Ericsson in brief

We have made the world a smaller place by connecting people through communications technology: from telegraphy to fixed telephony to mobile. As a 5G technology leader we are making it even smaller as we move from connecting every ‘one’ to connecting every ‘thing’.

It all started in a mechanical workshop in Stockholm in 1876 where Lars Magnus Ericsson designed telephones and his wife Hilda manufactured them by winding copper wire coils.

Ericsson revolutionized fixed communications with new switching techniques. We did it again with fixed telephone digital technology, and then came mobility.

We have been a technology leader in every generation of mobile communications. When broadband was in its infancy, Ericsson was already working on the technology that would become 3G. Ericsson was working on 4G long before the smartphone became ubiquitous.

Our technology leadership has been a key industry driver towards 5G.

With 5G now a commercial reality, we continue to invest to strengthen 5G leadership and help our customers, and by association their customers, capture the full value of connectivity.

Our portfolio spans Networks, Digital Services, Managed Services, and Emerging Business and Other. It is designed to help our customers go digital, increase efficiency and find new revenue streams.

The Ericsson shares trade on Nasdaq Stockholm and the Ericsson ADSs trade on NASDAQ New York. www.ericsson.com.

Earnings

Q1 report: Digital Services’ gross margin excluding restructuring charges improved YoY, to 41.4% (–25.5%) driven by improved services margins as a result of cost reductions.

Q2 report: Managed Services’ operating margin excluding restructuring charges improved to 6.5% (–2.1%) as a result of cost reductions and customer contract reviews.

Q3 report: Networks’ operating margin excluding restructuring charges was 16.1% (11.9%) driven by cost reductions and ERS ramp-up, partly offset by increased investments in R&D.

Q4 report: Sales adjusted for comparable units and currency increased by 4% and Ericsson returned to growth for the full year 2018.

Strategy execution

Digital Services: Provisions were made in the fourth quarter 2018 related to reshaping the BSS business and is expected to set Segment Digital Services on a strong path to achieving the target of low single-digit operating margin (excluding restructuring charges) in 2020.

Managed Services: At year-end 2018, the 42 contracts identified as unprofitable or non-strategic had been addressed, resulting in an annualized profit improvement of approximately SEK 0.9 billion.

Networks: The ERS is now fully transitioned and it accounted for 93% of total radio unit deliveries in the fourth quarter and 87% for full-year 2018.

Emerging Business and Other: Ericsson has partnered with One Equity Partners to further develop Media Solutions. Ericsson will retain 49% of the shares in the company.

Key announcements

North East Asia: Ericsson to automate Cloud Execution Environment (CEE) for NTT DOC-OMO in Japan.

South East Asia, Oceania and India : Celcom signs up with Ericsson to expand and upgrade its LTE network in Malaysia.

North America: T-Mobile and Ericsson sign a USD 3.5 billion 5G agreement in US.

Europe and Latin America: Wind Tre selects Ericsson for RAN modernization in Italy.

Middle East and Africa: MTN, Ericsson and Netstar record 5G first for South Africa.

The Ericsson that closed 2018 was much more focused and slimmer; more customer-centric and efficient; faster and more agile; and financially transformed compared with the Ericsson of 12–18 months earlier.

By concentrating on our core business, increasing R&D investments and aggressively reducing costs, 2018 saw us progressing on our turnaround with improved profitability and growth. We achieved this, and increased our market share in the process, despite continued challenging market conditions with an overall market that contracted, as well as exits of contracts and businesses. As we all know, the kite lifts in headwind.

With the increased focus on our core business, we partnered with One Equity Partners to develop MediaKind, formerly Ericsson Media Solutions. We retain 49 percent of the shares in the company as we believe in the upside of this area. We will continue to develop RedBee Media as a focused media services entity.

The year also saw 5G move from the labs and trials to the market with the first commercial deployments. In addition to being an industry-changing technology, it will also be the backbone to the digitalization of society.

Customers first

Our focused strategy, launched in March 2017, starts from our customers’ needs, with relentless focus on what creates value. By executing on our strategy, we enable our customers to become more efficient, create great end-customer experiences, and find new revenue streams.

Growth

We are moving to the next stage of our focused strategy: pursuing selective, disciplined and profitable growth.

We aim to grow in our core business and in new businesses. Both are driven by our 5G and IoT capabilities and opportunities arising from technology shifts in the market. We will remain financially disciplined to safeguard our growth ambitions will not dilute our margin targets.

5G – a commercial reality

5G became a commercial reality during 2018 with commercial launches in North America. In 2019 we will see further launches enabled by already made and coming spectrum allocations.

5G will significantly reduce the cost-per-delivered-gigabyte for mobile broadband. This is the immediate compelling reason for our customers to invest as network traffic continues to grow.

As an enabler of use cases beyond mobility and into IoT, 5G will also create new growth opportunities for our customers, such as virtual reality applications, fixed wireless access or digitalization of industries and wider society. Most telecom operators will leverage their 4G networks to set up 5G connections. We can already support 5G in our installed base of Ericsson Radio System, introduced into networks in 2015, for cost-effective coverage and capacity build-outs on multiple bands.

Moreover, our new Cloud Core solutions are made to smoothly introduce dual-mode 5G Core. Service providers can leverage Ericsson orchestration solutions to efficiently and dynamically manage their networks. This provides cost-effective and fast transition to 5G.

5G is anticipated to be rolled-out faster than any previous technology generation. Our Ericsson Mobility Report predicts that 5G coverage will be available to 40 percent of the world’s population by the end of 2024, with about 1.5 billion 5G enhanced mobile broadband subscriptions, and 4.1 billion cellular IoT connections.

Meanwhile, we continue to invest in R&D to ensure we can help our customers with those opportunities.

5G standardization

Technology leadership has always been important to Ericsson. Through early and significant investments in R&D we are recognized as a leader in 5G standardization. Through the end of 2018 Ericsson has submitted the most 5G-related contributions to the key 3GPP working groups, and we have many industry firsts’ behind us.

Ericsson has been fundamental in stabilizing specifications for both non-standalone and standalone 5G so that we, together with our device partners, can now implement 3GPP-compliant and interoperable products. We continue to strongly promote open standards, by licensing our cutting-edge technology as the 5G ecosystem develops.

Growth in core and new businesses

We anticipate that the majority of our growth in the coming years will come from our core business. We believe that even small growth in this area will add significant value to the company.

This includes capitalizing on the strength of our Networks business, with the competitive Ericsson Radio System offering, as the radio access market comes back to growth.

It also includes building on our profitable Managed Services business, in which we now take the next steps through investments in artificial intelligence and automation.

In Digital Services, our top priority remains reaching profitability before growth, supported by stabilizing the top-line, continued cost reductions, efficiency improvements, critical projects reviews, and disciplined investments in a 5G-ready and cloud-native product portfolio.

In Digital Services there has been solid progress in most portfolio areas. However, the Business Support Systems (BSS) area has not shown satisfactory progress. We are now progressing to reshape the business. To speed up the restructuring, additional measures were communicated in January 2019, including provisions and restructuring charges in Q4 2018 of SEK –6.1 billion.

Disciplined growth in new areas will be built on a horizontal technology- and platforms- led approach in Emerging Business and Other, where we aim to capture new revenues through rapid and disciplined innovation building on 5G and IoT. In cases of attractive new business opportunities, we may decide to scale up investments. This is also the reason why we believe it is better to manage Emerging Business and Other to maximize the net present value of cash flows rather than setting firm financial targets.

Our growth ambitions are being supported by our own digital transformation, giving our employees the digital tools and processes to best drive customer centricity and value- adding customer engagements.

Financial targets

At our Capital Markets Day in November we announced an increase in our 2020 net sales ambition by SEK 15 billion to SEK 210–220 billion, driven mainly by an improved market outlook in Networks.

We set out our long term target of more than 12 percent operating margin to 2022¹⁾, at the latest. At this level we generate economic value as a company.

Sustainability and corporate responsibility

Sustainability is central to Ericsson’s purpose – empowering an intelligent, sustainable and connected world. We are committed to creating positive sustainability impacts and reduce risks to the company, customers and society through our technology, solutions, and the expertise of our employees.

Ericsson is integrating sustainability and corporate responsibility into our business strategy, and as such, our sustainability performance is now 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.

We have concluded the second year of our five-year carbon emission reduction target period. We are on track to reduce energy consumption in our products by 35 percent by 2022 versus the portfolio sold in 2016. To date we have seen an 8 percent reduction in relation to the 2016 baseline. This annual reduction is lower than planned as we needed to increase the share of air transport to meet the challenges of getting components in time as market demand increased rapidly during 2018. We remain committed to meeting the five-year target as other sub targets have progressed better than planned and the extensive use of air freight is not normal practice.

As part of our climate advocacy efforts, together with partners, we have launched the Exponential Climate Action Roadmap report. It outlines the global transformation required to reduce carbon emissions by half every ten years. Our technology has a critical role, as 30 percent of identified savings depend on digitalization, which will be accelerated by 5G.

Ethics and compliance

We are committed to conducting business responsibly. How we do business is as important as what kind of business we do. To consistently meet this commitment and support our employees and leaders in fulfilling their duties and responsibilities, we continuously develop our Ethics and Compliance program. Our own investigations have detected improvement areas and in 2018 we continued to focus on our internal culture, third party management, and our investigation capabilities.

As previously disclosed, since 2013 Ericsson has been voluntarily cooperating with an investigation by the US Securities and Exchange Commission and, since 2015, with an investigation by the US Department of Justice into Ericsson’s compliance with the U.S. Foreign Corrupt Practices Act. We continue to cooperate with them and are in discussions to find a resolution.

In summary

2018 was a turnaround year. We saw improvements across all business segments.

We strive to continue to execute diligently on our focused strategy with the aim of building a stronger Ericsson long-term. Strategic contracts and costs for field trials have already negatively impacted our result in 2018, and we expect to see an increased proportion in 2019 to further position us for 5G leadership. While this will weigh on near-term performance, it will strengthen our business long-term, including our ability to reach both our 2020 and 2022 financial targets.

5G commercial reality is a significant landmark for Ericsson, the industry, and for society globally. Market uncertainty remains a factor as we move into 2019. However, as a 5G leader as shown by our 5G patent contributions and our 5G commercial contracts, we take the strong momentum behind the technology with us into the year with confidence and motivation.

Börje Ekholm

President and CEO

Artificial intelligence (AI), augmented reality (AR), and blockchain are all expected to gain traction. We believe though that the main technology 2019 trends will be 5G and the Internet of Things (IoT). They are also catalysts for, and interlinked with, the other technology trends.

Data demand

Network data traffic will continue to increase rapidly. The most recent Ericsson Mobility Report (November 2018) revealed that global data traffic grew globally by almost 80% between the third quarter of 2017 and the third quarter of 2018 alone. In the report, Ericsson also predicted that 2018 global data traffic will in turn increase five-fold by the end of 2024. 5G will handle about 25% of that total traffic.

5G goes beyond mobility, and beyond the wider information and communications technology (ICT) industry, 5G has the potential to facilitate new and sustainable use cases across all sectors of business and society towards enabling a connected digital society and driving the fourth industrial revolution.

Smart cities, virtual reality, autonomous cars, industrial IoT, fiber-over-the-air, digital health. All very exciting prospects. But they will not happen without 5G.

Needs and challenges

Such impact does not come without demands and challenges, where we believe that the largest challenge is to ensure that wide-ranging and efficient 5G and IoT ecosystems – spanning technology, regulatory, security, and industry partners – are in place to deliver on the potential.

Spectrum is a big topic area to be addressed. Delivering the economic and personal benefits of 5G will see huge data increases in networks. Handling that in the best way means more spectrum is required. Additional spectrum is therefore a must for 5G and IoT to truly drive global economic growth. Network security is another big and important topic. We believe that these topics must be addressed, answered, agreed upon and potential 5G engagers reassured.

Time to act

These discussions and decisions need to be happening now. Barriers to the roll-out and smooth implementation of 5G and IoT simply need to be removed if all the potential benefits are to be realized.

The telecom industry has an important role in driving this ecosystem through thought leadership and explaining the true potential of the technology.

We believe that regulators, policy makers and governments need to play their enabling role, not least regarding 5G spectrum availability.

5G and IoT provide uniquely huge opportunities where operators for example can benefit from additional 5G-enabled industry digitalization market opportunities. This requires global dialogue, collaboration and agreement.

We have identified three key areas in which we can support our customers, the telecom operators, to leverage the full value of connectivity and enable their success.

Firstly, customers need to continuously drive efficiency, relentlessly lowering the cost of delivering traffic in the networks. 5G will also increase spectrum efficiency which will lower cost.

Secondly, customers need to go truly digital to enable faster service provisioning and faster network configuration and to make services easier to use. This will be increasingly important in attracting new customers, but it will also help them to lower their costs further.

Finally, customers need to capture new revenue streams and new opportunities made possible by emerging technologies such as

5G and IoT. The 5G technology expands the addressable market for telecom operators beyond mobile broadband business into enterprise and industrial applications. The uptake of this technology on a large scale will lay the foundation for sustainable development across all sectors of society.

Technology leadership

Technology leadership brings innovative solutions to market ahead of competition, giving our customers an advantage. At the same time, technology leadership is a key driver for cost leadership, since we use the latest technology to bring the cost down in our products. This benefits both us and our customers.

Product-led solutions

We put software and hardware at the core of our customer solutions. These are complemented by services offerings such as installation, roll-out, system integration, support and consulting.

Global scale and skill

Our global presence and our close interaction with our customers brings opportunities for us to grow with discipline, leading to further scale advantages for our company.

Our peoples’ competence at Ericsson is a key asset to work close to our customers across the world.

Based on our strategic pillars we have divided our business into four segments: 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 a software-led business providing solutions for our customers to operate, control and monetize their mobile networks.

With our Managed Services offering we operate our customers’ networks, allowing them to focus on the services they provide to their customers.

In Emerging Business and Other we explore ways to leverage connectivity to create new revenue streams for our customers, such as IoT and the fourth industrial revolution.

All segments address the same customer group, the telecom operators, and they all build their offerings and strategies on the three strategic pillars described above.

We have organized the market into five geographical market areas. The market areas are responsible for selling and delivering the competitive solutions that are developed within our segments. Staying close to our

customers is key. Over time more responsibility has been shifted to the market areas to secure that we stay close to our customers while maintaining central guidelines and governance structures to ensure price discipline.

Ericsson integrates Sustainability and corporate responsibility into the business and works to understand and manage environmental, social and economic impacts and opportunities within each segment.

During 2017 and 2018 our strategy execution plan has been focused on creating stability and improving profitability for Ericsson. This turnaround plan is showing progress and is also becoming increasingly visible in our financial performance, with an increased operating margin and a positive free cash flow excluding M&A. We can see top-line and gross margins benefiting from our decision to increase R&D investments. With this foundation etablished, we can take the next step and look for growth opportunities. Growth is important for a technology company, as it creates business opportunities and increased scale to invest in technology leadership.

Market trends supporting growth

Mobile data and cellular IoT connections are estimated to continue to grow at a high pace. Telecom operators need to invest in network upgrades to make the networks cope with this increased traffic volume. For a period our customers have had limited revenue growth, which has put a limit on capital expendi-

tures (CAPEX). Going forward, we see new opportunities for our customers to grow revenues driven by 5G in different use-cases:

Our approach to growth

We believe that investments in technology leadership will support growth in our core business – Networks, Digital Services and Managed Services – and opportunities to grow in emerging business.

In the core business, we estimate the market to grow at a compound annual rate (CAGR) between 2% and 3% between 2018

and 2022. With increased stability and profitability in the company, we are in a position to selectively increase our market share in our core business.

We are also focusing on capturing growth outside the core business since our technology can be used in new businesses.

Growth through mergers and acquisitions (M&A) will target bolt-on and portfolio-near acquisitions.

We have a focused approach to sales growth. This is built on our focused business strategy and follows these criteria:

Selective – Product-led growth aligned with our streamlined portfolio and existing customer base.

Disciplined – Financial discipline, and disciplined execution in contract-signing and through contract delivery.

Profitable – The growth must be managed for positive net present value (NPV) and must support company group financial targets.

Cost reductions

The cost-reduction program announced in 2017 was completed as planned. Continuous cost improvements will continue, in order to stay competitive and support margin improvements. This includes increased activities on our own digital transformation and end-to-end process simplifications.

Targets beyond 2020

The long-term target of having an operating margin above 12% is now set to be achieved no later than 2022. Key drivers are a 5G-driven ramp-up of our Networks business; a more efficient Digital Services business with a larger

share of software sales; growth and profitability improvements in Managed Services via artificial intelligence (AI) and automation; and finally a scaling-up of Emerging Business and Other such as IoT.

In the process to improve financial performance, all segments are critical for success and all have clear targets and focus areas supporting the Group targets for 2020 and 2022. The sum of the segments’ operating margin targets for 2020 is 10–13%, compared with >10% for the Group. For 2022 the sum of the segments’ operating margin targets is 12–14% compared with >12% for the Group.

We see opportunities for growth above the estimated market growth of 2% to 3% CAGR. Opportunities can be achieved through winning market share with a competitive product portfolio and cost structure, through growth in new businesses, and through M&A.

For free cash flow, the target is to shift from positive to strong free cash flows before M&A no later than 2022. This will be supported by continued discipline and efficiency improvements in working capital and by being strict on CAPEX.

Previous generations of mobile networks addressed consumers predominantly for voice and SMS in 2G, web browsing in 3G, and higher-speed data and video streaming in 4G. The transition from 4G to 5G will serve both consumers and multiple industries. New applications such as 4K/8K video streaming, virtual and augmented reality and emerging industrial use-cases will also require higher bandwidth, greater capacity, reliability, security, and lower latency. Equipped with these capabilities, 5G will bring new opportunities for people, society, and businesses.

What is Ericsson’s vision for 5G?

5G is a platform for innovation. Previous generations were centered around consumer and personal communications. 5G will serve consumers, enterprises and take the Internet of Things to the next level, where superior connectivity is a prerequisite. The transition to 5G also has a huge potential not only to develop energy efficient solutions, but also to help different sectors of society to reduce their environmental impact.

Why will telecom operators invest in 5G?

The initial payback for 5G to telecom operators is lower cost to address traffic growth. These cost efficiencies will be enough to cover spectrum licenses and upgrades to 5G. The upgrade to 5G will typically start by building it upon the existing 4G network, with deployment of new 5G radios especially in densely populated areas with high capacity needs in the networks. According to our economic study of enhanced mobile broadband, 5G will enable 10 times lower cost per gigabyte than current 4G technology.

On top of the cost efficiency payback, telecom operators have options to address new incremental revenue opportunities based on their market specifics. For some, fixed wireless access will be a key growth opportunity to address a new market or underserved customers. Fixed wireless access is starting in North America where 5G services already were launched in 2018, but we see it gaining momentum also in other parts of the world.

Another opportunity is massive and critical IoT. Digitalization and 5G open up material revenue opportunities for telecom operators, with manufacturing and energy-and utilities sectors representing the biggest opportunity for revenues created or enhanced by 5G.

To what extent have telecom operators made progress defining the business case for massive and critical IoT?

We see many progressive telecom operators already starting to experiment and address these opportunities, based on 4G, with a mindset on the opportunities that 5G will open up. To better understand new use-cases, support our customers and build an ecosystem, we are collaborating with leading telecom operators worldwide, more than 40 universities and technology institutes and 20 industry partners.

When will 5G be a reality?

Already in 2018 there were a few 5G commercial networks up and running and in 2019 there will be many more commercial

5G network launches. The first 5G phone is expected to be introduced to the market during 2019 and by 2020 there will be broad availability of 5G devices.

How important is spectrum for Ericsson’s customers when transission to 5G?

Spectrum is most essential for this industry and is the telecom operators most critical asset. Previous technologies were built on low-frequency bands. Now with 5G also mid-bands around 3–6 GHz and high bands, above 24 GHz will be added. Telecom operators will have to combine low, mid and high bands to give the performance that users expect, whether it’s for video delivery or for the more advanced enterprise cases.

Does operators have to invest in new equipment to launch 5G services?

5G NR radios and corresponding antennas must be deployed. However, operators can leverage the existing 4G base station sites and also the 4G core network. The 5G NR equipment can be connected to 4G core network, making it possible to launch 5G services rapidly. Most operators will start to deploy 5G NR using 4G core networks and as new use cases, with higher requirements on for example network slicing, are required they will also upgrade to a 5G core network. The 5G core network has been standardized with a service-based architecture that facilitates new service introductions. It is also defined to be the same core network for mobile and fixed services. All 5G base stations will support both network build opportunities.

Our values:

Respect, professionalism and

perseverance

Vision and purpose:

To empower an intelligent,

sustainable and connected world

To offer a great customer experience we must create a great people experience. This is key to the development and execution of our focused strategy. To achieve this, we are clear about what we provide as an organization and what we expect from our people.

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

Our philosophies

To build greater transparency and alignment about what informs some of our most critical people related decisions, we defined a set of people philosophies.

We believe that:

In 2017 we set the foundation to re-design our ways of working in support of our company transformation and, in turn, evolve our culture. As part of this, we have implemented the following in 2018.

Succession and people planning

We created a framework that focuses on the value and impact that specific positions contribute to our business results. We manage the pipeline for those positions, in order to reduce risk of vacancy and to ensure performance. This work has started in 2018 with the top layers of the organization. We will cascade this way of working in 2019.

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, is mobile, flexible, and has given us increased speed to action in a more transparent and inclusive way. We performed a global employee survey twice in 2018. The first survey in the new format was performed in May and the second in November. During the year we saw a trend of increased scores aligned with our improved company performance and an increased focus on employee experience. The response rate increased by 4 percentage points to 85% and the employee satisfaction score increased by 5 percentage points to 73% putting us on par with the industry benchmark.

Building leadership capabilities for the digital world

We have designed and launched a set of development experiences that among other things include a “Digital Leadership Boot-camp”, a “Leadership on the Go” online digital learning path, that enable different parts of the organization to develop a baseline awareness and competence to understand what is needed to lead in a digital environment.

Learning and development

We have a comprehensive digital learning portal, called Ericsson Academy, which is integrated with our Performance Management and Learning Management systems. It connects employees to over 23,000 educational experiences – some self-paced and others instructor-led that drive upskilling and re-skilling. The average learning hours in 2018 was 21.3 hours.

Offering – main components

Networks’ solutions support all radio-access technologies and offer hardware, software and related services for both radio access and transport.

The product-related services comprise design, tuning, network rollout and customer support.

Business model

The contracts are primarily based on a transactional model, where Ericsson develops, sells, licenses and delivers hardware, software and services that are purchased by customers because of their specific functionality or capability. Networks’ business also includes recurring revenue streams such as customer-support and certain software revenues.

Market

In 2018, the market that Networks addresses, the RAN market, returned to growth after three years of decline. Investments in LTE in North America were the significant driver.

2018 was also an important year for 5G. Vital steps were taken to set the 5G standard; significant 5G radio spectrum were auctioned; and major telecom operators world-wide set their plans for 5G network deployments and services. In North America the first commercial 5G telecom network was launched, and in China and Taiwan large 5G field-trials were initiated.

The RAN equipment market is estimated by Dell’Oro to grow by 2% CAGR between 2018 and 2023, and by 3% in 2019.

In 2018, we strengthened our market position as one of the largest global suppliers of radio access equipment and increased our market share to approximately 29%.

Sustainability focus

The energy-efficiency of products, and sustainable materials management based on reuse and recycling, are key areas of importance for Networks and encapsulate Ericsson’s approach to environmental sustainability. One of the major cost items for telecom operators is energy, and we invest to improve the energy performance of our

offerings and to lower the total cost of ownership for our customers. Ericsson Radio System is 5G-ready with the option of remote software installation which further contributes to reducing carbon footprint and use of materials.

Strategic priorities

The target for Networks in 2020 is to generate an operating margin of 15–17%, excluding restructuring charges, with a net sales ambition of SEK 141–145 billion. Networks’ three strategic priorities are to invest in technology and cost leadership, to expand market share selectively and to accelerate 5G with leading customers.

Investments in R&D are focused on generating more cost-efficient networks, greater network agility and improved serviceability. Our customers – the telecom operators – have limited freedom to adjust prices upwards, and in order for them to remain profitable or improve profitability thesnetworks need to be even more efficient.

Investments are also being made to improve network agility to enable our customers to address new revenue streams. The revenue opportunity will be enabled 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.

Through a competitive product portfolio and a competitive cost structure the strategy is to continue to gain market share and to seize new business opportunities where it makes business sense. Long-term, the ambition is to grow the business by expanding the Networks portfolio into areas adjacent to the RAN market, such as antennas, fixed wireless access, public safety and, converged transport and mobile backhaul.

In order to secure technology and market leadership in 5G networks, we work with leading customers. By the end of 2018 Ericsson had signed 10 5G commercial contracts with large telecom operators on several continents.

The 2022 target for Networks is an operating margin of 15%–17% excluding restructuring charges.

Offering – main components

Digital Services provides solutions consisting primarily of software and services in the areas of Digital Business Support Systems (BSS), Operational Support Systems (OSS), Cloud Communication, Cloud Core, and Cloud Infrastructure. The portfolio is focused on 5G-ready, cloud-native, automated and industrialized solutions to secure a smooth digitalization and journey towards 5G for each customer.

Business model

Ericsson develops, sells , licenses and delivers solutions, based on software and services, for specific functions or capabilities in our customers’ operations. Customer contracts are typically integration projects, combining Ericsson software and high-value services. Customer-support and software upgrades typically continue to generate recurring sales after delivery of the initial solution. Ericsson has a selective approach to large and complex customer transformation projects and intends to move to a higher proportion of recurring revenues with subscription-based software licensing. This is over time expected to change the sales-mix towards a higher portion of software content.

Market

Ongoing digitalization, together with virtualization and the introduction of 5G is driving new opportunities for telecom operators. It gives possibilities to capitalize on the investments better by programming and slicing 4G and 5G networks for specific consumer and industry needs. It also gives possibilities to automate operations and become radically more efficient, and to serve and engage with customers digitally.

We estimate our addressable market to grow by between 1% and 4% CAGR between 2018 and 2022. The growth is primarily driven by the ongoing technology shift while the market for legacy products is declining.

Sustainability focus

Ericsson focuses on utilizing the full value of connectivity and enabling telecom operators to engage with modern digital ecosystems. Critical aspects of conducting business in these ecosystems are the protection of sensitive data, and respect for the right to privacy. Ericsson aligns its business with legal requirements for privacy and is committed to ensure that privacy is designed into Ericsson’s solutions.

Strategic priorities

The top priority for Digital Services is to turn the segment around into a profitable business. Actions proceed with efficiency improvements, cost reductions and 23 of the identified 45 critical and non-strategic projects addressed. Losses in 2018 were significantly reduced and the segment is tracking towards its financial targets.

The financial target for 2020 is a low single digit positive operating margin, excluding restructuring charges, with a net sales ambition of SEK 41–43 billion. The continued turnaround is executed in four strategic areas: customers, portfolio, commercial and operational. Key activities are:

New product portfolio sales grew in 2018 and profit improved compared to 2017. Most of the losses in 2018 are in BSS, for which additional strategic measures has been announced. These measures lead to provisions and restructuring charges of SEK –6.1 billion in the fourth quarter of 2018. The new strategy will set Digital Services on a stronger path on achieving the 2020 financial targets. Another key activity for the turnaround is to address the remaining critical and non-strategic projects. The target is to address additional 25% of the projects in 2019. A strong central governance and support around the projects have been established to reduce commercial risk and dilution of margins.

The 2022 target for Digital Services is an operating margin of 10%–12% excluding restructuring charges.

Offering – main components

Our offering to telecom operators includes networks and IT managed services, Network Design and Optimization (NDO), and Application Development and Maintenance (ADM). Our main competitive advantages are a strong domain competence in telecom networks and IT technology and operations; the volume of data processed from operations and investments in automation and artificial intelligence (AI).

Managed Services provides positive customer experience and cost performance based on operations and optimization driven by automation and AI.

Business model

Networks and IT Managed Services

Managed Services operates customer networks and IT systems both in the field and remotely from our network operations centers. The contracts are typically 3–7 years, including transition, transformation and optimization. The transition phase is associated with lower profitability because it involves up-front costs when employees and expertise are transferred from the customer to Ericsson. During the transformation phase, global processes, tools and delivery models are introduced. The optimization phase focuses on increasing efficiency using industrialized solutions for automation, AI and analytics.

Managed Services contracts are frequently renewed. Furthermore, the nature of this business gives a capital turnover ratio higher than the Group average.

Market

The main drivers for Managed Services are the increasing complexity of networks and IT systems, a high demand for better end-user experience, and a continued need for telecom operators to become more efficient and reduce costs. All this can be addressed with industrialized solutions in automation and analytics. The market is expected to grow by between 2% and 4% CAGR between 2018 and 2022.

Sustainability focus

Increasing the use of automation, machine learning and artificial intelligence improves network management and contributes to improve safety and reduce negative environmental impact. Protecting customer and other sensitive data and the right to privacy are significant topics for Ericsson as for the rest of the industry, and the importance will continue to grow with the implementation of 5G. 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 paramount importance to Ericsson when carrying out installation and service.

Strategic priorities

The target is to achieve a 5–8% operating margin, excluding restructuring charges, with a net sales ambition of SEK 23–25 billion in 2020.

One important initiative in the 2018 business turnaround was the contract review process. This involved 42 contracts which were unprofitable or non-strategic. These contracts were either exited, renegotiated or transformed. The review of the 42 contracts were completed in 2017 and 2018, resulting in an annualized profit improvement of approximately SEK 0.9 billion.

Industrialization and mass-deployed automation will drive continued efficiency in the service delivery organization. Investments will be made in automation and analytics as well as in AI-driven offerings to support 5G, IoT and cloud.

Moving forward, the focus is on disciplined growth with strict financial governance.

The long-term target is to reach an operating margin of 8–10%, excluding restructuring charges, no later than 2022.

Offering – main components

The Emerging Business and Other segment consists of four businesses:

Emerging Business is the area for investments outside Ericsson’s core business. The objective is to identify new revenue sources for telecom operators and new types of businesses. Major initial investments areas are Internet of Things platform (IoT Accelerator), Connected Vehicle Platform, and edge computing through Ericsson Edge Gravity, offering a Unified Delivery Network (UDN).

Iconectiv offers software-based interconnection solutions providing number portability between operators.

MediaKind includes platforms for compression, video processing and storage, content publishing and delivery.

Red Bee Media consists of technology enabled services, where Ericsson manages the play-out platform for broadcasters and content owners.

Sustainability focus

Strong, responsible business practices such as management of sensitive data and fair competitive behavior are considered by Ericsson when building partnerships and ecosystems for the future. Opportunities from implementation of the Internet of Things and new technology innovation have significant potential for sustainability improvements in society by

reducing environmental impact, and improving productivity and safety across industries. According to Ericsson research, ICT solutions could help to reduce greenhouse gas emissions globally by up to 15% by 2030.²⁾

Strategic priorities

The target for Emerging Business and Other in 2020 is to reach a break-even operating income, excluding restructuring charges, with a net sales ambition of SEK 5–7 billion given the current portfolio and scaling of opportunities.

The key strategy is to operate the businesses in Emerging Business with a disciplined and lean startup approach, including clear financial targets and regular reviews of business performance compared to target milestones for funding approvals.

Each strategic opportunity in Emerging Business will be managed for positive Net Present Value (NPV).

The 2020 target excludes MediaKind and includes Red Bee Media. Ericsson announced its focused business strategy in March 2017. As a result, the company decided to explore strategic opportunities for MediaKind and Red Bee Media, and in January 2018 the strategic review of the media business was concluded. Ericsson is forming an independent company together with an external partner, One Equity Partners and retains 49% of the shares in MediaKind. Red Bee Media will continue to be developed as an independent and focused in-house media service business.

Market trends

Long term evolution (LTE) penetration is currently 86% in North America, which is the highest share globally. In North America, 5G commercialization is moving at a rapid pace, and the region is the first to launch commercial 5G services. On October 1, 2018 Verizon launched a 5G fixed wireless internet service in four cities and on December 21, 2018 AT&T launched a mobile 5G service in 12 cities. T-Mobile and Sprint have announced plans to launch 5G during the first half of 2019. In Canada, Rogers announced a multi-year network plan on April 16 2018 that includes working with Ericsson on its 5G network evolution and will include 5G trials in 2019.

Telecom operators increased investments in mobile equipment 2018 to meet increased data traffic in the networks and to prepare for 5G. With continued pressure on the average revenue per user (ARPU) and high mobile data growth in the networks, operators are focusing on cost efficiencies, customer experience and new revenue streams to improve their competitive position in the market.

During 2019 a decision on the pending merger of T-Mobile and Sprint is expected, and at the same time Dish, Comcast, Charter and other new entrants are expected to continue to pilot and launch wireless service offerings.

The RAN market in North America is expected to grow at a compound annual growth rate (CAGR) of approximately 3% between 2018 and 2022 (source Dell’Oro).

Key announcements 2018

Sales development 2018

Networks sales increased, primarily driven by investments in 5G readiness across all major customers. Digital Services sales increased as operators digitalize operations and improve customer experience to prepare for 5G. Managed Services sales grew, driven by higher variable sales in large customer contracts.

Market trends

The Market Area Europe and Latin America had 1.8 billion mobile subscriptions in the third quarter 2018, more than 22% of the global total. In Western Europe, LTE is the dominant access technology, accounting for 57% of all subscriptions. Western Europe is preparing for 5G, with many operators planning commercial launches during 2019, and by the end of 2024 5G is forecast to account for around 30% of all mobile subscriptions. In Latin America, LTE became the dominant radio access technology in 2018, accounting for 42% of all subscriptions, which is expected to rise to 74% in 2024.

The high level of 5G activity in the US and China is creating momentum in Europe; Ericsson has already achieved the first commercial launch in Europe in 2018 with Swiss-com. Four of Ericsson’s first ten commercial 5G contracts are in Europe where industrial-use cases are expected to play an increasingly important role from 2020. Early deployments in the region will deliver enhanced mobile broadband and fixed wireless access.

Other market conditions such as spectrum assignments, prices and license terms and deployment barriers remain challenging. Whereas North America, Japan and China have markets of substantial scale, Market area Europe and Latin America with 128 countries has unique characteristics, such as the uncoordinated timing of spectrum release, that makes larger synchronized investments in 5G more difficult to justify. In

Western Europe, new spectrum has started to be released and all initial 5G bands are projected to be available by 2022. In Latin America, Brazil, Chile, Colombia and Mexico are expected to be leaders in 5G but spectrum availability will lag behind Europe.

In Europe and Latin America, the RAN equipment market is expected to remain relatively flat in the next 4–5 years.

Key announcements 2018

Sales development 2018

The strong growth in Networks sales in Latin America and parts of Europe was partly offset by lower sales in Managed Services due to exit of non-strategic contracts.

Market trends

The Market Area Middle East and Africa comprises 70 countries and is a diverse region. The countries of the market area vary with advanced markets which have over 100% penetration in mobile broadband subscriptions and emerging markets where around 40% of mobile subscriptions are for mobile broadband. At the end of 2018, more than 20% of all mobile subscriptions in the Middle East and North Africa were for LTE, while in Sub-Saharan Africa LTE accounted just over 7% of subscriptions. The region is anticipated to evolve, and 90% of subscriptions are expected to be for mobile broadband by 2024. Driving factors behind this shift include a young and growing population with increasing digital skills, as well as more affordable smartphones.

Operators’ revenue ratios are expected to stay relatively flat or grow slightly. Regulatory challenges (e.g. spectrum policy and technology-specific licenses) still exist in several countries. Despite coverage and affordability issues, mobile broadband subscriptions have grown in recent years. A majority of subscriptions are now on 3G while 4G is expected to be the dominant technology by 2025. The race for 5G leadership in the market area is increasing, with several frontrunner operators firming up their plans for 5G launches in 2018 or early 2019. 5G-network deployments are expected to take off in larger scale in 2021. Total 5G subscriptions in the market area are expected to reach 18 million by 2024.

Key announcements 2018

Sales development 2018

Sales declined slightly. Networks sales declined due to monetary restrictions in certain markets, Digital Services declined due to timing of project milestones while Managed Services sales were flat.

Market trends

South East Asia and Oceania includes developed markets with some of the most advanced networks in the world, as well as developing economies that have only recently launched LTE. 3G is still the dominant technology, at 48% of all subscriptions. However, LTE subscriptions grew by 70% during 2018, taking a share of 26%.

In India, 2G has remained the dominant technology during 2018, accounting for around 56% of total mobile subscriptions at the end of the year. However, the country has experienced strong growth in the number of LTE subscriptions over the last couple of years, and at the end of 2018 LTE accounted for close to 30% of all mobile subscriptions.

The overall telecom market in South East Asia, Oceania and India has strong fundamentals in terms of the growth in subscriptions, smartphone penetration and data consumption. At the same time, telecom operators are challenged by intense competition and the cost of managing increased data traffic. The appetite for 5G and virtualization is growing across most markets as a means of increasing efficiency, improving customer experience and creating new revenue opportunities. However, spectrum allocation constraints mean that the majority of 5G deployments across South East Asia and India are still several years away. In addition, there continue to be LTE capacity and cover-

age opportunities for these markets. Commercial 5G deployments in Australia have already begun, whilst in Singapore, large-scale 5G trials are expected to take place in 2019.

Key announcements 2018

Sales development 2018

In 2018 sales declined, mainly due to timing of major projects in Vietnam and India. Managed Services sales grew slightly mainly due to a new contract, while sales in Digital Services remained flat.

Market trends

In Japan and Korea, LTE has long been the dominant technology, and with the massive investment in LTE in mainland China in recent years, LTE subscriptions now account for more than 80% of total subscriptions there. China alone had more than 1.3 billion LTE subscriptions at the end of 2018.

All the large telecom operators are preparing for 5G, and network deployments are expected to start in 2019.

Large field trials have started in mainland China and will continue in 2019, and deployments of 5G networks are expected to accelerate in 2020. The focus of 5G investments is expected to be on industrial applications such as smart manufacturing. In Japan, the initial focus of 5G investments will be on deploying enhanced mobile broadband and will later move to IoT connections. The main volume of 5G deployments is not expected to start until the later part of 2020, constrained by spectrum allocation and construction resources. In Korea, the government has set a vision of smart manufacturing, health and transport running on 5G networks, but the initial focus will be on enhanced mobile broadband. Larger investments by telecom operators in 5G are expected in 2020 or 2021. The 5G subscription penetration is projected to exceed 43% in 2024.

Key announcements 2018

Sales development 2018

In 2018, sales declined due to reduced operator investments in LTE whilst the telecom operators plan for 5G.

The Ericsson supply chain secures high-performing, sustainable and cost-effective deliveries of hardware products, software and services to our customers. This requires continuous global supply chain management and resource management in close collaboration with sales and product management. Ericsson’s 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 surface transportation. This also includes proactive and reactive supply chain risk management as well as securing adherence to Ericsson’s implemented global standards. As the fourth industrial revolution is emerging and maturing, our manufacturing sites and logistics operations

are there to prove business value and to ensure that 5G meets industry requirements.

We conduct supplier contract compliance audits to verify compliance with the agreements. All potential new suppliers must complete mandatory supplier self-assessments, and existing suppliers must update their self-assessment on a regular basis.

● New product introduction

Preparing the supply chain for new products and solutions. Ensuring producibility and serviceability, securing the supplier base for hardware, software and service resources and preparing the processes across the supply chain, in close collaboration with R&D.

● Planning

Planning and dimensioning the supply chain of hardware, software and service resources to meet customer demands.

● Sourcing

Sourcing involves the sourcing of hardware, software and services. Purchase orders are created and monitored to manage delivery of products and resources from external and internal sources. Ericsson responsible sourcing works to ensure that business is conducted responsibly at suppliers and partners across the supply chain n accordance with the

Ericsson Code of Conduct. Cross-functional collaboration with R&D and sales teams from an early stage of each project is required to define the right scope and terms of the supplier agreements and to onboard suppliers in a compliant manner.

● Hardware manufacturing and software delivery

Hardware manufacturing and creation of software entitlement for customers. Balancing the hardware manufacturing between Ericsson manufacturing sites and external manufacturers to secure high delivery flexibility. The software delivery flow is digitized.

● Logistics (distribution, warehousing, order management)

Logistics includes the replenishment of production plants, supply hubs and warehouses; the management of hubs and warehouses; order and contract handling; global physical

distribution; and enabling, optimizing and executing logistic services and the transportation of goods.

● Local supply

Customer contract supply chain preparation in close interaction with sales, as well as coordinating delivery of hardware products including software license activation to our customers.

● Service delivery

Provisioning of services for design, operations, optimization and after sales support of our products and solutions balancing Ericsson’s own resources and local, regional and global external resources.

● After sales

After sales includes both a warranty period and after sales support.

Dear shareholders

At Ericsson’s Annual General Meeting in March 2018 I was elected Chair of the Board. I am grateful for the trust that the shareholders have given me. My ambition is to ensure that each one of Ericsson’s employees shares my passion for creating value for our customers. We can do this best by running the company as efficiently as possible and by continuing to invest in Research & Development so as to stay at the forefront of technology. My initial priorities have been to meet with customers and employees in order to better understand the needs of customers and the culture of the company. It has been very impressive to see the strong competence and technology skills that the organization possesses and highly rewarding to be in direct dialogue with our customers.

One reason why I accepted the position of Chair was the opportunity to be involved in a company that is leading the way in driving superior technical innovation, supported by Ericsson’s profound and long-standing heritage in communications, technology and infrastructure. I am deeply convinced that the company’s unique position in 5G gives it great potential for the future.

As a Board we have continued to invest significant time in corporate governance during 2018, since this is a fundamental element in building trust. The Board is totally committed to complying with the best-practice corporate standards at the global level and to supporting a robust corporate culture founded on the three core values of respect, professionalism and perseverance. The Board will ensure that Ericsson has a robust and fit-for-purpose compliance and that the company is continuously looking for ways to strengthen and improve ethics and compliance in different areas. These include our own people and culture as well as third-party engagements, compliance and investigation capabilities and internal control capabilities.

Ericsson’s leadership in sustainability for the past 25 years is a core asset that will continue to be in focus across the company and is becoming an ever more fundamental part of the business. The work of the Board includes ensuring that business is conducted in a responsible manner that focuses on responsible sourcing, anti-corruption measures and health and safety, but also addresses environmental issues, energy efficiency and climate change and creating a positive socio-economic impact.

As part of a strong focus on accountability, succession plans and talent management, the Board encourages long-term value creation and aims to retain, motivate and attract talented collaborators with the aid of our performance-based share-related incentives.

As a Board we review the company’s strategy, financial targets and risks on a regular basis. With 2018 behind us, I can conclude that Ericsson has made great progress in executing our strategy. We are well on-course towards achieving our financial targets, including our long-term target to reach an operating margin above 12 percent ¹⁾ on a sustainable basis no later than 2022.

The Board continuously analyzes and monitors the company’s capital structure – including a careful evaluation of business plans and investments in R&D – with the ambition of retaining a strong balance sheet and a positive free cash flow. In 2018 Ericsson continued to show a positive free cash flow excluding M&A of SEK 4.3 billion. The Board of Directors will propose a dividend for 2018 of SEK 1.00 per share to the AGM, with the ambition to increase the dividend over time as the financial performance continues to improve.

In 2019 all members of the Board are looking forward to working together with Ericsson’s CEO Börje Ekholm and the full Ericsson team to ensure that the company’s focused business strategy is implemented successfully.

Ronnie Leten

Chair of the Board

Business in 2018

In 2018, sales increased by 3% driven by sales growth in Networks. Sales increased by 5% in Networks and was mainly due to increased demand for radio access network (RAN) equipment in North America and in Europe and Latin America. Sales declined in Digital services by –2% due to lower sales of legacy products. Manages Services sales declined by –3% as a result of exited non-strategic contracts.

IPR licensing revenues were SEK 8.0 (8.3) billion.

Gross margin improved to 32.3% (23.3%) supported by cost-reductions, ramp-up of Ericsson Radio System product platform and good progress in the review of low performing managed services contracts.

The cost reduction program, launched in Q2 2017, was completed as planned. Number of employees decreased by 5,376 to 95,359 mainly because of the cost reduction program. The effect from the program was visible in improved gross margin and lower SG&A expenses, mainly through lower service delivery costs and common costs.

R&D expenses increased mainly due to increased investments in Networks R&D to improve competitiveness and profitability of the product portfolio.

Operating income (loss) was SEK 1.2 (–34.7) billion including restructuring charges of SEK –8.0 (–8.5) billion. Write-down of assets, as well as provisions and adjustments related to certain customers projects had a significant negative impact on operating income in 2017.

Ericsson delivered a full-year cash flow from operating activities of SEK 9.3 (9.6) billion. Free cash flow excluding M&A amounted to SEK 4.3 (4.8) billion. Net cash at year end was SEK 35.9 (34.7) billion.

Financial highlights

Net sales

Sales increased by SEK 5.5 billion or 3% to SEK 210.8 (205.4) billion. Networks sales increased by SEK 6.3 billion (5%), Digital Services sales decreased by SEK –0.7 billion (–2%), Managed Services sales decreased by SEK –0.7 billion (–3%) and Emerging Business and Other sales increased by SEK 0.5 billion (7%).

The sales increase in Networks was mainly driven by higher demand for radio access network equipment. Networks sales growth adjusted for comparable units and currency was 3%.

The sales decrease in segment Digital Services was due to lower sales in legacy products. The sales decline in Managed Services was mainly a result of exit of low-performing and non-strategic contracts. The sales increase in segment Emerging Business and Other was driven by growth in iconectiv business due to the multi-year number portability contract in the United States.

In the geographical dimension, sales grew in North America and in Europe and Latin America.

Sales adjusted for comparable units and currency increased by 1%. The sales mix by commodity was: software 21% (21%), hardware 37% (35%) and services 42% (44%).

Gross margin

Gross margin increased to 32.3% (23.3%) with improved margins in hardware and services mainly driven by cost reductions, ramp-up of Ericsson Radio System product platform and good progress in the review of low-performing managed services contracts. A reduced share of services sales had a positive impact on gross margin. Restructuring charges included in the gross margin increased to SEK –5.9 (–5.2) billion. Costs of SEK –5.9 billion, of which SEK –3.1 billion were restructuring charges, impacted gross margin in Digital Services.

Due to technology and portfolio shifts, the company has since 2017 reduced the capitalization of development expenses and the deferral of hardware costs, which had a net impact on gross income of SEK –0.9 (–2.6) billion. Write-down of assets, as well as provisions and adjustments related to certain customer projects had a significant negative impact on gross margin in 2017.

Operating expenses

Operating expenses decreased to SEK –66.8 (–70.6) billion with SG&A expenses of SEK –27.5 (–29.0) billion, R&D expenses of SEK –38.9 (–37.9) billion and impairment losses on trade receivables of SEK –0.4 (–3.6) billion. Restructuring charges included in operating expenses were SEK –2.1 (–3.3) billion.

R&D expenses increased due to increased investments in R&D for Networks. The increase was partly offset by R&D reductions in Digital Services. Higher amortized than capitalized development expenses had a negative effect on R&D expenses of SEK –1.7 (–0.3) billion.

SG&A expenses were reduced as a result of cost reduction activities. The reduction was more than offset by higher provisions for variable compensation, increased costs related to revaluation of customer financing and increased costs for 5G trials.

Other operating income and expenses

Other operating income and expenses was SEK –0.2 (–12.1) billion. In 2017, write-down of intangible assets had a significant negative impact on other operating expenses.

Consequences of technology and portfolio shifts

Due to technology and portfolio shifts the company is reducing the capitalization of development expenses for product platforms and software releases and the deferral of hardware costs. As a consequence, higher amortization than capitalization of development expenses and higher recognition than deferral of hardware costs had a negative impact on operating income of SEK –2.6 (–2.9) billion. The amounts related to capitalized software releases were fully amortized in 2017.

Restructuring charges

Restructuring charges amounted to SEK –8.0 (–8.5) billion, which was higher than the earlier estimate of SEK –5 to –7 billion. The restructuring charges in 2018 mainly relate to the cost-reduction program announced in 2017 and costs related to revised BSS strategy. Total restructuring charges for 2019 are estimated to be SEK –3 to –5 billion.

Impact from amortization and capitalization of development expenses and from recognition and deferral of hardware costs

Operating income and margin

Operating income improved to SEK 1.2 (–34.7) billion. Higher gross margin and sales and lower operating expenses had a positive impact. Write-down of assets, as well as provisions and adjustments related to certain customer projects had a significant negative impact on operating income in 2017. Operating margin was 0.6% (–16.9%). Operating margin excluding restructuring charges of SEK –8.0 (–8.5 ) billion was 4.4% (–12.8%).

Financial net

The financial net decreased to SEK –2.7 (–1.2) billion, mainly due to increased negative effects of foreign exchange revaluation, negative currency hedge effects and reduced interest rates. The currency hedge effects, which derive from the hedge loan balance in USD, impacted financial net by SEK –0.5 (0.5) billion. The SEK weakened against the USD between December 31, 2017 (SEK/USD rate 8.20) and December 31, 2018 (SEK/USD rate 8.94).

Taxes

Taxes were SEK –4.8 (3.5) billion, negatively impacted by impairment of withholding tax assets in Sweden mainly as a result of provisions related to revised BSS strategy. In addition, non-deductible expenses, withholding tax expenses outside of Sweden and revaluation of tax assets due to a change in Swedish corporate tax rate impacted tax costs negatively.

Net income and EPS

Net income improved to SEK –6.3 (–32.4) billion driven by higher operating income partly offset by a negative financial net and increased tax costs. EPS diluted was SEK –1.98 (–9.94) and EPS (non-IFRS) was SEK 0.27 (–3.24).

Employees

The number of employees on December 31, 2018 was 95,359, a reduction of 5,376 employees compared with Dec 31, 2017.

The employee reduction was mainly in services as a consequence of the cost-reduction program. The number of R&D employees has increased by more than 1,100 in 2018.

Cash flow

Cash flow from operating activities reached SEK 9.3 (9.6) billion. Working capital efficiency has improved as a result of a strong focus on cash flow. The business growth in 2018 and high delivery and invoicing volumes towards the end of the year led to some buildup of trade receivables, to be collected in the coming periods. Inventory and trade payables also increased to meet customer demand in a growing market. The combined working capital KPI (sales outstanding days plus inventory days less payable days) improved to 89 (102) days. The ambition is to maintain working capital efficiency and thereby effectively convert income to cash. Cash outlays related to provisions were SEK –6.9 (–8.2) billion, of which cash outlays related to restructuring charges were SEK –4.1 (–5.3) billion.

Cash flow from investing activities was SEK –4.1 (–16.1) billion, impacted by investments and sale of property, plant and equipment with a net effect of SEK –3.6 (–2.9) billion and investments in M&A of SEK –1.3 (0.3) billion. In addition, product development decreased by SEK –0.9 (–1.4) billion due to reduced capitalization of product platform development following technology shifts.

Cash flow from financing activities was SEK –4.1 (5.5) billion. Dividends of SEK 3.4 (3.4) billion were paid out.

The focus on free cash flow and release of working capital, in combination with limited investing activities, resulted in free cash flow of SEK 3.0 (5.1) billion and in free cash flow excluding M&A of SEK 4.3 (4.8) billion.

Financial position

Gross cash increased to SEK 69.0 (67.7) billion and net cash increased to SEK 35.9 (34.7) billion.

Liability for post-employments benefits increased by SEK 3.7 billion mainly due to decreased discount rates and normal service costs. The Swedish defined benefit obligation (DBO) has been calculated using a discount rate based on the yields of Swedish government bonds. If the discount rate had been based on Swedish covered mortgage bonds, the liability for post-employment benefits would have been approximately SEK 9.5 billion lower as of Dec 31, 2018.

The average maturity of long-term borrowings as of Dec 31, 2018, was 3.4 years, a decrease from 4.4 years 12 months earlier.

Ericsson has an unutilized Revolving Credit Facility of USD 2.0 billion. The facility will expire in 2022.

In 2018, Ericsson signed a credit facility agreement of EUR 250 million with the Euro-pean Investment Bank (EIB). The credit facility is undrawn and will mature five years after disbursement.

Moody’s changed their outlook on Ericsson’s long-term rating from negative to stable. The rating of Ba2 was unchanged.

The capital efficiency improved during the year and the capital turnover reached 1.4 (1.2) times.

Research and development, patents and licensing

In 2018, R&D expenses amounted to SEK 38.9 (37.9) billion. The increase is mainly due to investments in Networks R&D to increase the competitiveness and profitability of the radio product portfolio. The number of R&D resources were 24,800. The number of patents continued to increase and amounted to approximately 49,000 by end of 2018.

Seasonality

The Company’s sales, income and cash flow from operations vary between quarters, and are generally lowest in the first quarter of the year and highest in the fourth quarter. This is mainly a result of the seasonal purchase patterns of network operators.

Off-balance sheet arrangements

There are currently no material off-balance sheet arrangements that have, or would be reasonably likely to have, a current or anticipated material effect on the Company’s financial condition, revenues, expenses, result of operations, liquidity, capital expenditures or capital resources.

Capital expenditures

For 2018, capital expenditure was SEK 4.0 (3.9) billion, representing 1.9% of sales. Expenditures are largely related to test sites and equipment for R&D, network operation centers and manufacturing and repair operations.

Ericsson believes that the Company’s property, plant and equipment and the facilities the Company occupies are suitable for its present needs.

Annual capital expenditures are normally around 2% of sales. This corresponds to the needs for keeping and maintaining the current capacity level. The Board of Directors reviews the Company’s investment plans and proposals.

As of December 31, 2018, no material land, buildings, machinery or equipment were pledged as collateral for outstanding indebtedness.

Business results – Segments

Networks

Networks represented 66% (64%) of net sales in 2018. The segment delivers products and services that are needed for mobile and fixed communication, several generations of radio networks and transmission networks.

Net sales

Sales increased by 5% to SEK 138.6 (132.3) billion. Sales adjusted for comparable units and currency increased by 3%. The sales increase was due to sales growth in North America and in Europe and Latin America, driven by telecom operator investments in 5G readiness and LTE networks. The Networks share of IPR licensing revenues was SEK 6.5 (6.8) billion.

Gross margin

Gross income increased to SEK 55.2 (43.4) billion and gross margin increased to 39.8% (32.8%). Gross margin increased across all areas, mainly due to improved margins in hardware and a higher share of hardware sales at the expense of services sales. The impact on gross margin of higher recognition than deferral of hardware costs was SEK –0.7 (–1.5) billion. In 2017 the gross margin was negatively impacted by provisions and customer project adjustments.

Operating income

Operating income increased to SEK 19.4 (10.5) billion due to lower restructuring charges as well as higher sales and gross margin. The increase was partly offset by increased operating expenses. Operating expenses increased mainly due to higher investments in R&D to strengthened technology leadership. Net impact from amortization and capitalization of development expenses and from recognition and deferral of hardware costs was SEK –0.3 (–1.5) billion. Restructuring charges were SEK –1.8 (–4.8) billlion. Operating margin increased to 14.0% (7.9%).

Digital Services

Digital Services represented 18% (19%) of net sales in 2018. The segment provides solutions consisting primarily of software and services in the areas of Digital Business Support Systems (BSS), Operational Support Systems (OSS), Cloud Communication, Cloud Core, and Cloud Infrastructure.

Net sales

Sales decreased by –2%. Sales in BSS declined by –11% while sales in OSS and Cloud Core grew, driven by demand for the 5G-ready portfolio. Sales adjusted for comparable units and currency decreased by –4%.

Gross margin

Gross margin increased to 21.8% (12.1%) as a result of continuous work on service delivery efficiency. Gross margin was negatively impacted by costs related to revised BSS strategy, while cost reductions had a significant positive impact. Gross margin was negatively impacted by significant write-down of assets as well as provisions and customer project adjustments in 2017.

Operating income (loss)

Operating income improved to SEK –13.9 (–27.3) billion. Full-year operating income was SEK –5.5 billion, excluding restructuring charges of SEK –5.4 billion and excluding SEK –3.0 billion for other costs related to revised BSS strategy. This is a significant improvement compared with 2017, with profit improvements across all key portfolio areas. Most of the losses in 2018 are in BSS, and additional strategic actions to materially reduce the losses already in 2019 were announced in January 2019.

Write-down of assets as well as provisions and customer project adjustments had a significant negative impact on income in 2017. Cost reductions had a significant impact on gross margin and operating expenses compared with 2017.

Managed Services

Managed Services represented 12% (13%) of net sales in 2018. The segment delivers managed services and network optimization to telecom operators. Through these offerings, customers entrust Ericsson to run the operations of their network/IT systems and optimize network performance.

Net sales

Sales decreased by –3%. Sales adjusted for comparable units and currency decreased by –5% , as a result of contract exits, partly offset by sales growth in Managed Services IT.

Gross margin

Gross margin increased to 11.2% (–5.9%) mainly as a result of customer contract reviews and efficiency measures.

Write-down of assets as well as provisions and customer project adjustments had a significant negative impact on gross margin in 2017.

Operating income

Operating income improved to SEK 1.1 (–4.1) billion due to higher gross margin.

Restructuring charges amounted to SEK –0.3 (–0.7) billion.

Emerging Business and Other

Segment Emerging Business and Other represented 4% (4%) of net sales in 2018. The segment consists of four businesses; Media Solutions, Red Bee Media, Emerging Business and iconectiv.

Net sales

Sales increased by 7%. Sales adjusted for comparable units and currency increased by 3%, driven by growth in the iconectiv business through a multi-year number portability contract in the United States. Sales in Emerging Business grew by more than 25%. Media Solutions sales declined by –14% due to lower sales in the legacy portfolio. Red Bee Media sales declined by –4% due to renegotiations and changes in scope of contracts.

Gross margin

Gross margin increased to 21.9% (17.5%). Write-down of assets had a significant negative impact on gross margin in 2017.

Operating income (loss)

Operating income (loss) improved to SEK –5.4 (–13.8) billion with significant improvements in Media Solutions and Red Bee Media business. Restructuring charges amounted to SEK –0.6 (–0.5) billion.

Cost reductions had a positive impact on Media Solutions operating income, partly offset by reduced sales and costs of SEK –0.3 billion related to the transaction with One Equity Partners. Write-down of assets had a significant negative impact on Media Solutions income in 2017.

Operational efficiencies and cost reductions had a positive impact on Red Bee Media income, while reduced sales impacted negatively. Write-down of assets had a significant negative impact on Red Bee Media income in 2017.

Losses in Emerging Business were negatively impacted by costs of SEK –0.4 billion, of which SEK –0.1 billion in restructuring charges, for resetting the Edge Gravity business and increased investments in new areas such as IoT and Emodo. The growth in iconectiv business had a positive impact on operating income.

Business results – Market areas

South East Asia, Oceania and India

Sales declined, mainly due to timing of major projects in Vietnam and India. Managed services sales grew slightly mainly due to a new contract, while sales in Digital Services remained flat.

North East Asia

Sales declined due to reduced operator investments in LTE whilst the operators plan for 5G.

North America

Networks sales increased, primarily driven by investments in 5G readiness across all major customers. Digital Services sales increased as operators digitalize operations and improve customer experience to prepare for 5G. Managed Services sales grew, driven by higher variable sales in large customer contracts.

Europe and Latin America

The strong growth in Networks sales in Latin America and parts of Europe was partly offset by lower sales in Managed Services due to exit of non-strategic contracts.

Middle East and Africa

Sales declined slightly. Networks sales declined due to monetary restrictions in certain markets, Digital Services declined due to timing of project milestones while Managed Services sales were flat.

Other¹⁾

Sales declined slightly. IPR licensing revenues amounted to SEK 8.0 (8.3) billion.

Corporate Governance

In accordance with the Annual Accounts Act and the Swedish Corporate Governance Code (the “Code”), a separate Corporate governance report, including an internal control section, has been prepared and attached to this Annual Report.

Continued compliance with the Swedish Corporate Governance Code

Ericsson is committed to complying with best-practice corporate governance standards on a global level wherever possible. For 2018, Ericsson does not report any deviations from the Code.

Business integrity

Ericsson’s Code of Business Ethics summarizes the Group’s basic policies and directives governing its relationships internally, with its stakeholders and with others. It also sets out how the Group works to secure that business activities are conducted with a strong sense of integrity.

Board of Directors

At the Annual General Meeting, held on March 28, 2018, Ronnie Leten was elected new Chair of the Board, replacing Leif Johansson, and Jon Fredrik Baksaas, Jan Carlson, Nora Denzel, Börje Ekholm, Eric A. Elzvik, Kristin S. Rinne, Helena Stjernholm and Jacob Wallenberg were re-elected members of the Board. Kurt Jofs was elected new Board member and Kristin Skogen Lund and Sukhinder Singh Cassidy left the Board. As of March 28, 2018, Torbjörn Nyman, Kjell-Åke Soting and Roger Svensson were appointed employee representatives by the unions, with Anders Ripa, Tomas Lundh and Loredana Roslund as deputies. During the fall Per Holmberg replaced Tomas Lundh as deputy.

Management

Since 2017 Börje Ekholm is the President and CEO of the Group. The President and CEO is supported by the Group management, consisting of the Executive Team. During 2018 a number of new appointments were made to the Executive Team.

Ericsson has a global management system (EGMS) to ensure that Ericsson’s business is well controlled and has the ability to fulfill the objectives of major stakeholders within established risk limits. The management system also monitors internal control and compliance with applicable laws, listing requirements and governance codes.

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 2018, 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 2019 Annual General Meeting of shareholders resolve on unchanged guidelines for remuneration to Group Management for the period up to the 2020 Annual General Meeting compared to the guidelines resolved by the 2018 Annual General Meeting.

Long-Term Variable Compensation Program 2018 (LTV 2018) 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, no Stock Purchase Plan has been implemented. Instead share-based Long-Term Variable Compensation Programs for the Executive Team have been introduced. LTV 2018 for the Executive Team was approved by the Annual General Meeting of shareholders (“AGM”) 2018. Details of LTV 2018 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 for certain types of agreements, such as for example financing agreements and certain license agreements. However, considering among other things the Company’s strong financial position, the Company believes that none of the agreements currently in effect would in and of itself entail any material consequence for Ericsson due to a change in control of the Company.

Risk management

Risks are defined in both a short-term and long-term perspective. They are related to long-term objectives as per the strategic direction as well as short-term objectives for next coming year. Risks are categorized into industry and market risks, commercial risks, operational risks and compliance risks. Ericsson’s risk management is based on the following principles, which apply universally across all business activities and risk types:

A central security unit coordinates management of certain risks, such as business interruption, information security and physical security. The Group Crisis Management Council deals with events of a serious nature.

For information on risks that could impact the fulfillment of targets and form the basis for mitigating activities, see the other sections of the Board of Directors’ report, Notes A2 “Critical accounting estimates and judgments,” F4 “Interest-bearing liabilities,” F1 “Financial risk management” and the chapter Risk factors.

Sourcing and supply

Ericsson’s hardware largely consists of electronics. For manufacturing, the Company purchases customized and standardized components and services from several global providers as well as from local and regional suppliers.

The production of electronic modules and sub-assemblies is mostly outsourced to manufacturing services companies, of which the

vast majority are in low-cost countries. Final configuration of products is largely done in-house. This consists of assembling and testing modules and integrating them into complete units. Final assembly and testing are concentrated to a few sites. Ericsson has internal production sites in Estonia, China, Brazil and special operations in Sweden.

The Company generally negotiates global supply agreements with its primary suppliers. Ericsson’s suppliers are required to comply with the requirements of Ericsson’s Code of Conduct.

In general, Ericsson has alternative supply sources and seeks to avoid single source supply situations.

Sustainability and Corporate Responsibility

Sustainability and Corporate Responsibility are central to Ericsson’s business and the Company’s commitment to the triple bottom line of responsible environmental performance and socio-economic development. Ericsson’s ambition is to be a responsible and relevant driver of positive change in society. The Company’s vision and purpose, “Empowering an intelligent, sustainable and connected world”, embodies the breadth of what Ericsson aims to do and how the Company is contributing to the sustainable development agenda outlined in the UN’s Sustainable Development Goals (SDGs). The Company has always driven its technology development with the intention to improve people’s lives and contribute to the betterment of society, as a means to provide shareholder value. Ericsson is also committed to reducing risk for the Company and its stakeholders, and minimize economic, environmental and social negative impact.

Ericsson’s approach to sustainability and corporate responsibility is integrated into its business operations and performance is regularly measured, assessed and assured.

Ericsson has prepared a Sustainability Report in accordance with the Swedish Annual Accounts Act named the Sustainability and Corporate Responsibility Report 2018, attached to this Annual Report. The Sustainability and Corporate Responsibility Report 2018 contains information regarding the development, performance, position and impact of the Ericsson Group sustainability and corporate responsibility related activities

such as human rights, anti-corruption, occupational health and safety, climate action and energy performance. The report includes identified sustainability and corporate responsibility significant topics linked to the Company’s operations, as well as a description on how Ericsson manages them and mitigates related risks. Sustainability and corporate responsibility policies and the implementation results of these policies is covered. Non-financial key performance indicators are also presented.

Inquiries from US authorities

As previously disclosed, Ericsson has been voluntarily cooperating since 2013 with an investigation by the United States Securities and Exchange Commission (SEC) and, since 2015, with an investigation by the United States Department of Justice (DOJ) into Ericsson’s compliance with the U.S. Foreign Corrupt Practices Act (FCPA). The Company has identified facts that are relevant to the investigations. These facts have been shared with the authorities by the Company. The Company continues to cooperate with the SEC and the DOJ and is engaged in discussions with them to find a resolution. While the length of these discussions cannot be determined, based on the facts that the Company has shared with the authorities, Ericsson believes that the resolution of these matters will likely result in monetary and other measures, the magnitude of which cannot be estimated currently but may be material.

Legal proceedings

In April 2018, Telefonaktiebolaget LM Ericsson, the present President and CEO and the Chief Financial Officer of Ericsson as well as three former executives were named defendants in a putative class action filed in the United States District Court for the Southern District of New York. The complaint alleges violations of United States securities laws, principally in connection with service revenues and recognition of expenses on long-term service projects. In December 2018 Ericsson filed a motion to dismiss the complaint. In January 2019, the plaintiff filed an amended complaint which Ericsson is currently evaluating.

In 2013, Ericsson filed a patent infringement lawsuit in the Delhi High Court against Indian handset company Micromax, seeking

damages and an injunction. As part of its defense, Micromax filed a complaint with the Competition Commission of India (CCI) and the CCI has decided to refer the case to the Director General’s Office for an in-depth investigation. In January 2014, the CCI opened another investigation against Ericsson based on claims made by Intex Technologies (India) Limited. Ericsson has challenged CCI’s jurisdiction in these cases before the Delhi High Court and is waiting for a final decision by the Delhi High Court. Ericsson has made numerous attempts to sign a license agreement with both Micromax and Intex on Fair, Reasonable and Non- discriminatory (FRAND) terms and Ericsson and Micromax reached a settlement agreement in January 2018 resolving the patent infringement dispute between the parties.

In 2012 and 2013, Intellectual Ventures (“IV”) filed patent infringement lawsuits in the United States District Court for the District of Delaware accusing some of Ericsson’s U.S. customers of infringing 16 U.S. Patents, seeking an injunction and monetary damages. Ericsson’s customers were successful in a number of dispositive motions before trial. This matter is currently on appeal before the Federal Circuit.

IV subsequently filed additional lawsuits in the District of Delaware accusing some of Ericsson’s U.S. customers of infringing 12 U.S. Patents, seeking monetary damages. Ericsson successfully invalidated a number of IV’s patents through inter partes review proceedings. Ericsson and its customers also were successful on a variety of dispositive motions before trial. IV appealed a number of these rulings to the Federal Circuit. One claim of one patent survived these appeals and has been remanded to the District of Delaware.

In 2017, IV filed additional lawsuits in the Eastern District of Texas accusing Ericsson and some of Ericsson’s U.S customers of infringing 10 U.S. Patents. In February 2019, a jury awarded IV damages of USD 43 million in one of those lawsuits. Ericsson disagrees with the jury’s verdict and intends to appeal. Separately, the Patent Trial and Appeal Board has instituted a review of the patents that were the subject of the February 2019 trial, following its finding that there is a reasonable likelihood that those patents are unpatentable. The next case is currently set to go to trial in May 2019.

As a result of the lawsuits filed by IV, Ericsson may be required to indemnify its customers and/or pay IV damages.

In addition to the proceedings discussed

above, the Company is, and in the future may be, involved in various other lawsuits, claims and proceedings incidental to the ordinary course of business.

Parent Company

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 4 (5) branch offices. In total, the Group has 80 (80) branch and representative offices.

Financial information

Income after financial items was SEK 5.8 (–2.0) billion. The Parent Company had no sales in 2018 or 2017 to subsidiaries, while 37% (40%) 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 securities non-current amounted to SEK 58.1 (50.3) billion.

Share information

As of December 31, 2018, 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 at year-end were Investor AB with approximately 22.53% of the votes (7.20% of the shares), AB Industrivärden with 15.14% of the votes (2.61% of the shares) and Cevian Capital with 5.38% of the votes (9.09% of the shares).

In accordance with the conditions of the Long-Term Variable Compensation Program (LTV) for Ericsson employees, 13,208,460 treasury shares were distributed to employees or sold in 2018. The quotient value of

these shares was SEK 5.00, totaling SEK 66.0 million, representing less than 1% of capital stock, and compensation received for shares sold and distributed shares amounted to SEK 131.7 million.

The holding of treasury stock at December 31, 2018 was 37,057,039 Class B shares. The quotient value of these shares is SEK 5.00, totaling SEK 185 million, representing 1.1% of capital stock, and the purchase price amounts to SEK 269.2 million.

Proposed disposition of earnings

The Board of Directors proposes that a dividend of SEK 1.00 (1.00) per share be paid to shareholders duly registered on the record date of March 29, 2019, and that the Parent Company shall retain the remaining part of non-restricted equity.

The Class B treasury shares held by the Parent Company are not entitled to receive dividend. Assuming that no treasury shares remain on the record date, the Board of Directors proposes that earnings be distributed as follows:

As a basis for its dividend proposal, the Board of Directors has made an assessment in accordance with Chapter 18, Section 4 of the Swedish Companies Act of the Parent Company’s and the Group’s need for financial resources as well as the Parent Company’s and the Group’s liquidity, financial position in other respects and long-term ability to meet their commitments. The Group reports an equity ratio of 32.7% (37.5%) and a net cash amount of SEK 35.9 (34.7) billion.

The Board of Directors has also considered the Parent Company’s result and financial position and the Group’s position in general. In this respect, the Board of Directors has taken into account known commitments that may have an impact on the financial positions of the Parent Company and its subsidiaries.

The proposed dividend does not limit the Group’s ability to make investments or raise funds, and it is the Board of Directors’ assessment that the proposed dividend is well-balanced considering the nature, scope and risks of the business activities as well as the capital requirements for the Parent Company and the Group in addition to coming years’ business plans and economic development.

Events after the reporting period

Ericsson announces change to the Executive Team

On 16 January 2019, Ericsson announced that Helena Norrman, Senior Vice President, Chief Marketing and Communications Officer and Head of Marketing and Corporate Relations, has decided to leave Ericsson to pursue opportunities outside the company. She will leave her position no later than June 30, 2019.

Ericsson completes divestment of majority stake in MediaKind

On February 1, 2019, Ericsson announced it had closed the divestment of the MediaKind business to the private equity firm One Equity Partners. One Equity Partners become majority owner, while Ericsson has 49% of the shares after the transaction on January 31, 2019.

Ericsson anticipates that the transaction will generate a positive impact on operating income in Q1 2019 that with current visibility is estimated to SEK 0.4 – 0.6 billion and will be reported in Segment Emerging Business and Other.

As of February 1, 2019, Ericsson’s 49% share of MediaKind results will be reported as share in earnings of JV and associated companies in segment Emerging Business and Other. MediaKind was in 2018 reported as part of segment Emerging Business and Other, as part of Ericsson Media Solutions.

Ericsson announces change to the Executive Team

On 12 March 2019, Ericsson announced that Rafiah Ibrahim will leave her position as Senior Vice President and Head of Market Area Middle East & Africa and will take on a role as advisor to CEO Börje Ekholm.

Ericsson’s Annual General Meeting

On 27 March 2019, Ericsson held its Annual General Meeting in Stockholm, Sweden.

Decisions at the AGM 2019 included:

Approval of Board of Directors’ fees:

Board assurance

The Board of Directors and the President declare that the consolidated financial statements have been prepared in accordance with IFRS, as issued by the IASB and adopted by the EU, and give a fair view of the Group’s financial position and results of operations. The financial statements of the Parent

Company 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

Group’s and the Parent Company’s operations, financial position and results of operations and describes material risks and uncertainties facing the Parent Company and the companies included in the Group.

Report of independent

registered public accounting firm

To the Shareholders of Telefonaktiebolaget LM Ericsson (publ)

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Telefonaktiebolaget LM Ericsson (publ) and its subsidiaries (the “Company”) as of December 31, 2018 and 2017, and the related consolidated statements of income, comprehensive income (loss), changes in equity and cash flows for each of the three years in the period ended December 31, 2018, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018 in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Change in Accounting Principles

As discussed in Note A3 to the consolidated financial statements, the Company changed the manner in which it accounts for revenues from contracts with customers and the manner in which it accounts for financial instruments in 2018.

Basis for Opinions

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment

of the effectiveness of internal control over financial reporting, included in “Management’s Report on Internal Control over Financial Reporting”. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to 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 permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers AB

Stockholm, Sweden

March 29, 2019

We have served as the Company’s auditor since at least 1993.

We have not determined the specific year which we began serving as auditor of the Company.