Q2 2020 Telefonaktiebolaget LM Ericsson Earnings Call

[music].

Welcome to Ericsson's analyst and media conference call for the second quarter report.

To view visual AIDS for this call. Please log on to Www Dot Ericsson dotcom forward Slash press.

Or www Dot Ericsson dotcom forward slash investors.

Ladies and gentleman when you would like to ask a question. Please press zero one on your push button phone.

If you wish to decline from the polling process. Please press zero too.

As a reminder.

A replay will be available one hour after todays conference.

Peter Nyquist, well now open the call.

Thank you Gerry.

And everyone welcome to today's Q2 coal.

And with me here and stop them I have a body eckel, president and CEO, Ericsson and calling it I'm the chief financial officers.

Before starting I would like to read these words during the call today, we've been making forward looking statements.

These statements are based on current expectation of certain planning assumptions, which are subject to risks and uncertainties.

The actual results may differ materially due to factors mentioned in today's press release and discussed in this conference call.

We encourage you to read about these risks and uncertainties earnings report.

As well as in our airport.

With those words I would like to handle but they were to preempt. Please go ahead.

Thank you Peter I'm dwell come every round two hours called for the second quarter.

The human poll problem covert 19 is increasing the clear it's impacting lives for all of us either directly or indirectly through the macro economy.

However, despite the devastation prone covert 19, we've delivered a solid quarter.

I'm very proud of all my colleagues here there is on that I've been able to execute intimate love. These pandemic.

We have reached at this stage, where we are now able to demonstrate how we can capture the benefits of our increased investments in R&D.

We're demonstrating our technology leadership through customer momentum.

We're increasing our market share in key markets and we now have 99 commercial fiveg contract and piece before like Fiveg networks performing across 27 countries.

But I would say were mostly proud of our indices performance of the equipment we deliver.

We are winning contracts based on our technology leadership, we have selectivity grown our strategic contract over the past quarters, which are now showing profitability in line with our plans.

And they are now were normal part of our business. So on this basis, we will no longer be do reporting on the strategic contracts unless we see an extraordinary impact.

I'm very pleased to see that we've delivered a solid performance, which has been predominantly driven by the networks and digital services. Our sales saw 55.6 billion Swedish krona with an operating margin of 8.2%.

During the quarter, we have increased our market position in mainland China, winning contracts from all major players.

This is important to us as a company as it provides us with the scale and equally important China will be a driver of importance teachers for the futures.

We have also seen an increase across several market areas, including Europe.

In segment digital services, we have been impacted by covert 19, and really did market uncertainty and we've also seen a decline in our legacy portfolio.

However, we see a strong demand for our cloud native and Fiveg core portfolio.

The wrong, some significant tier one customers, which will deliver revenues in twentytwenty around them beyond.

And in response to this strong market momentum, we've increased our grid decided to increase our R&D investments.

As a result of these factors we are not going to reach a they're seeing good they did margins for twentytwenty that will slip by a few quarters. However, the long term value created from the investments in R&D will will more than compensated for this.

It's difficult to predict.

The current market given the uncertainty we see as the result of Cobot 19.

But with the current visibility, we remain confident and committed to our group targets for Twentytwenty and Twentytwenty too.

Our free cash flow before M&A remains strong at 3.2 billion kroner in the quarter.

We've not had a significant negative impact in the quarter from.

Koby 19.

However, the uncertainty that it brings does make forecasting a challenge.

As we've said before we're committed to conducting our business in the right way and we're pleased that during this quarter. We're now commenced them ownership for ship following the settlement with the U.S. authorities.

This will help us further strengthen our ethics and compliance program.

So we've seen some reduction in sales due to macroeconomic uncertainty and or the macroeconomic economic conditions and covert 19, we've seen that mostly in Latin America Africa, India.

So in Europe, and Latin America, we've seen a reduction in planned exit on managed services contracts. However, this is partly offset by growth in network sales in Europe, and that's due to market share gains coming from technology leadership.

We see continued fiveg deployments in Middle East, which has made a positive impact in North America. There is continued fiveg momentum we generate increased sales in networks. However, digital services has decreased and managed services sales have also decreased.

As expected due to the operator merger.

In northeast Asia, we've seen strong sales growth for networks and digital services across all countries in the market area, primarily driven by Fiveg deployments in mainland China.

We continue in segments networks, we continue to see a strong momentum due to our five de leadership.

Organic sales were up 4%.

Gross margin was 40.5%.

Which is after absorbing Lord cero strategic contracts, including a the write off we had in mainland China.

And it the contracts we have in China will be profitable over the lifetime, but they've had a negative impact actually larger than the right inventory write off during Q2.

In digital services, our gross margin has improved to 43.6% and that is due to a large are increasing portion of software sales.

However, overall sales declined.

Which is due to the classic portfolio.

As well as some cobot 19 effects.

The new portfolio sales grew by 18% and so we we are in the middle of this transition from the classic portfolio to the new portfolio.

In managed services, we've seen a the variable sales declining.

And that's really due to the operate their merger into U.S.

But it's also explained by a transfer over contract to Eric So Nicola Tesla in Croatia.

As well as some planned contract exits.

But the underlying business is good and we see the increase in gross margin and due to efficiency gains, but also that the investments in R&D is driving a different portfolio composition with higher value added services.

And we intend to continue to invest in R&D, whereas as we have done in a in automation to support fiveg and efficiency gains in service delivery.

In emerging business or we see a continued sales growth and gross margin growth.

And it has resulted in an improved operating income.

Overall sales decreased by 4%.

And that's really explained by lower sales in Red Bee media.

During the quarter, we have also exited the gravity business because we did not deliver on the long term business case, and we did not see long term value creation.

I connective is delivering good sales and solid profitability.

With that I'm gonna give the word over to our CFO carmella. Thank you very young.

Okay lets a diving a bit more to the number seven [noise].

Moving on the topline so 55.6 billion.

And the second quarter in and that sales that's a flat.

Organic development year on year.

And I'm looking at the parts that networks delivered organic growth of 4% so year over year strong five decides in China, but also continued growth in several of the accomplishing northeast Asia on parts and Middle East.

Managed services declined by 12% as mentioned by a body also due to lower variable sales in North America post merger, but also a managed service contract to transfer in Europe than some other planned exits of contracts and then did into service as a organic sales declined by four per.

With lower demand for legacy hardware, but also serves as partly related to covert 19.

And this was offset by higher sales of software was certainly helps the gross margin on so I will get back to that.

So a if you look at the gross margin here, improving by 150 basis points year over year. Despite the inventory write down 900 million that we.

Informed about earlier in June and that affected gross margin here by 1.6%.

Improvement year over year, it could say driven by higher software sales ended the services and also efficiency gains in math services, but also added to that the higher IP our revenues in the quarter.

Operating income improved to 4.5 billion, excluding restructuring versus 3.9.

And this means that 8.2% operating margin.

And again main driver for the improvement on this line as well or reduced losses in the data service, reaching that point 7 billion versus 1.3 negative.

Last year due to a better gross margin as discussed.

So looking at the graft obviously, they adjust in rolling four quarter operating margin now stands at 9.9%.

Obviously close to the Twentytwenty target of over 10%.

Just a final comment on this slide when it comes to net income a couple of items that restructuring was 700 million in the quarter and that's the edge gravity.

Closure that Bill you mentioned, but also related to the acquired antenna business as we have announced earlier.

And then of course, we have the FX effect. There. So we have some positive currency hedge effect this quarter.

Making the financial that's actually a positive number this has not happened since second quarter 2070.

Okay, we move on.

Looking at the gross margin then over time and you can see here again, the quarterly fluctuations due to items like mix or timing of projects and so on.

But on a rolling four quarter basis.

The gross margin continues to show a steady improvement here and now stands at 38.3%.

Now we have improved the gross margin for nine consecutive quarters.

Primary driver or I would say is still the R&D investments that we make and that translates into competitive offerings and also a cost efficiency leading to.

Better position in the market, but also but the gross margin.

So year over year here, the gross margin was 38.2% up from sub 6.7.

And you if you look at the the networks piece again I want to mentioned the Mt. Three write down in China that 900 million.

And networks also impacted by a general higher share of our strategic contracts, including a the Chinese find the business.

But then at part of this negative impact was offset by a more favorable mix, but also what we call operational leverage namely improvement elsewhere.

In the business and then of course, we have IP are contributing with the growth in the quarter as well 2.8 billion, all IP or revenues.

Okay. I think we can move onto R&D units DNA. So you see here R&D expenses, then our investments rather increased year over year by 300 million and this is due to higher investment in networks again, while in digital services as we have talked about.

Before we continue to take out cost in the R&D.

The portfolio and the legacy portfolio.

But to capture and then the business opportunities that we see currently and going forward a we have accelerated R&D in the digital services and we'll continue to do so.

Ask in a flat at 6.9 billion.

We continue with the investments in digitalization and compliance, but here you can see Lexus basically offsetting this quarter by less cost for traveling and similar given the situation we're in.

When you model S. DNA for the third quarter. Please remember that the thought or to 19 had.

Positive effect by a refund of social cost and that was <unk> point 9 billion singer.

And lastly, not visible on this page, but still let me mention that there was no effect in this quarter from impairment losses on trade receivables syrup [noise].

Okay moving over to the cash flow, a 3.2 billion as Barry mentioned in the quarter.

This is of course, a key indicator for us when it comes to value creation in the and the company and.

It's encouraging to see that we keep a good discipline and working capital. So here net operating assets and liabilities remained stable in spite of the sequential growth we had in the second quarter.

And.

Further to that I would say we'd need to Ah, we made a 1 billion payment into the Swedish pension Trust. That's included in these numbers.

In the second quarter, a and another 2 billion is expected to be paid into that same trust in the third quarter.

So now Ericsson has delivered positive free cash flow before M&A for eight consecutive quarters, a and if we this is if we exclude the DJ SSC fine for a moment and also looking at the rolling four quarter basis.

Back care free cash flow has amounted to 18.3 billion.

Also there of course, excluding the assisted deals a fine and this translates into 8% of a the sales over the rolling four quarters.

Okay, moving on and the financial position here I'm looking at gross and net cash to the left and the maturity profile of that.

To the right in the graph here.

Yes, as you can see here not cash it start to 7.5 billion out and gross cash stands at 75.4 billion.

The debt matures over the next five years and here with an average maturity currently of 2.2 years.

The next maturity comes now in the fourth quarter of this year, it's 8.7 billion and we intend to repay this with cash on hand.

And in addition, giving additional resilience or we have an undrawn committed facility off 250 million Euro plus of course seems earlier also the 2 billion U.S. dollar long term revolving credit facility.

[noise] you saw the good news earlier in June that the company was upgraded by move this to be a one with the stable outlook.

So to summarize this position I would say, we have a resilient balance sheet, giving us a strong.

Financial position and well diversified the debt maturity profile.

Next slide we look at some of the highlights from the planning assumptions and the.

Please refer to the report for the food is assessed of planning assumptions about a couple of comments here first of all on the targets for Twentytwenty I'm trying to 22.

Obviously, they affect so krave 19 create certain uncertainties and we remain humble when it comes to predicting the future here, but with the currency stability, we clearly maintain the full year targets for for the group.

But he said.

And we also mentioned the here are the delay in target fulfillment in digital services as well.

We will not to comment on strategic contracts earlier sat here because this is a normal part of the business and those contract or.

I will develop thing according to plan.

And the third point here on the FX.

Of course, FX impacts our financial results, especially on the U.S. dollar sea change straight.

And lately, we've seen the sake strengthened against the U.S. dollar.

So obviously, we're not making any predictions here, but it's the U.S. dollar to see it would stay at the current level around.

Nine points 10, and this would mean a headwind compared to the average around of around nine seven. They we had in Q2 now this year or compared to the average 955 during Q3 last year.

So in our planning assumptions you will.

Well find the rule of thumb that we usually use how this impact sales and operating margin.

With that thank.

Thank you and I hand back to our CEO Mr. Brett.

Thank you Mr., calling the lumber.

So we worked hard to lead in Fiveg.

And we continue to underpin this through our strong performance.

And our investments in R&D and for Technology leadership has delivered strong performance and clear cost benefits.

By consistently delivering against our promises and taking selective strategic contracts, we have regained and continues to gain market share across the globe.

We have proven that strategic contracts are now profitable during that time and it is with these rigor in our business that we're establishing house as a market leader in Fiveg.

I would be sit performance has provided us with much more flexibility to grow and capture the opportunity that in Fiveg provides and that includes of course expanding our footprint.

We have now secured 99, and we're very close to 100 commercial agreements.

And we have.

54 lives Fiveg network.

Rounding with Ericsson equipment.

And these numbers on of course, changing daily and you can pull of them on our website.

But it is we have a very strong momentum.

The criticality of the network continues to to be proven and I wouldn't say they cobot 19 has further strengthened the need for countries to invest in communications infrastructure.

And the importance of these investments is really twofold. One of course is to have individuals connect.

What you actually see is that the digital infrastructure is the launch pad put technology innovation and economic recovery.

And we see Fiveg is the innovation platform for the future.

Here, you are up and that's a European company.

We know these days Europe is falling behind its really time for Europe to start Incenting investments in the digital infrastructure.

And and that includes for example, addressing the question about spectrum prices.

We've now completed a solid first half and with current visibility, we remain committed and confident in our financial targets for Twentytwenty and Twentytwenty too.

Our world, leading technology, coupled with our strong financial position means that we are ready now to deliver on the problem is so fiveg across the world.

Thank you.

Thank you Bill area.

So by that the presentation.

Has come from them, but we will then move over to the Q and a session. So I would like Kim Gary could you open up the Accuen they session. Please.

Thank you.

Ladies and gentlemen at this time, we will begin the question and home session.

If you would like to ask a question. Please press zero one on you will push button phone. If you would decline from the polling process. Please press zero two.

As always please limit yourselves to one question at the time and please keep your questions that's a broad level.

Detailed information is provided in the report and Ericsson's Investor Relations and media relations teams will be happy to take additional questions and discuss further details with you after the call.

Our first question comes from the line of Edward Snyder of Count to equity Research. Please go ahead.

Good morning, Ed. Thank you very good morning. Thank you very much for taking my question a couple of what could have Oreo.

It's just kind of an unprecedented tire for and that's just covert but Tom if you're looking at the network systems business.

The number of things happening that we've not seen in color, Tom or ever because the merger of T mobile spreads going through in the United States, you've got the UK indicated to remove one of your competitors over next several years.

You've got some pressure at least in the initial new technology over your traditional.

Others why should we expect this shouldn't form.

Your growth faster than the market's organic growth and or I know you don't want to get out predict oh period too much but I mean, it seems like the karcher stacking up to see maybe a consistent period of better than normal growth for Ericsson at least into 2000 at 21, let me call if I could.

Yes, making additional investments R&D in digital services or you're not going to meet your margin targets. This year sounds like.

The investments you're going to pay off at some point can you help us understand where that pays off in terms of.

At or above your target margins would occur this year next year Whats. Your you must obviously have some planning assumptions on what these investments are going to yield the upside to strike. The right you have more that might be thank you.

Thanks, Ed I'll start no, where we are optimistic about our industry, where we believe the need for chronic David there.

Is there and the need for connectivity going forward, but he's going to be even more and I would say that has been proven with a pandemic.

So were the macro view for our industry were very positive on that and within that posted review what we have done over the last few years, you still have a strong focus on gaining footprint as well and gaining.

Well I growing faster than the market and gaining market share.

And we believe we with the portfolio, we have the with a very competitive portfolio.

We can actually we in front of the customer.

So far you know the geopolitical discussions have not.

You know, it's hardly visibility now where revenues.

Because our market share gain really has come from.

From other players so to say.

And it's really a result of of the technology investments. We've made then we believe those are going to continue to pay off as long as as we focus on delivering and executing on on the investments, we're making a so where we are optimistic about the future.

And I guess, maybe clicking on all I can take care high and so on the second question investments in R&D and <unk> services.

First of all the Twentytwenty two targets remain so this is for theater aiming for.

And I would say, we make these investments out of a petition all of them.

Straying thing that we see great traction in the new portfolio and not least when it comes to five decor, where we have recorded as early wins with leading operators.

That's very good thing and it requires some acceleration than an increase all of the investments to to meet the requirements and a new prime requirements.

That's a good thing we are.

We are still going to obviously reached the twentytwenty targets, but with a few quarters, a delay and from their ramp up further into twentytwenty too.

So.

I think it's a it's the right thing to do for long term value creation clearly even if we are have to move the timeline for when a couple of quarters for target fulfillment.

Okay. Thanks, that's when you wouldn't move electronics.

Question. Please.

Our next question comes from the line of Alexander Peterc or societies General. Please go ahead.

One thing Alex Good morning, Hey, good morning, and thanks for taking my question.

The results I just had a few first of all if you could be more specific on what exactly will receive more R&D attention in.

Additional services, which which kind of programs all product, so I'm going to get down to the second one is if you could give us an idea of.

How long do you take you think I mean, youre informed opinion to take out the probably get of European networks, where the swaps will be required and whether that's because any delays in the near term fiveg deployment seen in Europe in particular, and then secondly, it's just I just like in the front how to quarter Unreal.

You know I'm kind of cost for you guys because you didn't give us a warning on the second quarter.

And the results actually came out at levels at or slightly above where consensus was before that warning. So I'm going to wondering did you not get as much of a hidden margins that she is at your thoughts or did anything else comes through a lot better than you thought at the time off of that.

Moving on its important thanks.

[noise] restart at the end then a with your.

Question about the why we communicate to the big provision.

You know when we do we have as a guiding principle to be transparent.

And we when we take very large costs that are subject to while on the system.

And then we feel it's appropriate to talk about that them to 'em describe that to the market.

And this was one of those where we had a very large calls so you can count on us to be transparent on these things I'll stay calm.

So I I, that's really the reason why we disclosed.

Nothing else.

If we look at you know they they ultimate.

If you're talking about swapping et cetera, and how that there's going to pan out. It's you know, it's really up to the customer to decide our focus will remain on delivering a competitive solutions with the customer the best technology combined with where.

We cost competitiveness to make our customers succeed in the market. That's the only way for us to drive the business and that's what we're going to continue to do then how long that there's going to take I think thats more inappropriate discussions will take with our customers rather than me commenting on that.

Yeah. The first question I, but yes, it develop on the R&D investment leisure travel, which product areas that there are you know in reality there are a couple of different areas.

Where we see that the.

You know asked as the market evolves, even more into Fiveg, where we can capture a lot to market opportunities. The key driver here is within the five g. core.

And that is where they're the most allocation will be but we also see additional investments in in in other parts.

Such as a BSS for example to capture the the Fiveg billing opportunity.

So there are a number of of areas, where we are thanks to the ramp and the market traction of Fiveg that we have decided to you increase our investments, but most are the biggest parties in the five decor.

Thanks, Alex. Thank you fix we will continue into the next question. Please.

Our next question comes from the line of Daniel just back of Handelsbanken. Please go ahead.

Wanting Danielle thanks.

Thank you and good morning, and I have a question on the China or you just said that just China inventory.

Right and most oh, the actual impact was larger than that and the.

Can you comment if this will lead to continue into Q3 and those are little bit on.

Second half.

The gross margin recovery in China.

We'll follow view.

Your.

Patients. Thanks.

[music].

Well, we have said done and that the still holds we.

China, we as we expected a negative quarter and it was negative to more than the write off.

In Q2, but we are also said that the second half we would see it contributing to a operating profit it it will still be dilutive on a gross margin basis, but it will contribute positively to the operating profit. That's still holds so longer term these contracts.

Our profitable for us.

But they are there it's a negative a initially impact when you remember it was the same thing in 27 T that we disclosed at the time, when we took a contract as well.

Right.

And also for short follow up if I may seal off from news from the open right around the yeah.

Pull the scrip et cetera, I don't know there was thinking it's a can compete with Morris and your view on them.

You have seen here with no cap being quite vocal on the other payors and when you see where if you see time for Ericsson.

To to work more and be more vocal on this.

Thank you know that though we are also working very actively India.

Opened around.

Alliance and driving the standards have opened right and so we are also big believers of that.

What we see is that the you know in high performance applications.

I need to solve a number of different use cases some of them the demand very high performance. That's a one segment you're gonna see out this segments that demand less performance in the last performance intensive and I believe and that we are well positioned to capture opportunities across that spectrum that includes the you know.

The purpose built a sequel for high performance as well as as possibly a or you know open solutions for pour more lower end performance requirements. So you know we are focusing on delivering the solution sort of customer last the less about marketing.

Thanks Danielle.

We continue to next question please.

Next question comes from the line of I Telcel Tanya of Credit Suisse. Please go ahead.

Financial wanting theater, hi, good morning, everyone, well, you're just one clarification on that China comment that you're making so we know that 900 million impact on a write down but if we exclude that write down like China gross margin would still would have been negative in Q2.

Oh, yes, that's bigger than the 900 million, a corner or or less than that and then secondly, like are we know that it's gonna be deemed our UK, but we'd gross margins in China I turned positive in Q3 or Q4.

Can you give some color on that and then secondly on.

Oh, Yeah, and then second question was on the seasonality comment that you haven't depress me a Q3 has been very Ah. The seasonality has been quite varied it is bringing between minus to duplicate sequential growth and so you have not made any comment as to what do you expect the seasonality.

This year, a weather normal seasonal above or below just trying to understand what are the puts and takes out regarding China, U.S. and FX or does it.

All these uncertainties preclude you from like giving up a precise guidance for Q3 seasonality at this stage.

You know I believe there it's a big pandemic ongoing so one should there be cautious about giving precise guidance in a world of other pandemic.

So you know they are very seasonality. If we look between Q2 in Q3 is 4% and that's what we have said.

We're not gonna say much more than that.

Yeah on China, Yes, there there is there was a negative even if you exclude.

The inventory write down there was a negative gross margin.

But you can also understand that into second half of the year. It has to be a positive gross margin as it contributes to operating profit.

Oh.

In Q3, as well just too just to clarify there.

Our only you're going you're commenting about second half.

Yeah, you know.

You are asking in a world, where a quarter, it's a completely arbitrary timing.

You're asking about their specific time interval in the development of a contract that span. Several years of course, you know there can be differences, depending on exactly when things pan out, but the second half will clearly contribute to operating profit.

Okay, that's great. Thanks Bye.

Thank you Sam So open for the next question. Our next question comes from the line of Amit Harchandani of Citi. Please go ahead.

Wondering on it.

Good morning, Peter Good morning, all on the touching Donnie from Citi.

A question and then follow up if I mean.

So my main question relates to the conversations that you have with your customers across different regions.

Clearly there's talk of five gx innovating and I was curious to understand what is the kind of features and functionalities that youre being talked about asked about the most in your conversations with customers in different regions is a dynamic spectrum shedding in the U.S. is it open networks in Europe any other features in China.

But just wanted to better understand what is the nature of can conversations and will tell you focused on in the home formula.

You know what you see is there the customers are so far very much focused on getting to fiveg equipment up and running and providing the additional capacity to the customers. So so one of the key focus areas have been a our dynamic spectrum sharing and get.

I think that into the market and that's been one important discussion unimportant focus area for us of course, what you mentioned about opened that's will also be a topic that sounded discussion.

But so far it's being predominantly on how to bring coverage of fiveg as quickly as possible yeah into the market and on the here you know that's a probably one of the key reasons why we are also winning market share.

As we are.

First to deliver those type of solutions to the market, but we see that that's actually a global just gotten it's not only in North America. It's the same in a in other markets as well.

And you had a follow up them it's.

Yes, Indeed says a follow up.

I note that.

Let me leave with regard to 80, a in the released this morning talking about certain agreements, so to new and and payments being temporarily affected by GE is going to strengthen that could you maybe elaborate a bit mode on how should we think about that I presume. This is more for 2021, it's good sites and so there.

I live in helping us thinkable seemed to be has.

Thank you.

Oh, the key you know the IP RBS. This is an important business for us.

And though what we you know we have there the agreements we have they ought to typically time limited.

And today, we have very few contracts that include Fiveg. So we're now entering a cycle with the ramp of Fiveg. So a number of contracts will come for re negotiation.

So what we are going to do is to make sure we get the right value for our technology is long term.

That means that they can be you know if FX short term because we don't agree with.

Are we there the other part b cells to say, that's really what we're saying, but we're very committed to maximizing.

And the value of our patent portfolio and we will know the you know not enjoy any short term payoffs jobs to till it took to get the.

The interrupted flow royalty payments.

That's where we want to say.

Thank you booty. Thank you Peter.

Yeah. Thank you it we will follow in the next question. Please operator. Our next question comes from the line of your kind of low cost of Sep. Please go ahead.

Wondering on and good morning. Thank you very much congratulations to a strong report.

Last question relates.

It's a pickup on the past then I'm just wondering live a very strong in the quarter and I'm just I realize that Justin set of and then your full year guidance or were there sort of a long enough payment in any time this quarter, that's an opportunity still or how do you see that.

And then guests to try to gain a bit more on the gross margin for the second half and I realize it's Sam you.

We talked a lot about China. That's worked here what do you see on their renaming sort of business. If we exclude the China and do you see any profit take when they get to tie this to the gross margin in second half from here. Thanks.

Thank you.

<unk>.

Yeah good thing.

Got it.

Maybe I can tell thought tell Yamaha cardiac on IP are there are fluctuations over quarter, given how contracts the panel personality.

What drove the growth now is the some of the read some.

Agreements, we have way handset provided that we had signed in the end of last year, but there are elements also of Ah.

Oh fluctuations between quarters that we saw a boosting this quarter, we keep the 10 billion number four four twentytwenty totally unchanged us They love the number we talk about.

<unk>.

And on gross margin a second half I mean, as you know your own or we don't guide specifically here I think you should look at the rolling a trend that we talked about yet it also in the presentation.

Of course that puts and takes China, we have discussed already that that will lead time and profitable into the second half.

We always also of course had the inventory write down in the second quarter, which will not repeat.

And then it's a question of the mix of course in the second half including EM.

Uh huh commodity or mix business makes in general and how the markets will play out so I think that's.

That's what we can say about the gross margin.

Okay Fair enough. Thank you yeah perfect. Thank you.

Thanks, We moved to next question.

Next question comes on the line of Sebastin stability of Kepler Cheuvreux. Please go ahead.

Good morning semester, yeah, yeah, it'll be one just a quick question on your nonstrategic boom trucks did she does have you seen wow, you skin lesions of whose contractual unicom trucks that are the studio review that year notes it won't grow too and could you at this could be the listing.

What was little fees from these contract to no Q2, all you may twond since the beginning of the year and when do you expect to HM.

<unk> <unk> non strategic on trucks and do follow ups would be on the competitive landscape in that they'd be youre, where we see a goal number of countries stuff people looking to do done what we hope for a gene you see some soon be easily could be more aggressive in the you walk right now thanks.

<unk>.

If we start with a their number of contracts we have left it's nine.

They are gonna be you know we had no impact really during Q2.

Quoted the extraordinary they're following plan and were starting to boxing as much as we can.

They kind of course be a b incidence is going forward, but as it has in the past we will disclose it if that is the case.

But we're working through but you know there at some of these contracts I think we've been quite clear there very long some of them are even 10 years. So they are going to be part of the business for a long time at and continued to be in that sounds margin dilute there because they are in reality the reserves are there to bring gross.

Hard into zero.

So they they will continue the up.

Yeah on the if we look at.

The ban question in Europe. It you know the for us.

You know there.

I think the key here is to remove uncertainty.

What we have had for a period of time now is very uncertain, who who has improved who's not approved was going to happen was not going to happen.

And that has it creates an environment for our customers to that are not friendly for investments.

So for US Europe has been.

You know it's been in being a good market, but only thanks to share gains.

Ah So we've seen growth in the second quarter due to market share gains and not the general market.

And I I think here, it's important that Europe, instead of thinking about five years away.

As as another telecommunications technology, it's actually digitally infrastructure, that's critical for the for the economy going forward.

And the economic values, so fiveg should be factored into Oh, you look out for example, restarting the economies.

On the analogy here with Fourg is quite stunning be a the to the you know Europe has lagged behind on Fourg. So it's not a surprise that they take disruptors and take unicorns or American on Chinese because that's the two countries in the world that rolled out.

<unk> Fourg earliest first.

So you know you need the right digitally infrastructure for entrepreneurs and innovators innovate dawn and develop new applications. So that's why I know there. They criticality for Europe is to have a stronger focus on building out fiveg or so so were not falling behind on the next generational technology.

Yeah, you're you had the third question that I didn't write down.

I mean, what's going to work with market share bid into the markets yard, which you've never come Simpson duties and soon do you could be to more aggressively in Europe speed beginning.

You know, where where we really commenting more on our own business. So we have gained market share over the last.

Three years almost a if you look by Q3 Twentynine team if you follow Delaware, it's about 5% to 6%.

So we have a substantial market share gain most of that actually comes from.

You know not the Chinese competitors, but others.

Thanks about them.

So we moved to the next question. Please operator. Our next question comes from the line of Pizza Cook Nielsen of a BG. Please go ahead.

Good.

Thank you very much high Peter I have just a question I believe it's the did it services business. If I may return to that one in college comments about the investments that will push up profitability. It obviously makes perfect sense I'm just interested when when this is obviously this is where this strong seasonality and when you talk about pushing back the break even tell I assume.

On a full quarter rolling basis, that's it preclude.

Then we could see a profitable quarter in the second house I mean, obviously to full.

I wish we would know we expect and now you, indicating that the normal seasonality is perhaps being evened out as we move into next year. You said, how we should be two comments. Thank you.

No you should read you should read it on a rolling four quarter basis.

So you know Q4 is typically a a much stronger quarters in other quarters and we have no.

Oh, that's where we continue to believe right an individual quarters will battery in this business. That's we always I'm, saying that remains true.

That's great. Thank you May I, just made just ask a follow up willing to have northeast Asia you. Obviously since the your comments on China here could you just elaborate a bit on on what you're seeing in Japan, and Korea, or you're still seeing good momentum here.

We're seeing good momentum across the market area. So that the of course is it's driven by China now about the out there.

Parts of the market. There are also very strong.

Thank you. Thank you it to go and then we'll move to the next question. Please.

Our next question comes from the line up particularly to our stance Keybanc. Please go ahead.

Good morning, Frederic <unk>. Good morning, Thank you and congratulations to are healthy report a I have one minute. Many questions have been answered one maybe for call.

Can you elaborate little bit on the Opex levels that you have in Q2, and if you had any sort of savings from the fact that we'll have a cover the nice thing pandemic and you can't traveled around and what have you and a little bit a if you could elaborate on the full year sort of opex levers that you do.

It also went back in connection with the Q4 report or if you could sort of update a little bit on that thank you yeah.

Hi fabric.

Absolutely, yes, a indeed, we see savings from less traveling that's very natural foremost I suppose on the we also see it in our numbers. So lets you saw than the.

You look at the SDMA was a flat year over year in spite of certain investments, we make and digitalization compliance security to some extent.

So offset by savings in for example, travel expenses so that's true.

Now I think for the rest for the full yeah. We we maintain what we've said before which is that given though CMS spent on given of course that we have added they untapped quite antenna basins as well into the mix.

Opex that would grow slightly over 29 team, but of course, we still have the aim to reduce the percentage of net sales during twentytwenty they laden with them.

The the R&D ramp up that we talk about now in that digital services.

Okay. Okay. Thank you for that's clear.

Thanks, Rick will move to the next question. Please our next question comes from the line of Sandeep Deshpande. They have JP Morgan. Please go ahead.

Yeah, Hi, Andy Good morning, a couple of questions from me Firstly on a network side.

Can you talk about where you know that there could be potentially change here in Europe are going forward from here, how do you see your position, which is already very strong in Europe. So I mean is Dan much that you can gain in Europe that are going to be share shifts in Europe, given what the potential.

Changes that are occurring and then a and b undocking forward looking from here and then secondly in digital services can you understand where these are indeed additional R&D investment that going into a incomes of helping you talked about the fiveg equal or I mean, and you're already won contracts.

I guess those investments have already happened that is the cloud I'd call. It. So I'm trying to understand where you are investing whether we could potentially have you grow.

So if you're if you start with a you know their market share shift in Europe, we probably are a touch north of 30%.

So as far as I know there are lot to compete for as far as I see.

You know if your stock or proton rather it's a different story, but.

We're not that so we're going to make sure we.

And you know where whether it's an opportunity we are going to a couple say spend hours as with our technology to try to weigh in as much as possible.

We will see how that pans out it's really in the Io the customer and they are going to make an evaluation based on technology and commercial terms on the how that is going to pan out that we don't know.

But of course, we are going to be a as competitive as we cap.

Yeah, if you look at a deed, yes, yes, there you know again.

Fiveg core has been.

Won in a number of.

Customers on customer networks, but it's still a lot of customers remaining and we what we want to do is to make sure that we are well come well positioned to win these new contracts as well. So that's typically not the whilst we have already won its other contracts.

And the and.

You know so so for us increasing the pace of innovation here, increasing the pace of feature development is an important way to win customer business and that's why we're increasing R&D.

Thank you.

It would have funded.

So let us smitten men, we all know going for the last question only saw were so operators. Please access our last question comes from the line of Dominic Olszewski of Morgan Stanley. Please go ahead.

Hi, Good morning, everyone, Hi, Peter I view on.

Things, taking the questions so from a strategic level, we're looking at Europe.

Could you maybe just described some of the puts and takes around.

Whether some of the European operators could play for delay I'm sort of they would site cost and the time involved of swap outs.

And what makes you confident that they didn't take the time that school and use that opportunity for transitions open ran.

And then sort of a second question related to that is just could you describe your operational capacity to actually deliver such swap outs. If they want to start to a much in upcoming quarters that wouldn't be any bottlenecks operationally or by components from your perspective. Thanks.

You know weve with if we start with the latter one we have oh.

Overall since its basically a 28 team we have tried to.

Call it.

De bottleneck, our supply chain as much as opposed to but and make it that's flexible as possible and have at least the restrictions as possible. That's why we've also been able to handle that the colgate disruptions well without any read and delays in shipments to customers.

So you know the with the volume we have today, we're basically churning out you know if you're comparing.

To a a London a day in radios. So you know we don't believe.

Oh, where capacity is what would limit.

With the rate you could the drive implementation of our technology in Europe.

So we don't see that to be a restriction.

Ultimately you know Fiveg rollout in Europe is I think it's a it's a.

Difficult question.

The problem. We have is that Europe is rapidly falling behind into digital infrastructure.

It's behind in Fourg penetration, probably bye bye.

Varies by country by call. It in average two to three years.

That has led to a lot of loss of economic value in Europe as a coal to them.

So if you look at take unicorns.

Take disruptors and all that actually leveraged a mobile infrastructure they come out of wood, but with a notable exceptional Spotify really they come out of the U.S., where they come out of China.

If we are going to repeat that mistake in Europe, I think the European economy has a problem.

So Europe as a continent needs to not be behind on Fiveg.

And why is that so important fiveg is going to drive a lot of enterprise applications.

Being in health care being in logistics being in Smart city planning et cetera. So when you start to look at that the big value of Fiveg is not the network. The network infrastructure, it's not the operators, it's actually the applications that drawn on top of the network.

So if we are on purpose delaying fiveg in Europe.

Then we're also hurting our economic future and I think that's the realization that has to start to come to the surface in Europe. So what we should do is focused really on how do we drive the fastest roll out of the of Fiveg.

Then then you know they owe around discussion. It's clearly there are we are going to be a participant in that as well as you know we're already active.

But for the high performance applications today, we do not see Oh around us away to speed up the rollout is rather wait to slow down right now.

But the that the we're going to be one win over on his read there we're going to be there.

Okay, you're happy with that though.

Yes. Thank you.

Thank you don't before ending I would like to give the word again to 2 billion habit closing remark. So please.

Thanks, Peter So with this we then put another solid quarter behind us with a good Q2.

We have strong portfolio today of leading products and solutions and we are well prepared with capacity when product portfolio to roll out and to capture the benefits. So fiveg. So with that again. Thank you all for joining us. Thank you.

Good bye.

This now concludes I'll come from school. Thank you for attending you may now disconnect you lines.

[noise] a.

[noise] a.

[music].

[noise] App.

[music].

[noise] and.

[music].

[noise] and.

[noise].

[music].

[music].

Thank you Gary.

Welcome to today's Q2 core.

[laughter] with me here in stock on my have the body Eckel, President and CEO Eric.

She said that's <unk>.

Before starting I would like to read these works do you want to call today, we've been making forward looking statements.

These statements are based on current expectation.

Assumptions, which are subject to risks going up.

The actual results may differ materially due to factors mentioned in today's Chrysalis and discussed this conference call.

We encourage you to read about these risks and uncertainties, you're not only before.

Well if you are at Newport Beach.

Those words I wouldn't like to handle but did want to probably up just slightly.

Thank you Peter I'm glad to come every well two hours called for the second quarter.

The human polar problem covert 19 is increasing the <unk>, it's impacting lives for all of us either directly or indirectly through the Mac recalling them.

However, despite the devastation Prohm Cowen 19, we've delivered a solid quarter.

I'm very proud of all my colleagues here that rigs on that I've been able to execute intimate love. These pandemic.

We averaged at this stage, where we are now able to demonstrate how we can capture the benefits of our increased investments in R&D.

We're demonstrating our technology leadership through customer momentum.

We're increasing our market share in key markets that we now have 99 commercial fiveg contract and piece before like Fiveg networks performing across 27 countries.

But I wouldn't say were mostly proud of our indices performance of the equipment we delivered.

We are winning contracts based on our technology leadership, we have selectivity grown our strategic contract over the past quarters, which are now show in profitability in line with our plots.

And they are now with normal part of our business. So on this basis, we would no longer be do reporting on the strategic contracts unless we see an extraordinary impact.

I'm very pleased to see that we've delivered a solid performance, which has been predominantly driven by the networks and digital services.

Let's say to start 55.6 billion Swedish krona with an operating margin of 8.2%.

During the quarter, we have increased our market position in mainland China, winning contracts from all major players.

This is important to us as a company as it provides us with the scale.

Equally important China would be a driver old important teachers for the futures.

We have also seen an increase across several market areas, including Europe.

In segment digital services, we've been impacted by Cobot, 19, and really did market uncertainty and we've also seen a decline in our legacy portfolio.

However, we see a strong demand for our cloud native and Fiveg core portfolio.

You're wrong, some significant tier one customers, which will deliver revenues in twentytwenty round them beyond.

And the in response to this strong market momentum we've increased our we've decided to increase our R&D investments.

As a result of these factors we are not going to reach a they're seeing good they did margins for twentytwenty that would slip by a few quarters. However, the long term value created from the investments in R&D, we will more than compensated for this.

It's difficult to predict the current market gave India. They also are didn't do we see a city South Dakota 19, but with the current visibility we remain confident they commit the taught group targets that twentytwenty on Twentytwenty too.

Our free cash flow before M&A remains strong at 3.2 billion kroner in the quarter.

We have an all tied to significant negative impact into quarter from yeah Colby 19.

However, they also attended that Didnt beings does make forecasting a challenge.

As we've said before we're committed to conducting our business into the right way and we're pleased that during this quarter. We're now commenced them ownership ownership following the settlement with the U.S. authorities.

This will have bus further strengthen our ethics and compliance program.

So we've seen some reduction in sales due to macroeconomic uncertainty that.

Macroeconomic economic conditions, and Colgate 19, we've seen that mostly in Latin America Africa, India.

So in Europe, and Latin America, we've seen a reduction in plans exceed the amount of services contracts.

However, this is partly offset by growth in network sales, the Europe, and that's due to market share gains coming from technology leadership.

We see continued fiveg deployments in middle East, which has made to positively impact.

North America. There is continued five gain momentum we generate increased sales in networks. However, digital services has decreased and managed services sales have also decreased as expected due to the operate their merger.

You northeast age that we've seen strong sales growth when that works and digital services across all countries in the market area, primarily driven by five you deployments in mainland China.

We continue in segment networks, we continue to see a strong momentum due to our Fiveg leadership.

Organic sales were up 4%.

Gross margin was 40.5%.

Which is after absorbing large show strategic contracts, including a the write off we had in mainland China.

And that the contracts, we have in China, we'd be profit driven over the lifetime, but they've had a negative impact actually larger than the right inventory write off during Q2.

In digital services, our gross margin has improved to 43.6% and that is due to a large are increasing portion of software assays.

However, overall sales declined.

We just due to the classic portfolio.

As well as says some covert 19 effects.

The new portfolio sales grew by 18% and so we we are in the mid that of these transition from the classic portfolio to the new portfolio.

In managed services, we've seen a the variable say is declining.

And that's really due to the operate their merger in the U.S.

But it's also explained by trials for all the contracts or Eric somebody called out that slain Croatia.

As well as some plan contract exits.

But the underlying business is good and we see the increase in gross margin.

Due to efficiency gains, but also that the investments in R&D is driving a different portfolio composition with higher value added services.

And we intend to continue to invest in R&D, whereas as we have done in a in automation to support Fiveg and efficiency gains is service delivery.

In emerging business, we see a continued sales growth and gross margin growth.

And it has resulted in an improved operating income.

Overall sales decreased by 4%.

And that's really explained by lower sense in Red Bee media.

During the quarter, we have also exited the gravity business because we did not deliver on the long term business case, and we did not see long term value creation.

I connect it is delivering good sales thing and solid profitability.

With that I'm gonna give the word overtime hours CFO carmella.

Thank you very young.

Okay lets a diving a bit more to the number sun <unk> starting on the topline so 55.6 billion.

And the second quarter in that sense, that's a flat.

Organic or development year on year.

And I'm looking at them parts that networks didn't have an organic growth of 4% so year over year strong five decides in China.

But also continued growth in several of the accomplishing northeast.

Sean parts I mean leach.

Manish I would say so declined by 12% thus mention by but he also due to lower variable sales seen in North America post merger, but also a managed service contracts transferred in Europe, and some other klondex itself contracts I'm done Didnt assortment say, it's a organic sales declined by four.

It's a.

It lower demand for legacy hardware, but also serve as partly as a related so cobiz 19.

And this was offset by higher side, so soft or sometime they have the gross margin I'll get back to that.

So a if you look at the gross margin here and dropping by 150 basis points year over year. Despite the inventory write down 900 million that'd be a informed about the earlier in June and that affected gross margin have by 1.6%.

Improvement year over year can say, they've and by higher software size and into the service and also efficiency gains in in managed services, but also added to that the higher IP our revenues in the quarter.

Operating income improved to 4.5 billion, excluding restructuring versus 3.9.

And this means that 8.2% operating margin.

And again main driver for the improvement on on these line as well reduce losses in the data service, reaching 10.7 billion versus 1.3 negative.

Last year you too.

Gross margin I just discussed.

So looking at the graph that usually they adjust in rolling four quarter operating margin now stands at 9.9%.

Obviously close to the trends, it's fun to talk at all so over time, but sounds.

Just a final comment on this slide when it comes to nothing Tom a couple of items that restructuring will some 700 million in the quarter and that's the edge gravity.

Oh sure that Bill you mentioned, but also related to the quite on 10 base manifest we have announced Yep and then of course me how they FX effect. There. So we have some <unk> positive currency hedge effect this quarter.

Making the financial that's actually a positive number this ethanol top 10 cents a second quarter just want to 70.

Okay. We move on looking at the gross margin then over time and you can see here again, the quarterly fluctuations due to items like mix or timing of projects and so on.

But on a rolling four quarter basis.

Gross margin continues to show a steady improvements he had a now stands at 38.3% a now we have improved the gross margin for nine consecutive quarter.

The primary driver Ah I wouldn't say is still the R&D investments that we make and that translates into competitive offerings and also a cost efficiency leading to.

Better position in the market, but also about the gross margin.

So year over year had the gross margin was <unk>, 0.2% up from sub 6.7.

And.

You. If you look at the then that talks piece again I want to mentioned the Mt. Three right phone in China that 900 million.

And networks also impacted by have generally higher shattered all all strategic contracts, including a the Chinese finally be Smith.

But then at park all these negative impact was offset by a more favorable mix, but also I want to be caught operational leverage namely improvement elsewhere.

In the business and then of course, we have I'd be are contributing with the growth in nickel address web 2.8 billion a life yard revenues.

Okay. I think we can move onto R&D units DNA. So you see here or R&D expenses, then our investments rather increase.

The year by 300 million EM and this is due to higher investment in networks again.

Alan did it thus far with it.

As we have talked about before we continue to take helped costing the R&D.

Ah portfolio and the legacy portfolio.

But to capture and then the business opportunities that we see currently and going for what we have accelerated R&D that as a service itself and we continue to do so.

Ask in a flat that 6.9 billion.

We continue with the investments in digitalization and compliance, but he have you can see that just basically offsetting this quarter by less cost while traveling and seem like given the situation we are in.

When you mold then that's DNA for the third quarter. Please remember that the thought what the 19 hub.

Paucity of effect by a refund of social cost and that was <unk> point 9 billion singer.

And lastly, not to sit on this page seven Bucks. The let me mention that there was no effect in this quarter from impairment losses on trade receivables Ciro [noise].

Okay moving over to the cash flow, a 3.2 billion as Barry mentioned in the quarter.

This is of course, a key indicator for us when it comes to value creation in the and the company.

It's a encouraging to see that we keep a good discipline and working capital <unk> net operating assets and liabilities remained stable in spite of the sequential growth we had [noise] in the second quarter.

And.

Further to that I would say we'd need to Ah, we made a 1 billion payment into the Swedish pension Trust. That's included in these numbers.

In the second quarter ER and another 2 billion is expected to be paid into that same trusting the thawed caught them.

So now Ericsson has delivered positive free cash flow before M&A for eight consecutive quarters, a and if we need to say if we exclude the deal Jay SSC fine for a moment.

So looking at the rolling four quarter basis.

Back you have free cash flow has amounted to 18.3 billion.

Most of that of course, excluding necessary deals a fine and they translate into 8% adult or the sales over the rolling four quarters.

Okay moving on a the financial position here I'm looking at gross and net cash to the left and the maturity profile that.

To the right in the graph here.

Yes, she can see enough cash it start to 7.5 billion out and girls cast stands out 75.4 billion.

That's much horse over the next five years air with an average maturity currently or 2.2 years.

The next matures the comps now in the fourth quarter over this year, it's 8.7 billion, we intend to repay this with cash on hand.

And in addition, the giving I just meant resilience or we have an undrawn committed facility off trying to 50 million Euro plus of course seems hardly at all so the 2 billion U.S. dollar long term revolving credit facility.

[noise] you saw the good news starting here in June.

The company was upgraded by moved this to be a one with the stable outlook.

So to summarize this position I would say, we have a resilient balance it giving us a strong.

And I said position on a well diversified the that's much or at the profit.

Next slide we look at some of the highlights from the planning assumptions and the.

Please refer to the report for the food is assessed <unk> planning assumptions about a couple of comments here first of all on the targets for Twentytwenty unfunded tempted to.

Obviously, they affect so called me 19, Craig Sutton on certain things and we remain humbled when it comes to predicting the future here, but with the current visibility we clearly maintain the for your targets for for the group, but he said.

And we also mentioned that he had a the delay in targets for feel month in big data services as well.

Being will not to comment on strategic contracts or near saddened here because they since a normal apart from the base mass and those contract are now developing according to plan.

And the thought pointing out on the FX.

Of course FX.

Impacts our financial results, especially on the U.S. dollar exchange rate.

And lately, we're seeing the stakes strengthened against the U.S. dollar.

So obviously, we're not making any predictions here, but yes, the U.S. dollar to see it would stay at the current levels around.

Nine points 10.

This would mean a hand when compared to the average around of around nine seven they we had in Q2 now this year.

Or compared to the averaged 955 during Q3 last year.

So in our planning assumptions you will.

Well find the rule of thumb that we're usually use holiday season pass sales and operating margin.

With that thank.

Thank you and I haven't back to our CEO Mr. brilliant.

Thank you Mr., calling alone there.

So we worked hard to.

Need in Fiveg.

And we continue to underpin days through our strong performance.

And our investments in R&D and for Technology leadership has delivered strong performance and clear cost benefits.

By consistently delivering against our promises and taking selective strategic contracts, we have regained and continued to gain market share across the globe.

We have proven that strategic contracts aren't alpro for that but during that time and it is we had this rigor in our business that we're establishing house as a market needs in fiveg.

I would be said before minutes has provided us with much more flexibility to grow and captured the opportunity that then fiveg provides and that includes of course expanding our footprint.

We have now secured 99, and we're very close to 100 commercial agreements.

And we have.

54 lives Fiveg network running with Ericsson equipment.

And these numbers on of course, changing daily and you can pull of them on our website.

Ah why did you have a very strong momentum.

The criticality of the network continues to to be proven and the I wouldn't say they covert 19 has further strengthened the need for countries to invest in communications infrastructure.

And the importance of these investments is really twofold. One of course is to have individuals clinic.

But what you actually see is that the digitally infrastructure is the launch pad put technology innovation and economic recovery.

And we see Fiveg is the innovation platform for the future.

Here, you are up and that's a European company.

We know these days Europe is falling behind its really time for Europe to start incenting investments into digital infrastructure.

And that includes for example, addressing the question about spectrum prices.

We've now completed a solid first half I would currently used to be in that they remain committed and confidence in our financial targets for Twentytwenty interventions went to do.

Our world, leading technology, coupled with our strong financial position means that we are ready now to deliver on the problem is so fiveg across the world.

Thank you.

Thank you very so by that the presentation has come from them, but we will then move over to the key when they session. So I would like yeah. Yeah attitude you open up the Accuen they session piece.

Thank you.

Ladies and gentlemen at this time, we will begin the question <unk> session.

If you would like to ask a question. Please press zero one on you will push button phone. If you would decline from the polling process. Please press zero two.

As always please limit yourselves to one question at the time and please keep your questions that's a broad level.

Detailed information is provided in the report and Ericsson's Investor Relations and media relations teams will be happy to take additional questions and discuss further details with you after the cool.

Our first question comes from the line of Edward Snyder with Charter equity Research. Please go ahead.

Good morning adds. Thank you very good morning. Thank you very much taste like question a couple of what could Ah boy.

This is kind of an unprecedented tile for not just hogan, but Tom if you're looking at the network systems business.

The number of things happening that we've now seen in Kuala Tom or ever I guess, the merger of stuff Timo will spend going through in the United States, you've got the UK indicated and remove one of your competitors over next several years.

You've got an unprecedented lesion and that he is a new technology over your traditional competitors why shouldn't we expect this shouldn't form.

Youre grows faster than the market's organic growth and <unk> I know you don't want to get out predict oh pure it too much but I mean, it seems like the parts are stacking up to see maybe a consistent period of better than normal growth for Ericsson at least into 2000 at 21, let me call, but could you.

Making additional investments R&D in digital services or you're not going to meet your margin targets. This year sounds like.

The investments you're going to pay off at some point can you help us understand where that pays off in terms of.

At or above your target margins would occur this year next year Whats. Your you must obviously you have some planning assumptions on what these investments are going to yield the upside just trying to get your idea on where that might be thank you.

Thanks, Ed I'll start no, where we are optimistic about our industry, where we believe the a need for chronic David there.

Is there and the need for calling activity going forward, but he's going to be even more and I would say that has been proven with a pandemic.

So where were the macro view for our industry were very positive on that and within that Paul Sidney view, what we have done over the last few years, you still have a strong focus on gaining footprint as well and gaining.

I growing faster than the market than gaining market share.

And we believe we with the portfolio, we have the with the very competitive portfolio.

We can actually we in front of the customer.

So far you know the geopolitical discussions have not.

It's hard to be stability in our revenues.

Because our market share gain really has come from.

From other players so to say.

And it's really early south of the technology investments. We've made that we believe those are going to continue to pay off as long as as we focus on didn't he bring in executing on on the investments, we're making a so where we are optimistic about the future.

And I get into cooking.

I can take a high and so on the second question on the investments in R&D and <unk> services.

First of all the 20 to 22 targets remain so this is what their aiming for.

And I would say, we make these investments out of a petition all them.

Straying seen that we see great checks I mean, the new portfolio and not least when it comes to five decor, where we have recorded as early wins with leading operators.

That's very good thing and it requires some acceleration than an increase all of the investments to to meet the requirements and a new prime requirements.

That's a good thing we are.

We are still going to obviously reached the twentytwenty targets, but with a few quarters, a delay and from that ramp up further into twentytwenty too.

So.

I think it's a it's the right thing to do for long term value creation clearly even if we are have to move the timeline for about a couple of quarters <unk> target for feeding them.

Okay. Thanks, that's leaving them a little.

Question. Please.

Next question comes from the line of Alexander, but Oh societies General. Please go ahead.

One thing on its good morning, Hey, good morning. Thanks for taking my question. That's Miss a great results I just had a few first of all if you could be more specific on what exactly will see more R&D attention in are you still set the seats, which which kinda programs all brought up so I'm going to get down.

The second one is if you could you give us an idea of.

How long do you take you've seen I mean, youre informed opinion to take all the while it gets of European networks, where the swaps will be required and whether that's <unk> any delays in the near term fiveg deployment seen in Europe in particular, and then when it's just I, just lucky if and how to quarter unreal.

You know came across what you guys because you didn't give us a wounding on the second quarter.

The results actually came out at levels at or slightly above where consensus was before that warning. So I'm going to wondering did you not get as much of it hits on margins that you actually stores or.

Anything else comes through a lot better than you thought at the time of Oh that's.

William on second quarter. Thanks.

[noise] restart at the end then a with your.

Question about the why we communicate to the big provision.

You know when we do we have as a guiding principle to be transparent.

And we when we take very large cost that are subject to while on the system.

Then we feel it's appropriate to to talk about that them to 'em described out to the market.

And this was one of those where we had to very large coal. So you can count on us to be transparent on these things I'll stay calm so I I, that's really the reason why we disclosed.

Nothing else.

If we look at you know they they ultimate.

If you're talking about swapping et cetera, and how that there's going to pan out. It is you know, it's it's really up to the cost the meant to decide our focus will remain on delivering a competitive solutions to the customer the best technology combined with.

We cost competitiveness to make our customers succeed in the market. That's the only way for us to drive the business and that's what we're going to continue to do then how long that there's going to take I think that's more inappropriate discussions will take with our customers rather than me commenting on that.

Yeah. The first question I, yes, it depended upon that what Andy investment leisure travel, which product areas that there are you know in reality the article spinoff different areas, where we see that the.

You know asked as the market evolves, even more into Fiveg, where we can capture lot of market opportunities. The key driver here is within the five g. core.

And that these where they're the most allocation will be but we also see additional investments in in other parts.

Such as a DSS for example to capture the the Fiveg building opportunity.

So there are a number of ovarian elsewhere. We are thanks to the ramp into market traction of Fiveg that we have decided to increase our investments, but most are they the biggest partners in the five decor.

Thanks, Eric.

Okay. Thanks.

I will continue for the next question because.

Our next question comes on the line of Daniel just back of Handelsbanken. Please go ahead.

Wanting downhill and I think there.

Thank you and good morning, and I have a question on the China, but do you just said, but just trying to inventory.

Right than most Uh huh.

Actually impact was larger than that the.

I can't comment if this will raise to continue into Q3 and also that the bit on.

Second half of.

The gross margin recovery in China.

It will follow me or Youre a.

Patients. Thanks.

Well. It's we have said then that the still holds we China. We act, we expected a negative quarter and it was negative to more than the the right, though a in Q2, but we are also said that the second half we would see it's contributing to a operating.

Profit it it will still be dilutive on a gross margin basis, but it will contribute positively to the operating profit. That's still holds so longer term these contracts or profitable for us.

But they are there it's a negative a initially impact when you remember it was the same thing and fancy 17 that we disclosed at the time, when we took a contract as well.

Perfect and also for short follow up if I may.

See a local news from the open right there on the yeah.

Well, the scrip et cetera, I don't I was thinking if it comes at bit Morris on your view on them.

But you'll see in here with no cap being quite will close on the other day as and when you see where if you see time for Ericsson too.

To work more and be more vocal on this.

Thank you know that though we are also working very actively India.

Opened around.

Alliance and driving to stand up some opened right. So we are also big believers held up well.

What we see is that the you know in high performance applications.

I need to solve a number of different use cases, some of them <unk> demand very high.

Before most that's a one segment you're gonna see all the segments that demand less performance in the last performance intensive and I believe and we're well positioned to capture opportunities across that spectrum that includes the you know the purpose built a sequel for high performance as well as as possibly a.

Open solutions for for more lower end performance requirements. So you know, we we are focusing on delivering to solution on sort of customer less the less about marketing.

Thanks, Dan.

We continue to next question please.

Next question comes from the line of actual so Tanya of credit Suisse. Please go ahead.

Well now show a morning, Peter Hi, Good morning, everyone I'm going to just one clarification on that China comment that you're making a so we know that 900 million impact on a write down.

But if you exclude that write down like China gross margin would still would have been negative in Q2.

Oh, you stack are bigger than the 900 million, a corner or or less than that and then secondly, like that we know that it's going to be deemed our UK, but we'd gross margin see China I turned positive in Q3 or Q4 I can you give some color on that and then secondly on.

Oh, Yeah, and then second question was on the seasonality comment that you haven't depress me a few key has been very Ah. The seasonality has been quite varied is bringing between minus two plus eight sequential growth.

And so you have not made any comment as to what do you expect for seasonality this year or weather normal seasonal above or below so just trying to understand what are the puts and takes out regarding China, U.S. and FX or does it.

All these uncertainties preclude you from like giving up a precise guidance for Q3 seasonality at this stage.

You know I believe there it's a big time that make ongoing so one should be cautious about TV precise guidance in a world of all the pandemic.

So you know they are very seasonality. If we look between Q2 in Q3 is 4% and that's what we have said.

We're not gonna say much more than that.

Yeah on China, Yes, there there is there was a negative even if you exclude.

The inventory write down there was a negative gross margin.

But you can also understand that into the second half of the year. It it has to be a positive gross margin as it contributes to operating profit.

Oh.

In Q3, as well just too just to clarify there.

Or only you call when you're commenting about second half.

Yeah, you know.

You are asking in a world, where a quarter just a completely arbitrary time into them.

You're asking about those specific timing interval in the development of a contract that span. Several years of course, you know there can be differences, depending on exactly when things Pan out.

The second half, we've clearly contribute to operating profit.

Okay, that's great. Thanks Bye.

Thank you I sound. So open for the next question. Our next question comes from the line of I'm, a touch and Donny of Citi. Please go ahead.

One of them it could.

Good morning, Peter Good morning, all on the touching Donnie from Citi. A question and then a follow up if I mean.

So my main question relates to the conversations that you have with your customers at growth defend bleach and.

Clearly, there's talk of Fiveg innovating and I was curious to understand what just to kind of features and functionalities that youre being talked about asked about the most in your conversations with customers and just to engage in the dynamics that come shedding in the U.S. is it opened networks and yard or any of this feature in China.

Just wanted to better understand what is the nature of can conversations and what are you focused on.

Formula.

You know what you see is there the customers are so far very much focused on.

Shifting to fiveg equipment up and running and providing the additional capacity to the customers. So so one of the key focus areas have been.

I would dynamic spectrum sharing and getting that into the market and and that's been one important.

Discussion on important focus area for us of course, and what you mentioned about the opened that's will also be a topic that sounds a discussion.

But so far it's being predominantly on how to bringing coverage of fiveg as quickly as possible yeah into the market and on the here you know that's a probably one of the key reasons why we are also winning market share.

As we are.

First to deliver those type of solutions to the market, but we see that that's actually go but just gotten it's not only in North America. It's the same in a in other markets as well.

And you had a follow up them it's.

Yes, Indeed says a follow up.

I note that is coming clean with regard to I.E. on in the release. This morning talking about certain agreements for the new Lynn and payments being temporarily affected the play GE is going to certain can that could you maybe elaborate a bit more on how should we think about that I presume. This is more like 2021.

It's good sites and so the color and things thinkable seem that could be helpful. Thank you.

Oh, the key you know VIP RBS. This is an important business for us.

And though what we you know we have it then the agreements we have they ought to tip. The good time limited.

And today, we have very few contracts that include Fiveg. So we're now entering a cycle with the ramp of Fiveg. So a number of contracts will come for re negotiation.

So what we are going to do is to make sure we get the right value for our technology is long term.

That means that they can be you know if FX short term because we don't agree with.

Were there the other part b cells to say, that's really what we're saying, but we are very committed to maximize seeing.

And the value of our patent portfolio and we will know the you know not enjoy any short term payoffs jobs to till it took to get the uninterrupted flow royalty payments.

That's why we want to say.

Thank you Bobby Thank you Peter.

Yeah. Thank you it we will fall over the next question. Please operator. Our next question comes from the line of your kind of focused on Sep. Please go ahead.

Good morning on up at good wanting thank you very much congratulations to US don't report first question relates.

To pick up on the past and I'm just wondering if they have a very strong in the quarter and I'm just.

I realized that this then sort of and then your full year guidance, so where they're sort of a long enough payment in anytime this quarter that's enough <unk> dollar how do you see that.

And then guests to try to gain a victim of water on the gross margin for the.

The second half and I realize it's.

You know we talked a lot about China. That's worked here what do you see on their remaining sort of business. If we exclude the China and do you see any positive when they get to tie this to the gross margin in second half from here.

Thank you.

Yeah good thing.

Maybe I can tell thought to Yamaha calling.

Well not the argument that ought to fluctuations over quarter, given how contracts a pan out seasonality.

Well drove the growth Maui or some of the read some.

Agreements, we have a handset providers Duffy signed in the end of last year.

There are elements also of Oh.

Oh fluctuations between quarter, something we saw a boosting this quarter, we keep the 10 billion number four four twentytwenty totally unchanged us They love the number we talk about.

<unk>.

And on gross margin a second half I mean, that's you know you on that we don't guide specifically here I think you should look at the rolling a trend that we talked about the had also in the presentation.

Of course that puts and takes China, we have discussed already that that we lead time and profit the bundled into the second half.

We all toys or so of course had the inventory write down in the second quarter, which we're not to beat.

And then it's a question of the mix of course in the second half including.

ER commodity or mix business makes in general and how the markets would play out so I think that's.

That's what we can say about the gross margin.

Okay I don't know thank you yeah perfect. Thank you.

We'll go to next question.

Our next question comes on the line of Sebastin step as it off Kepler Cheuvreux. Please go ahead.

Many semester, yeah right over the one that just a quick question on your nothing's copies you called trucks did she does have you seen Wow you skin. He believes you.

<unk> contractual unicom trucks that are you review that yet so it won't grow too and could you. At this you can be done. This then what tools they love Fuseform. He's come truck to no Q2, all you may twond since the beginning with the yet and when do you expect to.

He's youd <unk> known sweat because you can trucks and do it for the what would be on the competitive landscape and that they'd be your oil where we see a goal number of country. You've got people looking to two button, what we hope I did you see some soon be newly could be more aggressive in the you walk.

Right now thank you.

If we start with a number of I know I'm, calling tracks we have left it's nine.

They are gonna be it you know we had no impact really during Q2.

Uh huh.

Quoted the extraordinary they're following plan and were starting to bulk seen as much as we can.

And that kind of course be a b incidence is going forward, but as it has in the past we will disclose it if that is the case.

But we're working through about you know there some of these contracts I think we've been quite clear there very long some of them I, even 10 years. So they are going to be part of the business for a long time at and and continued to be in that sounds margin dilute there because they are in reality the reserves are there to bring gross.

Margin for zero.

So they they will continue the up.

Yeah on the if we look at.

The bond question in Europe, you know there for us.

You know there.

I think the key here is to remove uncertainty.

Yeah, what we've had for a period of time now he's very uncertain, who who is it proves it was not improves was going to happen was not going to happen and that tests creates an environment for our customers to that they're not friendly for investments.

So for US Europe has been.

You know it's been in being a good market, but only thanks to share gains.

So we've seen growth in the second quarter due to market share gains and not the general market.

And I I think here it seems important that Europe, instead of thinking about five G.S. away.

As as another telecommunications technology, it's actually a digital infrastructure that's create good for the for their Colin let me going forward.

And the economic values, so fiveg should be factored into Oh, you look out for example in restarting the economies.

And on the analogy here with Fourg is quite stunning via the to the you know Europe has lagged behind on Fourg. So it's not to surprised that the take Disruptors and take unicorns are American on Chinese because that's the two countries into well that roll down.

<unk> for GE earliest first.

So you know you need the right digitally infrastructure for entrepreneurs and innovators to innovate dawn and develop new applications. So that's why I know there the criticality for Europe is to have a stronger focus on building out fiveg or so so were not falling behind on the next generational technology.

Yeah, you're you had the third question that I didn't write down.

Yeah.

No. It doesn't go to market should have been into that bucket shared with you next comes from some duties and soon so you could be to more aggressive in Europe speed beginning.

You know where where who.

Really commenting more on our own basis. So we have gained market share over the last.

Three years almost a if you look by Q3 Twentynine team. If you follow Delaware writes about 5% to 6%.

So we have a substantial market share gain most of that actually comes from.

You know not the Chinese competitors, but others.

Thanks about them.

So let me go to the next question. Please operator. Our next question comes from the line of Pizza Cook Nielsen off a BG. Please go ahead.

Pretty good.

Thank you very much high Peter just a question I believe it's is it did it services fitness, you're trying to really turned for that one and cause comments about the investments that will push up profitability. It obviously makes perfect sense I've just interesting. When this is obviously this was this strong seasonality and when you talk about pushing back the breakeven target I shouldn't.

On a full quarter rolling basis, that's it preclude.

That we could see a profitable quota in the second hogs I mean, obviously to full which we would normally expect and now you indicating that the normal seasonality is perhaps be evened out as we move into next year. You said, how we should be two comments. Thank you.

No you shouldn't read you should read it on a rolling four quarter basis.

So you know Q4 is typically a a much stronger quarters than other quarters and we have no.

No. That's what we continue to believe right an individual quarters will battery in this space since that's where all the way so I'm, saying that remains true.

That's great. Thank you May I, just made just ask a follow up related to a northeast Asia. You. Obviously sensor your comments on China here could you just elaborate a bit on on what you're seeing in Japan, and Korea, I, you're still seeing good momentum here.

We're seeing good momentum across the market area. So that Oh of course is it's driven by China now about the out there.

Parts of the market there are.

Are also very strong.

Thank you. Thank you that's a good and then we'll move to the next question. Please.

Our next question comes from the line up particularly to Danske Bank. Please go ahead.

I want to credit <unk>. Good morning, Thank you and congratulations to a healthy report a I have one minute. Many questions have been answered I have one maybe for call. It.

Can you elaborate little bit on the Opex levels that you had in Q2, and if you had any sort of savings from the fact that would have a cover the nice thing pandemic and you can't traveled around and what have you and.

Elizabeth.

If you could elaborate on the full year sort of Opex level that you did also went back in connection with the Q4 report a if you could sort of update Elizabeth on that thank you yeah.

Hi fed it.

Absolutely, yes, a ended we see savings from less traveling that's very not from a foremost I suppose on live we also see if they know number so that you saw than the.

If you look at the S. DNA was a flat year over year in spite of something investments, we make and digitalization compliance security to some extent.

So offset by savings in for example, travel expenses so that's true.

Oh I think for the rest for the full yeah. We we maintain what we've said before which is that given those CMS spent on given of course that we have added a they untapped quite antenna basins as well into the mix.

Opex would grow slightly over 29 team, but of course, we still have the aim to reduce the percentage on that saves during twentytwenty, they laden with them.

The the R&D ramp up that we talk about now in digital services.

Okay. Okay. Thank you heard us care.

Thanks, Fred It will move to the next question. Please Oh. My next question comes from the line of Sandeep Deshpande. They hold JP Morgan. Please go ahead.

Yeah, Hi.

Good morning, a couple of questions from me Oh, Firstly on the network side.

Can you talk about where you know that there could be potentially change shifts in Europe are going forward from here, how do you see optimization, which is already very strong in Europe. So I mean is Dan much that you can gain in Europe that are going to be CAC Western Europe, given what the potential.

Changes that are at city, and then I'm talking forward looking from here and then secondly in a digital services can we understand where these are indeed additional R&D investment going into a income don't you talked about the fiveg goal or I mean, and you're already won contracts.

I guess those investments have already happened that is the cloud equal or so I'm trying to understand where do you got to investing fluid that we could potentially have you grow.

<unk>.

So if you're if you start with a you know that market share shift in Europe, we probably are a touch north of 30%. So.

So as far as I know there are lot to compete for as far as I see.

You know if your stock or proton rather it's a different story, but.

We're not that so we're going to make sure we.

You know where whether it's an opportunity we are going to let's say spend hours satisfied with our technology to try to weigh in as much as possible.

We will see how about pans out it's really in the eye of the customer and they are going to make an evaluation based on technology and commercial terms on the how that is going to pan out we don't know.

But of course, we are going to be a as compared to divest recap.

Yeah, if you look at a deed, yes, yes.

Yeah again Fiveg core has been.

Won in the number of.

Customers on customer networks, but it's still a lot of customers remaining and we what we want to do is to make sure that we are welcome well positioned to win these new contracts as well so thats typically not the whilst we have already won its out there contracts.

And the and.

You know so so for us increasing the pace of innovation here increasing to page. So feature development is an important way to win customer business and that's why we're increasing R&D.

Thank you.

It would have some of it so.

So let us smitten men, we all know going for the last question. The only thought were so operators piece.

Next on last question comes from the line of Dominic Olszewski of Morgan Stanley. Please go ahead.

Hi.

Hi, Peter Hi, everyone.

Thanks for taking the questions. So from a strategic level, we're looking at Europe.

Could you maybe just described some of the puts and takes around.

Were there some of the European operators could play for a delay I'm sort of they would site cost and the timing of also swap outs.

And what makes you confident that you didn't take the time that school and use that opportunity for transitions open ran.

And then sort of a second question related to that just could you describe your operational capacity to actually deliver such swap house, if they want to start to a much in coming quarters that wouldn't be any bottlenecks operationally or by components from your perspective. Thanks.

No we waived if we start with a the latter one we have oh.

Overall since he is basically 2018, we have tried to.

Quoted.

The both doesn't make our supply chain as much as posted but and make it that's flexible as posted but I don't have as lead the restrictions as possible. That's why we've also been able to handle that the colgate disruptions well without any read and delays in shipments to customers.

So you know the with the volume we have today, we're basically a churning out you know if you're comparing it to.

To a a London a day in radios. So you know we don't believe.

Oh, where capacity is what would limit a with a rate you could drive implementation of our technology in Europe.

Ah. So so we don't see that to be a restriction.

Ultimately you know Fide you rollout in Europe is I think it's a it's a difficult question.

The problem. We have is that Europe is rapidly falling behind into digital infrastructure.

It's behind in Fourg penetration, probably bye bye.

Varies by country by call. It in average two to three years.

That has led to a lot of loss of economic value in Europe as a cold Dino.

So if you look at take unicorns take Disruptors and all that actually leveraged to mobile infrastructure. They come out of wood, but we didn't know double exceptional Spotify really they come out of the U.S., where they come out though China.

If we are going to repeat that mistake in Europe, I think the European economy has a problem.

So Europe as say continent needs to not be behind on Fiveg.

And why is that so important fiveg is going to drive a lot of enterprise applications being in health care being in logistics being in smart city planning et cetera. So when you start to look at that the big value of Fiveg is not the network the network infrastructure, it's not the operators, it's actually the application.

Yes that drawn on top of the network.

So if we are on purpose delaying fiveg a euro.

Then we are also hurting our economic future and I think that's the realization that has to start to come to the surface in Europe. So what we should do is focused really on how do we drive the fastest rollout of Oh fiveg.

Then then you know there the old around discussion. It's clearly there are we are going to be a participant in that as well as you know we're already active.

But for the high performance applications today, we do not see Oh around us await the speed up the rollout is rather wait to slow down right now.

But the that the we're going to be one when overall just read there we're going to be there.

Okay, you're happy with that though.

Yes. Thank you.

Thank you don't before ending I would like to give the world again to 2 billion to have it closing remark. So please go ahead.

Thanks, Peter So a witness a windows and put another solid quarter behind us with a good Q2.

We have strong portfolio today, all the leading products and solutions and we are well prepared with capacity when product portfolio to roll out and to capture the benefits. So fiveg. So with that again. Thank you all for joining us.

Thank you all.

Good bye.