Q4. And for cloud software and services, we expect the normal seasonality to play out in the first quarter when adjusting for the retroactive IPR again.

So, next when it comes to gross margin for networks, we are specific now in the guidance for the first quarter where we say that given this change in business mix resulting from market share gains and what we have explained now and earlier, we expect to see a range of gross margin in networks between 40% and 42% in the first quarter. And then when it comes to operating expenses in Q1, there is a typical decrease in our Company if you look at historic averages by SEK3.3 billion from Q4 to Q1. I believe this is a good indication also, this time. And that’s why I have said that of course there might be large variations between quarters.

Then amortization of intangibles expected to be around SEK0.9 billion per quarter for the Ericsson group in 2023, of which SEK0.8 billion in the enterprise segment. And lastly, for Q1, we expect EBITA for the group to be somewhat lower than EBITA last year, same period but then with an improvement during the rest of the year as a result of declining margins in networks that we guide for due to the changing business mix.

So that concludes this part and I hand back to you, Borje.

Borje Ekholm — President and Chief Executive Officer

Thank you, Carl. So to sum up we took several important steps during the quarter in achieving our strategic and financial goals during the last quarter. And in a choppy world, I would say we focus on managing what we can manage. And this includes, of course, saving costs of SEK9 billion that will have full effect by year end or 2023. And we expect to start seeing the reduced costs to come through during the second quarter of ’23.

We’re also executing on the plan for cloud software and services that will allow us to improve profitability and reach breakeven for the full year 2023. We see great traction in our expansion into enterprise. And we’ll continue to invest in broadening our product portfolio and build a strong enterprise go to market organization. These investments will create a strong platform for profitable growth going forward while weighing, of course, on the costs in 2023. And we expect to be able to showcase what we can do with the global communication platform during the coming quarters. So I encourage you to stay tuned for Barcelona this year.

Our basic premise for our business is basically that anything that can go wireless will go wireless. I’m truly excited about Ericsson’s future as we continue to execute on our strategy. As we go forward, the investments in and growth from our enterprise business will be a major driver of Ericsson’s long-term growth and profitability. And we remain committed to reaching the lower end of our long-term EBITA target of 15% to 18% by 2024.

I would like to thank everyone, each and every one of our customers, partners and employees. This has truly been a team effort. Thank you. Finally, I would like to welcome all of you to our annual general meeting at the end of March. And as you have seen, and Carl described, the Board is suggesting a dividend of SEK2.70 per share, split into parts as it was past year.

And with that, I would like to conclude this part of the presentation and hand back to you, Peter.

Questions and Answers:

Peter Nyquist — Vice President, Head of Investor Relations

Thanks, Borje. As we’re a little bit late, I will give you actually five minutes extra for Q&A. So we will have some. So it’s now the time for the Q&A session. [Operator Instructions] So let’s look here who we have on the first part of the question. I would like to welcome Andrew Gardiner ask the first question. Hi, Andrew from Citi.

Andrew Gardiner — Citi — Analyst

Good morning, Peter. Thanks very much to you all for taking the question. Really my question comes down to the unusual approach you’re now taking or at least unusual for you guys in terms of giving near term guidance, right. So being quite quantified in terms of what you’re telling us in 1Q for margins in particular, I think to many of us on the call that’s going to be quite appreciated. It’s been a long time, decades since Ericsson has done that. And hopefully it helps us find a floor in terms of our estimate revisions here, given the near-term challenges. But of course, for that to be a flaw, the estimates need to be conservative enough. I just hoping you can give us a better sense as to how much you have risk adjusted those 1Q targets. So worst case type modeling, to give us conviction that this indeed is hopefully the final cut in terms of the estimate. Can you give us some color around how you set those needs and targets? Thank you.

Carl Mellander — Senior Vice President, Chief Financial Officer

Should I start, Borje? Thanks for the question, Andrew. I would say we wouldn’t express it in this way if we weren’t — if we didn’t have the confidence about it. And as we provide a range also 40% to 42%. We think that different scenarios can be covered in there and with the visibility we have now on customer demand on project rollouts on our own cost situation, etc. in cost of sales we deem that this is the level where we expect to land in the quarter. So we have confidence.

Borje Ekholm — President and Chief Executive Officer

I think that’s — we recognize, Andrew, the repeated questions about near term guidance. So we felt this may be the right thing to do. So we took that step. So it was really to help. But we’ve been, I would say, as Carl described, trying to be providing you with the best estimates we can do. At the same time, there are, of course, always developments. But this is based on an assumption of all the inventory adjustments in networks. And I think that’s important to remember where we’re taking a rather conservative look on that. What we feel is conservative today. So I feel very good about the estimates that we provide you.

Peter Nyquist — Vice President, Head of Investor Relations

Thanks, Borje. Thanks Andrew.

Andrew Gardiner — Citi — Analyst

Okay. That’s helpful. And perhaps just —

Peter Nyquist — Vice President, Head of Investor Relations

Yeah, sure.

Andrew Gardiner — Citi — Analyst

Yeah. If I could just have a quick specific follow up. In terms of the first quarter EBITA guidance of it to be quite somewhat below last year, just so that we’re getting a reference point correct. I mean, you are referring to the SEK5 billion of EBITA reported in Q1 ’22. There’s no — any sort of one offs or things that we should be aware of, or is it just below SEK5 billion is what you’re going to?

Carl Mellander — Senior Vice President, Chief Financial Officer

Yes, that’s correct. Nothing specific around one-offs or anything like that to comment on.

Andrew Gardiner — Citi — Analyst

Thank you.

Peter Nyquist — Vice President, Head of Investor Relations

Thanks, Andrew. That was the first question. So we are now ready to go ahead with the second question. And that is from Aleksander Peterc from Societe Generale. Hello, Aleksander.

Aleksander Peterc — Societe Generale — Analyst

Yes. Hello. Good morning. Thank you for taking my question. I hope you can hear me well.

Borje Ekholm — President and Chief Executive Officer

Yes.

Peter Nyquist — Vice President, Head of Investor Relations

Right.

Aleksander Peterc — Societe Generale — Analyst

Yeah. Great. Yeah. So I’d just like to come back a little bit on margins again following up on Andrew’s question earlier. So, can you give us a sense of whether margins will bottom out in the first quarter of the year, that 40% to 42% range or should we model broadly speaking, a similar range for the second quarter because you said these pressures will persist and then we’ll see an improvement.

And then just broadly speaking, do you think that networks can longer term return to a 44% to 46% gross margin range, which you saw in previous quarters towards that an artificially high level of gross margins as a result of a particularly favorable business mix, which is not expected to prevail in the longer term just in broad terms? Thank you very much.

Carl Mellander — Senior Vice President, Chief Financial Officer

Yeah, I can start on that. As we have said, the first half is really where we’ll see the sizable inventory adjustments that impacting primarily from runner markets and their front runner markets around the world. So, we think that those effects are going to be there for the first two quarters. And from there, you’ll start to see an improved market environment during the second part. And the reason why we believe the market will improve is actually the underlying traffic growth. So that gives us the comfort. And this is what we’ve seen, by the way, in previous swings you’ve had in capex.

So, when you’ve had those big adjustments, operators can sweat assets for a couple of quarters, but it cannot be done for much more because simply traffic grows fast underneath. So that’s why we’re — what we are seeing is a gradual improvement in the second part of the year. So that’s the way we try to model it.

Aleksander Peterc — Societe Generale — Analyst

Thank you very much. And just a quick follow-up.

Peter Nyquist — Vice President, Head of Investor Relations

Yeah.

Aleksander Peterc — Societe Generale — Analyst

Yeah. Can I just ask you — can you give us an annual run rate of IPR and our quarterly run rate now that your main deals have been renegotiated? Could you provide us with an estimate at this stage? Thank you.

Carl Mellander — Senior Vice President, Chief Financial Officer

Yeah. So, current portfolio is around SEK9 billion. As you know, we ended up with SEK10.4 billion now during 2022. What we have also said, as you know, and we expanded on that at the Capital Markets Day is that we expect IPR to grow significantly. There are more device players in the ecosystem that are currently unlicensed, especially for 5G. So, we’re targeting those now on the back of the large agreements that we have just signed.

But there’s also other growth opportunity there, consumer electronics, IoT, as we have mentioned before. So, we believe that we cannot talk exactly about the timing because this is about negotiations, obviously, with the licensees, but we expect it to grow over time.

Peter Nyquist — Vice President, Head of Investor Relations

Thanks Carl.

Aleksander Peterc — Societe Generale — Analyst

Thank you very much.

Peter Nyquist — Vice President, Head of Investor Relations

Thank you, Aleksander. So we are now ready to go further in the Q&A queue. So, the next question I have here is from Andreas Joelsson at Danske. Hi, Andreas.

Andreas Joelsson — Danske — Analyst

Hi and good morning. A question on Vonage, please. If you could elaborate a little bit how the business model is actually working. Is it a subscription-based model? Is it a license-based model for getting sort of access to the APIs or how does that work really? Thanks.

Borje Ekholm — President and Chief Executive Officer

Well, if you look at the current model in Vonage, you have both on a subscription-based model, that’s the UCaaS, CaaS solutions, but you also have a transaction model on the CPaaS. Over time, as we launch now the new part, call it the network APIs, there are still more work to be done on the business model. So right now, the focus is to make sure that we technically solve the issues and that we can actually present those type of network APIs on the CPaaS platform.

And that’s why I said, you’ll see announcements during the year. And hopefully, we can start to display also the business model that we intend to see there. But so far, we need to continue the work we’re doing together with our operator partners to be able to launch those APIs and show them to the market. So stay tuned for announcements on that, Andreas.

Andreas Joelsson — Danske — Analyst

Perfect. Thanks.

Peter Nyquist — Vice President, Head of Investor Relations

Thanks, Andreas. Thanks for that question. So we will move further with the next question. And I’ll have the next question from Sebastien Sztabowicz from Kepler Cheuvreux. Hello, Sebastien.

Sebastien Sztabowicz — Kepler Cheuvreux — Analyst

Yeah. Yeah. Hello, everyone, and thanks for taking my question. I’ve got one question on the mix because Dell’Oro I know this RAN market in the US declining in the mid-single-digit range in the coming years. So, the scale effect will play negatively there. But do you see any room for any capacity of grade cycle building up in some advanced markets and including the US? So how do you see your mix shifting in the coming years with the capacity upgrades and maybe some rollouts in emerging markets?

And the second one is on the RAN market specifically. It is gradually slowing a little bit declining right now. Have you seen a change in the competitive landscape or the pricing conditions in the RAN market today or not so far? Thank you.

Borje Ekholm — President and Chief Executive Officer

If we start with the overall RAN market. And as we said at the Capital Markets Day, we expect a flattish, call it, mobile network market as well as RAN market over the next few years. That has not changed. And I would say Dell’Oro is now forecasting slight growth outside of China and a slight decline if you include China, then we see this inventory adjustment happening now that I think we have to expect to work its way through the system when everyone normalizes inventories. We do the same thing. That’s why we also are able to reduce inventory. So you see that is in the supply chain.

I think those will, as we see it now work its way through the next few quarters, one, two quarters or Q1, Q2. Then after that, what will drive the cycle in the US, but it applies also to other front-runner markets. It’s two things in reality. One is the underlying traffic growth that we’re seeing already. That continues at very healthy levels. So, we expect to see a, call it, normalization of the RAN market also in front runner markets, and that’s why you reached the overall flattish market.

The other part, which I think is very interesting is new applications. We’re starting to see some come through. First use case probably is fixed wireless access and fixed wireless access today may be used in mid-band. But over time, that’s probably going to migrate over to millimeter wave and provide also support for the market. So, when you look at this shifts that we are seeing, you will see these type of individual years have negative or positive numbers. But over time, we expect this more flattish market. So that will start to help the mix again as you move forward beyond 2023.

Pricing environment, we are in a competitive industry. This is why we’re focused on leading on technology. And when we lead on technology, we help our customers both improve performance in the network, but also lower the opex. And what we see is that we can win those deals at attractive gross margins. And that’s why you see us even though we’re fairly substantially changing the business mix in the company achieving compared to historic levels, a very attractive gross margin. So I feel quite good about our competitive position, and that’s ultimately the driver of the gross margin you can realize.

Peter Nyquist — Vice President, Head of Investor Relations

Thanks, Borje. Thanks, Sebastien.

Sebastien Sztabowicz — Kepler Cheuvreux — Analyst

Thank you.

Peter Nyquist — Vice President, Head of Investor Relations

Thank you. We will then move to the last question of this session today. And the last question I have from Terence Tsui at Morgan Stanley. Hello, Terence.

Terence Tsui — Morgan Stanley — Analyst

Yeah. Thank you. Good morning, everyone. A question on networks as well, please, and just around the strong growth in India. Can you just give us maybe a flavor of the margin profile in India versus the other regions? And maybe give us an idea of how your profitability should evolve as revenues start to pick up in the region?

And then a real quick follow-up just on a topic that we haven’t asked on the call so far, just around the provision you made for the DOJ. Just wondering, are there any updates on the investigations being conducted by the other authorities? And shall we expect maybe a single settlement that covers all of the investigations in the future? Thank you.

Borje Ekholm — President and Chief Executive Officer

If we start with the provision, yes, we set aside the provision for the breach notices. And that was because we could, as we say, provide a reliable estimate of the financial consequences. Besides that, we have, as you know, not reached any agreement with them or with anybody else. So that’s why at this point in time, there are ongoing investigations and discussions. So we cannot update you in any shape and form right now.

Terence Tsui — Morgan Stanley — Analyst

India?

Borje Ekholm — President and Chief Executive Officer

India. We will not comment on individual markets and our margin profiles there. But what I can say is that when you look at the guidance, we’ve given for Q1 on gross margin in Networks, and you can there see that we expect a decline in the US quite substantial as well as a growth in new market share contracts. That is not only India, it’s other market share contracts as well. And you still see a longer-term healthy gross margin. If you compare to what we had five years ago, it’s still a very healthy gross margin. So we have factored in a lot of those swings.

But the most important one here, when we talk about mix is actually the — that when we take a market share gain, the contract by nature has a lot more service content than a normal, continuous business. And when that happens, we have lower margin. They’re all positive margins, but it will dilute gross margin, but that’s all factored into the 40% to 42% gross margin.

Peter Nyquist — Vice President, Head of Investor Relations

Thanks Borje.

Terence Tsui — Morgan Stanley — Analyst

Thank you very much.

Peter Nyquist — Vice President, Head of Investor Relations

Thanks Terence. That was our last question. I see that I still have some questions in the queue. IR is clearly open, you can call in and ask a question to us. Carl Mellander will be in London on Tuesday, meeting some of you, both the sell side and the buy side. So, that’s another opportunity. And as Borje said, we have the event in Barcelona coming up, and I know that a lot of you are traveling down there as well to meet with us. So those are opportunities near-term to meet the management.

With that said, I would like to conclude this call. And thank you all for dialing in and asking questions. Thank you.

Carl Mellander — Senior Vice President, Chief Financial Officer

Thank you.

Borje Ekholm — President and Chief Executive Officer

Thank you.

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