Q2 2021 Telefonaktiebolaget LM Ericsson Earnings Call

Coming here from the studio and she's stuff.

Together with me here and the studio it is our president and CEO, Barry Quart and ours.

CFO.

Call it no longer.

It was usually after the presentation, we will have a Q&A session and it is important and in order to ask questions you need to sign up.

Telephone.

So it details can be found in today's press release and on our website.

It is on Dot com.

Day during today's presentation, we would it be making forward looking statements. These statements are based on our current expectation and certain planning.

It.

Or subject to risks and uncertainties.

Actual results may differ materially due to factors mentioned in today's press. It is and discussed in this conference call. It.

We encourage you to read about these risks and uncertainties in our earnings report, that's where it is.

And the annual report.

With that said I would like to hand over to work to do you believe it Pittsburgh.

Great. Thank you Peter.

And good morning, everyone and thanks for joining us.

And so conference for the second quarter.

And it continues to see good momentum and our business and it is based on the 5 D. Rollouts, but also on market share gains. So we saw organic growth of 8% during the quarter and we could also strengths and the gross margin and.

For the whole group to $43.4 per cent.

Before I step into the Q2 before them and so I really want to highlight the efforts by our people to deliver it is resolved during the second quarter. Despite the global pandemic that we've been operating within several of our markets.

Today, It's also clear that we are and leader in the 5 D area.

Have a very competitive portfolio and today, we power Ninety-three live 5 G networks out of it total number of 169.

Globally.

A few years back we also made the strategic decision to try to Deconcentrate and our supply chain again to be able to deliver to our customers that means that we have invested in making our supply chain more flex it better.

And during the quarter it we ever had no disturbances and our deliveries and we've been able to keep up with it demand we've seen and the markets.

I would say it the ability to delay it very in combination with the significant efforts or investments, we've made and the R&D area and and combined of course with our strong.

The efforts by our people have allowed us to perform well despite the very challenging environment during the second quarter.

So let me go through a couple of key highlights and our strategic execution during the second quarter here.

We have country and used to show great progress you know it product portfolio and it is highlighted by the addition of the 5 G mid band and massive Mimo support trial, where cloud drive and portfolio.

Cloud run it as a critical element and our product portfolio.

This will enable our customers to evolved and networks towards a cloud native architecture, and open network architecture, leveraging automation and food it will telling them as networks Erik.

And Exxon has always been and always will be a strong believer and openness and the mobile networks and we will work in close partnership with our customers.

And it took to leverage the benefits of the open architecture.

We take the same approach to open ran solutions and we are actively participating and the standard bolt this and open ran.

We also continue to see great momentum and the U S driven by strong demand for our 5 G. It solutions and we expect to continue as 5 day is rolled out across the nation.

And this was further highlight it did of course by the tightening we had this morning over 71 billion kroner it 5 year contract.

1 of the largest operators and the world and it sort of ice and of course.

And this is the largest contract and the history of Ericsson.

Yes.

On the IPR side, we continue to see good momentum and.

And in signing up new license source.

And we are your during the quarter have we have signed an agreement with Samsung that we believe it is a very attractive agreement for us.

And it kind of confirms the value of our portfolio. What we have also seen is that that momentum continues with signing up additional contracts here during July.

But despite the signing of the Samsung contract that also included revenues that's attributable to the first quarter. We saw a decline in total it IPR revenues over about half a billion kroner.

We have previously communicated that it is high risk that we would be allocated.

Low where marketshare and in in China do it the sweetest decision to not allow Chinese vendors industry. These 5 G network.

And this kennedy to a significantly lower market share going forward compared.

Compared to what we have today of course and.

And when we look at the second quarter, we have seen that our sales in mainland China. It has fallen by about $2.5 billion kroner and that's a 60 per cent reduction compared to Q2 last year.

We don't really know the definite the outcome of the tenders, that's ongoing but we want to say it that it's prudent for you to already and now planning for a significant reduction and market share both in networks as well as digital services.

And regarding digital it sort of is this a we can see that the material loss in market share in China, and mainland China would lead to a delay in reaching the targets and digital services.

And we have in addition during this quarter, we have taken a write off over 300 million kronor relate it to pre commercial product development for the Chinese market.

And this is basically pushing out a day the ability of us to reach breakeven that we predicted before and you know it.

And I would call it meant on that we all read it before it took a decision to increase our investments in R&D in it.

And what are to capture the 5 G opportunities that we see it front of us. So now we expect a limited loss in 2020.2.

But it will also be a bit back and have it. So you will see strong and good development in the second half assed and you portfolio start to generate significant revenues.

However, we can also see that based on this strong portfolio, we have and digital services and the strong momentum we have and the marketplace that we are going to overtime.

Compensate the Chinese volumes are without the markets. So we're going to see a path to exceed the previous targets of 4% to 7% EBIT margin that we said, but it will take a bit longer than we already are forecast it.

Finally, I want to just highlight the work we do on ethics and compliance.

And all our sparing no efforts and investing and our procedures way so working to make sure that we have.

Processes that are fit for purpose.

But most importantly, we're investing and creating a culture and the company.

Where we are and making sure that this will not happen again, that's happened in the past it.

And this is an area. We are strongly committed to as a management team are in the company. It because we believe this is going to be a long term competitive advantage for us.

That's been out and moving into the market that we've got before us.

And with Middle East and Africa.

Where sales declined by 10% and this is mainly due to low where 5 G investments and the middle East and 2 and the uncertain macroeconomic situation in Africa.

Of course this is to large extent dependent on the global.

Well it depends that make a COVID-19 pandemic.

Despite the low volumes in mainland, China, where we saw and north East Asia growing by 1% adjusting for currencies.

This was driven mainly by networks and it continued 5 G momentum in other markets and the market there are other countries and the market area.

The 5 day momentum continued in North America, where sales increased by 11% and this was driven both in networks as well as digital services.

And Europe, and Latin America sales increased by 14%.

And if we break this down a bit so we can see it like Europe grow 12% on tobacco market share gains primarily.

And we saw Latin America growing 28 per cent and.

That is a bit of a recovery compared to a very difficult second quarter last year and.

That was heavily affected by COVID-19 pandemic.

And finally, and South East Asia, Oceania, and India, where it sales grew by 14% that was primarily driven by significant investments in LTE and Rollouts in India.

So we however, I want to also say that we are seeing a bit of.

Of concerns relating to COVID-19, and in Southeast Asia, where many countries are heavily affect it now and we've had a very difficult situation and India. That's now gradually improving but we see all the countries affected and so we do believe we can see it risk for it slowed down and the general economy.

And in Southeast Asia.

But then move on to business segments.

Networks grew organically by 11% despite the low so volume in China, and lower IPR revenues.

And this reflects our strong product portfolio and it has allowed significant gains in market share outside of China.

And we continue to see good momentum as 5 gz increasingly rolled out across the world.

Gross margin increased to 47.9%.

And that's compared to 45 per cent last year of course that supported by strong operational leverage but also as you may recall, we took a write down oh pre commercial product inventory and didn't it showed a 5 day deployment in China and the second quarter of last year.

Indeed, it the services, we saw double digit growth in North America and Europe.

While we can see that sales declined and they are the market areas.

For the full segment.

Sales were stable and that's despite the reduction in volume and mainland China as well as low with IPR revenues.

Gross margin decreased to 37, 9% compared to 43, 6% last year that there's 2 large explained and extend it to a large extent explained by the write off that we do it to a pre commercial inventory.

Inventory and China, or 300 million kroner. It so that the impact to gross margin by almost 4 percentage points.

We see overall otherwise it good momentum in the business and digital services and we're continuing to execute on the plan, but of course as I said before it the breakeven and the reaching of 4% to 7% target it gets pushed out because of lower volume and China.

Our commitment to developing and leading products here stands firm and we're continuing to increase the investments in our R&D. Despite knowing that it will take year to 2 years before we start to see those reps productive elements convert it into revenues and the PNM.

But that will also allow us to grow outside of mainland China that will over time compensate for the Chinese volumes.

Sales in managed services decreased by 2% in the quarter and that was due to low where our sales as a result of the merge it between 2 operators in North America, but it also unplanned contract exits and in Europe.

At the same time, and we were able to increase gross margin to 19% from 17.2 per cent.

Also and managed services, we continue to invest and AI solutions for our customers and that will further strengthen our competitiveness.

And emerging business and other sales grew by 13%.

And gross margin continued to strengthen.

The most important part here is that we're continuing to believe and.

Crazy, Paul and just continuing to deliver according to our plans and we performed well see that we have is it offerings now that can capture a good growth opportunity and enterprise segment that we forecast to be 20% to 30% over the coming several years and we're very excited about the opportunities to further grow.

And wind up the area.

With that I give the word over to Carl Manhattan, Our CFO. Thank you Maria and good morning, everyone from Stockholm.

So we can't really say that the strategy to execution that you talked about this a visible in our financials and so.

And if we look at the P&L and here you see them again, not reported sales up to $54.9.

Yeah, and which is an 8% growth organically and with growth and.

4 out of 5 market area I thought it we saw a desk and all that.

This growth is mainly driven by by the networks business that grew 11%.

So when it reached its growth in spite of the decline and find out there and by 2 and a half a billion and that we mentioned earlier here.

I P O and revenues ended up at 2.3, and that's part of our the topline here. It says the final a several point 5 billion and.

But of course that this quarter and our socks and said with boost it here by the revenue coming out of the recently concluded Samsung the and the way we have revenues both from Q1 and Q2 and into Q2.

And.

On a 4 quarter rolling basis, if you look at the graph that it on the bottom left we are around 200, and sucked it sort of being down and in that top vinyl.

We continue on this picture to look at and cross margin 43 point to 4%, which is actually a 520 basis points improvement AR with the strong improvement as we saw right now from body and 3 out of 4 segments, that's very encouraging.

And networks.

To be thinking about again are we saw a continued operational and.

Average contributing to the higher margins for the.

A very high gross margin at 47.9% up from 40 and off.

Digital services and reported a decrease in gross margin here. That's a result of the write down and related to mainland China and it.

And so you mentioned.

And excluding that gross margin would have ended up at 41.7% the more healthy life level and the underlying business.

And and the underlying gross margin that starts to be mentioned 42, and 0.4%. If you look at the 4 quarter rolling basis, which is really more relevant as a individual quarters can vary up and down.

Opex.

The $17.4 billion and the quarter and as you've seen the tape and head of R&D and SG&A amounted to 17 and a half and then we have it positively impacts of several point 1 billion related to and positive related to impairments on trade receivables.

SG&A and.

Well I'll, just say that as it can say it helped by currency of course, but also impacted by the investments we make in our compliance and security.

The R&D side grew by half a billion.

And it is really coming from the data and services investments, we do it now and and our cloud native cloud your portfolio as we have planned and communicated around earlier and as well and then we shouldn't forget that trade at a point and performing on plan, but of course, adding also too so the R&D and SG&A expense to sales.

Well this resolve sunny and and EBIT.

Pfizer and tastes patheon, excluding restructuring up from 4 and a half.

A year ago and this represents a margin of 10 points.

Which expand and increase of 2 and and a 40 basis points year over year.

And again, the gross margin and networks, that's the big driver for this improvement on bottom line as well.

And we have a graph that and the bulk of them also showing the EBIT margin on a rolling 4 quarter basis, we are a starting point for which has done well within the range of the 2020.2 targets and which is between 12 and 14 and I can add also it which is not on the fly and here that the EBITDA.

Targets of 15 point 15 to 18 per cent that we have set up for the long term.

It cannot be compared with the actual performance in 4 quarters. It was just 14 per cent.

So let's have a look at how these profits and translate into cash flow.

And you can see how that test from the from cash flow from operating activities and.

Increased by 0.5 billion.

Of course supported by our IPR payments coming into Q2, rather than Q1, but it also offset by soft and tax payments, where it last quarter. It benefited from tax refunds and 2 the 2 and I'll point 7 billion.

So here I think the important thing is to talk about this working capital where it really continue to focus on lead times, and our company and keeping our and capital efficiency in our company and specifically the focus on project delivery and the whole credit took cash cycle allow us I mean, it and.

Labeled us to become a more and more capital efficient.

While at the same time growing top line and this is of course, something we will continue to focus on that going forward and as well and.

And also to match and when we talk about and working capital and if the inventory piece, where we are continuing to monitor obviously the components situation and make sure that we have proper risk and so we can deliver on time to our customers, which we have done so far.

So free cash flow, thereby before him and it came out it for point of 1 billion. This all signs and increase that and by they're a point 8 billion year over year.

And and again looking at the rolling it profiling here and comparing with long term targets and we.

And now delivering free cash flow before M&A up 9.6% and I'll say it unless you know the long term target that we have discussed this between 9 and 12. So we are within that range and that's why.

Yeah.

And when it comes out and cash position and our net cash increased by <unk> 7 a quarter over quarter.

Coming out of course, all of this our free cash flow generated and the business, but also are impacted or knocked it out by them and.

David and park, 1 that was paid and a $3.3 being down and the first and for the first half of the dividend paid off so.

So and that's cash ended up at 43, 7 and gross cash and our capital.

And movements, there as well and we're now up to $77.1 billion.

And as you know we each of the 500 million Euro bond and 8 year unsecured bond and the markets during the quarter and we have also utilized the and loan commitments from the European investment bank during the quarter about 300.

And Don and Ourself, sweat and which also.

And you start to support our R&D and fine James.

So as a result of these and events or actions regarding the debt portfolio and we have extended and all the.

Average maturity and the deaths portfolio to 4 years from 2.2, yes, a year ago.

Lastly on this picture I'd like to comment on return on capital employed important metric for US also which amounted to 13.5% now compared with 9.9.

And this is an increase obviously of around for almost 4 percentage points year over year again, a combination of improved profits and and capital.

Yes.

I wanted to say if it works about IP our and.

And this period that we've had that's been active when it comes to renewal and renegotiation of course, we're.

Very pleased with every new win win with Samsung and global multiyear agreements, which confirms again the value of our patent portfolio.

In addition to that and we signed up with 1 additional.

The company it for another and you're well in July so that falls out of the queue.

Q2 periods, but still important to mesh it match on here because it really impacted the Q3 numbers.

And so all in all now and our portfolio of license contracts amount to 7 billion on an annual basis.

And this is the starting point that you can see here and this bridge and then there are a couple of factors that explain the difference which is a question we often get to the 10 billion, which we had in 2020 and I'll go quickly through them of course, and we're exposed to FX movements here, that's the first bar.

And here, we are impacted by the relative weakness of the U S dollar towards the Swedish krona.

The other factor.

The factor of course is the upcoming renew and solve expired contracts that we are working on it.

And as mentioned.

And then the third bucket has to do with the fact that not all of the revenue and IPR is recurring and some is nonrecurring and this can vary between quarters.

And from time to time.

And then finally, the fourth bucket is lower volumes on from 1.

All of the licensing is affecting the numbers as well.

And so to conclude on this are we do feel confident that the leading position and we have and high G. On the patent side will create a foundation for growing the IPR revenue going forward.

And what I'm going to round off with a few words on the planning assumptions.

First of all.

It's encouraging to see now that the low the Laurel and forecast for the markets growth has increased dramatically I would say from 3% and that January reported 10% now for 2020.1.

And you see here and how that breaks down into different regions and sweat with North America 12 per cent, Europe, 9 and China and 11%.

And regarding our own top line and I just want to remind you that the normal seasonality is plus 5% from Q2 into Q3, but again I want to point out that these various of course, it with big fluctuations between quarters, depending on on the deployment.

And then.

And we talk about the the risk of losing a significant market share in China of course and onto the planning assumptions and the report you can find the quarterly numbers and I'll say it in in China.

Over to IP are here and I mentioned already that 7 billion is the annual bank and volume of contracts that we have.

And then.

Gross margin again, we're not guiding specifically on that but just to reiterate that the gross margin income can vary quite it off between the quarter. So so look rather at the rolling 4 quarter.

Last point, our digital services, and considering the risk and China.

And also the fact that which we have already said earlier that 'twenty 'twenty, 1 and he is an investment year for their day to services. We expect now a similar earnings lab and in Q3 and that we just delivered in Q2 by and we expect it Q4 to become breakeven on an isolated basis for digital.

Services.

With that thank you and it back to Brian Great. Thank you Clark.

So ericsson continues to be well positioned to take advantage of the market momentum we see no. That's 5 G is increasingly deployed around the world.

We see the North American market, moving very fast and with a strong demand for 5 G and it will be a key opportunity and now as operators and building out mid band spectrum that will be lit up at the end of the year.

And as you all know mid band spectrum and build out and mid band. It is critical to give the and user experience that you can get from it 5 G. Networks. So we are of course very excited about our position and the market and continue to work with the leading operators in North America and to build out their networks.

It digital services, we continue it to see it good momentum in 5 G core and.

And we have here Dean.

And it footprint over the last 2 quarters.

But we also recognize to capture the opportunities that are in front of us we need to invest in R&D and cost will come before revenues. So we we are continuing here as Carl also highlight it to ramp up our investments in R&D.

R&D to capture the market opportunities and we will see revenues start to be it would be generated from this portfolio call. It beginning of next year, but then ramping throughout next year.

Yeah.

We also see that with 5 G being built out and.

And as part of G is increasingly built out and meet band it will be a platform for innovation and.

And that will especially be well, we will be it for the consumer space, but it will especially be it for enterprise basis, and we are very excited and and we are strong believers that we'd 5 G. Wireless communication income for the first time be the primary choice. So it technology access technology for it.

The prices and.

Basically be the backbone of digitizing enterprises for the future.

We think they say it translates into a very exciting growth paths for Ericsson.

Okay.

What we also see it that we are seeing a strong momentum and the business as we've already said, but also the investments we've made and a flexible supply chain.

Low sauce to capture the growth opportunities in the market.

And it is thanks to the investment and the global supply strategy. We've had it for a long time that actually have allowed us to respond to customer needs very quickly and capture the extra demand that we see.

So when we look ahead, we see that we're well positioned with that we have a strong business momentum competitive product portfolio. So we feel very comfortable about the target. So on group level for 2020.2.

So with that I think before moving over to Q&A, maybe you want to add something Peter No. I think we were all happy with the presentation, so far and so it will move into the next phase and so they said.

A presentation here from the studio so that would be the Q&A. So it would that I would like to go next with you Richard and so you can open up the Q&A. Thank.

Thank you.

Ladies and gentlemen at this time it will begin the Q&A session. If you would like to ask it shouldn't it be suppressed zero, 1 and you'll push boats and fine if you'd loss declined from the podium price.

These price zero to.

The stream and the webcast. Please mute to what it costs would you and also asking question to minimize any feedback.

Thank you Richard and we have the first question here is from Ed Snyder from shorter equity so piece of it.

Good morning.

And so the question a couple of them if I could please first off I mean, you mentioned and Oran and but even if we ignore the interoperability and the system integration problems with the multi vendor solutions, which has never occurred before it seems clear that a workable solution and probably won't be ready for a year or 2 it kind of.

Begs the question of what's the point, what's the point of O ran it as if it was 5 geez it.

And maturing in China in terms of the build out and the U S. As is committing now to systems for their deployment. It seems as if most of the <unk>.

Most of the big tenders will already be a awarded and being built out before already been sees a practical solutions. So would it be a sixth G system or is there some sort of market dynamic that's going to drive carriers to move from the systems. They choose now to something that has not been used before and we'll have to be.

Shook out halfway through 5 G and then I have a follow up please.

Yeah.

It's a great question, Ed and there.

And the reality is you know.

Clearly overall and this is something that will happen and that's what we are investing for as well, we see and reality the first step to be the cloud dry and portfolios that will allow our customers to migrate towards and open architecture.

And you know it will take a few years before we have it fully operational and overall solution.

And we can debate how long it is but there is a question over here and now of building out 5 <unk> coverage and that's what we also see our customers doing it.

But of course, we need to work with our customers here to make sure that they have the best solution and it can well be that the overall and can have certain applications or earlier.

Where you have less before him as demands for example, it could be it.

Rural coverage for example, so there are pockets, where we can see that Tom but for sure overall it will be a fundamental part of the <unk> solutions and that's no question in my mind, but exactly how it is going to pan out in the meantime, I I think remains to be seen it depends on how the technology matures.

Clearly.

And you have to play it out as well.

Thank you and.

And it does kind of dovetail. My next question. So the U S is obviously, it and send and see now and I'm glad you rollout and L. A and C band auctions have been completed but if you look at the different different segments and you got a lot of spectrum to clear. So it is gonna be a multiyear process.

And at the same time I don't see it as a business plan, that's been proven well enough and China that you're going to see the same level of massive mimo mix versus macro.

So 2 pieces if I could 1 do you see it as the rollout and the U S will favor more of a macro cell approach initially.

And with Mimo to cover capacity and see the lower mix of high density stuff and to it does this dynamic change. If you. If you look it se T. Mo band 41 versus the C band spectrum, which is higher it is do we have a better chance of E C seeing either mimo or or maybe even more.

And macro and a 2.4 gigahertz environments, and we do and say see Ben Thanks.

Thanks for it.

What we see we see that of course, we need to build out a very big coverage and big dense.

And the city of mid band because ultimately that is what's going to give the and consumer their user experience. So 5 G. So today and many countries we have been focusing on call it low band and built out in reality that gifts.

And that keeps a 5 day coverage, but in order to give the read the performance has been and if it's a 5 G. You'll need to beat that and you need carrier aggregation across different frequencies. So we see right now that there will be a very big build out of course of the C band and North America that is going to drive the market.

And we will we will see that buildout happening.

And for sure and it's already starting to ramp but it will continue throughout the year and into next year. After that we will start of course to see it densification of the network. So that's the next step it.

And how this would be it depends on customer it depends on their specific situations. So I think that's a question best posed to them.

And rather than and I tried to interpret their strategists and it shouldn't really do that.

And I I I do it but we are very excited about the process, we see and North America and the build out.

And we by the way we see it Miller.

And it's in multiple countries being Australia, being Japan, and being a middle East for example, so it so a lot of things are moving in the 5 gigawatt.

Thanks, that's great. Thank all those questions. Thank you it will move to Francois book and that.

UBS and I don't know Francois.

Hi, good morning, everyone.

My first question is maybe a clarification on the on China. So when they look and your comments you said that you know you had low volumes from delayed safety deployment in China.

And that you had the impact negative impact of Tupi and 5 billion in the quarter. So my question is this stupid and 5 billion and they'll delay heat something that you're going to see universe. It you said.

Delayed coming back and disciplined half of the year or DC and you've got your impact is call. It the easiest and navy dense of already some market share impact I mean, they get to a channel impact because of the true intention just wanted to and I find that he said it's okay.

Yeah, no it's not coming back.

It depends of course on how the ultimate.

And it will look like and the distribution and tender, but we have said then you'll see that day.

We and we think it's prudent to plan for a significant reduction and market share and it.

That is the case, there's no coming back.

And so so what is the reality and we.

It is very hard to say, we know the geopolitical tension with Sweden, and we know what goes on there.

So what we see here is it is a reduction and the China volumes and.

You know, we can speculate and we can have a hypothesis, but but the consequence is very clear and I were sales volume and don't be prudent enough down to assume it is coming back.

Okay, and because it's very true and I think you have a follow up a quick for it up or is it not sure.

Yeah, the photo on the open run and specifically.

We we we are seeing a lot of projects and open run and the readiness is heating up there I mean, we serve I mean, rakuten and and dish network and Oh. It was it initiated like Vodafone, we recently, which I think he's he's whenever it.

Because some of the views.

And what we seen the width and the release of public statements you don't seem to be.

Yet in this kind of project. So far so I was wondering it E. What would make you change your mind or what would be the trigger for you to speak more and the opening run and why don't you speak today.

And I'm, you know with a big project going on and with your customers.

And now it's a couple of other things going on here first of all and and that's often not talked about but we're actually the largest contributor to the overall and the liar and so and standards. So we're already very reactive and up.

But what we are doing now is that we recognize there is a need to build out the 5 G networks around the world right now so it is it here and now question and where we do believe the purpose built networks actually can deliver that before and most of that's required and 5 G. Today. So we are simply saying Oh.

By the time overall news Red day, we will also be there with solutions, but we don't feel it's the right time right now and divert focus from actually what goes on and the markets.

Okay. That's very very much. Thank you, let's move to next question from a pip to quit isn't it a bit G hello cause it.

Hey, Hey, Peter Thank you very much and go more.

And gentlemen, a question related to the services piece it it.

It would appear that profitability here is it is highly dependent on on volumes and China could could you elaborate a bit on that piece why why we seem to be so dependent on on China as you sort of update your guidance vote for and so do you just said it services and also it would appear day that you are investing will tend to increase your.

And he spent more than previously anticipated within with it on the 5 T.

Of course side why is that have you seen increased competition that are forcing you to this anything you can say on elaborating a bit on this piece and and and just if I may give 1 follow up and how has the low volumes in China impacted the margins and it makes it.

Clearly, it's been negative and digital services has it been a positive impact on margins and it works because it the lower volumes and China. Thank you very much.

Okay. If we start from there and no it's not being positively contributing to the networks margins and the second quarter.

But it is fair to say that the second quarter last year, we had a day.

It right off of pre commercial development, but we have a positive margin on wealth reshape and China. So we would have had better margins and networks with China and U M C. It to.

Put it that way.

Our digital services no its not it it's actually continuing according to the plan and we've been operating with it. So and you know that we have been ramping R&D and of course that takes a bit of time before youll see it on the cost line. So we have added resource it throughout the years year and we are you know way.

2.2 lots much less extent now doing it resources. In addition, but it is all according to the plan to make sure that we can capture the 5 G core opportunities that we actually see and.

We are tendering for it so for US this has been just.

Part of the the overall strategic plan for digital services. So if you tack on that to the China volumes and and you can understand it. They just it services Easter business. It software like a with a very high R&D intensity. So of course and the volume change is very and.

And for our ability to deliver and margin and and it is fair to say the Chinese volumes and if.

If you look over all and telecom there probably you know 50.

50%, plus 60% plus and many parts of the total global volume. So of course, we have a dependency on lucent footprint in China that that primarily hurts or it is more exposed and there is a services than it is and networks.

Yeah.

Okay and it could be close.

Thank you, we'll move to the mix to throw him a question from Alexandre Patrick It's.

Hello, Alex.

And good morning, good morning, coping with it can hear me well.

Well good morning, Yeah.

Thank you very much and thanks for the question and.

I would like to delve a little bit into your IPR and if I may are you, providing it and very helpful. Slide here on this and so just to be clear. It was 7 billion and run rates that you now have that's for the current here and it from $6.6 billion, if I remember right and.

So this.

Presumably reflects the deal would you have signed and here in July.

And my question is really on the expired contracts you know do you still expect some of that has to come back on it.

So it gets you know potentially to some of it around 1.8 billion going forwards and then obviously ethics to stay let's assume and global volumes from call. It escape and stay as well, who will land somewhere and know what he's going to do some catch up that you would expect and 1 of them and IPR.

Give us a feeling on how you view it.

How do you think about the applebee's negotiations, which is true by the end of this year do you have anything to stay on that and then just a second quick follow up would be on the time and with Verizon contract how many years it.

And over approximately so it can gauge from how much you will contribute thanks a lot.

Thanks Alexander.

And I can take that first of all the Verizon contract itself of 5 yes, and somebody said it is the largest contract ever and Ericsson and history.

That's a nice thing to to announce today.

When it comes try it they are yeah. Certainly we are we are working with the other not yet renewed our license fees as well and in order to get to agreements and we find wound and early July so that is going to help revenues going forward and it would be a catch up effect in Q3 it from there.

And as well and we continue of course and the team too.

And 1 by 1 and settle the outstanding debts.

I learned it counts are up and I would say, it's a it's far too early to talk about that it will expire as you say at the end of the year and.

The parties will of course come together to resolve that and the best possible way, but that's too early to comment on any specifics regarding that.

That's great. Thank you very much.

Thanks, Thanks, Alex we'll move to.

Next question from somebody Deshpande of Jpmorgan.

Some of it yeah, hi, good morning.

Thanks for letting me on my first question and clearly I mean, it when you look at dealer networks business.

China and your market share gains.

And you brought and market share gains are very significant.

It is these are these share gains are.

James that you need a couple of years ago or in the past or is this new market share gains that are happening starting in the last 6 months associated with the geopolitical tension et cetera, which is causing the share shifts between China and the rest of the world.

And I have a follow up isn't it.

And what you see now coming through and the numbers are mostly the wins, we had some some time back.

And so it takes you know it at some periods of time it depends a bit on the contract depends on the situation for it it to flow through so so far the most recent waiting on it very limited impact on the numbers you see and I know this is a focus on.

The overall market share and situation if it geopolitically driven I would say it is of course very hard to separate the 2 but we see that we win market share in markets, where it also all vendors are allowed.

And as well as we've been in markets, where only western vendors all rollout so our overall market share gain.

You know sure part will be country, it, but it's a geopolitical political situation.

But I would also say here, it's the strength of our product portfolio that allows us to be it truly competitive against any competitor right now.

And you saw it for example, the reasons, we and in Malaysia, but we are able to build out the national <unk> network and it's a very important contract win per hour says well, indicating that we can where we can win market share and many markets.

Thanks morning, and she had a second question. So yeah, just a quick follow up.

And I'm talking about the same and geopolitical issues and the digital services business.

And given that you know you might not be able to have that 4.

5% chance that you currently have and that business from China.

Are there businesses within digital services, all day, and our business units, where you can now do reductions et cetera, because I mean digital and services has been promised to be profitable and put a very long time and it hasn't deliberate and that's not I know that there is a structural potential structural change in 1 market and whether there needs to be a flood and talk.

It says on the cost structure within the digital and services business.

No no there there.

It is a good question and it's a good thing king, but I would say if you look at the product portfolio. It typically global products in there. So it is just because you'll lose volume. It was March it doesn't mean you can.

Restructure in any way we saw it so in reality. It is just too low so revenues. The R&D remains the same to say it pretty much. So for US we are done and that's why we're saying very clearly that due to the delay and or due to the risk of losing China volumes you know it.

It is it likely is that we need to push out there.

Reaching the targets be it.

Because we didn't need to compensate that sales that we loose and mainland China by growth and all of their March mortgage markets around the world.

So when you see that that's why you'll see the push out now so I would say from a strategic execution and in digital services, where it continuing to deliver on the plan and and 1 day objectives, we set out a few quarters ago, but do it to the geopolitical situation with which it is Sweden and China.

And we're saying that will get pushed out now and and that's and unfortunate consequence, but you know we need to deal with it and give it.

I love the business and the other markets.

But I would also say that the good thing is we're seeing good growth in Europe, and North America and digital services. So we feel that we are going to grow into that also volume.

Thanks, Jeff Thanks to some day for those questions are there and.

Next question will come from theoretically it turned out the don'ts Goodbye and good morning for it to predict.

And thank you for taking my question and hope, you're all well and I just wanted to ask a little bit on Cray to appoint a few acquired it sometime back.

What is the sort of the status of that unit right now and how do you expect them fees and that this should progress going forward and and when should we expect that this unit would it be.

Got it heavily lossmaking anymore, but rather the opposite and and Elizabeth If you could talk about growth and that unit as well. Thank you.

And I can tell and thanks for the question.

And the point is it developing world Eh I must say it's on.

On track on the plants and following basically it was reset from the start that it would be a 1 percentage point impact on the EBIT margin and.

21, and and 22.

And.

And as you saw it perhaps and the report it contributed now it did positively from the final PPA calculation there and so now we are going forward. We are in good shape I think to deliver and a slow growth outpaced since also outside of the main markets, where they have been successfully establishing full.

And so far so I think it created point has a well performing assets and our family and our and it was great to have them on board.

It is that going to be sort of a little bit of a hub for further acquisitions that fits into that type of portfolio of products and services or how it should be what should we expect from this unit and and I mean in terms of growth and and when it should it should it move outs and the rest of the world and another way then it.

And once a day before and so on and so a little bit more if it goes on the planning for that doing it.

Mhm and Kevin and thank you.

And I can start with yeah.

And you're absolutely right it will be with what we are seeing is that we can leverage there.

What are the products. It has been predominantly sold in North America, So far with very limited presence outside we gradually and now expanding globally.

And and that is a quite exciting opportunity elsewhere. So growth, we foresee it to be quite good for grades at point.

What we're also seeing and and you hit on that it it becomes a bit of a hub for developing new solutions.

And that we can actually let go through their network of distributors to the market. So we're very excited about the opportunity we create with the acquisition of Crazy point to capture a larger and increasing share of the enterprise market.

But we should also recognized it crazy point is 1 piece that we need for enterprise. We're also looking at other growth opportunities in enterprise being and dedicated network for for corporations campus networks being it and I would be older connectivity platform I O T. A so there are a couple.

Additional opportunities, but we believe that.

The market opportunity and enterprise is so large that we need to increase the investments in that area by also looking at the broader acquisitions outside of credit point.

Okay. Thank you very clear thank you.

Synthetic <unk>. The next question is from Dominik Olszewski throne, and Morgan Stanley It.

Yes, good morning, everyone and thanks for thanks for taking my questions.

2 of them. So from the Q2 revenue run rate and you were indicating it looks like you know it basically 5 billion downside for sales in the second half in China, It would be sort of pro rata and what we've seen and Q2.

Could you. Please maybe talk about the regions and projects, which could help to mitigate downsides and the second half. So other areas. Obviously it for example, if it might have had to Laura raising estimates for the rest of the world.

North America it lately.

And then the second question is in the past you've talked a lot about labor shortages, particularly in North America for tower crews and obviously today, we're in an inflationary backdrop and talk about maybe she wants it used in certain regions. So could you talk about what it is a constraint on deployment and the second half and into next year.

Hmm.

Maybe I'll take the first 1 horse because no actually and all the.

The labor shortage side, we've talked about before it Australia about throw it out crews and our feet on the ground, where whether it was actually limiting our volumes and we don't see that to be a limiting factor.

Now I think it's a it is rather than the slight acquisitions from customer and thought that determines it disappeared and I should say speed. It is very high at the moment. So we have if I'm sort it that the problem loans.

And and if you look at our numbers, you'll see that we have grown and if you take networks for example, or even the total company. We've we've had and organic growth of 8%, despite losing 60% and the China volumes. So we are and and we are growing in many markets for it.

It really 2 reasons 1 is the build out of 5 day, it drives demand and that drives the increasing demand, but also that we've been able to gain market share and you know we start it will talk about that already and and 'twenty.

2018, or and a 2017, so that is something that we have.

Domestically invested in to make sure that we can and can gain scale outside of China as well and we believe that will contribute and help us to continue to grow even if the risk is very high that we would see significant also market share and China.

So it so.

That's probably the best we can look at it now so if you look at Q2, you have to stay and see that.

Even excluding China. It we have a very healthy development and the business.

Yeah.

Okay.

Thanks for those questions, we'll move to Dominik Olszewski, no sorry that was the previous 1 Amit how to shut down the it from Citigroup, So how low.

Good morning, Peter and good morning, all.

I'm, a touch and Donny from Citi.

2 questions and find me.

My first question is on the topical networks margin.

And you've delivered solid margins in this quarter and last quarter, indeed across our 'twenty 'twenty versus your long term 'twenty 'twenty 2 guidance of 16 to 18 and boots.

Given what you've seen in China and.

It comes with volume and maybe potentially profitability profile of the Chinese business.

Is it safe to assume that the networks margin going forward it more sustainable on that switch it.

And they've been and fixing it.

And the bus 6.4 to 6 quarter it all.

Did any factors, which could take you down to that 16% to 18% range. So your thoughts on that would be appreciated it and.

And then I have a formula.

Hmm.

Thanks, Amit it should I start per year.

On the networks margin I think what we see it.

And without all the work and in R&D day, where we are able to define out cost of the products and make it both of course like chocolate it from a feature functionality and point of view it so for the customers, but also minus the cost situation and and do you see the fruit of that and the ever improving gross margin and.

We don't see any particular reason why that logic would it would change over time and that's what we always point out. It's a of course individual quarters can can it change here and that because of how deployments are made and so on but basically I think tower. Our aim is to establish a stronger and stronger and la.

And with the cost side on the 1 hand, and and the competitive and escalating to the price slowdown and networks to continue on good levels.

And you had a follow up for it.

It you said your second question yes.

Yes, and it.

My second question is.

With regard to what you've seen and China, what the development is not ideal for you and I'm trying to understand what are you hearing on the ground in town and so youll customize your partners it.

It did I mean, it it if you're going to lose share do you get the impression that it is going more to the domestic competition do you get the crushing and foreign competition.

Get a sense that they might be and lobbying on your behalf and did it lead backing into China.

What it what is the feedback on the ground and that you're getting and what's the level of confidence that this is potentially even done and you also you would in the future.

You know it it there is an old and go wing and tender process right now in China. So it is a bit hard to speculate where it that he's going to go you know normally the way they they go at it it is hard to heart and know where you end up but you'll have also seem to have been indicate.

And just I would result in a significantly and we're getting a significantly lower share it does.

And so batesville 3 point too I think it's easier to comment on these things so more appropriate to comment on these things once we know how the a 10 day process will fall out.

But what we know and it's the same thing across the World is does.

And if you look at it before it Miss of our Pearl ducts. It in phases before him and it says it is very good we have a competitive portfolio. We are gaining footprint in all day, Mark and so we were quite low and that.

Since it seems that we have a strong purpose se central customers.

But but let's discuss more about the China situation once we're through with the tender process.

Okay got it thank you very much.

And Christian will move to today's last question and it's from donor to do it but it handelsbanken.

And the spunk and good morning, it on it.

Good morning, and thank you for letting me in.

Yeah, Yeah, 2 questions and then if I may and starting with <unk>.

Network gross margin and most negatively impacted by a write down and the pre commercial product inventory and.

And my question is it.

And this was related to mainland China.

And if you will see limited low volumes and the current tender.

Significant inventory write and risk lies ahead, where it.

It was you're right, though and in Q tool so it.

And related to possibly little low volumes of it.

And also a question.

If I may a would be on the show.

And again and that would be Oh.

And so the 1.5 billion and revenue you had in the quarter.

How much would you say it sort of recovering our 2 existing.

Total months software and et cetera, and how much just relate it to 2 previous 5 day deployments that will so to say it disappear when it went down.

It would be great to know.

Thing I guess it means the rights on them and and on digital services right and also networks.

Yeah, Yeah, yeah yeah.

Yep, Okay Hum.

Exactly and so.

Question about how much it is recurring.

The rest of it of course, a portion of support revenue for for our installed base that we have to follow it.

Captains without it it's hard to the time and exactly and I. Suppose you said, that's that's the way it the conclusion of this and then we can call. It meant on how it played out basically.

And on the other question and of course, we always scrutinized and scrutinize, our balance sheets and make the.

Empowerment and see if we need to every quarter and now in digital services.

We arrived at the conclusion that it's a $300 million right Thomas it appropriate thing to do given where we are on that pre commercially mandatory and but now it of course, our balance. It is what it is for this interest and we have now and we would have to consider that going forward no material right foundry and because we see today and that.

Context on it.

It's worth it and say and the rest of the business. We have is global products again, so that kind of helps it's really only 1 and you have market specific products and that's what we have and it.

Got it.

That's perfect and if it may only the wherever it last question would be on on Japan, Obviously, where it is growing again and this quarter, making up for it for florsheim weakness are quite a lot I would say.

It is it and they you know which would mean, we'd be worried post the olympics or something that it has what would you expect this drone and strength in Japan to continue until second half where and when.

The 22 or is it something and it starts to fade off.

Yeah, you know the.

I don't think purely and big sub actually it has an impact on this it's more the the need for the operators to get first of all it to build out 5 G. It you'll start to develop applications on top of and for the capacity need they have and the networks to cope with the increasing traffic volumes. So I would it would not.

Uh Huh I mean, there are always going to be a little bit.

Switching between quarters and individual markets, but I would not say I would hang it up on the Olympic games.

That's great great and thanks, Don It sure.

Before we close today's call or video call and I would like it actually it to hand over to you for any closing remarks.

Thanks Peter.

Uh huh.

It was appropriately dressed in a tie it today so anyhow.

We're very excited about our market momentum and it has continued and you're doing just second quarter, but what we're more excited about this actually those 5 G is gaining momentum around the world with increasing build outs and it so here and now question and with the investments we've made and the product portfolio.

Making that the competitive offering to our customers as well as a competitive cost position that we've established over the last few years, we feel that we are and a strong position to capitalize on this increasing demand for 5 G and were very excited about the future of the second part of this year, but it also into.

<unk> 'twenty 'twenty 2.

Thank you. Thank you.

Yeah.

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Yeah.

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Yeah.

Okay.