Telefonaktiebolaget LM Ericsson (ERIC) 20-F2019 FY Annual report (foreign)

When mobile broadband was in its infancy, Ericsson was already working on the next generation technology, 3G. Ericsson was working on 4G long before the smartphone became ubiquitous and our technology leadership has been a key industry driver towards 5G.

Now, with 5G as a commercial reality, we continue to invest to strengthen 5G leadership and we support our customers to capture the full value of connectivity for them and their customers.

Strategy execution

Networks: Byyear-end 2019, Ericsson announced 78 commercial 5G agreements with individual operators and 24 live 5G networks across the globe. Ericsson also increased investments within R&D, and reported organic growth and gross margin improvement.

Digital Services: The business momentum in the new portfolio of 5G and cloud-native products is good. Sales of the new portfolio grew by 7%, driven by customer investments in 4G and 5G. Byyear-end 2019, 75% of the critical andnon-strategic contracts identified in 2017 had been addressed.

Managed Services: R&D investments in Managed Services increased in 2019 and in the first quarter a newAI-based offering for operators, Ericsson Operations Engine, was launched.

Emerging Business and Other: In 2019, Ericsson increased its investments within IoT, a fast-growing business that addresses new opportunities created with 5G.

important to stress that we have a zero tolerance for corruption and the resolution highlights a number of shortcomings. We work hard every day to build a culture of compliance, anchored securely within the organization, to ensure that such an event will never happen again. Rebuilding our trust is a top priority. In the near term, the addition of significant resources to further strengthen our Ethics & Compliance program will negatively affect our earnings, but the long-term payoff is indisputable.

Excluding the costs related to the resolution of the investigations by the US authorities, our 2019 operating margin was 9.7%, almost achieving the target for 2020 one year ahead of plan. Proof of our strength and confidence in our future was reflected by the Board’s proposal to raise the dividend to SEK 1.50 per share.

The 5G opportunity

With a solid business foundation and our increased investments in 5G we are well positioned to benefit from an accelerated deployment of this technology. In 2019 leading telecom operators from all over the world have switched on their 5G networks and that market is growing even faster than most analysts expected. In total, we expect the global number of 5G subscriptions to reach 2.6 billion within the next six years, driven by sustained momentum and a rapidly developing 5G ecosystem. This will make it the fastest mobile technology to have ever been rolled out.

Importantly, the key individuals identified by the DOJ and SEC are no longer with the company. In total, 49 people with some form of culpable involvement in the matters reported to the DOJ and SEC have left Ericsson.

We have also strengthened the vetting of third parties and have improved screening for high-risk transaction. We take action when we find third parties who fail to live up to the standards we set to ensure ethical business practices.

We are focused onre-establishing the trust and confidence of all our stakeholders –including employees, customers, regulators, investors and the general public.

This work has made Ericsson a stronger company, but we know that there is more to be done. In fact, this work never stops. This is not just about policies and internal controls – it is about people and culture. To be a trusted partner we must ensure that everyone in the Company adheres to the highest ethical standards and principles. Ultimately, conducting business responsibly and with integrity is the only way we can drive real and positive change.

Sustainability and corporate responsibility

We have integrated sustainability and corporate responsibility into our business strategy, and our sustainability performance is reflected in the Sustainability and Corporate Responsibility report published together with this Annual Report. We continue to support the ten principles of the UN Global Compact and the UN Guiding Principles on Business and Human Rights as important elements of our commitment to responsible business.

Ericsson has been a driving force in showing how digital technology can reduce carbon

Mid-band

Mid-band frequencies are currently used for 2G, 3G and 4G services. In the new highermid-band spectrum, we are likely to see larger bandwidths (50–100 MHz). This could enable high-capacity, lower-latency networks to be used for new 5G use cases, with better wide-area and indoor coverage than what higher-band spectrum can offer.

High-band

High-band frequencies provide the quantum leap in performance promised by 5G. These new bands are typically in the 24–40 GHz range, with bandwidths in 100 MHz (or higher) blocks. Such large bandwidth enables ultra-high capacity networks with latency as low as 1 millisecond. However, these higher frequencies come with a coverage limitation compared with lower bands.

Spectrum strategy

Over time, existing spectrum used for 4G will be smoothly migrated to 5G. Functions that enable smooth spectrum migration and combinations of both bands and technologies will be crucial for the planned evolution of the network.

focused, and based on the following criteria:

Strategy built on our customers’ needs

Our mission is to enable the full value of connectivity for our customers, the telecom operators. There are three key areas in which we can support their success:

We aim to address these enterprise opportunities and continue to sell through our existing telecom operator relationships andgo-to-market models. Our ambition is to service our customers by developing competitive industrial solutions that are easy to scale, such as our global IoT platform and private networks solutions. We increased our M&A capabilities in 2019, and we see portfolio-near acquisitions as an enabler for future growth.

Our aim is to grow and create value by investing in solutions that support our customers’ new revenue streams, drive traffic to mobile networks and drive increased demand for network quality.

Driving our business through four segments and five market areas

Our business is divided into four segments. All of these segments address the same customer group, the telecom operators. The segments are Networks, Digital Services, Managed Services, and Emerging Business and Other.

In Networks we provide hardware, software and services for our customers to build and evolve their mobile networks.

Digital Services is asoftware-led business supporting our customers as they move to a cloud-native environment, providing solutions for our customers to operate, control and monetize their mobile networks.

With our Managed Services offering we operate our customers’ networks. Our AI and data driven Managed Services offering, Ericsson Operations Engine, proactively manages telecom operator networks to enhance customer experience, drive agile service creation, and optimize costs.

In Emerging Business and Other we explore how our customers can leverage connectivityin order to create new revenue streams.

While we are tracking well towards our targets for 2020 and 2022 and remain highly committed to them, our focused strategy aims at building a stronger Ericsson long-term.

The key financial target for 2022 is to reach an operating margin of 12–14% excluding restructuring charges, to be compared to the previous 2022 target of >12%. The near-term focus is to continue the financial turnaround, in order to reach an operating margin of at least 10% in 2020, excluding restructuring charges.

2019 progress

During 2019 we continued to execute on our strategy, which is visible in our financial metrics:

Strategy execution activities performed during 2019 included:

activities are other major elements to drive positive free cash flow. Our planning assumption for CAPEX including capitalized development expenses is 2% of net sales, but this can vary depending on the investments we make, and for instance in 2020, we are building a new5G-factory in Lewisville, Texas. M&A will vary depending on strategic decisions but are assumed to be around 1–2% of net sales, in line with the last few years. During 2015–2019 restructuring charges in percent of sales was on average 2.8%. In 2020 the ratio is estimated to be approximately 1% and our ambition is to maintain restructuring charges at that level going forward.

To support free cash flow generation, we apply financial discipline with priority on profitability and return on capital over growth.

Target breakdown

In the process to improve financial performance, all segments are critical for success and all have clear targets and focus areas

and making it obvious that these services bring new user experiences compared to 4G. Because the 5G ecosystem is still under development, consumers will be the initial target group, while industry and enterprise opportunities will be addressed on an‘on-demand’ basis to drive industrial innovation.

Selection criteria for cluster areas

The target areas for the 5G cluster-based deployment are selected by using floating population data, which identifies the locations of areas where many potential consumers are expected to need 5G services. The initial main targets are areas of high population or office areas with people in the 20–40 age group, as well as areas with high seasonal populations. One example of a cluster area is eSport stadiums, which provide various augmented and virtual reality services linked to watching eSports while supporting the gaming culture. Other examples include popular urban areas where local shops, cafes and restaurants are promoting digital offerings such as customer-centric discount coupons, discount promotions or events. Another selection criteria is areas with expected potential future demand forbusiness-to-business (B2B) services using 5G. Mobile game development clusters, where 5G networks withlow-latency capabilities can be used by the gaming industry, is one example.

During 2019, more than 70 cluster areas were selected to stimulate innovation and the uptake of new 5G services mainly addressed to consumers. Further cluster expansion will follow, along with the development of further5G-based,B2B-specific solutions.

SK Telecom’sgo-to-market services strategy for 5G

SK Telecom is initially targeting the enhanced mobile broadband opportunity of immersive

globally. Emerging technologies such as edge compute, zero touch, artificial intelligence and virtual and augmented reality are researched, and 6G is already being explored.

Supply chain

Our supply chain aims to secure high-performing, sustainable and cost-effective deliveries of hardware products, software and services to our customers. This requires the global supply chain management and resource management to be in constant close cooperation with sales and product management.

Our global hardware production strategy is to be close to our customers through all steps of the product life-cycle and to meet customer requirements with short lead-times and flexibility, targeting transportation by

to broaden our portfolio of antenna and filter products and brought essential competence regarding the evolution of advanced radio network products.

Investments to improve network agility will enable our customers to address new revenue streams. The revenue opportunity will open up through IoT and 4G as well as 5G technologies and our ambition is to be the first on the market to offer new features and functionalities in these areas.

In order to secure technology and market leadership in 5G networks, we work with leading customers. The strategy is to continue to gain market share and to seize new business opportunities where it makes business sense, through a competitive product portfolio and a competitive cost structure. The ambition is also to expand and adopt the portfolio to better serve adjacencies such as fixed wireless access, public safety applications, industry digitalisation and other verticals.

By the end of 2019, Ericsson had announced 78 commercial 5G agreements with individual operators, of which 24 were live networks, by the end of the year.

Sustainability focus

The energy-efficiency of products, sustainable materials management as well as circular economy such as reuse and recycling, are key areas of importance for Networks. One of the major cost items for operators is energy for network operations. Networks is investing to improve the energy performance of its offerings, to lower customers’ total cost of ownership and to reduce the carbon footprint from its products. Circular Economy is a topic with an increased focus, where Networks is focusing on reuse, refurbishment and recycling of products. During 2019, the segment launched a refurbished spare parts offering.

Strategic priorities

Top priority is to continue to increase sales of the new 5G and cloud-native portfolio while turning Digital Services into a profitable business.

During 2019 we proceeded with actions to improve efficiency and reduce cost. To date we have also addressed 35 of the 45 critical andnon-strategic contracts identified in 2017. The execution of the BSS strategy outlined in the beginning of 2019 is progressing according to plan. In 2019 losses were significantly reduced and the segment is tracking towards its financial targets.

For the long term, Ericsson works to ensure that investments in the new portfolio of 5G and cloud native products continue to strengthen the market position and equip Digital Services for profitable growth.

The new portfolio sales increased by 7% in 2019 and corresponds to approximately two thirds of total product sales.

The continued turnaround is executed in four strategic areas: customers, portfolio, commercial and operational. Key activities include:

Another key activity for the turnaround is to address (finalize, renegotiate, or both) the remaining critical projects.

Sustainability focus

Digital Services focus is on utilizing the full value of connectivity and enabling operators to engage with modern digital ecosystems. Critical aspects when engaging in these ecosystems are network security, the protection of sensitive data and right to privacy. Ericsson is committed to developing software solutions while meeting security and privacy requirements. By using the latest cloud and automation technologies, hardware resources can be utilized more efficiently.

Strategic priorities

In order to achieve the 2020 and 2022 financial targets, important priorities include:

Sustainability focus

The use of automation, machine learning and artificial intelligence improves both network optimization and management while reducing negative environmental impact and contributing to increased occupational health and safety. The ambition to strengthen energy management solutions and reduce carbon footprint is planned to be driven through a new Managed Services sustainability program.

We take an inclusive, risk-based approach to occupational health and safety that includes employees and anyone working or managing networks on our behalf. Consideration for safety and wellbeing is of crucial importance to Ericsson in all areas of our business.

The expected result for Emerging Business and Other in 2020 is an operating income loss of SEK –1.5 to –2.0 billion, excluding restructuring charges, with a net sales ambition of SEK 6–8 billion given the current portfolio and scaling of opportunities.

Emerging Business applies a disciplined and lean startup approach by conducting regular business performance reviews compared to target milestones and leading indicators for funding approvals.

Sustainability focus

New digital technologies such as 5G and IoT, can have a positive impact on climate action and we believe that Ericsson is in a unique position to drive sustainable development and influence emissions reductions in several industry sectors. As an example, the transportation industry accounts for 21% of the world’s carbon emissions. Solutions such as vehicle navigation and assisted driving systems, can reduce fuel consumption and emissions by 12%.

In Ericsson’s factory in Estonia we have implemented 5G, augmented reality, industrial IoT and machine learning, thus increasing our operational efficiency and workplace health and safety. Average fault detection time has been reduced by 15%, and factory heating costs are potentially reduced by up to 20%.

results show a common view around the most important areas outlined to the right and are listed on respective Market Area pages (pages 18–23). More information on Sustainability topics can be found on pages 142–146.

The RAN market in North America grew by 9% in 2019 and is expected by Dell’Oro to grow by 1% in 2020.

Key announcements 2019

Sales development 2019

Sales increased in 2019. Networks sales increased driven by investments in 4G and 5G across all major customers. Digital Services sales increased as operators digitalize in preparation for 5G. Managed Services sales grew, driven by strongadd-on sales in large customer contracts. Uncertainties regarding the pending operator merger betweenT-Mobile and Sprint impacted capital spend during Q4 2019.

Sustainability focus

In North America in 2019, the identified significant sustainability topics in priority order were: information security and privacy, anti-corruption, access and affordability, product energy performance and responsible management of suppliers.

Key announcements 2019

Sales development 2019

Sales decreased slightly in 2019. Growth in Europe was driven by previously announced contract wins, partly offset by renegotiation and exits oflow-performing andnon-strategic businesses. Sales in Latin America declined due to timing of large deployment projects.

Sustainability focus

In Europe and Latin America in 2019, the identified significant sustainability topics in priority order were: management of legal and regulatory environment, information security and privacy, anti-corruption, occupational health and safety and product energy performance.

Ericsson to grow slightly at 2% annually between 2019 and 2025. However, regulatory challenges (e.g. spectrum policy, SIM registration and local content requirements) still exist in several countries, hence slowing market growth.

Key announcements 2019

Sales development 2019

Sales increased in 2019 in Networks and Digital Services, driven by 4G and 5G investments in the Middle East. Managed Services sales declined due to exit ofnon-strategic contracts.

Sustainability focus

In Middle East and Africa in 2019, the identified significant sustainability topics in priority order were: anti-corruption, access and affordability, information security and privacy, critical incident risk management and product energy performance.

mean that the majority of 5G deployments across South East Asia and India are a few years away.

Key announcements 2019

Sales development 2019

Sales remained stable in 2019. Growth in Managed Services was driven byadd-on sales and by a contract that was signed in 2018. Digital Services sales decreased, due to lower legacy product sales in India.

Sustainability focus

In South East Asia, Oceania and India in 2019, the identified significant sustainability topics in priority order were: information security and privacy, anti-corruption, management of legal and regulatory environment, product energy performance and occupational health and safety.

Key announcements 2019

Sales development 2019

Sales increased in 2019. The strong Networks sales growth was driven mainly by 5G deployment in South Korea, increased business volumes in Japan and initial launch of 5G in China. 4G in China continued to decline. Digital Services sales were stable.

Sustainability focus

In North East Asia in 2019, the identified significant sustainability topics in priority order were: anti-corruption, occupational health and safety, information security and privacy, critical incident risk management and management of legal and regulatory environment.

values and our people philosophies, we have articulated an aspiration for the experience people can expect when working at Ericsson.

Our philosophies

We have defined a set of people philosophies to build greater transparency and alignment about what informs some of our most critical people related decisions, and to reinforce our commitment to compliance and the importance of demonstrating ethical and responsible business practices in everything we do.

We believe that:

and to ensure performance. This work, initiated in 2018, was cascaded during 2019, establishing a common way of working with strategic succession planning across the company.

Performance management

We have a flexible, future-focused, development-oriented and impact-based performance management framework. It supports individuals and teams to be clear on what needs to get done, how their work contributes to the company, and reinforces the importance of continuous feedback so that we can change direction when necessary to stay aligned with changing business demands.

Engagement

Our employee feedback tool, VOICE, has given us increased speed to action in a more transparent and inclusive way. Aligned with our improved company performance and an increased focus and investment in improving our employee experience, we see a clear positive trend. Both the results and response rate for our employee satisfaction survey have improved between 2018 and 2019. The Ericsson Care Framework was launched as a new holistic approach to occupational health, safety and wellbeing.

today. We aim to be a trusted partner committed to building a better future for all stakeholders. In particular, the Company is delivering solutions that help customers and other industries be more efficient by reducing their energy consumption and climate impacts. We believe that combining business and societal value is the best way to create long term value for Ericsson.

Ericsson’s strategy is based on the needs of our customers, the telecom operators, and my aim as the Chair of the Board, is that each one of Ericsson’s employees share my passion for creating value for these customers. It is very impressive to see the strong competence and technology skills that the organization possesses. The Board supports the Company’s relentless focus on improving its product portfolio and staying relevant, and we view it as essential that the Company continues to build competitive advantages through increased R&D investments. This is crucial in order to achieve both technology and cost leadership. I am happy to see that the results of these efforts were clearly reflected in a strong business momentum during the year and I believe that investing in R&D is fundamental for reaching our financial targets for 2020 and 2022 and for long-term value creation.

During 2019, Ericsson’s global 5G footprint continued to grow. The competitive 5G portfolio is reflected in the sales momentum and the improved market footprint for future business. At a global level, 5G will initially provide an opportunity for telecom operators to increase the offering to customers; however, exciting new innovations for 5G will come with new industrial and IoT applications that will leverage the speed, latency and security characteristics of 5G. This will provide many new opportunities for our customers, the telecom operators, to capture revenues.

The work of the Board also includes analyzing and monitoring the company’s capital structure with the aim of retaining a strong balance sheet and a positive free cash flow.

Business in 2019

In 2019, sales increased by 8% driven by sales growth in Networks. Sales increased by 12% in Networks with an increased demand for radio access network equipment mainly in North America and in North East Asia. Sales increased in Digital services by 5% with growth in the new product portfolio. Managed Services sales declined by –1%, mainly as a result of contract exits. A weaker Swedish krona (SEK) had a positive impact on reported sales on all segments. Sales growth adjusted for comparable units and currency was 4%.

IPR licensing revenues were SEK 9.6 (8.0) billion driven by new contracts and a stronger USD to SEK.

Gross margin improved to 37.3% (32.3%) with improved gross margins in Networks, Digital Services and Managed Services. A negative impact from strategic contracts in Networks was more than offset by improved hardware margins, operational leverage and lower restructuring charges.

Operating expenses decreased to SEK –64.2 (–66.8) billion with positive impacts from lower restructuring charges and lower negative impact from the net of capitalized and amortized development expenses. R&D expenses were stable with increased investments in Networks and Managed Services offset by reductions in Digital Services and Emerging Business and Other.

After completing a major cost reduction

Financial highlights

Net sales

Sales increased by SEK 16.4 billion or 8% to SEK 227.2 (210.8) billion. Networks sales increased by SEK 16.4 billion (12%), Digital Services sales increased by SEK 1.8 billion (5%), Managed Services sales decreased by SEK –0.2 billion (–1%) and Emerging Business and Other sales decreased by SEK –1.6 billion (–19%). Sales adjusted for comparable units and currency increased by 4%.

The sales increase in Networks was driven mainly by higher demand for radio access network equipment. Networks sales growth adjusted for comparable units and currency was 6%.

In Digital Services, growth in the new portfolio was offset by lower legacy product sales. Sales growth adjusted for comparable units and currency was –1%.

The sales decline in Managed Services was mainly a result of contract exits.

The sales decrease in segment Emerging Business and Other was due to the 51% divestment of MediaKind in February 2019. Sales growth adjusted for comparable units and currency was 14%, driven by iconectiv and IoT.

In the geographical dimension, sales-growth was driven by North America and North East Asia.

The sales mix by commodity was: software 21% (21%), hardware 38% (37%) and services 41% (42%).

Gross margin

Gross margin increased to 37.3% (32.3%) with improved margins in Networks, Digital Services and Managed Services. In Networks the negative impact from strategic contracts was offset by improved hardware margins, operational leverage and lower restructuring charges. Digital Services gross margin improved, since costs for a revised BSS strategy had a negative impact in 2018. Managed Services gross margin improved, driven by customer contract exits and efficiency measures. A reduced share of services sales and an increased share of IPR and licensing revenues had a positive impact on gross margin. Restructuring charges included in the gross margin decreased to SEK –0.3 (–5.9) billion.

Operating expenses

Operating expenses decreased to SEK –64.2 (–66.8) billion, with SG&A expenses of SEK –26.1 (–27.5) billion, R&D expenses of SEK –38.8 (–38.9) billion and impairment losses on trade receivables of SEK 0.7 (–0.4) billion. Restructuring charges included

Operating income and margin

Operating income improved to SEK 10.6 (1.2) billion driven by higher gross margin and higher sales. This improvement was partly offset by SEK –10.7 billion in costs related to the resolution of the US SEC and DOJ investigations. Operating margin was 4.6% (0.6%). Operating margin excluding the SEC and DOJ costs of SEK –10.7 billion and excluding restructuring charges of SEK –0.8 billion was 9.7%. Operating margin excluding restructuring charges of SEK –8.0 billion was 4.4% in 2018.

Financial income and expenses, net

The financial net improved to SEK –1.8 (–2.7) billion, mainly due to lower negative effects of foreign exchange revaluation, lower negative currency hedge effects and improved interest net. The currency hedge effects, which derive from the hedge loan balance in USD, impacted financial net by SEK –0.3 (–0.5) billion. The SEK weakened against the USD between December 31, 2018 (SEK/USD rate 8.94) and December 31, 2019 (SEK/USD rate 9.32).

Taxes

Taxes were SEK –6.9 (–4.8) billion impacted by the increased income. Costs of SEK –10.7 billion related to the resolution of the US SEC and DOJ investigations are handled as non tax-deductible. Excluding these costs, the 2019 tax rate was approximately 35%. The Company has implemented IFRIC 23, which requires quarterly assessments of uncertain tax positions.

Net income and EPS

Net income improved to SEK 1.8 (–6.3) billion, driven by higher operating income and an improved financial net. EPS diluted was SEK 0.67 (–1.98) and EPS(non-IFRS) was SEK 1.07 (0.27).

Employees

The number of employees was 99,417 on December 31, 2019, an increase of 4,058 employees compared with December 31, 2018. The increase derives mainly from the acquired Kathrein antenna and filter business and increased service delivery resources driven by higher sales. The increase was partly offset by the MediaKind divestment.

Cash flow

Cash flow from operating activities reached SEK 16.9 (9.3) billion mainly supported by improved income. Working capital efficiency has improved as a result of an increased focus on cash flow. Accounts receivables days of

Ericsson has an unutilized revolving credit facility of USD 2.0 billion, which will expire in 2022.

Ericsson drew on the credit facility of EUR 250 million, from the European Investment Bank (EIB), which was granted in 2018 to support R&D activities for 5G. The facility is set to mature in 2024.

Ericsson signed a new credit facility agreement of EUR 250 million with the European Investment Bank (EIB) in Q4 2019. The credit facility is undrawn.

Ericsson drew on the credit facility of USD 150 million, from the Nordic Investment Bank (NIB), which was signed in December 2019 to support investments in R&D for 5G technology. Part of the new funds, USD 98 million, replaced a credit with NIB that was set to mature in 2021, resulting in a net increase in funding of USD 52 million. The new facility is set to mature in 2025.

In July, Moody’s changed their outlook on Ericsson’s long-term rating from stable to positive. The rating of Ba2 was unchanged. In September, Standard & Poor’s changed their rating outlook on Ericsson from stable to positive. The rating BB+ remained unchanged. In 2019, Ericsson solicited Fitch for credit rating services. Fitch’s long-term rating for Ericsson isBBB- (“investment grade”) with stable outlook.

The capital turnover remained at 1.4 (1.4) times.

Research and development, patents and licensing

In 2019, R&D expenses amounted to SEK –38.8 (–38.9) billion. R&D expenses increased by SEK 2.9 billion when excluding restructuring charges of SEK –0.3 (–1.3) billion and the net effect of capitalized and amortized development expenses of SEK 0.3 (–1.7) billion. The number of R&D resources increased to 25,100 (24,800) and the number of patents continued to increase and amounted to more than 54,000 (49,000) by end of 2019.

Business results – Segments

Networks

Networks represented 68% (66%) of Group net sales in 2019. The segment solutions support all radio-access technologies and offer hardware, software and related services for both radio access and transport.

Net sales

Reported sales increased by 12% in 2019 to SEK 155.0 (138.6) billion. Sales adjusted for comparable units and currency increased by 6%. The sales increase was primarily in the US, South Korea, Italy, Germany and Saudi Arabia, driven by operator investments in LTE and 5G networks. The Networks share of IPR licensing revenues was SEK 7.9 (6.5) billion.

Gross margin

Gross income increased to SEK 64.7 (55.2) billion while gross margin increased to 41.8% (39.8%). The impact of strategic contracts was more than offset by improved hardware margins and operational leverage. Lower restructuring charges in 2019 contributed positively.

Operating income and margin

Operating income increased to SEK 24.8 (19.4) billion. Higher sales and gross margin as well as lower restructuring charges had a positive impact that was partly offset by increased operating expenses. Operating expenses increased mainly due to higher investments in R&D in line with the ambition to continue to strengthen the technology leadership.

Net impact from amortization and capitalization of development expenses and from recognition and deferral of hardware costs was SEK 1.1 (–0.3) billion. Restructuring charges were SEK –0.1 (–1.8) billion. Operating margin increased to 16.0% (14.0%).

Managed Services

Managed Services represented 11% (12%) of Group net sales in 2019. The segment provides Networks and IT Managed Services, Network Design and Optimization, and Application Development and Maintenance to operators.

Net sales

Reported sales decreased by –1%. Sales adjusted for comparable units and currency decreased by –4%, mainly as a result of customer contract exits.

Gross margin

Gross margin increased to 15.6% (11.2%). mainly as a result of efficiency measures, customer contract exits and lower restructuing charges.

Operating income and margin

Operating income increased to SEK 2.3 (1.1) billion. Operating income excluding restructuring charges improved to SEK 2.4 (1.4) billion due to a positive effect from reversal of a provision for impairment of trade receivables made in Q1 2019, of SEK 0.7 billion, and higher gross margin.

Operating margin was 6.3%, excluding restructuring charges and the positive effect from reversal of a provision for impairment of trade receivables of SEK 0.7 billion in Q1 2019.

Restructuring charges amounted to SEK 0.0 (–0.3) billion.

Business results – Market areas

North America

Sales increased in 2019. Networks sales increased driven by investments in 4G and 5G across all major customers. Digital Services sales increased as operators digitalize in preparation for 5G. Managed Services sales grew, driven by strongadd-on sales in large customer contracts.

Europe and Latin America

Sales decreased slightly in 2019. Growth in Europe was driven by previously announced contract wins, partly offset by renegotiation and exits oflow-performing andnon-strategic businesses. Sales in Latin America declined due to timing of large deployment projects.

Middle East and Africa

Sales increased in 2019 in Networks and Digital Services, driven by 4G and 5G investments in the Middle East. Managed Services sales declined due to exit ofnon-strategic contracts.

Remuneration

Remuneration to the members of the Board of Directors and to Group management, as well as the Guidelines for remuneration to Group management resolved by the Annual General Meeting 2019, are reported in note G2, “Information regarding members of the Board of Directors and the Group management.”

The Board of Directors’ proposal for guidelines for remuneration to Group management

The Board of Directors proposes that the Annual General Meeting 2020 resolve on updated guidelines for remuneration to Group management, see pages 36–40. Compared with the guidelines resolved by the Annual General Meeting 2019, the guidelines have been updated to comply with the requirements under the European Union Shareholder Rights Directive II as implemented into Swedish law.

Long-Term Variable Compensation Program 2019 (LTV 2019) for the Executive Team

The Company operated a Long-Term Variable Compensation program (LTV) up until 2017, building on a common platform of investment in, and matching of, Ericsson shares. It consisted of three separate plans: one targeting all employees, one targeting key contributors and one targeting senior managers. The program was designed to encourage long-term value creation in alignment with shareholders’ interests. Since 2017, noall-employee Stock Purchase Plan has been implemented. Instead share-based Long-Term Variable Compensation Programs for the Executive Team have been introduced. LTV 2019 for the Executive Team was approved by the Annual General Meeting 2019. Details of LTV 2019 are explained in note G3, “Share-based compensation.”

Material contracts

Material contractual obligations are outlined in note D4, “Contractual obligations.” These were primarily related to leases of office and production facilities, purchase contracts for outsourced manufacturing, R&D and IT operations as well as the purchase of components for the Company’s own manufacturing.

The Company is party to certain agreements, which include provisions that may take effect or be altered or invalidated by a change in control of the Company as a result of a public takeover offer. Such provisions are not unusual

into transactions for illegitimate purposes and, together with people under their influence, used sophisticated schemes in order to hide their wrongdoing. The resolution allows us to bring an end to the investigations conducted by the US authorities since 2013 and 2015 into Ericsson’s compliance with the US Foreign Corrupt Practices Act (FCPA).

The DOJ proceeding is a criminal enforcement action and the SEC proceeding is a civil enforcement action. The agencies resolve their investigation independently of one another using their own discretion and applying different standards of proof. As a result, the DOJ and SEC have come to different conclusions based on the same facts.

DOJ resolution

Ericsson has agreed to enter into a Deferred Prosecution Agreement (DPA) with the DOJ to resolve criminal charges relating to violation of bribery provision of the FCPA in Djibouti. The DPA also resolves criminal charges relating to violations of the accounting provisions of the FCPA in China, Djibouti, Indonesia, Kuwait, and Vietnam. In connection with the matter in Djibouti, Ericsson’s Egyptian subsidiary pled guilty to bribery. As part of the resolution Ericsson paid a fine of USD 520,650,432.

SEC resolution

Ericsson has agreed with the SEC to the entry of a judgment to resolve claims related to allegations of violations of the accounting provisions of the FCPA in China, Djibouti, Indonesia, Kuwait, Saudi Arabia and Vietnam and of the bribery provisions of the FCPA in Djibouti, China and Saudi Arabia. As part of the resolution, Ericsson paid financial sanction of USD 458,380,000, pluspre-judgement interest of USD 81,540,000.

As part of the settlement, Ericsson has agreed to engage an independent compliance monitor for a period of three years while the Company continues to undertake significant reforms to strengthen its Ethics and Compliance program.

In parallel to the investigations, the Company has since 2016, together with external expert advisors, conducted a comprehensive review of the Company’s anti-corruption program. Based on this review, Ericsson has been taking significant steps to improve its Ethics and Compliance program. Pursuant to the resolutions, Ericsson has agreed to continue enhancing its internal controls and its compliance program.

Improvements to Ericsson’s Ethics and Compliance program include:

Parent Company

Telefonaktiebolaget LM Ericsson (the Parent Company) business consists mainly of corporate management, holding company functions and internal banking activities. It also handles customer credit management, performed on a commission basis by Ericsson Credit AB.

The Parent Company has 3 (4) branch offices. In total, the Group has 77 (80) branch and representative offices.

Financial information

Income after financial items was SEK –3.1 (5.8) billion. The Parent Company had no sales in 2019 or 2018 to subsidiaries, while 35% (37%) of total purchases of goods and services were from such companies.

Major changes in the Parent Company’s financial position for the year included:

At the end of the year, gross cash: cash, cash equivalents, short-term investments, and interest-bearing securitiesnon-current amounted to SEK 56.5 (58.1) billion.

At the end of the year,non-restricted equity amounted to SEK 32.2 (40.8) billion and total equity amounted to SEK 80.4 (88.9) billion.

Share information

As of December 31, 2019, the total number of shares in issue was 3,334,151,735, of which 261,755,983 were Class A shares, each carrying one vote, and 3,072,395,752 were Class B shares, each carrying one tenth of one vote. Both classes of shares have the same rights of participation in the net assets and earnings. The largest shareholders of the Parent Company atyear-end were Investor AB with approximately 22.53% of the votes (7.2% of the shares), AB Industrivärden with 15.14% of the votes (2.61% of the shares) and Cevian Capital with 4.99% of the votes (8.43% of the shares).

In accordance with the conditions of the Long-Term Variable Compensation Program (LTV) for Ericsson employees, 17,203,792 treasury shares were distributed to employees or sold in 2019. The quotient value of

The Guidelines and the Company’s strategy and sustainable long-term interest

A successful implementation of the Company’s strategy and sustainable long-term interests requires that the Company can attract, retain and motivate the right talent and can offer them competitive remuneration. These Guidelines aim to allow the Company to offer the members of the Group Management attractive and competitive total remuneration. Variable compensation covered by these guidelines shall be awarded against specificpre-defined and measurable business targets derived from the long-term business plan approved by the Board of Directors. Targets may include financial targets at either Group, Business Area or Market Area level, strategic targets, operational targets, employee engagement targets, customer satisfaction targets, sustainability and corporate responsibility targets or other lead indicator targets.

The Company operates long-term variable compensation programs for the Group Management. These have been approved by the Annual General Meeting (“AGM”) and as a result are not covered by these Guidelines. Details of Ericsson’s current remuneration policy and how we deliver on our policy and guidelines and information on previously decided long-term variable compensation programs that have not yet become due for payment, including applicable performance criteria, can be found in the Remuneration Report and in note G2, “Information regarding members of the Board of Directors, the Group management” and note G3, “Share-based compensation” in the annual report 2019.

Governance of remuneration to Group Management

The Board has established a Remuneration Committee (the “Committee”) to handle compensation policies and principles and matters concerning remuneration to Group Management. The Board has authorized the Committee to determine and handle certain issues in specific areas. The Board may also on occasion provide extended authorization for the Committee to determine specific matters.

The Committee is authorized to review and prepare for resolution by the Board salary and other remuneration for the President and CEO. Further, the Committee shall prepare for resolution by the Board proposals to the AGM on Guidelines for Remuneration to Group Management at least every fourth year and on LTV and similar equity arrangements.

The Committee has the mandate to resolve salary and other remuneration for the other members of Group Management except for the President and CEO, including targets for short-term variable compensation (“STV”), and payout of STV based on achievements and performance.

There is clear alignment in the remuneration components for the members of Group Management and the Company’s employees in the way that remuneration policy is applied as well as the methods followed in determining fixed salaries, short-term and long-term variable compensation, pension and benefits, which are to be applied broadly and consistently throughout the Company. The targets under short-term variable compensation are similar and the performance measures under long-term variable compensation program are the same for the members of Group Management and other eligible employees of the Company. However, the proportion of pay that is linked to performance is typically higher for Group Management in line with market practice.

Employment contracts and termination of employment

The members of Group Management are employed on permanent rolling contracts. The maximum mutual notice period is no more than 12 months. In case of termination by the employee, the employee has no right to severance pay.

In any case, the fixed salary paid during the notice period plus any severance pay payable will not together exceed an amount equivalent to the individual’s 24 months fixed salary.

The employee may be entitled to severance pay up until the agreed retirement age or, if a retirement age has not been agreed, until the month when the employee turns 65. In a case where the employee is entitled to severance pay from a date later than 12 months prior to retirement, the severance pay shall be reduced in proportion to the time remaining and calculated only for the time as of the date when the employee’s employment ceases (i.e. the end of the period of notice) and until the time of retirement.

Severance pay shall be reduced by 50% of the remuneration or equivalent compensation the employee receives, or has become entitled to, from any other employer or from his/her own or other activities during the period that severance is paid to the employee by the Company.

The Company shall have the right to terminate the employment contract and dismiss the employee with immediate effect, without giving any advance notice and entitlement to severance pay, if the employee commits a serious breach of his/her obligations towards the Company.

Normally disputes regarding employment agreements or any other agreements concerning the employment of the members of Group Management, the way such agreements have been arrived at, interpreted or applied, as well

temporarily deviate from these Guidelines in whole or in part based on its full discretion in unusual circumstances such as:

Sol IP settlement

Ericsson has after theyear-end 2019 resolved the previously communicated litigation with Sol IP, concerning alleged infringement of 20 patents declared to the LTE standard. The patents originated from Electronics and Telecommunications Research Institute (ETRI), a Korean government-funded research institution. The settlement resolves the litigation with Sol IP and involves a patent license agreement between Ericsson, Sol IP and ETRI. The settlement will have a negative impact for 2020 of approximately USD 13

have been prepared in accordance with generally accepted accounting principles in Sweden and give a fair view of the Parent Company’s financial position and results of operations. The Board of Directors’ Report for the Ericsson Group and the Parent Company provides a fair view of the development of the

be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included a combination of testing of internal controls over the revenue and receivable cycle including procedures relating to business case reviews performed by the company’s central board for complex deals, analytical procedures and detailed tests of price allocation between performance obligations relating to major new contracts. Our audit also included detailed tests of proof of delivery to confirm that control had been transferred to the customer as well as data analytics relating to revenue related manual journal entries.

Impairment of goodwill and deferred tax assets

Goodwill and deferred tax assets are significant to the consolidated accounts and are sensitive to impairment. Goodwill is SEK 31 billion as of December 31, 2019. In the impairment test, management used future cash flow based on five years business plans and includes several key assumptions, including projected cash flows, future market conditions and discount rates. Should the discount rate be increased from 8.1 % to 11.0% the head room is still positive in all segments including Digital Services. A stress test has been performed and presented in Note C1 –Intangible assets. Ericsson has recognized deferred tax assets of SEK 7 billion as of December 31, 2019 mainly related to Sweden with indefinite periods of utilization. Additionally refer to the Annual Report Note A2 – Critical accounting estimates and judgement and Note H1 – Taxes.

The principal considerations for our determination that performing procedures relating to the impairment of goodwill and deferred tax assets is a critical audit matter are that under IFRS, Goodwill requires annual impairment tests which involve management’s judgment and estimates such as projected cash flows, future market conditions and discount rates. All of these are subject to judgement and subjectivity and might be affected by the current turbulence in the global economy. The value of the deferred taxes is based on management’s estimation of future taxable profits in Sweden. If the assumptions are not fulfilled goodwill and deferred tax assets may not be utilized which could lead to assets impairments. This in turn led to a high degree of auditor judgment, and effort in performing procedures and in evaluating audit evidence relating to management’s projected cash flows, future market conditions and discount rates for goodwill and management’s estimation of future taxable profits in Sweden for deferred tax assets. The audit effort involved the use of professionals with specialized skill and knowledge to assist in evaluating the audit evidence obtained from these procedures.