Telefonaktiebolaget LM Ericsson (publ) (ERICB) Earnings Call Transcript & Summary

Welcome to Ericsson's analyst and media conference call. To view visual aids for this call, please log on to www.ericsson.com/press or www.ericsson.com/investors. [Operator Instructions] As a reminder, replay will be made available 1 hour after today's conference. Peter Nyquist will now open up the call.

Thank you, operator. Good morning. Hello, everyone, and welcome to our call today concerning the news of us acquiring Cradlepoint. With me here today, I have Börje Ekholm, our President and CEO; Carl Mellander, our Chief Financial Officer; Åsa Tamsons, Head of Segment Emerging Business and Other. We will have Börje starting the presentation followed by Carl, and then we will end with Åsa. After Åsa, we will have the Q&A session. But before handing over to Börje, I would like to make the following statement. During the call today, we will be making forward-looking statements. These statements are based on our current expectation and certain planning assumptions, which are subject to risks and uncertainties. The actual results may differ materially due to factors mentioned in today's press release and discussed in this conference call. We encourage you all to read about these risks and uncertainties in our annual report. With that said, I would like to hand over the call to you, Börje. So please, Börje, go ahead.

Thanks, Peter. Good morning, everyone, and thanks for joining this call about our acquisition of Cradlepoint. I would like to start by saying this is a great day for Ericsson and for our customers as today, we can announce the intention to acquire Cradlepoint. As we have discussed before, 5G will speed up digitalization of enterprises and with the acquisition of Cradlepoint, we're strengthening our ability to capture the potential in the 5G enterprise market. And this is a good complement to our existing offerings of dedicated network as well as the IoT accelerator portfolio. And as we have said before, M&A activity is an important part of our growth strategy. And what we look for is portfolio near acquisitions that can work as enablers for future growth. Cradlepoint represents a critical segment that will become increasingly important in the 5G area and beyond. Therefore, we can now take the next step in developing these type of enterprise solutions and businesses. With Cradlepoint as part of the Ericsson family, we're boosting our service offerings and helping our key customers, the mobile operators, realize the full value of connectivity, and that allows them to monetize their network investments. Many of our customers have been facing a tough and challenging situation. Data growth in the networks are exponential, but service revenues are flat. And this investment is part of our strategy to build a strong enterprise offering and to address our customer situation by creating valuable new revenue streams for them. With Cradlepoint, we also get to beachhead in the enterprise market that we can build further upon. At the same time, we're securing sustainable demand for our core business as traffic in the networks will increase with new use cases as well as creating a strong foundation for long-term value at Ericsson. So let me talk a little bit about Cradlepoint, and you will get more when Åsa presents as well. We have been very impressed with the competent and talent in the company. This is simply a great company built by great people. Approximately 675 employees and is headquartered in Boise, Idaho. Cradlepoint is a clear global leader in the cellular-based wireless wall market. So what does this mean? Cradlepoint's technologies enabling companies to connect their businesses through the cellular network. Today, it's with 4G, but it will soon migrate to 5G. The market can be split in 3 segments: Branch offices; mobile units, such as first responder units in cars or stationary units such as vending machines, ATM, et cetera. We see strong annual growth in the wireless markets. And we estimate that to be 25% to 30% in each of the coming 5 years. This will be driven by the next wave of digitalization -- digital transformations from 5G for enterprises requiring advanced connectivity services and the growth in IoT devices as well as cloud applications. As said before, Cradlepoint is a quality company and the market leader in each segment, with leading 5G wireless WAN technology. It has strong gross margins and a proven track record with already large customer base. Today, they're focused on the U.S., but we see significant potential outside of North America as well. Importantly, Cradlepoint work with channel partners, and the main channel is through the service providers. With our relationships with the mobile service providers, we can accelerate Cradlepoint's international expansion. Cradlepoint will operate as a stand-alone subsidiary within Ericsson, and this will ensure minimal disruptions to current customers as well as channel partners. Åsa Tamsons, our Head of Business Area, Technologies and New Business, will discuss the market and offering in further detail a little bit later in this presentation. I would also now take the opportunity to welcome all Cradlepoint employees, partners and customers into the Ericsson family. And I really look forward to working together with all of our new partners in Cradlepoint in growing the business as we open it up to all of our existing markets globally. So with that, I would like to hand over to Carl Mellander, our CFO, to go through some financial details.

Thank you, Börje. Perfect. And let me then walk you through some of the financial impact from this acquisition, starting with some words covering the transaction as such and then some of the key financials here. So the acquisition price, on a cash-free debt-free basis, amounts to USD 1.1 billion, which will equal around SEK 9.7 billion, if we use today's U.S. dollar share rate of around 1 to [ 8.80 ]. The acquisition is a share deal, and Cradlepoint will then be fully owned by Ericsson. We expect to close this deal during the fourth quarter this year. And at that point, upon closure, of course, the purchase price will be paid, and that will then impact our Q4 cash flow. We will finance this acquisition with available funds at hand. And, as you recall, the balance sheet position that we reported in the recent Q2 earnings report is solid, including a gross cash level of SEK 75 billion and net cash of SEK 38 billion. In terms of reporting, Cradlepoint will be reported as part of our segment, Emerging Business and Other. Let's move to the next slide, please. And here, I'd like to share some of the key financials then, starting with how this acquisition will create value in summary. We believe that there is, here, considerable value potential in combining Cradlepoint's strong offering with our global presence and of course our strong relationships with the world's leading operators. And this -- by doing this, we can accelerate Cradlepoint's international expansions. And furthermore, Ericsson can, with Cradlepoint, offer package solutions for enterprises. So we see, in other words, opportunities for combined offerings and for cross-sell in both directions. So if we look at Cradlepoint's financial performance, as Börje already said, Cradlepoint is indeed a high-quality company in a high growth segment. In 2019, sales of -- at Cradlepoint amounted to, expressed here than in Swedish kroner, around SEK 1.2 billion. And in 2020, the company is expected to grow by over 30% to around SEK 1.6 billion. One interesting aspect here is that Cradlepoint is transforming into a subscription-based model. So in 2019, the majority of revenue was subscription-based. And this means that software and hardware are packaged then into subscription contracts with an average duration of 3 years. Of course, then with renewal options following that. And typically, customers pay upfront at the start of the contract for the full period, which leads to good working capital level and good a cash flow generation. Cradlepoint has delivered gross margin above 60% over the last 4 years, which again, is -- can be seen as a proof point of a healthy business in a quality company. And while this underlying gross margin will remain strong, we expect it to remain strong. Cradlepoint is then also under the Ericsson umbrella, investing in R&D, of course, going forward to support 5G technology leadership in the LF-1 market, but also in sales and marketing to support the growth we're discussing here, including the acceleration of international expansion together with Ericsson. And those investments, together with amortization of intangible assets, which are related to this acquisition, will generate a negative impact on the Ericsson operating income of around 1 percentage points in 2021 and similar in 2022. And when it comes to these intangible asset amortizations, they represent around half of this impact that I just mentioned, and will be visible both partly in gross margin and partly in OpEx, SG&A as well as R&D. And the cash flow that Cradlepoint generates is driven, of course, by high sales growth, in combination with this commercial model that I described before with prepayments. And by this, we expect a positive contribution to Ericsson's operating cash flow by 2022. And finally, just one more point, and this is an important point, even though we expect this impact on operating margin that I just described in 2022, our group targets for 2022 remain unchanged. And with that, I would like to hand over to Åsa Tamsons, Head of Business Area, Technologies and New Businesses. And Åsa will provide more details on the operation and the market of Cradlepoint and also what this means for Ericsson.

Thank you, Carl. So I want to start by saying that I'm very excited to welcoming the Cradlepoint to the Ericsson family and to talk with all of you about this important deal for Ericsson and for our customers. As you heard from our CFO, Börje Ekholm, this deal means that Ericsson is now taking a big step forward in the rapidly expanding 5G enterprise market. I will spend a few minutes on the background to Cradlepoint, as a company, the market they operate in and why we see them as an excellent fit for our ambitions here in Ericsson. Cradlepoint is a market leader in the wireless WAN market. It provides a portfolio of cloud-delivered wireless WAN touch solutions. That means, in practice, is that they help enterprises and first responders, connect sites, vehicles, mobile workforces and IT devices anywhere, wirelessly, in a simple and secure way. As you heard, this is a fast-growing market, fueled by the massive growth of IoT devices and cloud applications, and now accelerated by 5G and an increasing need from enterprises to get secure and add sometimes advanced connectivity services. It has a subscription-based net cloud software-as-a-service platform that helps enterprises connect through 4G and 5G with zero touch onboarding. The platform is really easy for enterprises to manage and control their connectivity, use applications and services in a secure and reliable way. Cradlepoint is the market leader in the wireless WAN market. They have over 1 million active subscriptions, 20,000 customers worldwide in enterprise, SMB and public sector markets. Its customer base includes 75% of the world soft retail brands, 40% of the Fortune 500 and over 3,500 public safety agencies, such as the New York Fire Department and LAPD. Cradlepoint, has strong multi-route channel to the enterprise market with over 1,500 standard partners, including leading mobile operators and distributors and resellers. We see that among many of the competitive advantages, Cradlepoint is the first -- they're first to market with gigabits 4G and 5G solutions. They are known for delivering a great customer experience, they have well packaged solutions that just works, and they are delivered through a flexible subscription-based business model that combines software, hardware and support. Next slide, please. And here is an overview on their offerings. As I mentioned, they connect enterprises, in the offices, branches, ambulances, mobile workforces and IoT devices of any kind. Next slide, please. So why is this a good complement to Ericsson's offering? Well, we have a multiphase 5G strategy at Ericsson that has now led us to become a world leader in the deployment of 5G cellular networks. And we have now over 100, 5G commercial agreements with unique mobile operators all over the world. A key part of this strategy is now to accelerate 5G adoption within the enterprise market and support the enterprise aspirations of our customers, the mobile operators in more than 180 countries. Now we are joining forces with the market leader in the wireless WAN edge solutions. With their market-leading and innovative solutions, we can now lead the next wave of enterprise transformation and secure that offices, retail branches, vehicles, first responders and smart devices can benefit from wireless, secure and reliable connectivity, connectivity that power solutions that will help improve productivity, deliver real-time services and keep workers and community safe. In addition, and as Börje mentioned, Cradlepoint Solutions are highly complementary to Ericsson's enterprise solutions, including our global IoT platform and the dedicated networks offering. By now extending 4G and 5G networking solutions to the customer edge, helps us to drive faster adoption of 5G in the enterprise segment. This is good news for our customers as it helps them to accelerate the returns of 5G networks investments and open up new revenue streams. The solutions and the offerings, and our continued investment in R&D will help operators and value-added resellers to offer the market-leading networking solutions to enterprises. Our scale and decades of deep customer relationships around the globe, Cradlepoint's strong portfolio and track record for innovating at the network -- networks leading edge and both bringing deep technical experience and leadership, we think, will provide a winning combination. The combination presents a compelling proposition to build significant scale as 4G and enterprise -- 5G enterprise expansion continue through this decade and into the next. Finally, let me make some brief remarks on how we intend to make all of this happen. First of all, we want to work together with Cradlepoint. We want to build on their success, their brand and business model. The company solution will continue to deliver as a subscription service through its growing list of partners, and we're focused on keeping that momentum. And for this to happen, we will continue -- Cradlepoint will operate as a stand-alone operation, fully owned by Ericsson within the Business Area Technologies and Emerging Business portfolio. This will minimize integration disturbance for Cradlepoint's current employees, customers and partners and secure that we continue to build on the market momentum with simply scaled global growth ambitions for the year ahead. Finally, I would like to say a warm welcome to all Cradlepoint employees that are now part of the Ericsson's family. We're impressed by the company, the teams and their market-leading solutions and the position they built. Cradlepoint will continue to innovate and develop new products, and provide its market-leading cloud management platform with emphasis on great customer experience. Together, we will support a joint customers and partners in accelerating the full value of cellular and 5G for enterprises. Thank you all very much.

Thank you, Åsa. By that, we are open for the Q&A. So operator, can you please open the Q&A session.

[Operator Instructions] Our first question comes from the line of Johanna Ahlqvist from SEB.

Congratulations to a great acquisition. First question maybe to you, Åsa. If you can share some details on how the process behind this acquisition was? Did you find this company? Or they -- did they come to you? And how should we look upon this. Was this one in a million acquisition? Or should we expect more of the same going forward? And maybe that's on that topic to you, Carl, I know you mentioned the net cash position, now if you exclude the pension liabilities after this acquisition, will be some SEK 27 billion. Would you consider -- is that sort of the magnitude that you consider to use for future acquisitions? Or how do you look upon that?

Thank you, Johanna. When it comes to the background and context for this acquisition, as Börje mentioned in the beginning, we have a focused strategy, focused on open up the full potential of 5G and connected world. A big part of the 5G rollout is, of course, the big enterprise opportunity. And we have -- we are proactively looking at both inorganic and organic and partnership strategies to make that happen. This is part of that focus and strategy. This is, I would say, the wireless WAN edge market is one of the segments that we've been looking into as part of the strategy, and as Cradlepoint is the clear leader, it has been an actual company to look at and engage with.

Okay. Thanks, Åsa. And Johanna, Carl here, on your second question, then. I think that what's important to say when it comes to our acquisition strategy is that we are -- it's part of our focused strategy, as such. So we will be looking at portfolio near acquisitions, but in a disciplined way, of course and we always make a make partner or buy assessment for different technologies or different angles to our business. In this case, I think this was a clear value-creating opportunity for us, propelling us into this space. In other cases, of course, it's the R&D route -- internal R&D route that is more compelling. And when it comes to available resources for further acquisitions, we have not really announced or discussed it in terms of how much money will be invested in these various parts. It's more a question for us about balancing financial resilience, of course, with creating value by investing either in our own R&D or in nonorganic. So I think that's what I can say about that, Johanna.

So we will move over to the next question. Please, operator.

Your next question comes from the line of Andrew Gardiner from Barclays.

I just had one regarding sort of the go-to-market and the competitive dynamics. You've highlighted that Cradlepoint's the global leader here and clearly has a very strong presence in the U.S. Can you sort of just give us a sense as to the split between U.S. and rest of the world in terms of its sales at the moment? And how is -- this market is clearly a bit more developed in the states. How is it in Europe and other developed markets? What's their competitive dynamics like? Are there other people out there that you would be competing with? Or is this a fairly unique solution that you're going to be offering into some of the other global regions?

So first of all, if we look at the wireless WAN market and the type of solution -- adoption of solutions that Cradlepoint offers, it's primarily today, also to world market, primarily dominated in U.S. So North America is the largest part of the global market today and that's also naturally where Cradlepoint has most of its presence of sales today. So they -- I would say they are relatively early stage in their expansion outside of the U.S. They have presence in key markets such as Australia and the U.K. And from a -- and this is really where we see a big value from our partnerships with a big opportunity that with our networks -- network and deep relationship with service providers across, one hand, into countries, we can help accelerate that international expansion. But I think your other point, the market outside of the U.S. is not as mature yet, but it's emerging, and that's why we're so excited because we think this timing is right to help drive that adoption with the market leader. And they are also the market leader in U.S. We're competing head-to-head with companies such as Cisco and Sierra. So we think we have -- with Cradlepoint, we have a very strong position to take this also outside of North America.

And just a quick follow-up, if I could. In the press release, you mentioned that you've sort of been working with them in, I don't know, whether the partnership is the right word, but you have been working with Cradlepoint since the 4G days. Can you just give us a bit of background as to what work you were doing and -- in the past?

Absolutely. So I think, first of all, and I think that's also why we see such a strong fit, not only strategically, but also when it comes to the vision and culture of the company. It's really to drive mobile solutions to basically take away the cables of fiber and replace that with cellular secure mobile connectivity. And there, you can assume from that description that we've been working with the same [ go for ] name for many, many years. So Cradlepoint has been one of the key partners to drive adoption of IoT solutions already in the 4G market. So first responders, IoT devices and payment machines that today, are connected wirelessly are typically using a Cradlepoint solution, running on LTE. Now they're also market-leading 5G. So the background for our collaboration with them has really been on opening up and drive adoption in the LTE market, just like we've done with other technology and market partners before.

Are you good with that, Andrew?

Yes, that's great.

We move to the next question please.

And the next question comes from the line of Achal Sultania from Crédit Suisse.

Two questions, please. So first, on the go-to-market strategy. Can you help us understand, like are you going to be working closely with the telco operators when you try to address this enterprise opportunity? Or is it going to be a mixed approach, whether -- where you can actually go to enterprise customers directly as well? And then secondly, on the overall size of the market, you mentioned that Cradlepoint is one of the leaders in this market. What is the size of this market, just to help us understand how fragmented this market is? And what's Cradlepoint's market share today?

Åsa?

So if we start with the first question, on the channel strategy, Cradlepoint is already today, working with, as I mentioned, managed channel partners. Among them are several of the leading service providers in the U.S. When we look at expansion outside of the U.S., the mobile operators should probably play an even more important role to open up that market. Hence, we will have a very -- we will be very focused on working closely with the mobile operators worldwide to bring Cradlepoint solutions to market with them and through them. We will also continue to scale and grow the channel partners, and grow through the channel partners that Cradlepoint already have established in the U.S.

And, I guess, the second question was about market size.

So on the market size, we have -- this is a market that is high growing. We expect it to be USD 4 billion in 2020. And today, on market shares, Cradlepoint is the leader. It's always a question how to define the market, but they have around 25% of the market. And that's the market share they have been growing consistently over the last couple of years. And with their leadership, we expect that they keep that.

Okay, operator, next question, please.

And the next question comes from the line of Jörgen Wetterberg from Nordea.

So 2, if I may. First one, and I guess it's a follow-up to Andrew's question. Really, how big a share of your current customer base does Cradlepoint cover, i.e., how much overlap is there? And how much -- what's the percentage of the remaining base? And how much room is there to grow beyond market growth really? And second one is, you mentioned that they've been great in 4G, but do you have a 5G-ready portfolio already with Cradlepoint? And a little bit on the timing from when you like the 5G network services for an operator until you can offer Cradlepoint services to the end market?

I might actually start with the latter question. So they have a very strong 4G portfolio, but they also have a 5G-ready portfolio that is already being sold in the U.S. market. So -- and I think this is one of the strengths they have. They are ahead of competition, both when it comes to the high-performing 4G segment and the 5G segment. And they are clearly even stronger positioned in all the high-value and high-performing segments. Secondly, on the overlap, I think we can say they have a very strong position in the U.S., as I mentioned. They -- there we are working with several of the same customers and partners, and that will continue. And there's still a lot of room for growth. As I mentioned, with the growth numbers, although North America is the most developed market, it's still a market that expect to double the penetration of mobile, for instance, among branches. And we will continue to be driven by the adoption of 5G and massive growth of IoT and cloud applications. So there are a lot of -- both wide spaces to grow in on North America and even more value to bring within existing customer accounts. International. The international side is very much a big open opportunity for all of us. They have a strong position, started to explore and started to sell in a few select market. But that's, I would say, 100% upsize for us, jointly to go after together with our mobile operator partners.

But percentage-wise, is it 30%, 70%, that 30% that they address of your current base? Or do you have any numbers?

I mean, it's basically -- basically, you can say they're working with 10 service provider around the world, and we have a relationship with 400.

We move on to next question. Please, operator.

And the next question comes from the line of David Mulholland from UBS.

Two questions. Just firstly, in terms of the business model, and we've kind of talked around this a little bit, but if I look at the numbers you gave, I think it was 1,500 channel partners that they have, of those only 10 are service providers. So it sounds like this has been historically more focused on serving enterprise directly. And if I look at one of the quotes on their website, they say that going forward, Cradlepoint will become Ericsson's route to enterprise. So I know you've always been very sensitive to your relationships with operators who are not trading on their toes as such as some of these areas grow that you work with them to go into it. But is it fair to say, Cradlepoint is, at least, the start of you working a little bit more directly into enterprise? And can you maybe just clarify on the sales, how much of it is actually generated through operators? And how much is through enterprise? And then I'll come back with the second question after.

I think I can start by mentioning, so Cradlepoint has a very mobile and cellular-centric business model. So it means, regardless of channel, they always generate revenues through the mobile operators. Because they bundle basically, the mobile subscription with a software subscription and they bundled service of hardware, software and support. And that means that there's always with the sale of Cradlepoint's offering, there's always a revenue stream to the service provider. In addition to that, to drive the traffic that generate additional revenue streams to the service providers and 'more demand for them in networks. So as regardless of channel, this is a win for the service providers, the win for Ericsson. Then they have a multichannel approach. And although there may be 10 of those that are -- of those 1,500 service provider, they generate a substantial part of the volume, given the coverage and their strong enterprise arm. And I think, yes, to mention another part, a lot of the large resellers are also partners to the service provider's enterprise arm today.

That's good. And then just in terms of the follow-up question and maybe one more for Börje. But in the past, when we've seen Ericsson start doing acquisitions that move a little bit further or a little bit different than what you do, I know this is probably more aligned than some of the historic acquisitions but, I guess, culturally, as you acquire a business that's been -- or has opportunity to grow, say, 20% to 30%, as you say in the press release. How do you try and maintain the culture within the organization to go and execute on that in the midst of a group that, I guess, at the group level, isn't seeing that opportunity at this point in time? How do you keep that culture of execution and drive to grow at that sales level?

Excellent question. I think, first of all, one thing that we've really been excited about when it comes to Cradlepoint is their values are very similar to Ericsson. It's very built on innovation, delivering a great customer experience. We have a lot of common -- in common. And that we also fell through the whole process with the Cradlepoint team. So I think that's one of the reasons why we feel very good about this, not only for the strategic fit, but there's a very strong return and tip of it. The other part is we have, as part of the business there, technology new business, where we have our portfolio of IoT in dedicated network, several others with a, say, immerging offerings. They all operate in a stand-alone operator model. So we always rather set up in our unit to be able to give that -- give us a independence and agility to be able to have more flexibility to build and grow the offerings and business in the best way.

And I think just to complement that also, I think the key here is the, what I will say, integrate light, either we are going to maintain Cradlepoint as a strong going concern and strong entity, continue to be headquartered in Boise, continue with their existing customer relationships and customer interface. So you don't see us integrate into our sales force and our go-to-market organization. And I think where we have struggled in the past, and it's a fair comment, is actually when we have started to integrate on the sales side because that's when you lose track of your, call it, go-to-market channel and customer interactions. And that's what we're doing very differently here.

Thanks Börje. We will continue to next question.

The next question comes from the line of Janardan Menon from Liberum.

Just on the profitability of Cradlepoint from an operating margin point of view. Clearly, it's growing very fast. Can you give us roughly a revenue range at which you would expect the company to be breakeven at the operating margin level? And within that, the answers to the previous questions clearly suggest that there is value in keeping the company separate to preserve their entrepreneurial spirit and their growth rates and things like that. But having said that, I would imagine there's a lot of overlap on core wireless technologies on 5G, et cetera, between their R&D that's going on as well as what you are clearly doing as a leader in the space. So would you be able to harvest those synergies and reduce the cost structure of Cradlepoint over coming years? Or would you rather keep it separate? And then I have a follow-up.

You want to take the first one on -- go ahead.

Yes. What I just mention on cost synergies. So it's clear, both Ericsson and Cradlepoint investing to take the leadership in 5G solutions. But I would say, though, their R&D investments are very complementary. We are focusing our investments on the 5G radiant core network and they're developing already the same base technology but for the Edge routers and software. I think though there's a lot of value, and we've seen that already through this process, of having our joint R&D teams working together to optimize the quality of service end-to-end from the 5G experience.

And Carl?

Yes. I think...

And I think it's fair to say also, so that this is actually an acquisition in order to accelerate penetration and use cases of 5G. So for us, this is not at all about getting any cost advantages in R&D. I'm sure there are -- there could possibly be, but that's actually uninteresting compared to the value we can create by speed up the introduction of new 5G use cases. So the notion here is we will leverage that collaboration in order to accelerate the 5G rollouts and 5G enterprise use cases.

Understood. And roughly, what level of revenue can you give us an idea?

Janardan, Carl, here, I can take that. So we don't expect this to be EBIT-positive or breakeven in the near term, actually, because this is a high-growth case. We will have a rapid expansion according to the plan for the next coming years. And with the characteristics that I explained before, I mean, strong underlying gross margin for sure, but also significant investment in both in R&D, sales and marketing. But what is more important, perhaps, I would say, I mean, you have -- you see a strong operating cash flow development. And this is then driven by this prepayment model, subscription model that we talked about and the growth. So operating cash flow, we expect it to turn positive in '22. And if you look a bit further down free cash flow before M&A, we'd turn positive according to our expectations here in 2023.

So your comment that it doesn't affect your 2022 targets, is that based on assumption that other businesses will do a little bit better and take this headwind?

Yes. The 2022 target is a range also. But we remain fully committed to that. And we see that the mix of our total business with the visibility we have today, justifies being -- staying with the 2022 targets completely unchanged, even with this acquisition and its impact.

Understood. And just one last question for me. Just -- can you explain how the enterprise market is trending like clearly, you and some of the other players have a more hardware-based solution where you're selling 5G solutions into enterprises already, and you've done that. And this is a very much of a cloud-based software subscription model. Do the 2 coexist? In the longer term, are we going completely to the sort of Cradlepoint model? Or is there a continuing path for the Ericsson kind of enterprise solution also in the longer term?

I think if you look at the enterprise market -- I think if you look at the enterprise market overall, having cloud-native subscription, the software-as-a-service solutions -- software-as-a-service solution subscriptions have been quite common and established for a long time now, that trend will continue. But that doesn't mean that there will not be a need for purpose-built hardware to be able to deploy that at all the places that needs to be connected. So I think that's also where we have very complementary strength from our joint hardware and software competence and capabilities. Anything you want to add, Börje?

I was just going to say that it's quite clear that the cloud-based models will increase in penetration, and that's absolutely true. But so far, you are going to need some sort of hardware, even in the longer-term to generate the radio network simply. So there are going to be, I think, a combination of those 2 for a very foreseeable future.

And the next question comes from the line of Frank Maaø from DNB.

So I have a clarification question to one of the previous questions, when Åsa talked about the market size, which I think you said was USD 4 billion in [ 2023 ] for the wider market. Could you please define the Cradlepoint's part of that market? How could you call -- what would you call that part because I think you said that they have a 50 -- sorry, a 25% market share of a smaller part of that $4 billion market?

For the $4 billion, I think -- thank you, Carl. The $4 billion is in 2024. And so --

Okay, it's in 2024. I misunderstood.

Yes. Yes. So that's 2024. Today, it's around USD 1.5 billion. And that's the broader wireless WAN market. And then to be clear, where you could say define their market is WAN router software solutions.

So then my main question was more relating to what synergies you see between the Cradlepoint Edge WAN products and your own dedicated wireless networks unit within, for instance, factory automation and other applications. Are there any [indiscernible] to these 2 businesses as a bit independent also in the medium to longer term?

I think, my first is -- to best answer that -- the big synergies is actually that jointly, we can accelerate adoption in all these segments. Because to say, realize a use case where you connect an ambulance and ambulance team, you both need to connect the ambulance. And there you have typically a Cradlepoint, rather an edge solution in the ambulance to be able to connect, that then aggregate all the devices that can be devices in the ambulance, it can be what the responders basically are wearing. So you can connect it to, say, the whole system and all the people and things around that ambulance. And that's what that driver secures. Then of course, to make sure they have connectivity, you need to have the networks, and that's what we, the service provider provides. In addition to that, if you take a solution like dedicated networks, we could actually start bundling this offering. So you get a complete solution to a factor we both have the things to connect the site locally and you can provide a local network. Same thing as global IT platform, we can provide a solution through our service providers, we can have that solution manage across all the ambulances in a country or across country. So that's how we see the synergies, more complementary and more to accelerate adoption and provide more complete solutions to the end market.

Next question comes from the line of Richard Kramer from Arete Research.

Just 2 quick ones that don't seem to be addressed. First of all, you have a partnership with Motorola Solutions. How does that fit in since it looks like Cradlepoint's customers are mostly public safety, enterprises? And I'll wait. Maybe we'll take that, and then we'll go to the second question.

So both the Cradlepoint and Ericsson are working with several partners because, obviously, we will have several type of devices and different applications. And Cradlepoint are focus on some routers edge solutions, but they may not provide all the purpose-built hardware for all types and not all devices. If you look at Motorola to provide some of those solutions and it also provides especially handset and other devices they use by first responders. So typically, when you go in and look at the devices and that you have with an ambulance or other type of first responders, so you have different devices, they need to aggregate to one system or one endpoint, and that endpoint is Cradlepoint. But obviously, they can aggregate other types of devices into that. That's one of the big value they bring. So you will always have other providers with complementary solutions out there, and Motorola is one of them and partnering with both of us.

Okay. And then maybe one for Börje. When we look back a couple of years ago, just before you came, Ericsson was talking extensively about the industry and society vertical, and that was going to be a major growth push for your -- for the company. That obviously was abandoned in the 2017 period. What were the lessons you learned about why that wasn't successful for Ericsson at the time? And how are you applying that in buying this company, which is obviously far away from Ericsson's heartland in Kista?

It's a fair question, Richard. The lessons learned from the industry and society is that we did not really have packaged solutions. And that the -- what you need to do, if you're going to enter the enterprise field, is to have industrialized package solutions for that type of use cases. That's one important part. The other one is that -- and that's why we're doing it very differently with Cradlepoint is the go-to-market, where our -- we are used to selling contract solutions to a few customers, right? And when you go to market to enterprise, it's almost the opposite. You're selling relatively standardized or industrialized solution to many customers, and that's why we need to make sure that we keep the go-to-market organization in Cradlepoint intact. And that's also something that I think we can build upon for other type of enterprise use cases going forward as well. But you will see us much more today, not compete in specific verticals, which industry and society did with kind of trying to develop vertical solutions, much more providing the horizontal connectivity, which is actually closer to geographically, maybe Boise side of it is far away from Kista, but providing horizontal solutions is kind of what is the bread and butter for Ericsson, and that's the same thing for Cradlepoint.

And the next question comes from the line of Daniel Djurberg from Handelsbanken.

Congratulations to all of you. And also, to me, a good integration strategy. Most of my questions are asked but I might ask about the gross margin factor in Cradlepoint, what you have seen, say, during the last 3 years and also if you see any potential for expansion from the 60 level towards the 70 levels? That will be the first question.

I would say, they have a very -- the underlying gross margin is really helping, and we expect that to continue to develop in a positive way, especially given the shift to 5G solutions. So we've increased penetration of 5G solutions. We also see a good mix effect of some of the mature products, perhaps going lower in gross margins, some of the new ones going higher. So we see mixed. Then as Carl mentioned, there will be short-term an effect of write-offs of intangible assets as part of the acquisition that will impact the gross margin in the first 2 years.

Yes. And also, you talked about -- I'm sorry.

Just maybe to complement a little bit on what Åsa said. I mean, Cradlepoint is -- operates in the high end space when it comes to the product, but also in premium sort of subsegment, including first responders, for example, as customers and users here. So I think that supports this gross margin development -- or gross margin level that they are -- have demonstrated for many years.

You have a second question, Daniel?

Yes it was only if -- also you talked about that this includes mostly or in many times, at least service providers in the go-to-market strategy. But still, would it be fair to guess that you have double checked this acquisition with your U.S. -- your large service provider customers in the U.S., i.e., of some kind of blessing ahead of this?

I think -- I mean, first of all, as I mentioned, the model itself provides always revenues, even if it doesn't go through service providers. And then we are very much focused now on making sure that we help the service providers that are already partners to Cradlepoint and customer of Ericsson, but they will be successful and we can jointly help them grow even faster in the market.

We're getting closer to the hour, and we'll have the time for the last question. Operator, we will now take the last question, please.

Last question comes from the line of Stefan Slowinski from Exane.

Just 2 kind of related questions. You mentioned Cradlepoint to transition to subscription. How far along are they in that process? Is there a split that you can provide in terms of the 2019 revenues? And is the -- are the hardware sales also moving to subscription? I mean, it's kind of a trend that we're seeing in the broader enterprise hardware market. And then secondly, along the same lines, is that a model that you would tend to pursue more in kind of the core service provider business, so packaging hardware, software services as a subscription rather than splitting it out as you have done in the past? Or do you see 2 different business models evolving going forward, one for enterprise and one for service provider?

I think I can comment first, on the first question. So Cradlepoint already today. So they are bundling hardware, software and services into the subscription, and that's their business model. So that model is fully established. And that also generates -- that's also, if you look at the base, they started our shift 3 years ago and now is the majority of the revenues from the billings. I think on the other questions, it's clear that this is a model that is working well on the enterprise side. We also, if you look at our global IoT platform, we sell that as as-a-service with a rev share with service providers. And we see a mix of models, I would say, in the dedicated network space. So I think there'll be more different models of business models in that trade going forward. I suggest Börje, if you want to comment on the models between operators and the enterprise segment?

We -- so far, we see -- there are some solutions package for the service providers, which are sold more as a service. Otherwise, it has rather limited traction there. So we may well see a world where we have different models to service providers and to enterprise applications. So I think it's a bit unclear how it's going to pan out on the service provider long term, but so far, it's rather limited.

So before closing the call, maybe, Börje, you want to make a closing remark?

Thanks, Peter. So in summary, this deal is an important step to deliver on our strategy of enabling our existing customers to create new revenue streams and basically allowing us to capitalize on the opportunities in the enterprise segment. Cradlepoint gives us an immediate offering of enterprise solutions, and it's highly complementary to our existing service offering, and it secures important capabilities to deliver a fully scalable and channel ready end-to-end offerings. We see very strong continued growth potential as wireless WAN increasingly penetrate the market as well as we see an opportunity for global expansion. So once again, I'm really excited to share this news today and to welcoming Cradlepoint into the Ericsson family. Thank you, everyone.

Thank you.

And have a great day.

This now concludes the conference call. Thank you all for attending. You may now disconnect your lines.