Telefonaktiebolaget LM Ericsson (ERIC) 2020 Q2 法說會逐字稿

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

To view visual aids for this call, please log on to www.ericsson.com/press or www.ericsson.com/investors.

(Operator Instructions) As a reminder, replay will be available 1 hour after today's conference.

Peter Nyquist will now open the call.

Thank you, Gary.

And everyone, welcome to today's Q2 call.

With me here in Stockholm, I have Börje Ekholm, President and CEO of Ericsson; and Carl Mellander, Chief Financial Officer.

Before starting, I would like to read these words.

During the call today, we will be making forward-looking statements.

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

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

We encourage you to read about these risks and uncertainties in our earnings report as well as in our annual report.

With those words, I would like to hand over the word to Börje.

Please, Börje.

Thank you, Peter, and welcome, everyone, to our call for the second quarter.

The human toll from COVID-19 is increasingly clear.

It's impacting lives for all of us either directly or indirectly through the macro economy.

However, despite the devastation from COVID-19, we've delivered a solid quarter.

I'm very proud of all my colleagues here at Ericsson that have been able to execute in the middle of this pandemic.

We have reached this stage where we are now able to demonstrate how we can capture the benefit 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 5G contracts and 54 live 5G networks performing across 27 countries.

But I would say we're mostly proud of our in-field performance of the equipment we deliver.

We are winning contracts based on our technology leadership.

And we have selectively grown our strategic contract over the past quarters, which are now showing profitability in line with our plans.

And they are now a normal part of our business.

So on this basis, we will no longer be reporting on the strategic contracts unless we see an extraordinary impact.

I'm very pleased to see that we have delivered a solid performance, which has been predominantly driven by the Networks and Digital Services.

Our sales are SEK 55.6 billion 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 important features for the futures.

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

In segment Digital Services, we've been impacted by COVID-19 and related market uncertainty, and we have also seen a decline in our legacy portfolio.

However, we see a strong demand for our cloud-native and 5G core portfolio.

We won some significant Tier 1 customers, which will deliver revenues in 2021 and beyond.

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

As a result of these factors, we are not going to reach the single-digit margins for 2020.

That will slip by a few quarters.

However, the long-term value created from the investments in R&D will more than compensate for this.

It's difficult to predict the current market given the uncertainty we see as a result of COVID-19.

But with the current visibility, we remain confident and committed to our group targets for 2020 and 2022.

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

We've not had a significant negative impact in the quarter from COVID-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 have now commenced the monitorship 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 the macroeconomic conditions and COVID-19.

We've seen that mostly in Latin America, Africa and 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 5G deployments in Middle East, which has made a positive impact.

In North America, there is continued 5G momentum, which 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 5G deployments in Mainland China.

We continue -- in segment Networks, we continue to see a strong momentum due to our 5G leadership.

Organic sales were up 4%.

Gross margin was 40.5%, which is after absorbing a large share of strategic contracts, including the write-off we had in Mainland China.

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

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

However, overall sales declined, which is due to the classic portfolio as well as some COVID-19 effects.

The new portfolio sales grew by 18%.

And so we are in the middle of this transition from the classic portfolio to the new portfolio.

In Managed Services, we've seen the variable sales declining, and that's really due to the operator merger in the U.S., but it's also explained by transfer of a contract to Ericsson Nikola Tesla in Croatia as well as some planned 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, as we have done in AI and automation, to support 5G and efficiency gains in 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 sales in Red Bee Media.

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

iconectiv is delivering good sales and solid profitability.

With that, I'm going to give the word over to our CFO, Carl Mellander.

Thank you, Börje.

Okay, let's dive in a bit more to the numbers then, starting on the top line.

So SEK 55.6 billion in the second quarter in net sales.

That's a flat organic development year-on-year.

And looking at the parts, Networks delivered organic growth of 4% year-over-year, strong 5G sales in China, but also continued growth in several other countries in Northeast Asia and parts of Middle East.

Managed Services declined by 12%, as mentioned by Börje, also due to lower variable sales in North America post merger, but also a Managed Service contract transfer in Europe and some of the planned exits of contracts.

And then Digital Services, organic sales declined by 4%, with lower demand for legacy hardware, but also services, partly related to COVID-19.

And this was then offset by higher sales of software, which certainly helped the gross margin as well.

We'll get back to that.

So if you look at the gross margin here, improving by 150 basis points year-over-year despite the inventory write-down, SEK 900 million that we informed about earlier in June, and that affected gross margin here by 1.6%.

The improvement year-over-year, you could say, driven by higher software sales in Digital Services and also efficiency gains in Managed Services, but also added to that the higher IPR revenues in the quarter.

Operating income improved to SEK 4.5 billion, excluding restructuring, versus SEK 3.9 billion, and this means then 8.2% operating margin.

And again, main driver for the improvement on this line as well reduced losses in Digital Services, reaching then SEK 0.7 billion versus SEK 1.3 billion negative last year due to a better gross margin, as discussed.

And so looking at the graph there, you see the adjusted rolling 4-quarter operating margin now stands at 9.9%, obviously close to the 2020 target of over 10%.

Just a final comment on this slide when it comes to net income.

A couple of items, the restructuring was SEK 700 million in the quarter, and that's the Edge Gravity closure that Börje 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 net actually a positive number.

This has not happened since second quarter 2017.

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, timing of projects and so on.

But on a rolling 4-quarter basis, the gross margin continues to show a steady improvement here and now stands at 38.3%.

And now we have improved the gross margin for 9 consecutive quarters.

Primary driver, I would say, is still the R&D investments that we make, and that translates into competitive offerings and also cost efficiency, leading to better position in the market, but also better gross margin.

So year-over-year here, the gross margin was 38.2%, up from 36.7%.

And if you look at the Networks piece, again, I want to mention the inventory write-down in China, the SEK 900 million.

And Networks also impacted by a general higher share of our strategic contracts, including the Chinese 5G business.

But then 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 IPR contributing with the growth in the quarter as well, SEK 2.8 billion of IPR revenues.

Okay.

I think we can move on to R&D and SG&A.

So you see here R&D expenses then, or investments rather increased year-over-year by SEK 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 portfolio and the legacy portfolio, but to capture then the business opportunities that we see currently.

And going forward, we have accelerated R&D in Digital Services and will continue to do so.

SG&A, flat at SEK 6.9 billion.

We continue with the investments in digitalization and compliance.

But here, you can see this is basically offsetting this quarter by less cost for traveling and similar given the situation we are in.

When you model SG&A for the third quarter, please remember that the third quarter '19 had a positive effect by a refund of social cost, and that was SEK 0.9 billion.

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.

That was 0.

Okay.

Moving over to the cash flow, SEK 3.2 billion, as Börje mentioned, in the quarter.

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

And it's encouraging to see that we keep a good discipline in 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 did -- we made a SEK 1 billion payment into the Swedish Pension Trust.

That's included in these numbers in the second quarter, and another SEK 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 8 consecutive quarters.

And if we -- this is if we exclude the DOJ, SEC fine for a moment.

And also looking at the rolling 4-quarter basis back here, free cash flow has amounted to SEK 18.3 billion.

Also there, of course, excluding the SEC, DOJ fine, and this translates into 8% of the sales over the rolling 4 quarters.

Okay.

Moving on, the financial position here.

Looking at gross and net cash to the left and the maturity profile of debt to the right in the graph here.

You can see here net cash is SEK 37.5 billion now and gross cash stands at SEK 75.4 billion.

The debt matures over the next 5 years here with an average maturity currently of 2.2 years.

And the next maturity comes now in the fourth quarter of this year.

It's SEK 8.7 billion.

And we intend to repay this with cash on hand.

And in addition, giving additional resilience, we have an undrawn committed facility of EUR 250 million, plus, of course, since earlier, also the USD 2 billion long-term revolving credit facility.

You saw the good news earlier in June that the company was upgraded by Moody's to Ba1 with a stable outlook.

So to summarize this position, I would say, we have a resilient balance sheet, giving us a strong financial position and a well-diversified debt maturity profile.

Next slide.

We look at some of the highlights from the planning assumptions.

And please refer to the report for the full set of planning assumptions.

But a couple of comments here, first of all, on the targets for 2020 and 2022.

Obviously, the effects of COVID-19 creates certain uncertainties, and we remain humble when it comes to predicting the future here.

But with the current visibility, we clearly maintain the full year targets for the group, as Börje said.

And we also mentioned here the delay in target fulfillment in Digital Services as well.

We will not comment on strategic contracts, as earlier said here, because this is a normal part of the business.

And those contracts are now developing according to plan.

And the third point here on FX.

Of course, FX impacts our financial results, especially then the U.S. dollar-SEK exchange rate.

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

So obviously, we are not making any predictions here.

But if the U.S. dollar to SEK would stay at the current level around 9.10, this would mean a headwind compared to the average around -- of around 9.70 we had in Q2 now this year or compared to the average 9.55 during Q3 last year.

So in our planning assumptions, you will find the rule of thumb that we usually use how this impacts sales and operating margin.

With that, thank you, and I hand back to our CEO, Mr. Börje Ekholm.

Thank you, Mr. Carl Mellander.

So we worked hard to lead in 5G, and we continue to underpin this through our strong performance.

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 continue to gain market share across the globe.

We have proven that strategic contracts are now profitable during the term, and it is with this rigor in our business that we're establishing us as a market leader in 5G.

Our business performance has provided us with much more flexibility to grow and capture the opportunity that 5G 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 live 5G network running with Ericsson equipment.

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

But we have a very strong momentum.

The criticality of the network continues to be proven.

And I would say the COVID-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.

But what you actually see is that the digital infrastructure is a launch pad for technology innovation and economic recovery.

And we see 5G is the innovation platform for the future.

Here, Europe -- and as a European company, we noticed this.

Europe is falling behind.

It's really time for Europe to start incenting investments in the digital infrastructure, and that includes, for example, addressing the question about spectrum prices.

We have now completed a solid first half.

And with current visibility, we remain committed and confident in our financial targets for 2020 and 2022.

Our world-leading technology, coupled with our strong financial position, means that we are ready now to deliver on the promise of 5G across the world.

Thank you.

Thank you, Börje.

So by that, the presentation has come to an end, but we will then move over to the Q&A session.

So I would like -- Gary, could you open up the Q&A session, please?

(Operator Instructions) Our first question comes from the line of Edward Snyder of Charter Equity Research.

A couple, if I could, Börje.

This is kind of an unprecedented time for, not just COVID, but if you're looking at the network systems business, you've got a number of things happening that we've not seen in quite a long time or ever, looking at the merger of T-Mobile and Sprint going through in the United States.

You've got the U.K. indicating they're going to remove one of your competitors over the next several years.

You've got an unprecedented lead in new technology over your traditional competitors.

Why shouldn't we expect this to inform your growth faster than the market's organic growth?

I know you don't want to get out, predict out period too much.

But I mean, it seems like the cards are stacking up to see maybe a consistent period of better-than-normal growth for Ericsson, at least into 2021.

And then, Carl, if I could, making additional investments in R&D and Digital Services, you're not going to meet your margin targets this year.

And it sounds like the investments are 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 it occur this year, next year?

What's your -- you must obviously have some planning assumptions on where these investments are going to yield the upside.

I'm just trying to get your idea on where that might be.

Thanks, Ed.

I'll start.

No, we are optimistic about our industry, where we believe the need for connectivity is there and the need for connectivity going forward is going to be even more.

And I would say that has been proven with the pandemic.

So we're -- the macro view for our industry, we're very positive on that.

And within that positive view, what we have done over the last few years is to have a strong focus on gaining footprint as well and gaining -- growing faster than the market and gaining market share.

And we believe, with the portfolio we have, with a very competitive portfolio, we can actually win in front of the customer.

So far, the geopolitical discussions have not -- it's hardly visible in our revenues because our market share gain really has come from other players, so to say.

And it's really a result of the technology investments we've made.

And we believe those are going to continue to pay off as long as we focus on delivering and executing on the investments we are making.

So we are optimistic about the future.

And again, a quick one...

Yes, I can take -- Ed, so on the second question, investments in R&D and Digital Services.

First of all, the 2022 targets remain.

So this is what we are aiming for.

And I would say we make these investments out of a position of strength in that we see great traction in the new portfolio, not least when it comes to 5G core where we have recorded early wins with leading operators.

That's a very good thing, and it requires some acceleration and an increase of the investments to meet requirements and lead time requirements.

That's a good thing.

We are still going to obviously reach the 2020 target, but with a few quarters delay, and from there, ramp up further into 2022.

So I think it's the right thing to do for long-term value creation, clearly, even if we have to move the time line forward a couple of quarters for the target fulfillment.

Our next question comes from the line of Aleksander Peterc of Societe Generale.

I just have a few.

First of all, if you could be more specific on what exactly will receive more R&D attention in Digital Services, which kind of programs or products are going to get that?

The second one is, if you could give us an idea of how long you take, you think, I mean your informed opinion, to take out the Huawei kits of European networks where the swaps will be required and whether that will cause any delays in near-term 5G deployments in Europe in particular.

And then the third one is just -- I'd just like to understand how the quarter came across for you guys because you did 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 kind of wondering, did you not get as much of a hit on margins that you -- as you thought?

Or did anything else come through a lot better than you thought at the time of that warning on the second quarter?

We start at the end then with your question about why we communicated the big provision.

When we -- we have as a guiding principle to be transparent.

And when we take very large costs that are subject to one decision, then we feel it's appropriate to talk about that and describe that to the market.

And this was one of those where we had a very large cost.

So you can count on us to be transparent on these things as they come.

So I -- that's really the reason why we disclosed, nothing else.

If we look at -- the ultimate -- if you talk about swapping, et cetera, and how that is going to pan out, it is -- it's really up to the customer to decide.

Our focus will remain on delivering a competitive solution to the customer, the best technology combined with 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 is going to take?

I think that's more an appropriate discussion to take with our customers rather than me commenting on that.

The first question, I...

Yes, development on the R&D investment in digital...

Which product areas?

There are -- in reality, there are a couple of different areas where we see that as the market evolves even more into 5G, where we can capture a lot of market opportunities, the key driver here is within the 5G core, and that is where the most allocation will be.

But we also see additional investments in other parts such as BSS, for example, to capture the 5G billing opportunity.

So there are a number of areas where we are, thanks to the ramp and the market traction of 5G, that we have decided to increase our investments.

But most -- the biggest part is in the 5G core.

Our next question comes from the line of Daniel Djurberg of Handelsbanken.

I have a question on China.

Börje, you said that the China inventory write-down was -- the actual impact was larger than that.

And can you comment if this will risk to continue into Q3 and also a little bit on second half if the gross margin recovery in China will follow your expectations?

Yes.

What we have said, and that still holds, we -- China, we expected a negative quarter, and it was negative to more than the write-off in Q2.

But we also said that the second half, we would see it contributing to operating profit.

It will still be dilutive on a gross margin basis, but it will contribute positively to the operating profit.

That still holds.

So longer term, these contracts are profitable for us.

But they are -- there is a negative initial impact.

And if you remember, it was the same thing in 2017 that we disclosed at the time when we took a contract as well.

Perfect.

And also a short follow-up, if I may.

We see a lot of news from the OpenRAN policy group, et cetera.

And I was thinking if you can comment a little bit more on your view on what you've seen here with Nokia being quite vocal and other players.

And when you see -- or if you see time for Ericsson to work more and be more vocal on this ahead.

You know that we are also working very actively in the OpenRAN alliance and driving the standards of OpenRAN.

So we are also big believers of that.

What we see is that in high-performance applications, you need to solve a number of different use cases.

Some of them demand very high performance.

That's one segment.

You're going to see other segments that demand less performance and/or less performance-intensive.

And I believe -- and we are well positioned to capture opportunities across that spectrum.

That includes the purpose-built basic for high-performance as well as possibly open solutions for more lower-end performance requirements.

So we are focusing on delivering the solutions to the customer, less about marketing.

Our next question comes from the line of Achal Sultania of Crédit Suisse.

Börje, just one clarification on the China comment that you're making.

So we know that SEK 900 million impact on write-down.

But if we exclude that write-down, the China gross margin would still would have been negative in Q2.

Is that bigger than the SEK 900 million or less than that?

And then secondly, like we know that it's going to be GM dilutive, but will gross margins in China turn positive in Q3 or Q4?

Can you give some color on that?

And then secondly, on...

Go on.

Yes.

And the second question was on the seasonality comment that you have in the press release.

Q3 has been very -- the seasonality has been quite varied.

It is ranging between minus 2% to plus 8% sequential growth.

And so you have not made any comment as to what you expect for seasonality this year, whether normal seasonal, above or below.

So just trying to understand what are the puts and takes regarding China, U.S. and FX.

Does it -- all these uncertainties preclude you from like giving a precise guidance for Q3 seasonality at this stage?

I believe there is a big pandemic ongoing, so one should be a bit cautious about giving precise guidance in the world of a pandemic.

So the average seasonality, if we look between Q2 and Q3, is 4%, and that's what we have said.

We're not going to say much more than that.

On China, yes, there is -- there was -- even if you exclude the inventory write-down, there was a negative gross margin.

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

In Q3 as well?

Just to clarify there.

Or only -- you're only commenting about second half?

Yes.

You're asking in a world where a quarter is a completely arbitrary time interval.

You're asking about the specific time interval in the development of a contract that spans several years.

Of course, there can be differences depending on exactly when things pan out, but the second half will clearly contribute to operating profit.

Our next question comes from the line of Amit Harchandani of Citi.

Amit Harchandani from Citi.

A question and a follow-up, if I may.

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

Clearly, the stock of 5G accelerating.

And I was curious to understand what is the kind of features and functionalities that you are being talked -- asked about the most in your conversations with customers in different regions.

Is it dynamic spectrum sharing in the U.S.?

Is it open networks in Europe?

Any other features in China?

So just wanted to better understand what is the nature of current conversations and what are you focused on.

And I have a follow-up.

What you see is the customers are so far very much focused on getting the 5G equipment up and running and providing the additional capacity to the customers.

So one of the key focus areas have been our dynamic spectrum sharing and getting that into the market.

And that's been one important discussion, an important focus area for us.

Of course, what you mentioned about openness will also be a topic that's under discussion.

But so far, it's been predominantly on how to bring coverage of 5G as quickly as possible into the market.

And here, that's 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 discussion.

It's not only North America.

It's the same in other markets as well.

And you had a follow-up, Amit?

Yes, indeed.

So as a follow-up, I note there is a commentary with regard to IPR in the release this morning talking about certain agreements up for renewal and payments being temporarily affected, but 5G is going to strengthen it.

Could you maybe elaborate a bit more on how should we think about that?

I presume this is more for 2021.

But if you could cite some further color in helping us think about the same, that would be helpful.

The key -- the IPR business is an important business for us.

And what we have -- the agreements we have, they are typically time limited.

And today, we have very few contracts that include 5G.

So we're now entering a cycle with a ramp of 5G.

So a number of contracts will come for renegotiation.

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

That means that there can be effects short term because we don't agree with the other party, so to say.

And that's really what we're saying.

But we are very committed to maximizing the value of our patent portfolio.

And we will not enjoy any short-term payoffs just to get uninterrupted flow of royalty payments.

That's what we want to say.

Our next question comes from the line of Johanna Ahlqvist of SEB.

Congratulations to a strong report.

First question relates to pickup on the patents.

Just wondering, they were very strong in the quarter, and I'm just -- I realize that you still sort of remain your full year guidance.

So were there sort of a one-off payment in any term this quarter that will not repeat?

Or how do you see that?

And then just to try to dig in a bit more on the gross margin for the second half.

I realize it's -- we talked a lot about China, but what do you see on the remaining sort of business?

If we exclude the China, do you see any positive or negative drivers to the gross margin in second half from here?

On IPR, maybe I can start to tell you on a -- Carl here.

On IPR, I mean, there are fluctuations over quarters given how contracts pan out in reality.

What drove the growth now is some of the recent agreements we have with handset providers that we signed in the end of last year.

But there are elements also of fluctuations between quarters that we saw boosting this quarter.

We keep the SEK 10 billion number for 2020 totally unchanged.

That's still the number we talk about.

You can take the second.

And on gross margin, second half, I mean, as you know, Johanna, we don't guide specifically here.

I think you should look at the rolling trend that we talked about here also in the presentation.

Of course, there are puts and takes.

China, we have discussed already that, that will turn profitable into the second half.

We 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 commodity mix, business mix in general and how the markets will play out.

So I think that's what we can say about the gross margin.

Our next question comes from the line of Sébastien Sztabowicz of Kepler Cheuvreux.

Just a quick question on your nonstrategic contracts in Digital Services.

Why are you extending the review of those contracts?

How many contracts have been basically reviewed at the end of the second quarter?

And could you help us a little bit understand what was the losses from this contract in Q2 or in H1 since the beginning of the year?

And when do you expect to have fully reviewed nonstrategic contracts?

And the follow-up would be on the competitive landscape and notably in Europe, where we see a growing number of countries starting or looking to ban Huawei from 5G.

Do you see Samsung being a little bit more aggressive in Europe right now?

If we start with the number of contracts we have left, it's 9. They are going to be -- we had no impact really during Q2, call it, extraordinary.

They're following plan, and we're starting to box in as much as we can.

There can, of course, be incidences going forward, as it has in the past.

We will disclose if that is the case.

But we are working through.

But some of these contracts, I think we've been quite clear, they're very long.

Some of them are even 10 years.

So they are going to be part of the business for a long time and continue to be, in that sense, margin dilutive because they are -- in reality, the reserves are there to bring gross margin to 0. So they will continue that.

On the -- if we look at the ban question in Europe, for us, the -- I think the key here is to remove uncertainty.

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

And that has created an environment for our customers that are not friendly for investments.

So for us, Europe has been -- it's been a good market, but only thanks to share gains.

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

And I think here, it's important that Europe, instead of thinking about 5G as a way -- as another telecommunications technology, it's actually a digital infrastructure that's critical for the economy going forward.

And the economic values of 5G should be factored into how you look at, for example, restarting the economies.

And the analogy here with 4G is quite stunning.

The 2 -- Europe has lagged behind on 4G.

So it's not a surprise that the tech disruptors and tech unicorns are American and Chinese because that's the 2 countries in the world that rolled out 4G earliest and first.

So you need the right digital infrastructure for entrepreneurs and innovators to innovate on and develop new applications.

So that's why the criticality for Europe is to have a stronger focus on building out 5G, so we're not falling behind on the next generation of technology.

Your -- you had a third question that I didn't write down.

The question was on the market share.

Basically, the market share aggressiveness from Samsung.

Do you see Samsung being a little bit more aggressive in Europe specifically?

We're really commenting more on our own business.

So we have gained market share over the last 3 years.

Almost if you look by Q3 2019, if you follow the law, it's about 5% to 6%.

So we have a substantial market share gain.

Most of that actually comes from not the Chinese competitors, but others.

Our next question comes from the line of Peter Kurt Nielsen of ABG.

Just a question, I believe, the Digital Services business, if I may return to that one in Carl's comments about the investments that will push up profitability.

It obviously makes perfect sense.

I'll just be interested, when -- this is obviously a business with a strong seasonality.

And when you talk about pushing back to breakeven, Carl, I assume you mean on a 4-quarter rolling basis.

Does it preclude that we could see a profitable quarter in the second half, I mean, obviously, Q4, which we would normally expect?

And are you indicating that the normal seasonality is perhaps being evened out as we move into next year?

Is that how we should read your comments?

No, you should read it on a rolling 4-quarter basis.

So Q4 is typically a much stronger quarter than other quarters.

And we have now -- that's what we continue to believe, right?

And individual quarters will vary in this business, as we always say, and that remains true.

That's great.

May I just ask a follow-up relating to Northeast Asia?

You obviously censor your comments on China here.

Could you just elaborate a bit on what you're seeing in Japan and Korea?

Are you still seeing good momentum here?

We're seeing good momentum across the market area.

So that, of course, it's driven by China.

But the other parts of the market area are also very strong.

Our next question comes from the line of Fredrik Lithell of Danske Bank.

Congratulations to a healthy report.

I have one -- many, many questions have been answered.

I have one maybe for Carl.

Can you elaborate a little bit on the OpEx level that you had in Q2?

And if you had any sort of savings from the fact that we have a COVID-19 pandemic and you can't travel around and what have you.

And a little bit if you could elaborate on the full year sort of OpEx levels that you did also went back in connection with the Q4 report, if you could sort of update a little bit on that.

Yes.

Fredrik, absolutely.

Yes, indeed, we see savings from less traveling.

That's very natural for most, I suppose, and we also see it in our numbers.

So as you saw then the -- if you look at the SG&A, it was flat year-over-year in spite of certain investments we make in 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 year, we maintain what we have said before, which is that given those investments and given, of course, that we have added the acquired antenna business as well to the mix, OpEx would grow slightly over 2019.

But of course, we still have the aim to reduce the percentage of net sales during 2020 still, even with the R&D ramp-up that we talk about now in Digital Services.

Our next question comes from the line of Sandeep Deshpande of JPMorgan.

A couple of questions from me.

Firstly, on the network side, can you talk about where there could be potential share shifts in Europe going forward from here?

How do you see your position, which is already very strong, in Europe?

So I mean is there much that you can gain in Europe if there are going to be share shifts in Europe given what the potential changes that are occurring?

And then -- I'm talking forward-looking from here.

And then secondly, in Digital Services, can we understand where these R&D -- additional R&D investments are going into in terms of -- I mean you talked about the 5G core, I mean, and you already won contracts.

So I guess those investments have already happened.

That is the cloud 5G core.

So I'm trying to understand where you're investing further which will potentially help you grow.

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

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

If you start to approach 100, it's a different story, but we're not there.

So we're going to make sure we -- where there is an opportunity, we are going to position ourselves with our technology to try to win as much as possible.

We will see how that 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.

And how that is going to pan out, we don't know.

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

If you look at DGS, yes, again, 5G core has been won in a number of customers and 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 positioned to win these new contracts as well.

So that's typically not the ones we have already won.

It's other contracts.

And 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.

Our last question comes from the line of Dominik Olszewski of Morgan Stanley.

So from a strategic level, if we're looking at Europe, could you maybe just describe some of the puts and takes around whether some of the European operators could play for a delay, sort of they would cite costs and the timing involved of swap-outs?

And what makes you confident that they don't play for time, therefore, and use that as an opportunity for transition to OpenRAN?

And then sort of a second sub-question related to that is just, could you describe your operational capacity to actually deliver such swap-outs, if they were to start to emerge in the coming quarters?

Will there be any bottlenecks operationally or by components from your perspective?

We -- if we start with the latter one, we have over -- since basically 2018, we have tried to, call it, debottleneck our supply chain as much as possible and make it as flexible as possible and have as little restrictions as possible.

That's why we have also been able to handle the COVID disruptions well without any real delays in shipments to customers.

So with the volume we have today, we're basically churning out, if you compare it to London a day in radios, so we don't believe our capacities, what would limit with the rate you could drive implementation of our technology in Europe.

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

Ultimately, 5G rollout in Europe is -- I think it's a difficult question.

The problem we have is that Europe is rapidly falling behind in the digital infrastructure.

It's behind in 4G penetration, probably by -- varies by country, by, call it, in average, 2 to 3 years.

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

So if you look at tech unicorns, tech disruptors that actually leverage the mobile infrastructure, they come out of -- with a notable exception of Spotify, really, they come out of the U.S. or 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 5G.

And why is that so important?

5G 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 5G is not the network, the network infrastructure.

It's not the operators.

It's actually the applications that run on top of the network.

So if we are on purpose delaying 5G in Europe, 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 focus really on how do we drive the fastest rollout of 5G.

Then the ORAN discussion, it's clearly there.

We are going to be a participant in that as well.

And as you know, we're already active.

But for the high-performance applications today, we do not see ORAN as a way to speed up the rollout.

It's rather a way to slow down right now.

But that -- we're going to be -- when ORAN is ready, we're going to be there.

Okay.

You're happy with that, Dom?

Yes.

Thank you, Dom.

Before ending, I would like to give the word again to Börje to have a closing remark.

So please, Börje.

Thanks, Peter.

So with this, we've put another solid quarter behind us with a good Q2.

We have a strong portfolio today of leading products and solutions.

And we are well prepared with capacity, with product portfolio to roll out and to capture the benefits of 5G.

So with that, again, thank you all for joining us.

Thank you all.

Thank you.

And goodbye.

This now concludes our conference call.

Thank you all for attending.

You may now disconnect your lines.