We have connected people through the evolution of communications technology. It started with telegraphy on to fixed telephony and mobile. As a 5G technology leader we are now not only connecting every “one”, but also 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.

We have been a technology leader in every generation of mobile communications.

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

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

Our portfolio spans Networks, Digital Services, Managed Services, and Emerging Business and Other. The portfolio is designed to help our customers go digital and increase efficiency in an intelligent and sustainable way, while finding 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: Ericsson reported underlying operating margin improvement in all segments YoY. Segment Managed Services’ gross margin excluding restructuring charges improved to 17.7% (9.1%) YoY, supported by efficiency gains and customer contract reviews.

Q2 report: Ericsson grew by 7% YoY adjusted for comparable units and currency. Segment Networks’ operating margin excluding restructuring charges improved to 15.0% (13.3%) as a result of higher sales and gross margin.

Q3 report: Ericsson delivered 11.4% (7.0%) operating margin excluding restructuring charges and items affecting comparability.¹⁾ Segment Digital Services’ operating margin significantly improved YoY with stronger gross margin and growth in the new portfolio of 19% rolling 12 months.

Q4 report: Ericsson reported growth for the sixth consecutive quarter adjusted for comparable units and currency. Gross margin excluding restructuring charges improved to 37.1% (32.0%) YoY, mainly driven by improvements in Digital Services. The board will propose a dividend for 2019 of SEK 1.50 (1.00) per share to the AGM.

Strategy execution

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

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

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

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

Key announcements

In 2019 we have seen 5G grow faster than expected, there is an unprecedented demand for consumer applications and 5G will be the platform for connectivity in the enterprise space. Our focused business strategy, built on increased R&D for technology leadership, allowed us to double down on our 5G investments and this has created a solid foundation for growth. We closed out the year in a clear leading position with 78 contracts and 24 live 5G networks across 4 continents.

Over the last three years, we have executed on our focused strategy. With the turnaround phase behind us, we now see our topline growing and margins improving. This, in combination with improved working capital efficiency, has generated a solid cash flow. In short, we have a healthy business and can now take the next steps to identify profitable growth opportunities.

With increased R&D we now have a competitive portfolio which is driving improved gross margin and in addition, we have recorded several important commercial agreements that strengthen our future business.

During 2019, we adjusted our sales ambition for 2020 up by SEK 20 billion to SEK 230–240 billion. Our operating margin target for 2020 remains at more than 10% and we have crystallized the 2022 operating margin target as a range of 12–14%.

M&A activity will continue to be an important part of our growth strategy, where we see potential value creating portfolio-near acquisitions as enablers for future growth. In 2019, we acquired Kathrein’s antenna and filter business to expand our portfolio and bring vital competence into the Company.

Over the past several years, we have worked to resolve many difficult issues, including turning around our challenged contracts and resolving our settlement with the US authorities. With the resolution with the US Department of Justice (DOJ) and the US Securities and Exchange Commission (SEC), we have brought closure to the long- standing investigations into our past conduct. It is

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

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

The 5G opportunity

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

Our research shows that consumers have a high interest in the new 5G-enabled services and a willingness to pay for them.

We also expect data usage to increase rapidly. In South Korea, where commercial 5G services were launched in early 2019, 5G subscribers on unlimited data plans consume on average 30 percent more data than that of 4G subscribers on similar plans.

But 5G is much more than enhanced mobility for consumers. This is an innovation platform so powerful that it will be the driving force behind the next big shift in society – the fourth industrial revolution. By 2025, we expect the number of cellular IoT connections to reach 5 billion. This shift will impact all sectors, potentially increasing the addressable opportunity for telecom operators by up to 30% by 2030.

We are increasing our investments in IoT and advanced connectivity solutions that will allow us to capture this growing market. We already see very strong demand for these solutions.

Technology leadership

Over more than three decades, we have invested tens of billions of dollars in all generations of mobile technology, and with 5G we are laying the foundation for a new era of connectivity. Our 5G platform is commercially live with 24 customers on four continents and our focus continues to be on performance.

Thanks to our early and significant investment in R&D, Ericsson has the world’s leading patent portfolio in cellular technology, with

more than 54,000 granted patents and over 100 signed licensing agreements. When an independent law firm reviewed the 5G patents which are declared as potentially standard-essential, they found Ericsson to have a leading share of relevant patents. Another way to look at 5G leadership is that we have the most devices certified to work on our equipment. To put it simply, from technology leadership to performance in the field, there is no one ahead of us in 5G.

Doing business the right way

It is my strong belief that a culture of integrity, responsibility, transparency and accountability is what ultimately counts in determining a company’s long-term success. Unfortunately, the commitment to our values and to upholding our Code of Business Ethics has in the past been inconsistent.

We must acknowledge that we have not always met the high standards that we set for ourselves for doing business the right way. The settlement with the DOJ and SEC is evidence of that.

The resolution allows us to bring an end to the investigations conducted by the US authorities since 2013 and 2015 into Ericsson’s compliance with the US Foreign Corrupt Practices Act (FCPA). We can do nothing about yesterday, very little about today, but we can fundamentally change tomorrow. We are working hard to be a better company, today and in the future, to ensure that this doesn’t happen again.

Over the past several years we have significantly increased resources devoted to compliance and investigations. We have introduced vetting of Executive Team members and staff in over 150 key positions.

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

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

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

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

Sustainability and corporate responsibility

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

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

emissions by 15% in sectors like manufacturing and transport by 2030. We are one of a handful of companies that has set Science Based Targets committed to support limiting global temperature rise to 1.5°C, to further demonstrate our leading position we have made an additional commitment to become carbon neutral by 2030.

In summary

We are empowering an intelligent, sustainable and connected world by relentlessly innovating technologies that are easy to adopt, use and scale. We have already connected billions of people, and our solutions are helping to solve some of the planet’s biggest challenges. Through our people, solutions and technology leadership we will continue to drive real, positive change in society.

We are stronger today. We have returned to profitability, have a solid core business and are growing. Our focused strategy remains in place, with the prime focus on telecom operators, and we are continuing our work to bolster ethics and compliance across the Company and build a culture defined by integrity, responsibility, transparency and accountability. We know that conducting our business the right way is the only way to be successful for another 100 or more years.

A company’s performance is all about people. Therefore, I want to especially thank all my colleagues at Ericsson for turning around the company. You have done a tremendous job in 2019. You rock!

Börje Ekholm

President and CEO

For every new generation of mobile technology, new radio frequency bands have been allocated to enable the commercial launch of the new technology, while maintaining previous generations in operation. With the rapid uptake of 5G expected to continue, operators will need more spectrum, not least to achieve the full benefits of 5G, such as ultra-high peak data-rates and low latency in the millimeter wavelengths. By 2025, Ericsson forecasts 2.6 billion 5G subscriptions globally, accounting for 29 percent of all mobile subscriptions at that time.

Different spectrum for different needs

Each spectrum band has different physical properties, meaning that there are tradeoffs between capacity, coverage and latency as well as reliability and spectral efficiency. When planning 5G deployments, operators need to take these trade-offs into consideration to match their own service focus, whether this is enhanced mobile broadband, massive IoT, critical IoT or Fixed Wireless Access.

Low-band

The low-band frequencies have historically been used for 2G, 3G and 4G networks for voice and mobile broadband services as well as for TV broadcasting. For a typical 5G mobile broadband use case, capacity and latency are similar to 4G on the same band.

Mid-band

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

High-band

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

Spectrum strategy

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

There are likely to be several combinations of bands and technologies for 5G over the coming years, as traffic increases and markets mature. This will enable devices to be connected to both 4G and 5G simultaneously. Utilizing spectrum in combination with new bands will enable operators to serve a wider variety of use cases more efficiently and, in many cases, more quickly.

Challenges in Europe

Compared with the introduction of 4G, larger quantities of new radio spectrum have been allocated for 5G. In the US the Federal Communications Commission has freed up vast amounts of bandwidth for 5G in underused high-band spectrum. Although EU lawmakers have agreed to open up the 3.6 and 26 GHz bands by 2020, about half of all European countries have not yet licensed spectrum for 5G. European countries will thus lag behind countries like the US, Japan, Korea, Australia, and China. Several European countries and their society, industries and consumers will not be able to use 5G to its full extent until several years after the early 5G countries.

Building a stronger Ericsson long term

The execution of our focused strategy is visible in our financial performance, which shows organic growth, increased operating margin and a positive free cash flow. While we are committed to our targets for 2020 and 2022 and are tracking towards them, our focused strategy aims at building a stronger Ericsson long term, beyond 2022, with continued sales growth and improved returns.

Our strategy to increase R&D investments for technology and cost leadership has been successful, giving us a competitive advantage as telecom operators accelerate their 5G investments. We believe that our position and the current market dynamics present a unique opportunity for us to grow our market share. We aim to address long-term opportunities that present clear advantages of scale and new, profitable revenue streams.

Our ambition is to grow faster than the market, but our approach to sales growth is

focused, and based on the following criteria:

Strategy built on our customers’ needs

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

The strategy stands on a foundation of four pillars

Technology leadership

Investments in R&D and technology leadership allow us to bring innovative solutions to the market ahead of competitors, giving our customers an advantage.

Cost efficiency

A cost-efficient base is essential for our business. Investments in R&D enable not only technology leadership but also cost leadership. Using the latest technology enables us to bring down cost in our solutions. This benefits both us and our customers.

Product-led solutions

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

Global scale & skill

Our global presence and our close interaction with our customers bring opportunities for us to grow with discipline, leading to increased market footprint and advantages of scale.

At Ericsson, the expertise that our people have is a key asset that enables us to work close to our customers across the world.

Addressing new revenue opportunities

With 5G our industry will move beyond connecting people; it will also connect machines and things. 5G is a powerful network platform for innovation, opening up new revenue opportunities for telecom operators in both the consumer segment and the enterprise segment. We are already seeing that 5G is supporting telecom operators to deliver new, differentiating services to consumers with upside revenue potential, and there is also significant upside revenue potential for telecom operators who invest in delivering new 5G enterprise services. Our studies show that telecom operators could see an additional revenue opportunity of USD 700 billion by 2030 driven by industry sectors such as healthcare, manufacturing and automotive.

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

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

Driving our business through four segments and five market areas

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

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

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

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

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

Our market is divided into five geographical market areas. The market areas are responsible for selling and delivering products and solutions developed by our business areas. Staying close to our customers is key. In line with the strategy, we have shifted more responsibility to the market areas, to ensure that we stay close to our customers while maintaining central guidelines and governance structures to ensure price discipline.

Sustainability and Corporate Responsibility

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

We work continuously to improve and strengthen our responsible business practices, with focus on building and maintaining trust, transparency and integrity wherever in the world we operate. We have set targets that are in line with the reduction required to keep the temperature-rise trajectory to 1.5°C. In 2019, we made a further commitment to climate action by approving a target to be carbon neutral in our own operations by 2030.

Sustainability and corporate responsibility are integrated into the business with the aim of understanding and proactively managing environmental, social and economic risks, opportunities and impacts within each segment and market area. Integrating sustainability practices and programs throughout the Company can help us to run operations more efficiently and deliver value to our customers.

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

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

2019 progress

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

Strategy execution activities performed during 2019 included:

2020 increased net sales ambition driven by Networks

In 2019 the Company increased the net sales ambition for 2020 to SEK 230–240 billion (based on a USD to SEK rate of 9.5), to be compared to the previous 2020 sales ambition of SEK 210–220 billion. The increase is mainly expected in Networks, driven by a growing radio access network (RAN) market, favorable FX movements, the acquisition of Kathrein’s antenna and filter business and selective market share gains. Actual sales in 2019 was SEK 227.2 billion.

Continued focus on gross margin

Gross margin in 2019 has improved, driven by structural improvements. Cost reductions, efficiency improvements and investments in R&D in selected areas are important to keep us competitive and generate further expansion of gross margin. When pursuing expansion of market footprint, initial margins may be challenging, while expected to be profitable over time and support our financial targets.

R&D to drive profitability

We expect our R&D investments to drive profitability, and to secure technology and cost leadership. Continued technology investments are fundamental for long-term competitiveness and a key part of our focused strategy. In Networks we have increased investments to generate more cost-efficient networks for our customers, enable new services and improve serviceability. As 5G is being deployed in high-, mid- and low-band spectrums, this requires us to develop different variants to meet different customer demands. In Digital Services we are investing to develop a full 5G and cloud-native portfolio. In Managed Services we are investing in automation, analytics and AI driven offerings, to support 5G, IoT and cloud as well as to increase service delivery efficiency. In Emerging Business we are increasing our investments in IoT to leverage our position and capture new revenue streams.

Technology leadership will also be a contributor to market share generation and to increase advantages of scale. There will be a continued high focus on implementing structural and continuous improvements in SG&A expenses to safeguard target fulfilment and long-term profitability.

Working capital efficiency and free cash flow in focus

The strong focus on cash flow is paying off. Our ambition is to maintain a strong balance sheet and we aim to secure financial resilience, improve performance visibility, increase accountability and drive focus on profit and cash. In 2019 the Company increased the target for 2020 free cash flow before M&A, from “positive” to “strong”. As illustrated in the graph below, based on an operating income of >12%, Ericsson has the ambition that free cash flow before M&A should be >8% of net sales. In 2019, the free cash flow was 3.4% of net sales by the new definition from the Q4 2019 report, where free cash flow before M&A has been adjusted to include amortization of lease liabilities according with IFRS 16.

The target is to improve collection and credit management as well as sourcing and supply chain management, with an ambition to remain below 100 working capital days. Sharp discipline in both CAPEX and M&A

activities are other major elements to drive positive free cash flow. Our planning assumption for CAPEX including capitalized development expenses is 2% of net sales, but this can vary depending on the investments we make, and for instance in 2020, we are building a new 5G-factory in Lewisville, Texas. M&A will vary depending on strategic decisions but are assumed to be around 1–2% of net sales, in line with the last few years. During 2015–2019 restructuring charges in percent of sales was on average 2.8%. In 2020 the ratio is estimated to be approximately 1% and our ambition is to maintain restructuring charges at that level going forward.

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

Target breakdown

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

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%, the same as for the Group.

We see opportunities for growth above the estimated market growth. Please see pages 14–17 for specific growth CAGR for each segment. 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.

While we are committed to, and are tracking towards, our targets for 2020 and 2022, our focused strategy aims at building a stronger Ericsson long term, beyond 2022, with continued sales growth and improved returns.

Providing premium network experience in selected cluster sites

SK Telecom completed the first phase of its 5G deployment in 2019. The operator focused on an initial build-out of coverage primarily in major metropolitan areas, along major traffic and commuter routes and in other densely populated areas. The second phase is now continuing with a build-out of 5G coverage on mid-band. It will be complemented by deployments in the millimeter wave band to meet expected capacity needs and increase network speeds in selected densely populated areas.

A cluster-based 5G deployment strategy

To drive further uptake of 5G services, SK Telecom has identified areas with large numbers of potential consumers who could be provided with a variety of high-quality services supported by a dense 5G network. Identifying and selecting such areas is a key element in SK Telecom’s cluster-based 5G deployment strategy, which aims to provide various new services and benefits to customers in specific clusters, and thereby to create new business growth opportunities. The strategy is therefore centered around providing a premium 5G network experience and innovative services to customers in selected limited geographical locations. The goal is to drive uptake of 5G subscriptions in the clusters, as well as to stimulate the development of new 5G services for consumers, enterprises and industries.

Enhancing customer value

In the clusters, 5G network capacity will be built out to provide for high-volume data traffic and include localized services and benefits tailored to each area’s specific characteristics. The objective of the 5G clusters is to enhance customer value, showing the features and benefits of 5G-enabled services,

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

Selection criteria for cluster areas

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

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

SK Telecom’s go-to-market services strategy for 5G

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

consumer experiences based on virtual and augmented reality (VR/AR) and high-quality streaming content in ultra-high definition (UHD) formats (2K, 4K and 8K). VR and AR are both parts of rapidly evolving device ecosystems which include smartphones, headsets, glasses and displays.

The multimedia content produced includes multi-view and pinch-zoom features to enhance and differentiate the 5G media experience compared to watching regular TV or video content. For example, SK Telecom’s Social VR service enables multiple users to experience sports events and movies together in a virtual environment as if they were in the same physical location.

New business opportunities in the game streaming market will emerge with the introduction of ultra-low-latency capabilities in the 5G networks.

5G drives an increase in average mobile data consumption

In September 2019, a 5G subscriber’s average monthly data consumption in South Korea was almost three times higher than that of 4G subscribers. Under one possible scenario, if SK Telecom were to reach 2.2 million 5G subscribers with an average monthly data consumption of around 28 GB by the end of 2019, about 25 percent of its total mobile traffic would have been carried over the 5G network.¹⁾ SK Telecom continues to build out 5G coverage during 2020.

Research and Development

Our investments in R&D generate technology and cost leadership for us and our customers. Ericsson has 25,100 employees within Research & Development, which represent about a quarter of Ericsson’s employees.

In Research the focus is long-term. We have dedicated research teams located across the world who stay on top of what the technology future will look like and why it matters. In Development the focus is on making timely product investment decisions and executing them with the right capabilities and at the right cost.

Our insight into the emerging technology trends and potential disruptors is high, supported by collaboration initiatives with leading industry forums and universities

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

Supply chain

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

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

road, train or ship. This also includes proactive and reactive supply chain risk management as well as ensuring adherence to our implemented global standards. Our manufacturing sites and logistics operations are there to deliver business value and to ensure that 5G meets industry requirements.

Through our Code of Conduct for business partners we conduct audits to verify Code of Conduct compliance. New suppliers that meet certain criteria are required to complete a self-assessment, while existing suppliers must update their self-assessment on a regular basis. Read more on responsible management of suppliers in our Sustainability Report on page 145.

Offering – main components

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

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

Business model

Networks business is primarily based on a transactional model, where Ericsson develops, sells, licenses and delivers hardware, software and services. Networks business also includes recurring revenue streams such as customer support and certain software revenues.

Market

In 2019, the market that Networks addresses, the RAN market, grew by 5.5%, driven by investments in North America and Asia.

2019 was the year when 5G took off. Ericsson was first with commercial live networks in four continents – Americas, Europe, Asia and Oceania. This included multiple operators in the United States, South Korea, Europe as well as in Australia and the Middle East.

Strategic priorities

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 for our customers, enabling new services and improving serviceability. The constantly increasing mobile data usage is estimated to grow four times by the end of 2025, highlighting the operators’ need to lower the cost per gigabyte to remain profitable. Revenue and profitability can also be increased by new advanced services.

In 2019, the Company acquired Kathrein’s antenna and filter business with a strong R&D organization and extensive experience in antenna design and research. This enabled us

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

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

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

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

Sustainability focus

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

Offering – main components

Digital Services provides solutions consisting of software, services and hardware in the areas of business support systems (BSS), operational support systems (OSS), cloud communication, cloud core, and cloud infrastructure. The portfolio is focused on 5G, cloud native, automated and industrialized solutions to facilitate a smooth journey towards 5G for our customers’ consumer and enterprise business. Customers’ consumer business is the main business driver of solutions that Digital Services provides, but their enterprise business is increasingly important. One example is their private networks and IoT offerings, in which the core network plays a vital role.

Business model

Ericsson develops, sells, licenses and delivers solutions, based on software and services, for specific functions or capabilities in our customers’ operations. The contracts are typically systems integration projects, combining Ericsson software and high-value services. Customer support and software upgrades typically continue to generate sales for Ericsson after delivery of the initial solution. Ericsson has a selective approach to large and complex customer transformation projects. We strive for a gradually higher proportion of recurring revenues through subscription-based software licensing that includes software upgrades and solution support. Over time, we expect the sales-mix to shift towards a higher portion of software content driven by the adoption of cloud native and automation technologies.

Market

Ongoing digitalization, together with virtualization, cloud native and 5G, is driving new opportunities for operators. Digitalization gives possibilities to capitalize on the investments by programming and slicing 4G and 5G networks for specific consumer and enterprise needs. There are also possibilities to automate operations and thus become more agile and radically more efficient with digitalization.

Market growth varies between and within areas. The average growth 2018–2023 CAGR is low single digit, with pockets of up to mid-teens growth, e.g. in orchestration (source Analysys Mason). The growth is primarily driven by the ongoing technology shift to 5G.

Strategic priorities

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

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

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

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

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

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

Sustainability focus

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

Offering – main components

Managed Services provides Networks and IT Managed Services, Network Design and Optimization, and Application Development and Maintenance to operators.

The AI and data driven Managed Services offering, Ericsson Operations Engine, proactively manages operator networks to enhance customer experience, drive agile service creation, and optimize costs.

Business model

Managed Services operate customer networks and IT systems both in the field and remotely from our network operations centers. The contracts are typically multi-year, including transition, transformation and optimization phases. 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, AI and automation tools and delivery models are introduced. The optimization phase focuses on increasing efficiency using industrialized solutions for AI, automation and analytics.

Managed Services has a high contract renewal rate and a higher capital turnover ratio than Group average.

Market

The introduction of 5G and IoT is driving new opportunities for Managed Services, as the growth in data traffic and number of devices increases network complexity, generates a high demand for better end-user experience, and a continued need for cost efficiency.

All this can be addressed with industrialized solutions in automation and analytics. Managed Service’s market is expected to grow by between 3% and 5% CAGR between 2018 and 2022.

Strategic priorities

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

Sustainability focus

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

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

Offering – main components

The Emerging Business and Other segment consists of:

Emerging Business is the area for investments building on Ericsson’s core business and R&D. The objective is to identify new revenue sources for operators and new types of businesses. Major initial investments areas are IoT offerings, Industry 4.0 and automotive.

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

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

MediaKind includes platforms for compression, video processing and storage, content publishing and delivery. Since February 1, 2019 Ericsson has 49% ownership in MediaKind after having divested 51%.

Strategic priorities

To fully leverage Ericsson’s market position, capture new recurring revenue streams and create long-term value, the segment needs to do additional investment in IoT which means that the segment is not expected to reach a breakeven result in 2020.

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

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

Sustainability focus

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

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

As an important input to Ericsson’s continuous efforts to assess the environmental, economic and social topics that are significant to the Company, materiality assessments were carried out with each market area. The

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

2019 top commonly prioritized Sustainability areas by all market areas¹⁾

Market trends

LTE penetration is currently 91% in North America. The transition to 5G is moving rapidly across the US. Ericsson led the way in 2019, deploying 54 live 5G networks in 44 unique markets across all major operators in the US with an unparalleled series of industry firsts. AT&T and Verizon each deployed 5G mmWave services in over 30 markets. Sprint deployed 5G in the mid-band across nine markets, while T-Mobile deployed 5G mmWave services in six markets and launched nationwide in the low band. In Canada, Rogers is planning a commercial 5G launch in 2020. All operators are advertising aggressive network expansion plans, with many new devices planned for 2020. By the end of 2025, we anticipate close to 320 million 5G subscriptions in the region, accounting for 74% of mobile subscriptions.

The US government continues to make 5G leadership a strategic priority, targeting accelerated spectrum deployment, network build regulation, and innovation in the broader ecosystem.

In 2019 the US DOJ1) and FCC2) approved a proposed merger between T-Mobile and Sprint under conditions supporting DISH Networks becoming a new nationwide wireless operator. In February, 2020, a federal judge in New York found in favor of the merger. The deal remains subject to certain closing conditions, possible additional court proceedings, and resolution of outstanding business issues among the parties.

Binding commitments made by T-Mobile and DISH Networks to the FCC and DOJ for national/rural 5G and mobile broadband coverage may intensify the US 5G buildout.

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

Key announcements 2019

Sales development 2019

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

Sustainability focus

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

Market trends

The market area Europe and Latin America had 1.8 billion mobile subscriptions in 2019, representing more than 22% of the global total. Ericsson forecasts 5G to account for around 55% of all mobile subscriptions in Western Europe and around 25% in Central and Eastern Europe by the end of 2025. In Latin America, LTE is the dominant technology in 2019, accounting for 51% of all subscriptions, which Ericsson expects to rise to 69% in 2025. By then, Ericsson expects that 5G will account for 11% of all subscriptions.

On April 17, 2019, Swisscom switched on the first European commercial 5G network, which was 100% powered by Ericsson. Since then Ericsson equipment has been part of ten live 5G networks across eight European countries. However, the overall pace of 5G deployments in Europe is expected by Dell’Oro to lag that of North East Asia and the US.

Market conditions such as uncoordinated timing of spectrum release, prices and license terms act as head winds to deployments in the market area.

In Western Europe, Ericsson expects the majority of 5G spectrum to be released by the end of 2020 with an EU deadline for spectrum release set for end 2022. The current approach to 5G spectrum assignment in Europe is mixed. There is a high variance in spectrum prices with a close correlation to the amount of spectrum made available.

In Latin America, Ericsson expects 5G spectrum to be auctioned in a number of countries next year.

In Europe and Latin America, the RAN equipment market is expected by Dell’Oro to remain relatively flat over the next 4–5 years.

Key announcements 2019

Sales development 2019

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

Sustainability focus

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

Market trends

The market area Middle East and Africa is comprised by over 70 countries and is a highly diverse region. While a majority of subscriptions are still 2G and 3G, Ericsson believes 4G to be the dominant technology by 2025 with 720 million subscriptions, comprising around 40% of the total. The race for 5G leadership in the market area continues, with several front-runner operators in the Middle East launching commercial networks in 2019, putting the market area among the early adopters of 5G. Ericsson expects 5G network deployments to take off on a larger scale in 2020 and 2021, with total 5G subscriptions forecast to surpass 120 million in the market area by 2025.

The countries in the market area vary from advanced markets having over 100% penetration in mobile broadband subscriptions to emerging markets with less than 10% penetration. At the end of 2019, more than 25% of all mobile subscriptions in the Middle East and North Africa were for LTE, while in Sub-Saharan Africa LTE connections stood at 11% of the total. Mobile subscriptions in the region are forecast by Ericsson to continue to grow, with close to 75% of total subscriptions expected to be on mobile broadband (3G, 4G and 5G) networks by 2025. Driving factors behind this shift include increased operator investments, a young and growing population with increasing digital skills, and the availability of more affordable smartphones and mobile services in general.

Operators’ revenues are forecast by

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

Key announcements 2019

Sales development 2019

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

Sustainability focus

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

Market trends

The market area South East Asia, Oceania and India includes developed markets with some of the most advanced networks in the world, as well as emerging markets where there is more opportunity for mobile broadband capacity and coverage. In South East Asia and Oceania (excluding India), 3G is still the dominant technology, at 44% of all subscriptions in 2019. However, LTE subscriptions grew by approximately 35% during 2019, taking a 34% share of total mobile subscriptions in the region. In India, as a result of the strong growth in the number of LTE subscriptions over the past couple of years, LTE has emerged as the dominant technology during 2019. By year end 2019, LTE accounted for 48% of total mobile subscriptions, and the share of 2G subscriptions stood at 41%.

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, operators are challenged by intense competition and the cost of managing increased data traffic. The demand for 5G is growing across most markets as a means of increasing efficiency, improving customer experience and creating new revenue opportunities. 5G has been launched commercially in Australia and there have been 5G trials during 2019 across India, Indonesia, New Zealand, the Philippines, Malaysia, Singapore, Thailand and Vietnam. However, spectrum allocation constraints

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

Key announcements 2019

Sales development 2019

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

Sustainability focus

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

Market trends

In 2019, 5G took off in South Korea as all three major operators started commercial 5G services targeting mobile broadband subscribers. 69 days after network launch in April 2019, there were already more than 1 million 5G subscribers and by year-end the numbers of subscribers had increased to more than 4.6 million. Network deployments for nationwide 5G coverage will continue in 2020.

In Japan, 5G spectrum auctions were concluded in the first half of 2019, and all large operators are preparing for larger scale deployments and commercial launches in 2020. The 2020 summer Olympic Games in Tokyo is expected to be an important showcase for the 5G technology.

Initial 5G services were launched by all three major operators in mainland China in the second half of 2019. Investments in 4G were reduced as the operators were planning for the large scale 5G deployments in 2020.

The initial focus of the 5G investments in North East Asia is on deploying enhanced mobile broadband services and will later move on to IoT connections and industrial services such as healthcare, transportation and smart manufacturing. Ericsson expects the 5G subscription penetration to exceed 56% by 2025.

Key announcements 2019

Sales development 2019

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

Sustainability focus

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

Core values

Respect, professionalism and perseverance

Purpose

Empowering and intelligent, sustainable and connected world, by relentlessly innovating technologies that are easy to adopt, use and scale

To offer a great customer experience we must create a great people experience. This is key to the execution of our focused strategy. To achieve this, we must be 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 when working at Ericsson.

Our philosophies

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

We believe that:

During the past three years we set the foundation and re-designed our ways of working to create an even more positive employee experience in support of our company transformation. During 2019 we have focused on the following areas.

Ethics and compliance

In the course of investigations by the US SEC and DOJ, violations of Ericsson’s values and Code of Business Ethics were identified. One of the remedial actions in response to those findings was to enhance our vetting system for senior executives and introduce additional integrity and background checks in other critical positions. We are also taking a rigorous approach to remediation of breaches of the Code of Business Ethics. Whereas there is a dedicated Ethics & Compliance Function in charge of driving the overall Ethics & Compliance program throughout the organization, compliance is the responsibility of all our employees and management is expected to demonstrate visible leadership in responsible and ethical business. Read more on page 8.

Succession and people planning

We have continued to build a strong succession bench with our critical positions in focus. We actively manage the pipeline for those positions, in order to reduce risk of vacancy

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

Performance management

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

Engagement

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

Building leadership capabilities for the digital world

Ericsson on the Move is our leadership culture transformation initiative to equip our people to lead in a digital world. This initiative is also deeply rooted in our commitment to develop ethical and responsible leaders across the organization.

The five focus areas for this initiative are fundamental to strengthen our leadership culture: foster a speak up environment; execute speedily; consistently make fact-based, courageous decisions; cooperate and collaborate to create One Ericsson; and increase our focus on humanness and empathy.

Learning and development

In 2019 we activated a new, mobile-first, learning ecosystem that amplifies our learning and teaching culture in a digital age of continual skill set and mindset growth. The ecosystem connects learners to both content and community, including over 23,000 educational experiences, as well as intensive upskilling and reskilling programs. 2.5 million hours were invested by employees in active learning and development, re-skilling/upskilling our people for business growth and individual career advancement.

During 2019, important focus areas of the Board include corporate governance and to ensure that sufficient investments are being made available to strengthen the Ethics and Compliance program. Target areas include leadership and culture, compliance resources, third-party management and internal control.

In 2019, settlement discussions with the United States Securities and Exchange Commission (SEC) and the United States Department of Justice (DOJ) resulted in a resolution that allows us to bring an end to the investigations conducted by the US authorities since 2013 and 2015 into Ericsson’s compliance with the US Foreign Corrupt Practices Act (FCPA). The resolution identified historical breaches of the United States Foreign Corrupt Practices Act and highlighted shortcomings in the way the Company has been doing business in the past. Strengthening the Ethics and Compliance program to ensure that Ericsson lives up to the highest standards remains a top priority for the Board. The Audit and Compliance Committee regularly receives reporting on compliance related matters from the Chief Legal Officer, the Chief Compliance Officer and the Head of Corporate Investigations.

Conducting business responsibly also includes a commitment to health and safety and responsible sourcing, and to continuing to build a robust speak-up culture. In addition, the Board continues to focus on accountability and talent management. Through employees, we can build a stronger Ericsson long term. It is a key priority for the Board that Ericsson is able to attract, retain and motivate talented people. The Company has implemented long term variable compensation programs with a focus on value creation and on retaining senior managers and key contributors in a competitive market.

We are convinced that digitalization and mobile broadband networks will help tackle some of the global challenges our world faces

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

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

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

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

Business plans, and investments in R&D and other assets, are carefully evaluated and allocated in line with our focused strategy and our ambition for overall capital efficiency. In 2019 Ericsson continued to show a positive free cash flow before M&A of SEK 7.6 billion, including payments of SEK 10.1 billion related to the resolution of the US SEC and DOJ investigations. The Board will propose a dividend for 2019 of SEK 1.50 (1.00) per share to the AGM. The increase underlines the Board’s confidence in Ericsson delivering on its financial targets and building a stronger company long term.

On behalf of all members of the Board, we look forward to continuing working with CEO Börje Ekholm and the full Ericsson team in 2020. I also want to take the opportunity to say thank you to all employees for a job well done in 2019.

Ronnie Leten

Chair of the Board

Business in 2019

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

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

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

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

After completing a major cost reduction

program in 2018, restructuring charges decreased to SEK –0.8 (–8.0) billion in 2019. With a continous focus on efficiency and structural improvements, the ambition is to maintain restructuring charges around 1% of sales going forward. In 2019, SG&A expenses were impacted by increased costs for digitalization of the business processes which will increase costs short term but is expected to improve productivity in 2021 and beyond. SG&A expenses were also impacted by increased investments in compliance and security.

Operating income was SEK 10.6 (1.2) billion. Operating income was SEK 22.1 billion (9.7% operating margin) excluding restructuring charges of SEK –0.8 billion and costs of SEK –10.7 billion related to a resolution with the US SEC and DOJ.

The number of employees increased to 99,417 (95,359) mainly due to the acqusition of the Kathrein antenna and filter business, and due to increased service delivery resources driven by higher sales.

Free cash flow before M&A amounted to SEK 7.6 (4.3) billion, including payments of SEK 10.1 billion related to the resolution of the US SEC and DOJ investigations. Cash flow was supported by an improved income and by improved working capital efficiency. Net cash at year end was SEK 34.5 (35.9) billion.

Financial highlights

Net sales

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

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

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

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

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

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

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

Gross margin

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

Operating expenses

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

in operating expenses were SEK –0.5 (–2.1) billion. Currency effects impacted operating expenses negatively while the 51% divestment of MediaKind had a positive impact.

R&D expenses were impacted by increased investments in R&D for Networks and Managed Services. This increase was partly offset by lower R&D in Digital Services and Emerging Business and Other. The net effect of capitalized and amortized development expenses was SEK 0.3 (–1.7) billion. Restructuring charges impacted R&D expenses by SEK –0.3 (–1.3) billion. R&D expenses increased by SEK 2.9 billion when excluding restructuring charges and the net effect from capitalized and amortized development expenses.

SG&A expenses were positively impacted by a refund of earlier paid social security costs in Sweden of SEK 0.9 billion and by lower restructuring charges of SEK –0.1 (–0.8) billion. Currency effects and increased investments in corporate projects for digital transformation, compliance and security had a negative impact compared to last year. Costs for customer financing revaluation declined to SEK –0.7 (–1.1) billion.

Costs for the resolution of the US SEC and DOJ investigations

In 2019, SEK 10.1 billion in payments were made as Ericsson announced the resolution of the previously disclosed investigations by the US DOJ and SEC regarding the Company’s compliance with the US Foreign Corrupt Practices Act (FCPA). In addition a provision of SEK 0.6 billion was made to cover future monitoring costs. The combined impact of SEK –10.7 billion was reported as Other operating expenses in segment Emerging Business and Other.

Other operating income and expenses

Other operating income and expenses was SEK –9.7 (–0.2) billion and was negatively impacted by SEK –10.7 billion in costs related to the resolution of the US SEC and DOJ investigations. 51% of MediaKind was divested with a capital gain of SEK 0.7 billion in the first quarter. Share in earnings of JV and associated companies was SEK –0.3 (0.1) billion, negatively impacted by the 49% ownership in MediaKind. The Company´s share in earnings of MediaKind was SEK –0.4 billion and the remaining investment is SEK 0.8 billion.

Restructuring charges

Restructuring charges amounted to SEK –0.8 (–8.0) billion. The cost reduction program announced in 2017 was completed in 2018. Restructuring costs related to the revised BSS strategy had a negative impact in 2018.

Operating income and margin

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

Financial income and expenses, net

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

Taxes

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

Net income and EPS

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

Employees

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

Cash flow

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

sales outstanding improved to 75 (91) days. Sale of trade receivables continued to trend downwards and decreased compared to last year. Due to the increase in 5G buildout this year, demand for customer financing solutions has increased. Most of such financing has been successfully transferred to banks and the balance of customer finance credits on the balance sheet remains low. The ambition is to maintain working capital efficiency and thereby effectively convert income to cash. Cash outlays related to provisions were SEK –7.6 (–6.9) billion, of which SEK –1.8 (–4.1) billion was related to restructuring charges. Cash flow from operating activities had a positive impact of SEK 3.0 billion from the implementation of IFRS 16 “Leases”. Financing activities were negatively impacted by amortization of the leasing liability of the same amount.

Cash flow from investing activities was SEK –3.5 (–4.1) billion, where interest-bearing securities impacted by SEK 4.2 (2.2) billion. Investments in property, plant and equipment was SEK –5.1 (–4.0) billion. The increase was mainly due to investments in 5G test equipment. Capitalized development expenses increased to SEK –1.5 (–0.9) billion due to 5G development projects. M&A was SEK –1.5 (–1.3) billion.

Cash flow from financing activities was SEK –6.9 (–4.1) billion. Dividends of SEK 4.5 (3.4) billion were paid out. The repayment of lease liabilities was SEK –3.0 (0.0) billion.

The improved result and focus on free cash flow, in combination with limited investing activities, resulted in free cash flow of SEK 6.1 (3.0) billion and in free cash flow before M&A of SEK 7.6 (4.3) billion. The negative effect of payments related to the resolution of the US SEC and DOJ investigations was more than offset by improved income and working capital efficiency.

Financial position

Gross cash increased to SEK 72.2 (69.0) billion while net cash decreased to SEK 34.5 (35.9) billion.

Liabilities for post-employments benefits increased to SEK 35.8 (28.7) billion mainly due to lower discount rates. 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 9.8 billion lower as of December 31, 2019.

The average maturity of long-term borrowings was 2.7 years as of December 31, 2019, a decrease from 3.4 years 12 months earlier.

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

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

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

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

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

The capital turnover remained at 1.4 (1.4) times.

Research and development, patents and licensing

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

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 2019, capital expenditure was SEK 5.1 (4.0) billion, representing 2.3% of sales. Expenditures are largely related to test sites and equipment for R&D, network operation centers and manufacturing and repair operations.

The increase in 2019 was mainly due to investments in 5G test equipment.

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, 2019, no material land, buildings, machinery or equipment were pledged as collateral for outstanding indebtedness.

Capitalized development expenses

Capitalized development expenses inreased to SEK 1.5 (0.9) billion due to 5G development projects. The net effect on operating income of capitalized and amortized development expenses was SEK 0.3 (–1.7) billion.

Business results – Segments

Networks

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

Net sales

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

Gross margin

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

Operating income and margin

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

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

Digital Services

Digital Services represented 18% (18%) of Group net sales in 2019. The segment solutions include products and services for operators in the areas of BSS, OSS, Cloud Core, Cloud Communication, NFV and Cloud infrastructure. It also includes consulting, learning and testing services.

Net sales

Reported sales increased by 5% in 2019 driven by growth in North America. Services sales increased driven by customer support. Sales in the new portfolio grew by 7% driven by customer investments in 4G and 5G, while sales in legacy products declined. Sales adjusted for comparable units and currency decreased by –1%.

Gross margin

Gross margin increased to 37.2% (21.8%). Gross margin excluding restructuring charges of SEK –0.2 (–4.0) billion improved to 37.8% (32.4%). 2018 was negatively impacted by costs related to the revised BSS strategy.

Operating income (loss)

Operating income improved to SEK –4.0 (–13.9) billion. Operating income excluding restructuring charges of SEK –0.6 (–5.4) billion improved to SEK –3.4 (–8.5) billion, supported by higher gross margin and higher sales. In addition, operating expenses excluding restructuring charges of SEK –0.4 (–1.4) billion declined by SEK –2.2 billion despite a currency headwind. The net impact of capitalized and amortized development expenses was SEK –0.9 (–1.8) billion.

Managed Services

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

Net sales

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

Gross margin

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

Operating income and margin

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

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

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

Emerging Business and Other

Segment Emerging Business and Other represented 3% (4%) of Group net sales in 2019. The segment includes:

Net sales

Reported sales decreased by –19% in 2019 due to the 51% divestment of MediaKind in February 2019. Sales adjusted for comparable units and currency increased by 14% driven by growth in the iconectiv business through a multi-year number portability contract in the US.

Gross margin

Gross margin declined mainly due to the 51% divestment of MediaKind. The decline was partly offset by lower restructuring charges.

Operating income (loss)

Operating income was impacted by costs of SEK –10.7 billion related to the resolution of the US SEC and DOJ investigations, a refund of earlier paid social security costs in Sweden of SEK 0.9 billion and by costs of SEK –0.3 billion related to the wind-down of the ST-Ericsson legal structure.

Operating income in Emerging Business, iconectiv and common costs improved, driven by profitable growth in iconectiv. Red Bee Media income improved supported by profit improvement activities. Media Solutions income improved driven by the 51% divestment of Media Kind, including a capital gain from the transaction.

Business results – Market areas

North America

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

Europe and Latin America

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

Middle East and Africa

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

South East Asia, Oceania and India

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

North East Asia

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

Other¹⁾

Sales declined as a result of the 51% divestment of the media business, which was transferred to MediaKind. IPR licensing revenues amounted to SEK 9.6 (8.0) 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 appended 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 2019, 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. Upon recruitment, new employees are asked to acknowledge the code. In 2019, the acknowledgment was repeated throughout the global Ericsson organization for purposes of ensuring the employees’ understanding and commitment to the principles of the Code of Business Ethics and securing that business is conducted responsibly.

Board of Directors

At the Annual General Meeting, held on March 27, 2019, Ronnie Leten was re-elected Chair of the Board, and Jon Fredrik Baksaas, Jan Carlson, Nora Denzel, Börje Ekholm, Eric A. Elzvik, Kurt Jofs, Kristin S. Rinne, Helena Stjernholm and Jacob Wallenberg were reelected members of the Board. As of March 27, 2019, Torbjörn Nyman, Kjell-Åke Soting and Roger Svensson were appointed employee representatives by the unions, with Anders Ripa, Loredana Roslund and Per Holmberg as deputies.

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 2019 two new appointments were made to the Executive Team.

Ericsson has a global management system (EGMS) to ensure that Ericsson’s business is well managed and has the ability to fulfill the objectives of major stakeholders within established risk limits and with reliable internal control. The management system also aims to ensure 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 2019, are reported in note G2, “Information regarding members of the Board of Directors and the Group management.”

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

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

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

The Company operated a Long-Term Variable Compensation program (LTV) up until 2017, building on a common platform of investment in, and matching of, Ericsson shares. It consisted of three separate plans: one targeting all employees, one targeting key contributors and one targeting senior managers. The program was designed to encourage long-term value creation in alignment with shareholders’ interests. Since 2017, no all-employee Stock Purchase Plan has been implemented. Instead share-based Long-Term Variable Compensation Programs for the Executive Team have been introduced. LTV 2019 for the Executive Team was approved by the Annual General Meeting 2019. Details of LTV 2019 are explained in note G3, “Share-based compensation.”

Material contracts

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

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

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

Ericsson’s Enterprise Risk Management (ERM) framework is an integrated part of the Ericsson Group Management System. The aim of the ERM framework is to strengthen the Group’s governance by integrating risk management with strategy-setting and execution. The ERM framework is designed to establish an adequate and effective management of risk, i.e. the uncertainty in achieving the strategic objectives of the Company. The framework provides methods to identify, assess and treat the risks, and to agree on the Company’s risk appetite and risk tolerance.

Each manager is responsible for handling the risks that emerges from the respective area of responsibility. The responsibility for identified prime risks of the Company is always allocated to an Executive Team member. The Group Risk Management function is responsible for driving the ERM strategy execution and the ERM operations on Group level. The head of each group function, market area and business area, is accountable for appointing one or several risk manager(s) to drive risk management within the unit’s area of responsibility, and for overseeing the ERM in the respective unit. The Chief Financial Officer is accountable for performing oversight of ERM, and the Board of Directors and the Audit and Compliance Committee are responsible for reviewing the effectiveness and appropriateness of ERM.

For information on risks that could impact the fulfillment of objectives, 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 both global, regional and local suppliers.

The production of electronic modules and sub-assemblies is mostly outsourced to manufacturing services companies. Ericsson is focusing internal manufacturing on new product introductions and new technologies. Majority of the matured portfolio is outsourced through production partners. Ericsson has internal production sites in Estonia, China and Brazil. During 2020 a new production site will be established in the USA.

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

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

Sustainability and Corporate Responsibility

Ericsson’s ambition is to be a responsible and relevant driver of positive change in society. The Company is committed to creating positive sustainability impacts and reducing risks to the Company and its stakeholders through its technology, solutions, and the expertise of its employees. Ericsson’s approach to sustainability and corporate responsibility is an integral part of the Company’s strategy, business model and governance.

Ericsson has prepared a Sustainability Report in accordance with the Swedish Annual Accounts Act named the Sustainability and Corporate Responsibility Report 2019, appended to this Annual Report, pages 141–146.

US FCPA investigations

On December 7, 2019, Ericsson announced the resolution of the previously disclosed investigations by the US Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) regarding the Company’s compliance with the US Foreign Corrupt Practices Act (FCPA). While the DOJ and SEC conduct separate investigations, the same facts have been shared by Ericsson with both authorities.

The resolution relates to historical FCPA breaches ending Q1 2017. While the Company had a compliance program and a supporting control framework, they were not adequately implemented. Specifically, certain employees in some markets, some of whom were executives in those markets, acted in bad faith and knowingly failed to implement sufficient controls. They were able to enter

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

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

DOJ resolution

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

SEC resolution

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

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

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

Improvements to Ericsson’s Ethics and Compliance program include:

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 October 2018 the plaintiffs filed a first amended complaint. In December 2018 Ericsson filed a motion to dismiss the complaint. In January 2019 the plaintiffs filed a second amended complaint. Ericsson again filed a motion to dismiss the complaint. On January 11, 2020 the court granted Ericsson’s motion to dismiss. At the same time the court granted plaintiffs leave to file a third amended complaint within thirty days. The plaintiffs did not file an amended complaint by the court-ordered deadline.

As part of its defense to a now settled patent infringement lawsuit filed by Ericsson in 2013 in the Delhi High Court against Indian handset company Micromax, Micromax filed a complaint against Ericsson with the Competition Commission of India (CCI). The CCI 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.

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 US customers of infringing 16 US Patents, seeking an injunction and monetary damages. IV subsequently filed additional lawsuits in the District of Delaware accusing some of Ericsson’s US customers of infringing 12 US Patents, seeking monetary damages. In 2017, IV filed additional lawsuits in the Eastern District of Texas accusing Ericsson and some of Ericsson’s U.S customers of infringing ten US Patents. In February 2019, a jury awarded IV damages of USD 43 million in one of those lawsuits. In June 2019 Ericsson announced that Ericsson and IV had signed a license agreement ending all patent infringement lawsuits between the companies.

In December 2018, Sol IP sued AT&T, Verizon, and Sprint in East Texas, alleging infringement of 20 patents declared to the LTE standard. Sol IP is a non-practicing entity. The patents originated from Electronics and Telecommunications Research Institute (ETRI), a Korean government-funded research institution. In March 2019, Ericsson intervened in the litigation to defend its products against claims of infringement. In December 2019, Ericsson challenged the patentability of a number of the patents with the Patent Trial and Appeal Board. Ericsson has after the year-end 2019 resolved the litigation with Sol IP. The settlement resolves the litigation with Sol IP and involves a patent license agreement between Ericsson, Sol IP and ETRI.

In April 2019, Ericsson was informed by the Chinese SAMR (State Administration for Market Regulation) Anti-Monopoly Bureau that they have initiated an investigation into Ericsson’s patent licensing practices in China. Ericsson is cooperating with the investigation.

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. For information on risks e.g. relating to lawsuits, claims and proceedings, see the chapter Risk Factors.

Parent Company

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

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

Financial information

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

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

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

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

Share information

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

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

these shares was SEK 5.00 per share, totaling SEK 86 million, representing less than 1% of capital stock, and compensation received for shares sold and distributed shares amounted to SEK 166.1 million.

The holding of treasury stock at December 31, 2019 was 19,853,247 Class B shares. The quotient value of these shares is SEK 5.00, totaling SEK 99 million, representing 0.6% of capital stock, and the purchase price amounts to SEK 144.2 million.

Proposed disposition of earnings

The Board of Directors proposes a dividend SEK 1.50 (1.00) per share, and that the Parent Company shall retain the remaining part of non-restricted equity. The dividend is proposed to be paid in two equal installments, SEK 0.75 per share with the record date April 2, 2020, and SEK 0.75 per share with the record date October 2, 2020.

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 29.6% (32.7%) and a net cash amount of SEK 34.5 (35.9) 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

Guidelines for Remuneration to Group Management

The Board of Directors proposes that the Annual General Meeting of shareholders 2020 resolve on the following guidelines for remuneration to Group Management. Compared to the guidelines resolved by the Annual General Meeting of shareholders 2019, the guidelines have been updated to comply with the requirements of the European Union Shareholder Rights Directive II (“SRD II”) as transposed into Swedish law.

Guidelines for Remuneration to Group Management

Group Introduction

These Guidelines for Remuneration to Group Management (the “Guidelines”) apply to the Executive Team of Telefonaktiebolaget LM Ericsson (the “Company” or “Ericsson”), including the President and Chief Executive Officer (the “President and CEO”) (“Group Management”). These Guidelines apply to remuneration agreed and changes to previously agreed remuneration after the date of approval of the Guidelines and are intended to remain in place for four years until the Annual General Meeting of shareholders 2024. For employments outside of Sweden, due adaptations may be made to comply with mandatory local rules or established local practices. In such cases, the overall purpose of these Guidelines shall be accommodated to the largest extent possible. These Guidelines do not cover remuneration resolved by the general meeting of shareholders, such as long-term variable compensation programs (“LTV”).

Objective

These Guidelines aim to ensure alignment with the current remuneration philosophy and practices applicable for the Company’s employees based on the principles of competitiveness, fairness, transparency and performance. In particular to:

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

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

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

Governance of remuneration to Group Management

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

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

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

In order to conduct its responsibilities, the Committee considers trends in remuneration, legislative changes, disclosure rules and the general global executive remuneration environment. It reviews salary survey data, Company results and individual performance before preparing salary adjustment recommendations for the President and CEO for resolution by the Board and before approving any salary adjustments for the other members of Group Management. In order to avoid conflict of interests, no employee is present at the Committee’s meetings when issues relating to their own remuneration are being discussed. The President and CEO is not present at Board meetings when issues relating to the President and CEO’s own remuneration are being discussed. The Committee may appoint independent expert advisors to assist and advise in its work.

The Chair of the Remuneration Committee along with the Chair of the Board work together with Ericsson’s Investor Relations team, striving to ensure that healthy contact is maintained as necessary and appropriate with shareholders regarding remuneration to Group Management.

Overview of remuneration package covered by these Guidelines

For Group Management the remuneration package may consist of fixed salary, short-term and long-term variable compensation (STV and LTV), pension and other benefits.

The table below sets out the key components of remuneration of Group Management covered by these Guidelines, including why they are used, their operation, opportunity levels and the related performance measures. In addition, the AGM has resolved and may in the future decide to implement LTV for Group Management. The ongoing share-based LTV programs resolved by the AGM have been designed to provide long-term incentives for the members of Group Management and to incentivize the Company’s performance creating long-term value. The aim is to attract, retain and motivate executives in a competitive market through performance-based share related incentives and to encourage the build-up of significant equity holdings to align the interests of the members of Group Management with those of shareholders. The vesting period under the ongoing share-based LTV programs resolved by the shareholders is three years and vesting is subject to the satisfaction of identified performance criteria. Although LTV is an important component of the remuneration of Group Management, it is not covered by these Guidelines, because these programs are separately resolved by the AGM.

Alignment of short-term variable compensation with the Company’s strategy and criteria for payment

These Guidelines for Remuneration to Group Management have been developed to support alignment of Ericsson’s business strategy and long-term interests of members of Group Management with that of shareholders, in particular:

Consideration of remuneration offered to the Company’s employees

When developing these Guidelines, the Board and the Committee have considered the total remuneration and employment conditions of the Company’s employees by reviewing the application of Ericsson’s remuneration policy for the wider employee population to ensure consistency.

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

Employment contracts and termination of employment

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

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

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

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

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

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

as any other litigation proceedings from legal relations based on such agreements, shall be settled by arbitration by three arbitrators in accordance with the Rules of the Arbitration Institute of the Stockholm Chamber of Commerce. Irrespective of the outcome of any arbitral award, the Company may, in the relation between the parties, carry all fees and expenses charged by the arbitrators and all of its own litigation costs (including attorney’s fees), except in the event the arbitration proceedings were initiated by the employee without reasonable cause.

Recruitment policy for new members of Group Management

In determining the remuneration of a new member of Group Management, the Board and the Committee shall take into consideration all relevant factors to ensure that arrangements are in the best interests of the Company and its shareholders. These factors include:

Additional arrangements

By way of exception, additional arrangements can be made when deemed appropriate and necessary to recruit or retain an individual. Such arrangement could be in the form of short-term or long-term variable compensation or fixed component and can be renewed, but each such arrangement shall be limited in time and shall not exceed a period of 36 months and twice the annual fixed salary that the individual would have received if no additional arrangements were made. In addition, if appropriate, different measures and targets may be applied to the new appointment’s incentives in the first year.

In addition, it may on a case by case basis be decided by the Board and the Committee respectively to compensate an individual for remuneration forfeited from a previous employer during recruitment. The Board and the Committee will consider on a case by case basis if all or some of the remuneration including incentives forfeited need to be ‘bought-out’. If there is a buy-out of forfeited incentives, this will take into account relevant factors including the form they were granted (cash vs. shares), performance conditions attached to these awards and the time they would have vested/paid. Generally, buy-out awards will be made on a comparable basis to those forfeited.

In the event of an internal candidate being promoted to Group Management, legacy terms and conditions may be honored, including pension and benefit entitlements and any outstanding incentive awards. If a Group Management member is appointed following a merger or acquisition with/of another company, legacy terms and conditions may also be honored for a maximum period of 36 months.

Board of Directors’ discretions

The Board upon recommendation from the Committee may in a specific case decide to

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

The Committee is responsible for preparing matters for resolution by the Board, and this includes matters relating to deviations from these Guidelines. Any such deviation will be disclosed in the Remuneration Report for the relevant year.

US Securities class action

On January 11, 2020, the United States District Court for the Southern District of New York granted Ericsson’s motion to dismiss the putative class action filed in 2018 against Telefonaktiebolaget LM Ericsson, the present President and CEO and the Chief Financial Officer of Ericsson as well as three former executives. At the same time the court granted plaintiffs leave to file a third amended complaint within thirty days. The plaintiffs did not file an amended complaint by the courtordered deadline.

Sol IP settlement

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

million on operating income within Segment Networks of which USD 10 million will be recorded in Q1 2020 and the balance spread equally over the remaining quarters. This quarterly license fee amortization will continue in subsequent periods. The exact terms of the agreement are confidential.

Ericsson to acquire Genaker to strengthen Mission Critical Push-to-talk offering

On March 12, 2020, Ericsson announced that it had signed an agreement to acquire 100 percent of the shares in Genaker, a provider of Mission Critical Push-to-talk (MC-PTT) solutions. The acquisition strengthens Ericsson’s MC-PTT offering as the mission critical communications and private network market is going through a significant technology shift. Genaker, located in Barcelona, Spain, was founded in 2004 and employs around 30 people, all of whom will transfer to Ericsson as part of the acquisition.

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

Pandemics, such as for example the one caused by the Coronavirus, could severely impact our local and global operations related to e.g. Service Delivery, Research & Development, Sales and Supply, as well as our customers and suppliers, with significant financial and other consequences. As an example, the Coronavirus has caused disturbance to our operations in China where Ericsson has offices and manufacturing sites. It is starting to cause similar disruptions to Ericsson’s operations and those of its customers and suppliers in other countries and to negatively impact the global economy. The effects of those disruptions may have material adverse effects on our business and financial position.

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.

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, 2019 and 2018, and the related consolidated income statements, statements of comprehensive income (loss), changes in equity and cash flows for each of the three years in the period ended December 31, 2019, 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, 2019, 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, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019 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, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

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 appearing on page 97. 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.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Compliance with antibribery laws and regulations

As disclosed in Note B4 Other Operating Income and Expenses Telefonaktiebolaget LM Ericsson (publ) accounted for a cost of SEK 10.7 billion to settle an investigation with the U.S. Department of Justice and the U.S. Securities and Exchange Commission in 2019 regarding the historical compliance with the US Foreign Corrupt Practices Act (FCPA) in Djibouti, China, Kuwait, Indonesia, Vietnam and Saudi Arabia. Under the related Deferred Prosecution Agreement, the Company will in 2020 implement an Independent Monitor that oversees the Company’s compliance improvement program for a period of three years.

The principal considerations for our determination that performing procedures on compliance with antibribery laws and regulations was a critical audit matter is that if the recommendations provided by the Independent

Monitor are deemed to be inadequately implemented, further fines could amongst others be imposed. As such we believe that the Company’s progress in 2019 with respect to implementation of the procedures and recommendations warrants attention from an audit perspective.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing of controls for proper documentation of due diligence for the retention of third party agents and consultants as well as the process of informing agents and business partners of commitment to anti-corruption and codes, testing of manual journal vouchers and payments, examination of the signing and update of the Code of Business Ethics and performing fraud and error inquiries of management and in certain markets.

Revenue recognition of major contracts

Total revenue for 2019 amounts to SEK 227 billion according to note B1 – Net Sales. Large and complex customer contracts are a major part of Ericsson’s business and revenues. Many of these contracts include multiple elements of products, software and services as well as complex contract terms. Each customer contract often involves more than one legal entity within the Ericsson Group. Estimates and judgments are used in determining the amount and timing of revenue particularly when determining the transaction price and its allocation to performance obligations identified under the contract. Refer to the Annual Report Note A1 – Significant accounting policies and Note A2 – Critical accounting estimates and judgements.

The principal considerations for our determination that performing procedures relating to revenue recognition of major contracts is a critical audit matter are that the application of revenue recognition accounting standards is complex and it requires management judgement and estimates particularly when referring to transaction price and its allocation to performance obligations under the contract. This in turn led to significant audit judgment and effort in performing procedures to evaluate transaction price and its allocation to performance obligations under the contract.

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

Impairment of goodwill and deferred tax assets

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

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

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing of controls over financial reporting and analytical procedures. Additionally, detailed tests of management’s assessment of projected cash flows, future market conditions and discount rates were performed. For the utilization of deferred tax asset, evaluation of the recognition of the deferred tax assets in Sweden was performed. Professionals with specialized skill and knowledge were used to assist in the evaluation of the Company’s goodwill impairment assessments.

Provisions and allowances related to projects and inventory

Ericsson has recognized provisions and allowances relating to customer projects, inventory, warranty, litigations, restructuring and other contractual obligations. Adjustments and allowances for customer and supplier related projects of SEK 2,1 billion accounted for in 2019 mainly refers to provisions for supplier claims and provisions for onerous contracts. The closing balance for allowance for inventory is SEK 3.4 billion as of December 31, 2019. Refer to the Annual Report Note A2 – Critical accounting estimates and judgements, Note B5- Inventories and Note D1 – Provisions.

The principal considerations for our determination that performing procedures relating to Provisions and allowances related to projects and inventory is a critical audit matter are that the need for provisions are by nature based on management’s judgement and the evaluation of contracts and projects and the estimates of future outflow of cash. Onerous customer contract provision includes estimate of costs to be incurred based on the latest conditions and progress on the contract as well as assumptions on the probable outcomes of revenue and costs. This in turn led to a high degree of auditor judgment and effort related to evaluation of the assumptions and estimates made by management on future estimates and costs.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included a combination of testing of controls over inventory and customer projects, analytical procedures and detailed testing of management judgements for certain significant onerous contracts to ensure that provisions and allowances made are sufficient for existing commitments and exposures.

/s/ PricewaterhouseCoopers AB

Stockholm, Sweden

March 19, 2020

We have served as the Company’s auditor since at least 1993. We have not determined the specific year which we began servicing as auditors of the company.