Q1 2020 Earnings Call
Welcome to Ericsson's analyst and media conference calls for quarterly reports.
If you visual AIDS for this call. Please log on to double the dog eat dog eat dog Ericsson Dot com forward Slash press, Oh, Www Dot Ericsson Docomo fourth slashing investors, ladies and gentlemen, when you would like to asked a question. Please press zero warm on your push Watson fine if you'd like.
It's a decline from the planning process. Please press seared sea.
As a reminder, replay will be available one hour after todays conference Beach Nyquist will now take Q critical.
Thank you operator.
And welcome to today's call the Q.
Good.
And the S. Due to the unprecedented circumstances, we will obviously do these costs a little bit differently.
And our president and CEO, but any color in a U.S. and that we have our CFO here comment on the its taco.
So we will conduct a meeting based on that.
But I think that will work sorry.
So before starting the meeting I will just like to the following text during the call today, we were making forward looking statements.
These statements are based on our current expectations and certain planning assumptions, which are subject to risk and uncertainties.
Actual results may differ materially due to factors mentioned in today's press release and discussed in this conference call.
We encourage you to read about these risks and uncertainties in our earnings report.
As well as our newly published a report.
So with that said I would like to handover the call to your body. So please go yes.
Thanks Peter.
And again welcome to answer this analyst briefing of course, it's a bit different than the than usual and.
I cannot be in stock on due to the restrictions on I guess, if you may well be than you weigh a working so working from home at the new normal, but anyhow when that we've tried to do with us.
Much as normal as possible.
So let's go to the first slide.
Of course, we have to recognize that with covert 19 with to live in a long precedented time.
It's impossible to predict how long.
And also at what level. This pandemic will impact our lives, but one thing is for sure worried about direct and indirect impact on all of us underway will leave and the way the work.
Every business decision we have taken.
We have made with the safety and health of our employees customers and other stakeholders as a primary concern.
And what we're doing we're working to support our customers to ensure that they keep the critical national impressed structures around the globe up and running during these unprecedented types.
We continue to push forward on our focus strategy.
And we are determined to get through this difficult times as a much stronger company more agile and well positioned in the market.
We delivered a solid Q1, which is seen across our segments and we're delivering a strong gross margin and good cash flow.
We're pleased to see a strong performance in networks, which is the result of high activity across many of our region.
Operating leverage compensated for an increase portion of.
Strategic contract.
In the quarter, we have seen very limited impact from call. It 90.
Unfortunately, we've seen a decline in sales for digital services.
This has been the result of.
Juan reduction in hardware, which is fully along our strategy.
To reduce the dependence on hardware.
Digital services.
But we have also seen some timing on contract.
Partly explained by Cobot 19, we simply have made it difficult for us to gain access to customer networks during the locked down and travel restrictions.
At the same time.
Good to see that the underlying business is strong.
We can deliver gross margin on 40% for digital services.
And that's on the back of growing software sales.
And that's also after we have taken a provision for critical contracts or 200 million cone.
So we feel that we have a very strong and competitive portfolio and we have several wins.
During the first quarter.
And we are also very comfortable that this positions us well for the future.
We continue to drive forward with investments R&D for cloud native inside your core portfolio areas.
Our industry has shown resiliency even during these pandemic.
But I think it is reasonable to expect some impact as well.
And we continue to be prepared to take action if needed.
But one thing is we're sure our commitment to coming through this as a stronger company and requires awesome and demands us to continue to push for bid on R&D.
As a way to create a competitive advantage.
At the end of the quarter, we had signed 86 commercial Fiveg contract and delivered 29 live networks and now we have actually 31 networks lives. So it's a bit of a daily number.
So we remain positive on the long term outlook.
But we anticipate that had softer second quarter.
And this is due to the uncertainty from Covidien 19, but also that we see a number of.
Strategic contracted pooling in Q2, instead of being evenly spread out over the year and that of course include the important win in China.
However, I prefer to look at the longer term perspective of our company and I have.
Not felt better than I do today about the competitiveness across our business and across our portfolio.
We feel very different discussion with customers today.
So we are on the right track here.
So that's why we also remain committed to our targets onetwenty trend being granted trentadue.
Due to the fact that we have the strong business.
On the next slide we put together some summary of the co bid 19.
And and of course.
It's where in the same situation as every company and we've been required to take a number of decisions.
Based on the fact available when Weve.
At the time of the system.
And here is a way to at least put some of them on the slide So you see.
The most important guiding principle for us have been the this the safety and health of our employees and partners and customers.
We have also always kept the customer at the center how do we ensure work that they are not affected.
And I would overall say and that's a very important.
We have seen.
Very very limited impact if any on the customers business.
We made the capital significant this excess over the quarter.
So to summarize we have encouraged.
And now we actually have about 85000 of our workforce working from home.
And successfully using the collaboration tools we have available.
We have limited all travel except for business essential travel today.
It's shutdown, but we did that early.
We cancelled all external events and we we can send our participation in mobile World Congress already in early February.
We've we've had our crisis management councillor established and part of that work is also to assess our business continuity.
And we have teams focused on ensuring that supply R&D service delivery. Our network operating centers are all managed to respond to different scenarios and different customer request.
And and Tanquilut will have multiple production sites and global sourcing, which has enabled us to keep flexibility to delever again, our commitments so customers.
I am overall, I must say on I'm I'm Super proud of all the dedication and commitment our.
My colleagues have shown in the situation here working really hard to deliver to customers.
Keeping their networks rounding 24, seven we have seen the engineers out servicing the equipment continued to do so despite the locked down and tough environment and it shows.
The reinstatement of the end of our people in the company and that we have.
Doubt thirdly, the best people in the industry.
We move on to look at the different market areas.
We see that Europe, and Latin America.
Hello, which is two large extent you two very large deployment in the first quarter of 29 team in Latin America.
But also some planned exits of managed services contracts as part of the contract review.
What we also have seen is that Europe actually grew during this period.
Then if we take the next.
Which is then.
And the Southeast Asia, Australia, India.
We saw sales declining in.
Due to timing of projects and believe recent milestones.
We see northeast Asia.
Experienced a decline in fourg deliveries to China, but had a solid growth in Japan.
Middle Eastern Africa, So good growth on the back all the investments in Fourg and Fiveg in key markets.
Our North America had a good growth driven by strong fiveg.
Momentum.
Not to mention here is that.
The merger continue to affect with uncertainty during the first quarter and we expect the merged company now that it's approved too.
To pick up the spending in the second half on Twentytwenty.
We also note that the managed services.
Or their view on outsourcing is different so we expect to be negatively impacted during Q2 and managed services from that merger.
Finally on the segments.
Yeah in networks, we continue to strengthen gross margin and it's now at 44.6% as operating leverage more than offset an increase portion of all the strategic contract.
And here, we see that our investment in R&D is paying off in in Fiveg momentum, but also on the very solid do indeed performance of our gear.
Sales in the digital services declined primarily due to lower hardware sales and timing or contract part of the timing impact by Koby 90.
But we also see the they focus on software is starting to pay off and grow with growing sales of software and that helped gross margin reach 40%.
Despite the charge of 200 million kroner on critical contract.
But the most important thing.
For.
Digital services Easter we continue to execute on the on the road map on providing leading solutions for our customers and we see very good traction on our portfolio with several important wins during the quarter.
And managed services topline declined.
As a part of the contract review or contract exits as part of the contract review we conducted.
Over the last few years.
But we are there more important thing here is we see continued good gross margin development and is now about 20%.
As we've said before operating margins will bear EBIT by quarter.
Because of timing of over.
Contracts on course.
But the ambition we have to invest in R&D to develop new automated offering offerings are really starting to gain traction and we can see that this is a key driver of the improved gross margin.
Emerging business saw continued growth in the different businesses.
The loyalty platform continue to grow faster than the market and DC some investment area, where we're encouraged by the traction we have.
With that I give the word over to you call.
Thank you Maria Thank you Brenda and good morning, good afternoon, everyone. Thanks for joining the call.
So let's look at Q1 twentytwenty in in the numbers a bit more.
To start with our new see the topline 49.8 billion.
And this is a decline of 2% deferred just for non organic FX.
Due mainly them too as Barry mentioned digital services.
Where we had reduced sales of services and legacy hardware.
And the services piece. So yeah, we saw a few where project completions in the quarter and some negative effect on of course with 19 as well rather limited or.
Network was flat.
And managed services down 5% due to planned contract the excess source mentioned before.
Our gross margin 40.4, it's the highest and a long time and all segments improved I think thats a strong point in this quarter.
Favorable mis business mix contributed but also efficiency gains to this to this.
Number.
You look at the operating income than.
4.6 billion, that's 9.3% operating margin.
However, if we adjust for some of these positive one offs, we had in the first quarter of 29 team or you see that there than adjusted operating income increased by 30% from three and half to 4.6.
Billion.
As you know.
Judging asked or any company by individual quarters might not be their right to think so we prefer to look here at the rolling at to complement the picture as well.
So if you look at the graph there in the bottom left to see that our net sales on a four quarter rolling basis is 228.1 billion.
With an adjusted operating margin of 9.6.
Both being well in line or aiming for the Twentytwenty target and importantly, as Barry said, we with the visibility we have now we see no reason to change the targets for Twentytwenty or.
For that matter Twentytwenty too.
If you see the gross margin development over a number of quarters Blue line here being the rolling four quarters value again.
And of course.
Obviously, showing a much smoother development plan the individual quarter, such you can see on the grey dotted line here.
And as you see.
The current rolling four quarter number is very much in line with an aiming for the the midpoint of the Twentytwenty target that you remember that target process expressed as 37% to 39% gross margin.
So in in the first quarter here, we recorded 44.4 plus percent again, excluding restructuring up from 37.1 in Q4.
Driven by improvements in all segments, but.
As a matter of fact also by a higher share of idea or in this quarter IDR such was flat, but sharrow IDR sales hiring in Q1.
And that gross margin improvements income from in networks. It's a two large extent the business mix.
Question.
Digital services higher software shock, but also better hardware margins.
Managed services than lower cost in the quarter and efficiency gains coming out of.
The investments we do in R&D that for artificial intelligence.
Set from.
So.
I wanted here to take the opportunity also to highlight some of the planning assumptions that impact the gross margin.
So as we discussed there China mobile apps awarded also the five year round marketshare.
And.
We by the way also expect to have marketshare decisions from the other two major operators in China soon towards the end of the month here.
Deployments, there, we'll start to happen in Q2 and that.
We expect to have an increasingly negative impact.
On our resulted in Q2 compared with Q1.
Of course us in all previous quarters, we expect to partly offset this bye.
Continued operational improvements and this will of course never stopped offset then compensate with other improvements.
When it comes to North America, we expect than investments from the carrier style capex investments to intensify.
During the second half not so much in the second quarter, but in the second half of Twentytwenty.
And of course, we believe we have a strong position in the North American market.
And finally heavily.
We should say and we always say that we can expect to continue to see variations in gross margin and this is particularly true I would say in digital services and managed services due to sales mix and project mix and the timing of course in those segments.
Okay, if we move onto the next one.
Let's look at R&D and engineering.
And of course. These items also can vary between the quarters not least due to seasonality so here.
The comments are really about a year over year development, starting with R&D them.
In general investments in R&D as you know is a strategic cornerstone for us.
And we see clear, Colorado called correlation between R&D investment than and gross margin improvement.
And here, we are focusing of course, the investment on Friday, but also a AI for example across the segments.
The year over year development here shows an increase of the R&D by 0.2 billion them for the group and part of that it's actually due to FX.
I'm also the net capitalization impact here was a 0.2 billion lower than year ago. So you could say the underlying increases is likely more than that and ways that increase its mainly networks.
Because in digital service this week.
As we reduce the focus of focus the portfolio, but also reinvest some of those reductions into the new Fiveg and cloud native portfolio.
Moving to the bottom part payer SDMA expenses increased by 7.2 billion down due to FX.
But also the investments in digitalization that we've talked about last quarter as well.
And some of the finer points, we had the revaluation of customer financing impacting us DNA here point 3 billion.
And also an impairment loss on trade receivables that Sarah point 2 billion and you can compare that then with positive.
0.6 billion in the first quarter last year.
So.
We have previously talked about the planning assumption when it comes to a DNA and we stick to that so we expect follow with higher operating expenses in general here than in 29 team driven down by as we have talked about before compliance security and digitalization enough.
But also when it comes to R&D them.
Including now the acquired antenna business.
From the time.
But again I said us at our Investor update as well as the ambition. We have is to grow topline more than the expenses here of course.
Free cash flow.
We delivered positive free cash flow all that.
2.3 billion before M&A.
And remember airway might do that year over year, a comparison that we had a positive one time effect in Q1, 19, which was a payment of a large overdue customer receivables sub 0.7 billion.
And if you look at the working capital line. There is a small build up in this quarter and put forth.
And I would say this is a mix of inventories and trade payables. After a very long period of reduction in working capital.
Of course this is a big.
We have a big focus internally here on maintaining good working capital efficiency also going forward now in its current climate.
Capitalized to add development, which at San part here all the Capex line was reduced.
So it's about 250 million this quarter versus 450 million a year ago.
Finally on this slide and on a rolling four quarter basis again free cash flow before M&A amounts to 16.6 billion and this is Dan if we exclude the UGI and the you Jay sorry, absolutely fine.
And that is amounting to 7.3% of the of sales on a rolling basis.
Here you see the current financial position and the using cash position here gross and net to the left and our debt maturity profile to the right and this chart.
And so end of this quarter, we ended with a net cash position of 38.
Point 4 billion Swedish krona.
And gross cash now amounts to 79.5.
And if you look at the debt maturity profile here you can see that our debt batteries have now matures over the coming five years and the average maturity is 2.4 years.
What's important to keep in mind is that now in Q4. This year 8.7 billion of that will mature and our intention here is to repay this with the cash on hand.
And now before handing over to Barry again, I recommend you all strongly to read the planning assumptions closely we will not go through them and any more detail than what I've already said.
And also on page one the report you find them planning assumption highlights and on page four in the report you find a complete planning assumption. So please read those assumptions to to guide that the Q2, and a and full year outlook here.
Thank you so much and let me now hand over to our sealed vehicle.
Thanks car.
So.
In closing before we head into Q and Ace ER.
We have worked hard now to ensure that we are the leader in Fiveg, which is basically underpinning our performance.
We see our focused strategy with increasing investments in R&D is paying off.
And the we have now established.
Gross margin on the new level.
But more importantly.
Is that our technology is winning in the market.
I would say that is proven with our APC commercial contracts and 29 nine live networks on Fiveg by the end of the quarter and today, it's it's as I said before and 31.
Live networks.
The criticality of the networks.
Has never been more apparent that we see today.
Hey, Colby pandemic helps further strengthen the need for all countries to investing the communications infrastructure as it is the backbone of society in many ways and that has been increasingly clear.
And here, we especially called upon to European government to look for ways to encourage investments in fiveg.
That is surely one way to help restart the economy's, while the pandemic is over.
We have now so many proof points on how this will help emergency services more than large businesses as well as consumers and I'm not to mention it but as most of US today a in Europe work from home, we depend on good and solid telecommunications infrastructure.
We will continue to make our investments in the technology just drive even further ahead with our portfolio leadership.
Here, we feel that we are well positioned for the future.
We have completed and solid first quarter with limited impact on our operations from the pandemic and with what we can see today, we see no reason to change our financial targets for Twentytwenty and Fourtwenty 22.
So with that thank you.
Over can you give maria.
Yes, Thank you Barry.
So we have about 30 minutes for.
For Q and a so with that I would like to hand over to do you operators to open the Q Nay session. So please.
Thank you ladies and gentlemen at this time will begin the question answer session. If you wanted to ask a question. Please press star one on you push button fine.
And if you if you would like to decline from the pollen process. Please press the series C.
As always please limit yourself to one question as time I'm. Please keep your questions at a board level detailed information is provided in the report and Ericsson's Investor Relations and media relations seem to be happy to take additional questions and discuss further details refi after the call.
Our first question comes from the line almost on your view by Oh Handelsbanken. Please go ahead, Sir your line is open.
Good morning O'donnell.
Good morning, Thank you for letting me on the cold number one.
Congratulations on strong quarter I, just would like to ask you about the year were strong net for gross margin.
This afford 4.6% despite strategic contracts.
To me this show a very good impact perhaps on currency, but also network capacity upgrades.
And.
My question is really if this assumption is correct should we expect to see this capacity upgrades.
Boost helping also Q2 Q2 and onward choice if more of a one time upgrade effects that you can do remotely.
To help your operators to cope with their capacity constraint, we've seen in the quarter. Thank you.
When you started Maria.
Yeah, I can start out yet you know they test your as you note.
Of course, there is some element of upgrades, but but it's also part of the longer terms drive to gradually change the business to be.
More and more tied towards software upgrades. So the improvement in gross margin may be somewhat bigger in individual quarter, but you also have seen the trend go in there in that direction side I think you should not see it as a as a one off but rather as part of his strategic.
<unk>.
Initiative to change our gross margin profile in networks.
Well, we can't say, though is that.
We do expect.
The gradual improvement to continue overtime.
Thats a.
That's our fundamental premise for the focus strategy.
You will see a pad so.
Uh huh.
Topline and and the gross margin in Q2 due to the returns of the cold in 19, but also.
This proportionate share of strategic contract, including China. Thank you too.
Okay. Thank you ill jump back in line good luck in Q2.
Thank you Donna we're open for the next question Sankey, that's from the line of Edward Snyder at Chaucer Equity Research. Please go ahead. Your line is open.
Looking at Q4.
Thank you good morning qualified on gross margin again, clearly are facing a more strategic.
Investment environment, especially North America, with chemo and spread margin coming up your normally seasonally down into Q1 gross margin should we expect that to be a bit exacerbated this year or is it can be pushed to the second half of years, you mentioned most of that will play out there.
And then more if I could now lets you have in tennis is lumpy brought to bear in your revenue line should enough to affect Fiveg I know, there's a lot more.
So by the carriers need kennesaw sort of the business, especially for the Mimo systems can you give you qualification and bring up or product soon after the fact that or is it more long term investment. Thank you.
Hi, Ed cardiac just circling to start with the yeah. Thanks, Barry I'll start with the first one.
As a bit similar when it comes to the gross margins. There of course, we we have a favorable business mix in Q1 and a gross margins will vary now in Q2 of course, the China volumes will.
Coming and that would weigh on the margin somewhat.
Well the merger investments what what we see now is that the the investments that will take off or second half so not so much in the second quarter.
But overtime that will of course coming into the mix as well, but not so much in the very near term.
But I would say.
And the full year guidance, a remains and a if you look further down EBIT, it's still the 15% to 17% the operating margin that we talk about for network that we are aiming for him and with 16.8% here. We are clearly in that range on enough for end of that range. So we keep the 15.7, 15% to 17% for.
For the full year.
Great ability on the antenna.
Yeah.
We acquired of course the constraint.
Business for first capital returns one is the capabilities and product portfolio in passive antenna.
But we also see that the importance of all three integrated site solutions between Fourg and Fiveg.
To our customers.
So what we're doing if there is.
Investing and basically we're increasing the investments in developing the portfolio can train.
To make it even more competitive in the market and we see the.
We feel good growth opportunity in non paying us and it you know where they that's where we investing to capture that will be partly in.
More complicated than panel systems like massive mimo, but it will also be more passive on 10.
And that is a key investment area for US you will take some time you will not see that for two years. The equates result.
Where.
It takes its going to take care.
Maybe 18 24 months to upgrade their product portfolio constrain.
Well, we've seen the encouraged by the progress we've made the since the acquisition closed late last year.
Thank God.
We were.
Go to the next question please operator.
Thank you asked that question comes from the line of from Swamp Affinia Rvps. Please go ahead, Sir your line is Simon.
One of Rustler hi, thank thank you very much good morning.
I just have a quick question on the full year outlook for 2020 some.
Still the according to deliver rule C ran of four person goes for the for the for your 2020 and if we look at Q1. It was flat and if we look at your guidance for Q2. It's also not growing so I just wanted to see like what has a main drivers that you will see.
I wish to issue can quantify as well and we the covina do you see any potential you know downside risk to the compared to let's say one quarter ago, given that it's all pushed out into the second half.
Thank you very much.
He started Maria.
Yeah, you know there they have Nicole with 19 impact this of course hard to assassin, we need to be a bit homebuilding predicting what but it's going to impact.
And on the Watson Handy, if we look globally, we see a number of countries.
Actually accelerating investments.
Into fiveg as well as Fourg capacity.
In response to the.
Pandemic.
You know there the one of the clear cases is clearly China.
But if you look in Europe, it's doing the opposite slowing down.
Adoption of Fiveg and so so the impact is.
A bit difficult and not transparent to see what we see so far is actually on the totality for our business. It's a bit is is no impact at the world.
We see continued good demand and that we expect to continue throughout the year.
What we do say is that the deployments in China. It support your bookkeeping effect that you need to book.
The the cost upfront, but we will also start to see acceleration in the second part of the year.
So there.
We use the Delaware to us.
As an estimate for the total market during the year and.
And as a outside.
Perspective on on on the growth.
We don't see any reason to have a different view than than the lower so we believe we will see.
Growth in the run market on sub 4% this year.
Its about it but of course it it's an acceleration in the second part part to give them by China.
Okay, and the U.S., sorry, as one of the country.
Yeah. The U.S. will clearly also you know the merger uncertainty will be removed them, we don't think.
We don't think is right to plan for in the.
Ramp in their modes to operate the spending until the second part of the year.
Thank you very much.
Okay Francois thank you.
The next question.
Thank you that's from the line on for Joe can whether or not yet. Please go ahead onsite.
One of the Oregon.
Good morning, Thank you very much for taking my question and congratulations so.
Two questions if I'm a one is related to a two your China business.
If you could give a little bit more color on.
Whether you think it will be EBIT accretive universe is the margin targets of 10%.
This year or maybe if it will be later.
During the during the life span of all the contracts a and then.
Maybe Maureen in particular since you are more detail on that's on the China Mobile Fiveg contract that is an announced an onsite. If there will be if you think it will be further investments from China mobile in age too.
Question number two is relating to digital services.
What what level of confidence do you have to reach.
Full year guidance that you have if I take the midpoint sales and the low single digit EBIT margin target.
I do the math correct that that gives us a between 1.5 and 3.5 billion EBIT to bridge before the end of year. So what is your confidence there and we will see progress already in Q2 or and what are the main numbers. Thank you.
Please operator, we start with the.
China question, then you know it's it.
If you look at the typical profile in China nights its margin accretive over the phone contract, but its of course.
You know, it's lossmaking in the beginning and that's what we're trying to say here.
Exactly how that is going to look like we will see when we are.
And the other operators have.
Comp concluded there or a piece.
So we will come back on that but what we have we have already and when we set out the target of 10%.
Margin for Twentytwenty.
In the beginning in late last year in the beginning of this year, we actually assumed.
We would have.
The negative contribution from from China in there.
So exactly how that is going to look like for the full year, where we're comfortable about the over a one outlook.
But we also say that we will have a disproportionate effect in Q2.
But then you can conclude you will see benefits in the rest of the yet.
Yeah.
Digital services.
The most important thing with digital services is of course that we have said that we are going to reach low single digit margins. This year and we continue to execute on that plan.
Yeah, you do have some effect of the cold with 19 that actually push us projects over quarter, ending et cetera. So it is a b.
Bit more exposed.
And that these services, we agree with physical.
Persons traveling in per country is going to customer premises et cetera, and that's that that is difficult in today's environment. So that you should bear in mind, but the most important thing with a digital services is the investments we make in the poor but looking portfolio.
So you know, but we feel very comfortable about this our competitive.
Ability with the solutions in digital services.
And that we see you know driving that that's what really going to turn around the business and there we see great progress.
I will be on that's to say, we're not focused on an individual quarter.
And on that did yes.
Fluctuate quarter by quarter, depending on project completions et cetera. So.
Predicting a quarter, it's always associated with a large degree of uncertainty, but the trend is there and makes us very comfortable to see that will turn around this business and make it into a contributor for Ericsson.
That confidence it is not shaken out the one.
Thank you Brian Thanks for you.
Okay, you, Oregon, you're happy with that.
Yes. Thank you.
Good.
Operator, we will move onto next question.
And that's from the line on piece Nelson.
Could you. Please go ahead your line is open.
Okay. Good thanks, a lot.
Thank you just last quarter, we spoke a lot about the investments in digitalization in the North Sea could chime in Q4.
We spoke less about it this time, obviously given impressive margins could you just talk about the are these investments on track sort of in.
In line with that with the size you indicated three months ago and similarly has constrained also show the expected I guess it has improvement in the profitability that that you anticipate has anything changed in these two regards versus three months ago. Thank you I also look into it for the rest of the thank you.
Call, maybe you just don't recall.
Both of these actually are on track. So we can say on the digitalization, we continue to invest in the end Digitalizing our company.
We believe that is going to help us to come out as a as a.
Stronger company also when when the Corbett 19 pandemic house.
Subsided no. So we've seen those investments are critical for our long term competitiveness and we will push ahead.
And of course are included in the targets for granted grantee.
And the same thing applies to constrain we know that the that will also be a gradual journey.
So we are investing for technology leadership in on time now so we're increasing R&D. While we're at the same time working also have the right cost structure in the business. So progress there is.
It's according to plan.
That we said the in Q4.
Super Thank you very much.
Thank you.
Operator, we moved to the next question.
That's from the line all Stuart Jeffrey Agency Partners. Please go ahead. Your line is open.
Thank you.
Hello.
So I got a question on capacity investments just thinking intuitively, if there are fewer people traveling due to kind of it.
More people at home, which in turn means as more people on why fine.
That should mean, there's less demand on the overall mobile network, specifically LTV 14 networks.
So I guess I'm trying to understand why do you see or are you seeing still strong demand on capacity investments. During the course of decision why wouldn't we expect that to perhaps is off perhaps compensated for by investments in fiveg, but why wouldn't be investments in foundry capacity noughties off if you people traveling and using the mobile networks.
Thanks.
This old varied by country, it's a much more complex picture then.
That then you described there and what you see Ace say.
The increase in overall traffic in the network so despite.
Rolling being down a were which which is clearly affecting the market negatively and to some extent some of the mobility features are also down.
But you see a quite a large increasing overall traffic in the network.
So it it.
In some countries you're gonna see exactly the situation you describe.
That's in countries with a very strong fiber network for example.
But there are large number of countries with a very.
I'll note that the waldseemuller, but rather experienced very heavy growth in traffic. So so I think the picture, it's it's not us.
A straightforward as yes, you show.
And the large parts of the world, we see that the people hardly have a fixed line connection at home.
And rather rely on the on the mobile network for the older connectivity needs.
But if you live in a culture with a poor you know mobile network, which actually.
You know a man Nick the countries have.
Also in Europe and of course, you're going to rely more on alternative means.
Good afternoon.
Yeah, I was just thinking that the fast poker revenues to come from countries with pretty established and strong.
Fixed line networks.
I understand that for Indian met in most of these countries, but we have to look at the real pattern in the traffic right.
And the traffic actually increases.
So.
That means that they may not benefit from all the features that that you have from mobility, but you'll see the overall traffic increasing.
In there in the mobile network as well.
Okay. Thanks.
Okay.
Thanks Stuart.
We'll move over the next question.
Okay. That's from line of Paul Silverstein Count. Please go ahead. Your line is open.
I appreciate taking the question.
Good morning, good evening.
Clarification or Youre pointed out the restrictive attorneys contract for long term, it's no positive in person bottom line, but.
Adverse early on.
Maybe I missed her but I thought you also said that you were expecting most to the adverse impact to hit in Q2, two and followed by I thought you should benefit the second half of the year.
Did you literally do you expect to see.
Actual benefit.
In terms of net impact in the second half of your did you mean to expect to see improvement from the particularly severe impact in Q2.
Albeit still negative impact throughout the year assumes for water.
Well you started Maria.
<unk> Q2 will be negatively impacted clearly as we have said here. So that no question and you will see improvements in the second part of the year.
Leading up to the full year forecast, we when we know the full.
No no little the business in China, we can be more specific how it's going to want to impact.
But but we foresee the and the negative effect, primarily in Q2, and then improving during the year.
Spurrier just to be clear when you're talking about improve.
Well, it's hard but improving care to actually came in actually benefit in the second half of your from bottom line perspective.
You know our our plan is that the.
I don't want to talk about specific quarters, except that we're we see that they're they're paying in Q2 right, but we also see that we can reach the full year target right.
So so you have to kind of assume based on that that at least we're taking a contract, which which hurts us short term whether that hurts us in Q2, and Q3 or if it's going to be only Q2, I cannot say today because it ultimately depends on when deliveries starts and how do they look like.
Are we can clearly foresee a bit of the hurting Q2.
But comp but.
Reducing over the year.
No it's not the business itself the rollout business and that's in January for wall operators, it's actually not the quarterly basis.
So you know it it's a very artificial timeline when we introduce quarters.
So some you know goal it may actually takes six months to roll out the network worth seven Moms and then it's all of his have been impacting three quarters. So it is it really depends on them, it's a bit or little know yet.
Well there so I appreciate that thank you.
There, maybe just a compliment carly a the and reiterate the fact that that we're one of the operators have decided but the other two have not yet so we ah, it's really a bit too early or very much to our lets just to talk about specific volumes, but I.
Yes that the assumption here is that we will have high volumes in Q2, and that's mainly what we're talking about that's why it we weigh on the margins, especially in Q2.
Then the rest of the volume will come in the later then portfolio.
So, let's see when we have a clarity from oil.
Operators in China.
Great. Thanks, Paul that question.
We'll move over to the next questions operator is perhaps from the line of your hand Ahlquist of Citi. Please go ahead. Your line is item.
Oneone I'm, Matt Good morning. Thank you so much and congratulations to a strong results I'm just I'm wondering on that we talk a lot about the margins, but I'm thinking the seasonality you guys for less than the normal seasonality on sales into second quarter and I'm just wondering given the fact, yes.
Hi volumes in China in second quarter, how do you foresee I mean normal seasonality is 11% or how much less what flow Larry So to say is it 5% or is it too because I guess, then you need to assume that other countries, except China will be.
Much worse off so I'm just wondering how if you can give any say their own on how you see seasonality in Q4 is based on geography. So division and then yes. The second question, if I may or in terms of visibility on operators Catholic spend what is your visibility is it three months.
Six months or how do you foresee that thank you.
Installed car.
HM Arkansas.
When it comes to visibility I would say we are of course extremely close to the customers now not only to make sure that the networks are up and running on can cater for this that the traffic.
Then changes and so on but also on the investment plans of course on how to carry out rollout and the deliveries during the rest of the year.
I would say, we have a pretty good understanding and visibility on those plans.
What's that as an overall as we say in the requirement as an overall uncertainty on the macro level.
We have I would say good visibility when it comes to customer plans at least.
When you talk about the goes I just wanted to underline what we what we say and whats important in report is that yes, we believe Q2 will be a weaker than normal 11% seasonality, but it will still grow that's our and assumption.
And the planning assumption we want to.
Transmit to you as well so we're not talking about the decrease there was still talking about the goes but somewhat lower than than the 11%.
Without commenting exactly where their specific geographies that.
But that.
Can you comment where do you foresee less than normal seasonality I guess do you expect more than one of the seasonality in China friends.
Yeah.
Yeah, Hi.
I think it probably in them.
Latin America for example, we will see less than normal seasonality.
That's it that's about it probably also maybe in the middle Eastern Africa, as one, but the but let's see.
I think China is definitely going to grow.
And the U.S., it's a rather flat.
At this time, because as we said the merger investments are not taking off until the second half.
Well, yes.
No I was going to say that you know we we.
When you run the company will vary so we have a number of market that we think are gonna be stronger some are gonna be weaker.
And it varies by quarter, you saw Q4 had the different revenue mix than it has now that's always going to be the case and that's going to be the case for Q2, as well and based on where we does form the view of the overall.
Interactions, we have we customers, where we are saying that.
Okay, we would see an acceleration in China that will be one one aspect, we're gonna see some deceleration in other parts. So so to formulate an overall guidance and I don't think it's appropriate for us to start guiding by geography by a business area because then.
And then we then you're going to hold us accountable to something that we actually look at best to pilot it with some variations in each part.
So so that that's why we're not going to be more specific in guidance than than you see.
Sure.
Okay. Thank you, yes, I'm happy with that thank you.
Great. Thanks, Thank you and I will continue to the next question.
That is from the line of Alex Duval Goldman Sachs. Please go ahead your own honestly.
Wondering Alex.
Good morning, everyone. Congrats on the strong result.
Okay uplift.
On.
Firstly, just launched on the one of the Scandinavian Telco page, we need me talking about actual complaining that season.
But there's just.
Just one day.
For the collateral.
Sure.
Okay.
The lake situation that.
Then just quickly on digital services that all the king.
How we should get coach quota and but just wanted to give more color.
And how we should think about it yeah.
<unk>.
If we start with a supply situation we.
No. This is in a way it's it's a.
Unprecedented situation, we called it 19 and disturbances on supply chains.
And I don't know, which.
Operator, we are talking about a weaker than the they referred to we can only comment from our situation and of course.
So far we could manage Q.
Without any problems a.
Lot of hard work on the on this by despite people, but but we could manage stuff we foresee that the we can manage the.
The volumes in Q2, as well and thanks to the.
Well the diversified production base, we have been the company.
And the supplier base that's also diversified.
We have also benefit did of course with the there the very sharp interruption, we got during Q2.
Because we have built up strategically.
Bigger buffer stocks over the last two years, we've done that in order to to try to unconstrained the supply chain as much as possible.
To reduce I mean, we had no chance of forecasting the pandemic. So happened so don't be understand me there, but we said that it must be natural to to try to unconstrained the supply chain due to the geopolitical uncertainty the uncertainty oversupply in general.
That we saw a happening as the notion of all there.
And all the.
Geopolitical tensions rising and trade sanctions rising so that has helped us quite a lot in this pandemic to actually supply our customers what they need.
We as as of today, we haven't you know we believe we can't compete in supply also in the second half of the year.
Because we have prepared for it and we were.
We put our sense.
In that position.
But we will then locked down and the restrictions go on for very long of course. The you know then then we will be increasingly stressed in the supply chain.
But we will do our utmost to fulfill the customer's demand of equipment.
And that our strong commitment on and you know what I talked for everyone in supply, we live and die by what we supply to our customers.
On a daily basis and that the that will not the we will know the waiver from that commitment.
And I guess do and then left and I look at.
Yeah digital services.
The key here is ER, we made.
Basically the capital decisions now its a.
Two or three years back to invest in the cloud native portfolio.
And that has served does really well so we see very good traction on Fiveg core and our dual mode Fourg to fiveg core and the whole fiveg offering.
That's why we are very comfortable on the on the turnaround plan.
All the digital services you know it is fluctuations will be there by quarter. That's for sure. They are not going to go away, but but we are very encouraged with the the wins, we see a on on the Fiveg side.
We're also seeing very good traction on the on the B as outside so we think the over a wall business. We have now in digital services actually we'll we'll have some very interesting developments over the next couple of years.
As the operators or building out their business into fiveg as well as expanding their offerings into enterprise.
So so we are.
And we're very happy with the investments we made in the digital services a few years back in the way the team is execute.
Thanks.
Yeah, Alex you happy with that.
Very happy May Act.
Correct, we're getting close to the hour we would have one final question come up now and then we will close for his closing remarks. So its next question. Please.
Thank you that's from the line off Patrick China at Credit Suisse. Please go ahead your line is right.
Hi, Thanks, Hi, good morning, Thanks, very much so I have so.
Actually two questions if I may.
Just a quick so first question just wanted to understand do you think theres any scope of increasing market share for it to you as cost emergency situation.
The second one is can you. Please talk about the latest on any corpus offsetting into even a stronger position in Japan.
Touching the remaining operators.
Yes.
Yep.
Yeah, if we start with Japan, we are we have the partnership there, which would get US you know.
And reworking of course to see if we can strengthen our position further in Japan.
It's very important market for us and we have the we have invested quite heavily.
There are over the past two years, including.
Putting all the research.
In Japan, as well and our ambition is to be a stronger player in the Japanese market. That's for sure where we end up of course, we will fight board to do that that's where we invest for we will see where we.
And up and down we.
Then we can report after the fact.
Well, we feed that where we have a very competitive offering there as well.
The capital spent in the U.S.
You know it's.
Well, it's quite clear it states it's been.
<unk>.
Yeah, the uncertainty caused by the a very long approval process for this merger have impacted us during the last few quarters that's clear.
What we see though is that.
The the combined company they will leverage the yes that they have now in the merger and and start to invest again, we see that in the second half of the air.
Then a horse move on to fight hard to.
So keep our position in that and the you know if we are in power technology or wins, which we can be better.
But let's see where that stands out overtime here.
Thanks for your thanks, Patrick you're happy with that.
Yeah. Thank you.
Okay at TEP M. stickier today, but before ending this call I would like to hand over again to you barrier with some closing remarks.
Thanks, Peter So I'm only going to end the by saying this is an unprecedented time we live in.
And the despite that we can continue to execute on on our strategy all the technology leadership.
By investing in.
R&D to drive them market, leading portfolio and we could deliver a solid fourth quarter with good gross margin and a solid free cash flow.
So with that we see that we are well position to manage a a difficult environment.
But we are very comfortable about our position on the long term attractiveness of the market.
With that thank you.
Thank you all stay well.
Thank you.
This now concludes our conference call. Thank you for attending you may now disconnect your lines.
[music].
And.