16/07/2021 - Telefonaktiebolaget LM Ericsson: Material Event (Form 6-K)

Our strong business performance continued, with an organic sales¹ growth of 8% in the quarter. This was despite a sales decline of SEK -2.5 b. YoY in Mainland China. Networks continued to grow market shares in the quarter with some significant wins. Group gross margin² increased to 43.4% (38.2%). We are well positioned to take advantage of continued market momentum with our competitive 5G product portfolio and cost structure. However, it is prudent to forecast a materially lower market share in Mainland China for Networks and Digital Services as the earlier decision to exclude Chinese vendors from the Swedish 5G networks might influence market share awards.

Networks sales¹ grew organically by 11%, despite lower volumes from delayed 5G deployment in Mainland China. This growth reflects the continued high activity levels in most markets. The North East Asia market outside Mainland China saw strong growth in 5G volumes. Gross margin² improved to 47.9% (40.5%). Through proactive and continuous measures for supply chain resilience we have accelerated production to meet customer demand, and we are well prepared for any challenges in the future. Our increased R&D investments have accelerated product development. We strengthened our Cloud RAN portfolio further with 5G mid-band and massive MIMO support for increased network performance. Cloud RAN will enable service providers to seamlessly evolve their networks towards cloud-native technologies and open network architectures, meeting demand for more deployment flexibility. We continue on the successful path of 5G wins in North America. We have signed another 5-year contract, this one amounting to USD 8.3 b. (SEK 71 b.), with a leading customer. This is the single largest deal in the history of Ericsson.

In Digital Services the strong momentum in 5G Core continued and we are ramping up R&D investments in the cloud native 5G portfolio. Organic sales were stable in the quarter. However, excluding the reduced sales in Mainland China, sales¹ grew by 5%. Gross margin² decreased to 37.9% (43.6%) YoY, mainly due to a write-down of SEK -0.3 b. related to pre-commercial product investments for the Chinese market. A material loss of market share in Mainland China, which contributed 5.4% of Digital Services sales in 2020, would cause a delay in reaching the EBIT margin target for 2022. A significantly reduced volume would lead to a limited loss in 2022 in Digital Services. Improvements are skewed towards the year end 2022, as we expect to see a gradual increase in Core revenues. Based on our strong portfolio, we expect to exceed our original EBIT margin target of 4-7%, as sales in other markets over time will compensate for the reduction in Mainland China. We see strong demand for our OSS, BSS and 5G core offerings, positioning us well for longer-term profitability.

The new IPR agreement with Samsung reaffirms the significant value of our patent portfolio and with this agreement in place we are well positioned to conclude pending and future

patent license renewals. One additional agreement was signed in July. There is currently high activity in renewal negotiations. As new contracts are concluded, revenues will include retroactive payments for the unlicensed period prior to signing.

Whilst many markets are returning to normal following the COVID-19 pandemic, we continue to see rising numbers of cases in South East Asia, which may result in a slower recovery for impacted countries.

We continue to invest in compliance to fully embed our commitments to ethical business practice, in all areas across the organization. Ensuring all decisions are taken with integrity is a driving force in our culture-change journey.

The opportunity from enterprise for 5G provides an exciting growth path for Ericsson. Building on the strong foundations of our core business we will continue to take a stepwise approach to investing in growth in Dedicated Networks, IoT and the wireless portfolio acquired with Cradlepoint. We foresee 20-30% annual market growth in enterprise, with opportunities in automation, remote operations and safety management across whole industry sectors such as smart manufacturing, ports and airports, energy, mining, health and agriculture. Enterprise use cases in 5G - and the continuing growth in 4G - will drive the digital transformation of business globally combining the high performance, low latency and security benefits of wireless over traditional fixed networks. We are confident that wireless will be the first-choice connection for global business in the 5G era.

Stay healthy and well.

Börje Ekholm

President and CEO

Group reported sales were SEK 54.9 b. Sales adjusted for comparable units and currency grew by 8% YoY, with double-digit currency adjusted growth in three of the five market areas. Sales in North East Asia remained stable despite a sales decline in Mainland China of SEK -2.5 b. YoY in Networks and Digital Services. Sales in the Middle East and Africa declined YoY.

IPR licensing revenues decreased to SEK 2.3 (2.8) b. Revenues from the new contract with Samsung, attributable to both Q1 and Q2, were offset by expired contracts under renewal negotiations, lower volumes with one licensee and a weaker USD.

Networks sales adjusted for comparable units and currency increased by 11% YoY driven primarily by growth in market areas Europe and Latin America, South East Asia, India and Oceania as well as in North East Asia except Mainland China. Sales in Mainland China were SEK -2.0 b. lower YoY. Excluding Mainland China, sales in Networks grew by 17%, adjusted for comparable units and currency. Networks accounted for 73% (72%) of total sales.

Digital Services sales adjusted for comparable units and currency were stable YoY, with double-digit growth in North America and in Europe and Latin America. Excluding Mainland China, where revenues were SEK -0.5 b. lower YoY, sales in Digital Services grew by 5% adjusted for comparable units and currency. Digital Services share of total sales was 14% (15%).

Managed Services sales adjusted for comparable units and currency decreased by -2% YoY, mainly due to reduced variable sales in a large contract in North America, post the merger between two large operators. Managed Services share of total sales was 9% (10%).

Emerging Business and Other sales adjusted for comparable units and currency increased by 13%, driven by growth in Emerging Business. Emerging Business and Other share of total sales was 4% (3%).

Sequentially, reported gross margin increased to 43.4% from 42.8%, mainly driven by continued strong operational leverage in Networks and a positive impact of two quarters of IPR revenues related to the patent agreement signed in the quarter.

Research and development (R&D) expenses

R&D expenses amounted to SEK -10.5(-10.0) b. R&D expenses increased in Digital Services due to increased investments in the cloud-native 5G portfolio and in Emerging Business and Other as a result of the acquisition of Cradlepoint.

Selling and administrative (SG&A) expenses

SG&A expenses were SEK -7.0(-7.1) b. Increased investments in compliance and security and the consolidation of Cradlepoint were offset by lower discretionary spending in other areas.

Revaluation of customer financing was SEK 0.1 (0.0) b.

Impairment losses on trade receivables

Impairment losses on trade receivables were SEK 0.1 (0.0) b.

Other operating income and expenses

Other operating income and expenses was SEK -0.6 (0.1) b., negatively impacted by SEK -0.8 b. as a result of the Nokia settlement related to the 2019 resolution with the U.S. Department of Justice (DOJ) and the U.S. Securities and Exchange Commission (SEC).

Share in earnings of JVs and associated companies was SEK -0.1(-0.2) b.

Restructuring charges

Restructuring charges amounted to SEK 0.0 (-0.7) b.

EBIT

Reported EBIT improved to SEK 5.8 (3.9) b. YoY. EBIT excluding restructuring charges was SEK 5.8 (4.5) b. corresponding to an EBIT margin excluding restructuring charges of 10.6% (8.2%). The increase was driven mainly by improved gross margin in Networks.

Sequentially, reported EBIT increased to SEK 5.8 b. from SEK 5.3 b. driven by increased revenues and gross income primarily in Networks.

EBITA

EBITA improved to SEK 6.1 (4.1) b. YoY. EBITA excluding restructuring charges was SEK 6.1 (4.8) b. corresponding to an EBITA margin excluding restructuring charges of 11.1% (8.6%).

Financial income and expenses, net

Reported financial net was SEK -0.5 (0.3) b. The weakened USD to SEK resulted in a positive currency hedge effect. The currency hedge effect was SEK 0.1 b. in the quarter compared with SEK 0.6 b. in Q2 2020.

Sequentially, financial net was stable at SEK -0.5 b. with the currency hedge effect up from SEK -0.4 b. in the first quarter 2021. The USD weakened against the SEK between March 31, 2021 (SEK/USD rate 8.71) and June 30, 2021 (SEK/USD rate 8.51).

Taxes

Taxes were SEK -1.5(-1.6) b. The effective tax rate in Q2 was 27% compared with 33% in Q1 2021, mainly due to the market mix in the quarter.

Net income

Net income improved to SEK 3.9 (2.6) b. and EPS diluted improved to SEK 1.10 (0.74) YoY driven by stronger EBIT.

Employees

The number of employees on June 30, 2021, was 101,624 compared with 101,113 on March 31, 2021. The increase derives mainly from research and development.

Financial highlights, year to date (Jan-June) development

Reported sales decreased by -1%. Sales adjusted for comparable units and currency increased by 9% driven primarily by sales in market areas North America and Europe and Latin America. Networks sales adjusted for comparable units and currency increased by 13%, Emerging Business and Other and Digital Services grew by 11% and 1% respectively, while Managed Services declined by -5%.

Reported gross margin increased to 43.1% (38.6%) driven by improvements primarily in Networks, which showed strong operational leverage. Q2 2020 was negatively impacted by both a write-down of pre-commercial product inventory and initial 5G deployments in Mainland China.

Reported EBIT increased YoY to SEK 11.1 (8.2) b. as a result of improved gross income.

Reported EBITA increased to SEK 11.7 (8.7) b. YoY. EBITA excluding restructuring charges was SEK 11.7 (9.7) b. corresponding to an EBITA margin excluding restructuring charges of 11.2% (9.2%).

Net income year to date improved to SEK 7.1 (4.9) b. with the improved gross income impacted by a more negative financial net and higher taxes.

Planning assumptions

Market related

Ericsson related

Net sales

Gross margin

R&D and SG&A expenses

EBIT

Restructuring charges

Currency exposure

Cradlepoint

South East Asia, Oceania and India

Currency adjusted sales increased by 14% YoY. Networks sales increased YoY primarily driven by continued investments in LTE, mainly in India, and as a result of timing of project milestones in South East Asia. Sales decreased YoY in Digital Services due to timing of orders and project milestones. Managed Services sales increased YoY, mainly as a result of a new contract signed in the second half of 2020. Reported sales increased by 8%.

North East Asia

Currency adjusted sales increased by 1% YoY. Despite lower 5G volumes in Mainland China, sales in Networks grew, driven by continued 5G momentum in the other parts of the market area. Digital Services sales declined in Mainland China. Reported sales declined by -9%.

North America

Currency adjusted sales increased by 11% YoY. Sales growth was driven by strong demand for 5G solutions in Networks and for 5G Core and cloud-native solutions in Digital Services. Reported sales declined by -2%.

Europe and Latin America

Currency adjusted growth was 14% YoY with 12% growth in Europe and 28% in Latin America. Sales in both Networks and Digital Services continued to grow as a result of market share gains, while sales decreased in Managed Services YoY due to earlier decisions on contract exits and rescoping of contracts. Reported sales increased by 7%.

Middle East and Africa

Currency adjusted sales declined by -10% YoY. Sales declined YoY in Networks and Digital Services primarily due to lower 5G investments in the Middle East and uncertain macroeconomic conditions in Africa, which are likely to prevail for some time. Managed Services sales were stable. Reported sales decreased by -18%.

Other

IPR licensing revenues decreased to SEK 2.3 (2.8) b. Revenues from the new contract with one licensee were offset by expired contracts under renewal negotiations, lower volumes with one licensee and a weaker USD.

Sequentially, IPR licensing revenues increased to SEK 2.3 (0.8) b. mainly due to the new agreement with Samsung.

Segment Networks

Breakdown of sales into products, services and IPR licensing is available in note 3.

Net sales

Sales adjusted for comparable units and currency grew by 11% YoY, with growth in four of the five market areas. Sales in Mainland China declined by SEK -2.0 b. YoY. Sales declined in market area Middle East and Africa primarily due to lower 5G investments in the Middle East and uncertain macroeconomic conditions in Africa. IPR revenues were SEK -0.4 b. lower YoY. Reported sales were stable YoY.

Sequentially, reported sales increased by 10%, driven primarily by growth in Europe and Latin America as well as in North East Asia outside of Mainland China.

Gross margin

Reported gross margin increased to 47.9% (40.2%) YoY. Gross margin in the quarter was supported by strong operational leverage, which more than offset the lower IPR revenues YoY. Q2 2020 was negatively impacted by a write-down of pre-commercial product inventory and by initial 5G deployments in Mainland China. Gross margin excluding restructuring charges was 47.9% (40.5%).

Reported gross margin increased QoQ to 47.9% from 46.1% with continued strong operational leverage and a positive impact of two quarters of IPR revenues related to the patent agreement signed in the quarter.

EBIT

Reported EBIT increased to SEK 8.6 (5.3) b. YoY, which increased the EBIT margin to 21.7% (13.2%). The increase was driven by improved gross income. EBIT margin excluding restructuring charges increased to 21.7% (14.1%)

Sequentially, reported EBIT increased by SEK 1.4 b. EBIT margin increased to 21.7% from 20.0%, due to seasonally higher sales and improved gross income.

Net sales rolling four quarters were SEK 167.2 b. and EBIT margin rolling four quarters excluding restructuring charges was 21.5%.

Segment Digital Services

Breakdown of sales into products, services and IPR licensing is available in note 3.

Net sales

Sales adjusted for comparable units and currency were stable YoY, with double-digit growth in North America and in Europe and Latin America, while sales declined in the other three market areas. Sales in Mainland China decreased by SEK -0.5 b. YoY. IPR revenues were SEK -0.1 b. lower YoY. Reported sales decreased by -8% YoY.

Reported sales increased by 14% QoQ, with growth in all market areas except in North East Asia.

Gross margin

Reported gross margin decreased to 37.9% (43.6%) YoY. There is a high risk regarding future market share in Core in Mainland China and the Company has made a write-down of SEK -0.3 b. for pre-commercial product investments for the Chinese market. The impact of the write-down on gross margin was -3.6 percentage points. Gross margin was also negatively impacted by lower IPR revenues YoY.

Reported gross margin decreased to 37.9% from 43.5% QoQ as a result of the write-down related to the Chinese market. The write-down more than offset the positive impact of two quarters of IPR revenues from the patent agreement signed in the quarter.

EBIT (loss)

Reported EBIT (loss) was SEK -1.6(-0.7) b. with an EBIT margin of -19.9%(-8.1%). Operating expenses increased to SEK -4.6 b. mainly due to acceleration of R&D investments in the cloud native 5G portfolio.

Sequentially, reported EBIT decreased by SEK -0.1 b. to SEK -1.6 b. due to the above-mentioned write-down.

Net sales rolling four quarters were SEK 36.2 b. and EBIT margin rolling four quarters excluding restructuring charges was -8.5%.

Segment Managed Services

Net sales

Sales adjusted for comparable units and currency decreased by -2% YoY, due to reduced variable sales in a large contract in North America, post the merger between two operators, and lower sales mainly in Europe due to earlier decided contract exits. Sales in Network Optimization showed growth mainly in Europe and Latin America. Sales in Managed Services IT&ADM showed growth mainly in North America. Reported sales declined by -8% YoY.

Gross margin

Reported gross margin increased to 19.0% (17.1%) YoY. Gross margin excluding restructuring charges increased to 19.0% (17.2%) YoY, mainly due to efficiency gains and higher variable sales.

Reported gross margin decreased slightly to 19.0% from 19.4% QoQ. Gross margin excluding restructuring charges decreased to 19.0% from 21.0% QoQ, due to seasonally lower costs in Q1.

EBIT

Reported EBIT was SEK 0.4 (0.3) b. EBIT margin excluding restructuring charges increased to 8.1% (4.8%) YoY, driven by efficiency gains and higher variable sales.

EBIT excluding restructuring charges was stable at SEK 0.4 b. QoQ.

Net sales rolling four quarters were SEK 21.3 b. and EBIT margin rolling four quarters excluding restructuring charges was 8.0%.

Segment Emerging Business and Other

Net sales

Sales adjusted for comparable units and currency increased by 13%. Reported sales increased by 29% YoY, driven mainly by the acquired Cradlepoint business.

Gross margin

Reported gross margin increased to 37.9% (12.6%) YoY. Gross margin excluding restructuring charges increased to 38.1% (25.3%). The increase in Emerging Business was driven mainly by Cradlepoint and new businesses.

Reported gross margin increased to 37.9% from 36.6% QoQ. Gross margin excluding restructuring charges increased to 38.1% from 36.8% QoQ. The improvement was driven by Cradlepoint.

EBIT (loss)

Reported EBIT (loss) was SEK -1.7(-1.0) b.

EBIT was negatively impacted by SEK -0.8 b. in the quarter, as a result of the Nokia settlement related to the 2019 resolution with the U.S. authorities. Adjusted for this settlement, reported EBIT (loss) was SEK -0.9(-1.0) b.

The positive impact from the changes between the preliminary and final PPA (Purchase Price Allocation) for Cradlepoint was SEK 0.1 b.

Net sales rolling four quarters were SEK 7.1 b. and EBIT margin rolling four quarters excluding restructuring charges was -47.9%.

Cash flow from operating activities

Reported cash flow from operating activities was SEK 5.9 (5.4) b. Continued business momentum with increased profit and higher incoming IPR payments supported cash flow. Cash flow from operating activities in Q2 2020 was impacted by a payment of SEK -1.0 b. into the Swedish Pension Trust. Operating net assets were stable in the quarter and key movements include an increase in contract liabilities with a positive impact of SEK 4.6 b. relating to a combination of customer contracts and incoming IPR payments. This was offset by an increase in trade receivables and contract assets of SEK -4.0 b. as a result of the sales growth in Networks in the quarter. Taxes paid/received were SEK -1.9 b.

Free cash flow

Free cash flow before M&A was SEK 4.1 (3.2) b. Capex net and other investing activities was SEK -1.3(-1.6) b., primarily related to investment in Networks. Repayment of lease liabilities was stable at SEK -0.6 b. YoY and free cash flow after M&A was SEK 4.0 (3.2) b.

Cash flow from investing and financing activities

Reported cash flow from financing activities was SEK 4.3 (-4.6) b. including repayment of lease liabilities. In the quarter, Ericsson issued a EUR 0.5 b. (SEK 5.0 b.) bond maturing in 2029 and drew on its credit commitment with the European Investment Bank (EIB) of USD 0.3 b. (SEK 2.6 b.) maturing in 2028. Dividends of SEK -3.3 b. were paid out in the quarter, and an additional SEK 1.00 per share (SEK -3.3 b.) will be paid out in October.

Reported cash flow from investing activities was SEK -7.1(-0.5) b. mainly due to purchases of interest-bearing securities.

Financial position

Net cash improved QoQ to SEK 43.7 b. from SEK 43.0 b. due to the positive cash flow, partly offset by dividends paid. Gross cash increased by SEK 8.5 b. QoQ, driven by the issuing of a EUR 0.5 b. (SEK 5.0 b.) senior unsecured 8-year bond and the utilization of the USD 0.3 b. (SEK 2.6 b.) credit commitment with the EIB. Current borrowings increased due to reclassification of the USD 1.0 b. (SEK 8.5 b.) bond from non-current borrowings as it becomes due in Q2 2022. The average maturity of long-term borrowings was 4.0 years as of June 30, 2021, an increase from 2.2 years 12 months earlier.

Liabilities for post-employment benefits decreased slightly in the quarter, to SEK 31.4 b. from SEK 31.9 b. The Swedish defined benefit obligation (DBO) was calculated using a discount rate based on the Swedish government bond yield-curve. If the discount rate had been based on Swedish covered mortgage bonds, the liability for post-employment benefits would have been approximately SEK 17.7 b. (SEK 13.7 b. lower than current DBO).

Return on capital employed (ROCE) was 13.5% (9.9%).

Parent Company

Income after financial items Jan-June 2021 was SEK 5.7 (2.3) b.

At the end of the quarter, gross cash (cash, cash equivalents, short-term investments and interest-bearing securities, non-current) amounted to SEK 62.9 (63.3) b.

There was an increase in intercompany lending of SEK 2.5 b. and in intercompany borrowing of SEK 0.2 b. in the second quarter.

The Parent Company has recognized dividends from subsidiaries of SEK 5.2 (1.0) b. in the quarter. There was a negative impact of SEK -0.8 b. (Other operating income) in the quarter, as a result of the Nokia settlement related to the 2019 resolution with the U.S. Department of Justice (DOJ) and the U.S. Securities and Exchange Commission (SEC).

In accordance with the conditions of the long-term variable compensation program (LTV) for Ericsson employees, 1,629,894 shares from treasury stock were distributed or sold to employees in the second quarter. The holding of treasury stock on June 30, 2021 was 4,414,066 Class B shares.

Other information

Ericsson and Samsung signed global patent license agreement

On May 7, 2021, Ericsson and Samsung reached a multi-year agreement on global patent licenses between the two companies, including patents relating to all cellular technologies. The cross-license agreement covers sales of network infrastructure and handsets from January 1, 2021.

Furthermore, Ericsson and Samsung agreed on technology cooperation projects to advance the mobile industry in open standardization and create valuable solutions for consumers and enterprises.

This settlement ends complaints filed by both companies before the United States International Trade Commission (USITC) as well as the ongoing lawsuits in several countries and confirms the value of the strong patent portfolios of both companies. The details of the agreement are confidential and will not be disclosed.

Ericsson's IPR licensing revenues continue to be affected by several factors, mainly expired patent license agreements pending renewal, geopolitical impact on the handset market, technology shift from 4G to 5G, and possible currency effects going forward.

Over several decades, Ericsson has made significant investments in R&D and in developing global mobile standards and is committed to licensing its standard-essential patents on fair, reasonable and non-discriminatory (FRAND) terms for the benefit of consumers and enterprises everywhere. The FRAND system allows access to technology and intellectual property, developed by inventors like Ericsson, and also rewards those inventors for their major up-front investment in R&D in each mobile generation.

The value of Ericsson's IP portfolio extends to more than 57,000 granted patents and is strengthened by annual investment in R&D of approx. SEK 40 b. With a leading global position in 5G, the company is confident of growing its IPR revenues long term, thereby further maximizing the value of the overall patent portfolio.

Ericsson announced settlement with impact in second quarter 2021

On May 12, 2021, Ericsson announced that the Company had reached an agreement with Nokia for settling a damages claim against Ericsson. The settlement relates to events that were the subject of 2019 resolutions with the U.S. Department of Justice (DOJ) and U.S. Securities and Exchange Commission (SEC) of investigations into Ericsson's violations of the U.S. Foreign Corrupt Practices Act (FCPA).

As communicated in 2019, the resolution with DOJ related to criminal charges of books and records and internal controls violations of the FCPA in five countries including in Djibouti and a guilty plea to one instance of bribery in Djibouti. The resolution with the SEC related to allegations of violations of the books and records and internal controls provision of the FCPA in six countries and of the bribery provision of the FCPA in three of these six countries.

The agreement with Nokia contemplates the payment by Ericsson of a total settlement amount of EUR 80 m (SEK 0.8 b. equivalent). The amount reflects uncertainty, risk, expense, and potential distraction from business focus associated with a potentially lengthy and complex litigation. The settlement will have an impact of EUR 80 m. on EBIT and EUR 26 m. on cash flow in Q2 2021. The remainder of the settlement amount will be made in similar installments in 2022 and 2023 respectively, impacting cash flow. The settlement amount will be recorded as Other operating expenses under Segment Emerging Business and Other. Further details of the terms of the settlement are confidential.

Ericsson has a zero-tolerance policy for corruption and has in recent years worked hard to strengthen its Ethics and Compliance program and to build a culture of compliance.

Ericsson updated risk factors for Euro corporate bond prospectus

On May 24, 2021, Ericsson announced that the Company was in the process of issuing a EUR 500 million unsecured 8-year bond under its EMTN program. In connection with this proposed issue, Ericsson updated the risk factors in its prospectus regarding geopolitical and trade uncertainty.

The reason for the update was as previously disclosed by Ericsson in its Q4 2020 financial report and in its 2020 Annual Report, that there is a risk that the decision by the Post and Telecommunication Authority (PTS) to exclude Chinese vendors' products from the 5G auction in Sweden may adversely impact the economic interests of Sweden and Swedish industry, including those of Ericsson.

This risk has been included in the risk factors in Ericsson's EMTN prospectus. The update coincides with Ericsson's proposed issue under the EMTN program and the change in relation to the risk factor, as shown in the Q4 report, is reflected in the italicized text below.

Extract of text from Q4 report

Ongoing geopolitical and trade uncertainty from a range of factors may have a material adverse impact on our business, operations, business prospects and consequently on operating results, financial conditions and our ability to meet our targets.

[…]

There are uncertainties for the future bilateral trading relationships between China and several countries as a result of restrictions to wards Chinese vendors in national 5G networks.

[…]

In Sweden, the Post and Telecommunication Authority (PTS) has taken a decision to exclude Chinese vendors' products from the 5G auction. Of special relevance for Ericsson in this context is the trade relationship between Sweden and China, since Ericsson, even though it is a global company with a presence on all global markets, has its headquarters in Sweden and therefore risks collateral damages from a weakened Swedish-Chinese relationship as a result of this decision. There is a risk that the above leads to measures taken by China that are targeted at the economic interests of Sweden and Swedish industry, including those of Ericsson. While Ericsson is invited to various ongoing tender processes in China, the final outcome remains uncertain and it is the company's current assessment that the risk has increased that Ericsson will in those tenders be allocated a significantly lower market share than its current market share.

[...]

The geopolitical situation can have consequences on the entire industry, with an increased likelihood of further industry split, separation of global value chains and separation of global standards for mobile telecommunications. This overall development has also led to several countries evaluating how to ensure uninterrupted access to telecommunication network infrastructure, for example through promoting disaggregation of the Radio Access Network and support of national communication network infrastructure champions as alternative to the established global vendors such as Ericsson although the timing and extent of this remains unclear.

All of the above may have a material and potentially lasting adverse impact on our business, including sales, market share, market access and supply chain and R&D activities, our financial condition and results of operations.

COVID-19 update

Despite the effective deployment of vaccines in many markets we continue to take the utmost care to ensure the health and well-being of our colleagues in respect of the COVID-19 pandemic.

We remain cautiously optimistic as 2021 progresses that control over the spread of the virus is increasing due to vaccination, public education and continued restrictions on movement in areas of heightened infection risk. It will still take time before the full effects of this strategy are seen. Therefore, we continue to advocate working from home for the majority of our employees throughout 2021.

In preparation for a phased return to the office, our Workplace of the Future program planning continues to enable future work flexibility and increased opportunities to connect and collaborate in the office, once it is deemed safe to do so.

We continue to operate efficiently and profitably and believe that tax-payers' money is better used to target the health and economic effects of COVID-19, accordingly we have not sought public funding during the pandemic. The proactive approach to business continuity management in full alignment with customers at the beginning of the pandemic continues to pay off. Quality in Ericsson's operations and customers' networks are maintained. The dual mode production strategy and regionalized supply chains make it possible to keep performing to high levels across the supply chain.

POST-CLOSING EVENTS

Ericsson and Verizon ink landmark multi-year USD 8.3 b. 5G deal

On July 16, 2021, Ericsson announced a landmark multi-year agreement with Verizon to provide its industry-leading 5G solutions to accelerate the deployment of Verizon's world-class next-generation 5G network in the U.S.

Under this USD 8.3 billion agreement, Verizon will deploy Ericsson's 5G MIMO C-band,low-band, and millimeter wave (mmWave) solutions to enhance and expand Verizon's 5G Ultra Wideband coverage, network performance, and user experience. Ericsson's technology solutions, including Massive MIMO, Ericsson Spectrum Sharing, and Ericsson Cloud RAN, complement the high-performing Ericsson Radio System portfolio to support 5G services. Ericsson's industry-leading software functionality provides end-users with the speed and performance they expect from 5G networks.

In 2020, Verizon was the first communications service provider to receive a commercial 5G mmWave Street Macro base station from Ericsson's award-winning new state-of-the-art U.S. smart factory in Lewisville, Texas. Ericsson is committed to building and accelerating the nationwide build-out of 5G across the country.

Ericsson is exposed to a number of risks in its activities. To stimulate identification and support cross-functional treatment within the Ericsson Group, risks are grouped in a number of categories, including for example risks relating to technology, IPR, compliance, project execution, operations, products and services, treasury and accounting, the geopolitical environment, M&A, cyber security and occupational health and safety.

Ericsson's risk management is embedded into strategy development and operational processes and is a part of the Ericsson Group Management System to ensure accountability, effectiveness, efficiency, business continuity and compliance. Risks are defined in both a short-term and long-term perspective and are related to long-term objectives as per the strategic direction as well as to short-term objectives.

Risk factors and uncertainties of relevance to Ericsson are described in the Annual Report 2020. Updates to these risk factors and uncertainties observed by Ericsson that are deemed of short-term relevance include, but are not limited to, the following:

Pandemics, such as for example the one caused by the novel Coronavirus, COVID-19, could severely impact our local and global operations

The COVID-19 pandemic has caused challenges and risks relating to travel and lockdowns limiting access to sites, transportation and logistics and impacting the flow of goods, as well as having major parts of the workforce working remotely. With an increasing infection rate in some of Ericsson's markets, there is an increased risk for negative impact and disturbances in the Company's operations, including in network deployments in those markets, impacting corresponding revenues. As previously mentioned, disturbances from the pandemic may have material adverse effects on our business and financial position.

This report has not been reviewed by Telefonaktiebolaget LM Ericsson auditors.

Date for next report: October 19, 2021

Media and analyst briefing

Ericsson invites media, investors and analysts to a conference call and live video webcast at 9:00 AM CEST on July 16, 2021.

Link to the webcast, dial-in to audio conference, supporting material and replay will be available at:

www.ericsson.com/investors and

www.ericsson.com/newsroom

For further information, please contact:

Carl Mellander, Senior Vice President, Chief Financial Officer

Phone: +46 72 583 88 70

E-mail: investor.relations@ericsson.com or

media.relations@ericsson.com

Stella Medlicott, Senior Vice President, Chief Marketing and Communications Officer Phone: +46 73 095 65 39

E-mail: investor.relations@ericsson.com or

media.relations@ericsson.com

Telefonaktiebolaget LM Ericsson

Org. number: 556016-0680

Torshamnsgatan 21

SE-164 83 Stockholm

Phone: +46 10 719 00 00

www.ericsson.com

Investors

Peter Nyquist, Vice President,

Head of Investor Relations

Phone: +46 70 575 29 06

E-mail: peter.nyquist@ericsson.com

Lena Häggblom, Director,

Investor Relations

Phone: +46 72 593 27 78

E-mail: lena.haggblom@ericsson.com

Stefan Jelvin, Director,

Investor Relations

Phone: +46 70 986 02 27

E-mail: stefan.jelvin@ericsson.com

Media

Kristoffer Edshage, , Director of Corporate Media

Phone: +46 72 220 44 46

E-mail: media.relations@ericsson.com

Corporate Communications

Phone: +46 10 719 69 92

E-mail: media.relations@ericsson.com

This report includes forward-looking statements, including statements reflecting management's current views relating to the growth of the market, future market conditions, future events, financial condition, and expected operational and financial performance, including, the following:

The words 'believe,' 'expect,' 'foresee,' 'anticipate,' 'assume,' 'intend,' 'likely,' 'projects,' 'may,' 'could,' 'plan,' 'estimate,' 'forecast,' 'will,' 'should,' 'would,' 'predict,' 'aim,' 'ambition,' 'seek,' 'potential,' 'target,' 'might,' 'continue,' or, in each case, their negative or variations, and similar words or expressions are used to identify forward-looking statements. Any statement that refers to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements.

We caution investors that these statements are subject to risks and uncertainties many of which are difficult to predict and generally beyond our control that could cause actual results to differ materially from those expressed in, or implied or projected by, the forward-looking information and statements.

Important factors that could affect whether and to what extent any of our forward-looking statements materialize include, but are not limited to, the factors described in the section 'Risk Factors', and in 'Risk Factors' in the Annual Report 2020.

These forward-looking statements also represent our estimates and assumptions only as of the date that they were made. We expressly disclaim a duty to provide updates to these forward-looking statements, and the estimates and assumptions associated with them, after the date of this report, to reflect events or changes in circumstances or changes in expectations or the occurrence of anticipated events, whether as a result of new information, future events or otherwise, except as required by applicable law or stock exchange regulation.