Telefonaktiebolaget LM Ericsson (ERIC) 2020 Q1 法說會逐字稿

Welcome to Ericsson's analyst and media conference call for their fourth (sic) [first] quarter reports. 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 take you through the call.

Thank you, operator, and welcome to today's call, the Q1 results call. And as due to the unprecedential circumstances, we will obviously do this call a little bit different. We have our President and CEO, Börje Ekholm in U.S.; and we have our CFO here, Carl Mellander here in Stockholm. So we will conduct the meeting based on that, but I think that will work fine.

So before starting the meeting, I would just like to read the following text. During the call today, we will be making forward-looking statements. These statements are based on our current expectations and certain planning assumptions, which are subject to risks and uncertainties. The actual results may differ materially due to factors mentioned in today's press release and discussed in this conference call. We encourage you to read about these risks and uncertainties in our earnings report as well as in our newly published annual report.

So with that said, I would like to hand over the call to you, Börje. So please, Börje.

Thanks, Peter, and again, welcome to this analyst briefing. Of course, it's a bit different than usual, and I cannot be in Stockholm due to the restrictions. And I guess it's -- it may well be the new way of working, so working from home is the new normal. But anyhow, we'll try to do it as much as normal as possible.

So let's go to the first slide. Of course, we have to recognize that with COVID-19, we truly live in an unprecedented time. It's impossible to predict how long, and also at what level this pandemic will impact our lives. But one thing is for sure, it has direct and indirect impact on all of us and the way we live and the way we work. Every business decision we have taken and we have made with the safety and health of our employees, customers and other stakeholders as a primary concern. And what we're doing, we're working to support our customers to ensure that they keep the critical national infrastructures around the globe up and running during these unprecedented times. We continue to push forward on our focused strategy, and we are determined to get through these difficult times as a much stronger company, more agile and well positioned in the market.

We delivered a solid Q1, which is seen across our segments, and we're delivering a strong gross margin and good cash flow. We're pleased to see a strong performance in Networks, which is a result of high activity across many of our regions. Operating leverage compensated for an increased portion of strategic contracts. And in the quarter, we have seen very limited impact from COVID-19.

Unfortunately, we have seen a decline in sales for Digital Services. This has been a result of, one, reduction in hardware, which is fully along our strategy to reduce the dependence on hardware in Digital Services, but we have also seen some timing of contracts, partly explained by COVID-19, which simply have made it difficult for us to gain access to customer networks during the lockdown and travel restrictions.

At the same time, it's good to see that the underlying business is strong. We can deliver gross margin of 40% for Digital Services, and that's on the back of growing software sales, and that's also after we have taken a provision for critical contracts of SEK 200 million. So we feel that we have a very strong and competitive portfolio, and we have several wins during the first quarter. And we are also very comfortable that this positions us well for the future.

We continue to drive forward with investments in R&D for cloud-native and 5G core portfolio areas. Our industry has shown resilience even during this pandemic, but I think it is reasonable to expect some impact as well. We continue to be prepared to take action, if needed. But one thing is for sure, our commitment to coming through this as a stronger company requires us and demands us to continue to push forward on our R&D as a way to create a competitive advantage.

At the end of the quarter, we have signed 86 commercial 5G contracts and delivered 29 live networks, and now we have actually 31 networks live, so it's a bit of a daily number. So we remain positive on the long-term outlook, but we anticipate a tad softer second quarter and this is due to the uncertainty from COVID-19, but also that we see a number of strategic contracts falling in Q2 instead of being evenly spread out over the year. And that, of course, include the important win in China.

However, I prefer to look at the longer-term perspective of our company, and I have not felt better than I do today about the competitiveness across our business and across our portfolio. We see a very different discussion with customers today. So we are on the right track here. So that's why we also remain committed to our targets for 2020 and 2022 due to the fact that we have a strong business.

On the next slide, we put together some summary of the COVID-19. And of course, it's -- we're in the same situation as every company and we've been required to take a number of decisions based on the facts available when we -- at the time of decision. And here is a way to at least to put some of them on the slide, so you see. The most important guiding principle for us has been the safety and health of our employees and partners and customers. And we have also always kept the customer at the center, how do we ensure that they are not affected. And I would overall say, and that's very important, we have seen very, very limited impact, if any, on the customers' business.

We've made a couple of significant decisions over the quarter. So to summarize, we have encouraged and now we actually have about 85,000 of our workforce working from home and successfully using the collaboration tools we have available. We have limited all travel, except for business essential travel. Today, it's shut down, but we did that early. We canceled all external events, and we canceled our participation in Mobile World Congress already in early February. We've had our crisis management council established, and part of that work is also to assess our business continuity. And we have teams focused on ensuring that supply, R&D, service delivery, our network operating centers are all managed to respond to different scenarios and different customer requests. And thankfully, we have multiple production sites and global sourcing, which has enabled us a key flexibility to deliver against our commitments to customers. And overall, I must say, I'm super proud of the dedication and commitment our -- my colleagues have shown in the situation here, working really hard to deliver to customers, keeping their networks running 24/7. We have field engineers out servicing the equipment, continue to do so, despite the lockdown and tough environments. And it shows the real stamina of the -- of our people in the company that we have undoubtedly, the best people in the industry.

If we move on to look at the different market areas. We see that Europe and Latin America fell, which is, to a large extent, due to very large deployment in the first quarter of 2019 in Latin America, but also some planned exits of Managed Services contracts as part of the contract review. What we also have seen is that Europe actually grew during this period.

Then, if we take the next, which is then Southeast Asia, Australia and India, we saw sales declining in -- due to timing of projects and deliveries and milestones. We've seen Northeast Asia experienced a decline in 4G deliveries to China but had a solid growth in Japan. Middle East and Africa saw good growth on the back of investments in 4G and 5G in key markets. And North America had a good growth, driven by a strong 5G momentum. Worth to mention here is that the merger continued to affect with uncertainty during the first quarter, and we expect the merged company now that it's approved to pick up the spending in the second half of 2020. We also note that the Managed Services -- or their view on outsourcing is different, so we expect to be negatively impacted during Q2 in Managed Services from that merger.

Finally, on the segments. In Networks, we continue to strengthen gross margin, and it's now at 44.6% as operating leverage more than offset an increased portion of the strategic contracts. And here, we see that our investment in R&D is paying off in 5G momentum, but also on a very solid in-feed performance of our gear.

Sales in Digital Services declined primarily due to lower hardware sales and timing of contracts, part of that timing impact by COVID-19. But we also see the focus on software is starting to pay off and with growing sales of software, and that helped gross margin reach 40% despite the charge of SEK 200 million on critical contracts. But the most important thing for Digital Services is that we continue to execute on the road map of providing leading solutions to our customers and we see very good traction on our portfolio with several important wins during the quarter.

Managed Services top line declined as a part of the contract review or contract exits as part of the contract review we conducted over the last few years. But we -- the more important thing here is we see a continued good gross margin development, and it's now about 20%. As we have said before, operating margins will vary a bit by quarter because of timing of contracts and costs. But the ambition we have to invest in R&D to develop new automated offerings are really starting to gain traction, and we can see that is a key driver of the improved gross margin.

Emerging Business saw continued growth in the different businesses. The IoT platform continued to grow faster than the market, and this is an investment area where we're encouraged by the traction we have.

With that, I give the word over to you, Carl.

Thank you, Börje.

Thank you, Börje, and good morning, good afternoon to everyone. Thanks for joining the call.

So let's look at Q1 2020 in numbers a bit more. And to start with then, you see the top line, SEK 49.8 billion. And this is a decline of 2%, if we adjust for nonorganic and FX due mainly then to, as Börje mentioned, Digital Services, where we had reduced sales of services and legacy hardware. And the services piece, yes, we saw fewer project completions in the quarter and some negative effect of COVID-19 as well, rather limited one.

Networks was flat, and Managed Services, down 5% due to planned contract exits, as was mentioned before.

Gross margin, 40.4%. It's the highest in a long time, and all segments improved. I think that's a strong point in this quarter. Favorable business mix contributed but also efficiency gains to this number.

If you look at the operating income then, SEK 4.6 billion, that's 9.3% operating margin. However, if we adjust for some of these positive one-offs we had in the first quarter of 2019, you see that then adjusted operating income increased by 30% from SEK 3.5 billion to SEK 4.6 billion.

As you know, judging us or any company by individual quarters might not be the right thing. So we prefer to look here at the rolling to complement the picture as well. So if you look at the graph there in the bottom left, you see that our net sales on a 4-quarter rolling basis is SEK 228.1 billion, with an adjusted operating margin of 9.6%, both being well in line or aiming for the 2020 target. And importantly, as Börje said, we -- with the visibility we have now, we see no reason to change the targets for 2020 or, for that matter, 2022.

Here, you see the gross margin development over a number of quarters. Blue line here being the rolling 4 quarters value, again. And of course, obviously, showing a much smoother development than the individual quarters that you can see on the gray dotted line here. And as you see, the current rolling 4-quarter number is very much in line with and aiming for the midpoint of the 2020 target. As you remember, the target was expressed as 37% to 39% gross margin.

So in the first quarter here, we recorded 40.4%, again, excluding restructuring, up from 37.1% in Q4, driven by improvements in all segments, but as a matter of fact, also by a higher share of IPR in this quarter. IPR, as such, was flat, but the share of IPR of sales was higher in Q1. And gross margin improvement then come from in Networks. It's, to a large extent, the business mix question. Digital Services, higher software share, but also better hardware margins. And Managed Services then lower cost in the quarter and efficiency gains coming out of the investments we do in R&D, therefore, artificial intelligence, et cetera.

So I wanted here to take the opportunity also to highlight some of the planning assumptions that impact the gross margin. And as we discussed, the China Mobile has awarded us the 5-year RAN market share. And we, by the way, also expect to have market share decisions from the other 2 major operators in China soon, towards the end of the month here. Deployments there will start to happen in Q2 and that, we expect to have an increasingly negative impact on our results than in Q2 compared with Q1. Of course, as in all previous quarters, we expect to partly offset this by continued operational improvements, and this will, of course, never stop to offset and compensate with other improvements.

When it comes to North America, we expect then investments from the carriers there, CapEx investments to intensify during the second half, not so much in the second quarter, but in the second half of 2020. And of course, we believe we have a strong position in the North American market.

And finally here, we should say, and we always say that we can expect to continue to see variations in gross margin. And this is particularly true, I would say, in Digital Services and Managed Services due to sales mix and project mix and the timing of cost in those segments.

Okay. If we move on to the next one, let's look at R&D and SG&A. And of course, these items also can vary between the quarters, not least due to seasonality. So here, the comments are really about the year-over-year development, starting with R&D then. In general, investments in R&D, as you know, is a strategic cornerstone for us, and we see clear correlation between R&D investment and gross margin improvement. And here, we're focusing, of course, the investments on 5G, but also AI, for example, across the segments. The year-over-year development here shows an increase of the R&D by SEK 0.2 billion then for the group, and part of that is actually due to FX. Also, the net capitalization impact here was SEK 0.2 billion lower than a year ago. So you could say the underlying increase is slightly more than that. And where is that increase? It's mainly in Networks because in Digital Services, we reduced the focused -- focused the portfolio, but also reinvest some of those reductions into the new 5G and the cloud-native portfolio.

Moving to the bottom part here. SG&A expenses increased by SEK 0.2 billion then due to FX, but also the investments in digitalization that we talked about last quarter as well. And some of the final points, we had a revaluation of customer financing, impacting SG&A here for SEK 0.3 billion. And also an impairment loss on trade receivables at SEK 0.2 billion. And you can compare that then with a positive SEK 0.6 billion in the first quarter of last year.

So we have previously talked about the planning assumption when it comes to SG&A, and we stick to that. So we expect somewhat higher operating expenses in general here than in 2019, driven then by, as we have talked about before, compliance, security and digitalization investments. But also when it comes to R&D, then including now the acquired antenna business from Kathrein. But again, I said at our investor update as well, the ambition we have is to grow top line more than the expenses here, of course.

Free cash flow. We delivered positive free cash flow of SEK 2.3 billion before M&A. And remember here, when we do the year-over-year comparison, that we had a positive onetime effect in Q1 '19, which was a payment of a large overdue customer receivable of SEK 0.7 billion.

If you look at the working capital line, there is a small buildup in this quarter, SEK 0.4 billion. And I would say this is a mix of inventories and trade payables after a very long period of reduction in working capital. And of course, this is a big -- we have a big focus internally here on maintaining good working capital efficiency also going forward now in this current climate.

Capital-light development, which is then part here of the CapEx line was reduced, so it's about SEK 250 million this quarter versus SEK 450 million a year ago.

Finally, on this slide then on a rolling 4-quarter basis, again, free cash flow before M&A amounts to SEK 16.6 billion, and this is then if we exclude the DOG -- DOJ, sorry, SEC fine, and that is amounting to 7.3% of sales on a rolling basis.

Here, you see the current financial position and you see cash position here, gross and net to the left, and our debt maturity profile to the right in this chart. And so, end of this quarter, we ended with a net cash position of SEK 38.4 billion, and gross cash now amounts to SEK 79.5 billion. And if you look at the debt maturity profile here, you can see that our debt that we have now matures over the coming 5 years, and the average maturity is 2.4 years. What's important to keep in mind is that now, in Q4 this year, SEK 8.7 billion of debt will mature, and our intention here is to repay this with cash on hand.

And now before handing over to Börje again, I recommend you all strongly to read the planning assumptions closely. We will not go through them in any more detail than what I've already said. And also on Page 1 in the report, you'll find the planning assumption highlights. And on Page 4 in the report, you'll find a complete planning assumptions. So please, read those assumptions to guide the Q2 and full year outlook here.

Thank you so much. And let me now hand over to our CEO, Börje Ekholm.

Thanks, Carl. So in closing, before we head into Q&As, we have worked hard now to ensure that we are the leader in 5G, which is basically underpinning our performance. We see our focused strategy with increasing investments in R&D is paying off. And we have now established a gross margin on a new level, but more importantly is that our technology is winning in the market. I would say that is proven with our 86 commercial contracts and 29 live networks on 5G by the end of the quarter, and today, as I said before, 31 live networks.

The criticality of the networks has never been more apparent than we see it today. The COVID pandemic has further strengthened the need for all countries to invest in communications infrastructure as it is the backbone of society in many ways, and that has been increasingly clear. And here, we especially call upon the European government to look for ways to encourage investments in 5G, as that is surely one way to help restart the economies once the pandemic is over. We have now so many proof points on how this will help emergency services, small and large businesses as well as consumers. And not to mention it, but as most of us today in Europe work from home, we depend on a good and solid telecommunications infrastructure. We will continue to make our investments in the technology to strive even further ahead with our portfolio leadership. And here, we feel that we are well positioned for the future. We have completed a solid first quarter with limited impact on our operations from the pandemic. And with what we can see today, we see no reason to change our financial targets for 2020 and for 2022.

So with that, thank you. Over to you, Peter.

Thank you, Börje. Yes. Thank you, Börje. So we have about 30 minutes for Q&A. So with that, I would like to hand over to the -- you, operator, to open the Q&A session. So please.

(Operator Instructions) And our first question comes from the line of Daniel Djurberg of Handelsbanken.

Congratulations to a strong quarter. I just would like to ask you about the very strong Network gross margin of 44.6% despite strategic contracts. And to me, this show a very good impact perhaps on currency but also network capacity upgrades. And my question is really, if this assumption is correct, should we expect to see this capacity upgrade boost helping also Q2 and onward? Or is it more of a onetime upgrade effect that you can do remotely to help your operators to cope with the capacity constraints we've seen in the quarter?

Will you start there, Börje?

I can start there, yes. As you note, of course, there is some element of upgrades. But it's also part of the longer-term strive to gradually change the business to be more and more tied towards software upgrades. So the improvement in gross margin may be somewhat bigger in an individual quarter, but you also have seen the trend go in that direction. So I think you should not see it as a one-off, but rather as part of a strategic initiative to change our gross margin profile in Networks. What we can say, though, is that we do expect the gradual improvement to continue over time. That's our fundamental premise for the focus strategy. But you will see a tad soft top line and gross margin in Q2 due to the reasons of the COVID-19 but also disproportionate share of strategic contracts, including China in Q2.

That's from the line of Edward Snyder at Charter Equity Research.

Carl, if I could, on gross margin again. Clearly, you're facing a more strategic investment environment, especially in North America with the T-Mobile and Sprint merger coming up here. You normally are seasonally down in 2Q in gross margins. Should we expect that to be a bit exacerbated this year? Or is that going to push to the second half of the year? As you mentioned, most of that will play out then.

And then, Börje, if I could, as you have antennas is -- will that be brought to bear in your revenue line soon enough to affect 5G? I know there's a lot more invested by the carriers in the antennas side of the business, especially for the MIMO systems. Can you get you qualification and bring up a product soon enough to affect that? Or is it more of a long term investment?

Ed, Carl here to...

Yes. Carl, can start with it.

Yes, thanks, Börje. I'll start with the first one. It's a bit similar when it comes to the gross margins there. Of course, we have a favorable business mix in Q1, and gross margins will vary. Now in Q2, of course, the China volumes will come in, and that will weigh on the margin somewhat. While the merger investments, what we see now is that the investments there will take off second half, so not so much in the second quarter. But over time, that will, of course, come into the mix as well, but not so much in the very near term. But I would say, I mean the full year guidance remains. And if you look further down on EBIT, it's still the 15% to 17% operating margin that we talk about for Network that we are aiming for. And with 16.8% here, we are clearly in that range and in the upper end of that range. So we keep the 15% to 17% for the full year.

Great. Börje on the antenna?

Yes. We acquired, of course, the Kathrein business for a couple of reasons. One is the capabilities and product portfolio in passive antenna. But we also see the importance of offering integrated site solutions between 4G and 5G to our customers. So what we are doing there is investing -- basically, we're increasing the investments in developing the portfolio of Kathrein to make it even more competitive in the market. And we see the -- we see a good growth opportunity in antennas, and that's what we're investing to capture. That will be partly in more complicated antennas systems like that in MIMO, but it will also be in the more passive antennas. And that is a key investment area for us. It will take some time. You will not see that to yield a quick result. We're -- it takes -- it's going to take maybe 18, 24 months to upgrade the product portfolio of Kathrein, but we feel encouraged by the progress we've made since the acquisition closed late last year.

That question comes from the line of Francois Bouvignies of UBS.

I just have a quick question on the full year outlook for 2020. So you still, according to Dell'Oro, see RAN of 4% growth for the full year 2020. And if we look at Q1, it was flat. And if we look at your guidance for Q2, it's also not growing. So I just wanted to see like what are the main drivers that you will see in H2, if you can quantify as well. And with the COVID, do you see any potential downside risk to this compared to, let's say, one quarter ago, given that it's all pushed out into the second half?

Would you start there, Börje?

Yes. The COVID-19 impact is, of course, hard to assess, and we need to be a bit humbled in predicting what is going to impact. On the one hand, if we look globally, we see a number of countries actually accelerating investments into 5G as well as 4G capacity in response to the pandemic. The -- one of the clear cases is clearly China. But if you look in Europe, it's doing the opposite, slowing down adoption of 5G. So the impact is a bit difficult and not transparent to see. What we see so far is actually, on the totality for our business, is no impact at all. We see continued good demand and that we expect to continue throughout the year. What we do say is that deployments in China, it's a partly a bookkeeping effect that you need to book and the cost upfront, but we will also start to see acceleration in the second part of the year. So the -- we use Dell'Oro as an estimate for the total market during the year, and there's an outside perspective on the growth. We don't see any reason to have a different view than the Dell'Oro, so we believe we will see a growth in the RAN market on sub-4% this year. It's -- but of course, it's an acceleration in the second part, partly driven by China.

Okay. And the U.S., sorry, as well, quantifying?

Yes. The U.S. will clearly also -- the merger uncertainty will be removed, and we don't think it's right to plan for any ramp in the merged operator spending until the second part of the year.

That's from the line of Jörgen Wetterberg of Nordea.

Congratulations. So 2 questions, if I may. One is related to your China business, if you could give a little bit more color on whether you think it will be EBIT accretive versus the margin targets of 10% this year? Or maybe if it will be later during the life span of the contract?

And then maybe more in particular, since you have more detail on that on the China Mobile 5G contract that has been announced. And also if there will be -- if you think there will be further investments from China Mobile in H2?

Question number two is relating to Digital Services. What level of confidence do you have to reach the full year guidance that you have? If I take the midpoint sales and the low single-digit EBIT margin target, if I do the math correct, that gives between SEK 1.5 billion and SEK 3.5 billion EBIT to bridge before the end of the year. So what is your confidence there? And will we see progress already in Q2? And what are the main levers?

Will you start, Börje?

We start with the China question then. It's -- if you look at the typical profile in China, it's margin accretive over the full contract, but it's -- of course, it's loss-making in the beginning, and that's what we're trying to say here. So exactly how that is going to look like, we will see when we -- when the other operators have concluded their RFPs. So we will come back on that. But what we have -- we have already when we set out a target of 10% margin for 2020 in the beginning of -- in late last year and the beginning of this year, we actually assumed that we would have negative contribution from China in there. So exactly how that is going to look like for the full year, we're comfortable about the overall outlook, but we also say that we will have a disproportionate effect in Q2. But there you can conclude, you will see benefits in the rest of the year.

Digital Services. The most important thing with Digital Services is, of course, that we have said that we are going to reach low single-digit margins this year, and we continue to execute on that plan. Here, you do have some effects of the COVID-19 that actually pushes projects over quarter ending, et cetera. So it is a bit more exposed and that is service delivery with physical persons traveling into countries, going to customer premises, et cetera. And that is difficult in today's environment. So that you should bear in mind. But the most important thing with Digital Services is the investments we make in the forward-looking portfolio. So what we feel very comfortable about is our competitive ability with the solutions in Digital Services. And that, we see driving -- that's what's really going to turn around the business. And there, we see great progress.

I will be honest to say, we're not focused on an individual quarter. And the DGS, it fluctuates quarter-by-quarter depending on project completions, et cetera. So predicting a quarter is always associated with a large degree of uncertainty. But the trend is there and makes us very comfortable to see that we'll turn around this business and make it into a contributor for Ericsson. That confidence is not shaken at all.

Okay. Jörgen, you're happy with that?

Yes.

That's from the line of Peter Nielsen at ABG.

Just last quarter, we spoke a lot about the investments in digitalization and the loss in Kathrein in Q4. We've spoken less about it this time, obviously, given impressive margins. Could you just talk about the -- are these investments on track or sort of in line with the size you indicated 3 months ago? And similarly, has Kathrein also showed the expected, I guess it has, improvement in the profitability that, that you anticipated? Has anything changed in these 2 regards versus 3 months ago? And also, looking ahead for the rest of the year.

Carl, maybe you should start?

Well we can -- both of these actually are on track. So we can say on the digitalization, we continue to invest in digitalizing our company. We believe that is going to help us to come out as a stronger company also when the COVID-19 pandemic has subsided. So we feel those investments are critical for our long term competitiveness, and we will push ahead. And of course, they're included in the targets for 2020. And the same thing applies to Kathrein. We know that, that will also be a gradual journey, so we are investing for technology leadership in antennas. So we're increasing R&D, but we're, at the same time, working also to have the right cost structure in the business. So progress there is according to plan that we said in Q4.

That's from the line of Stuart Jeffrey at Agency Partners.

So I got a question on capacity investments. Just thinking intuitively, if there are fewer people traveling due to COVID, there are more people at home, which, in turn, means there's more people on WiFi. And that should mean there's less demand on your overall mobile network, specifically LTE 4G networks. So I guess I'm trying to understand why do you see or are you seeing still strong demand on capacity investments during the course of this year? And why we wouldn't we expect that to perhaps ease off? Perhaps compensated for by investments in 5G, but why wouldn't the investments in 4G capacity not ease off, if fewer people are traveling and using the mobile networks?

This all vary by country. It's a much more complex picture than you described there. And what you see is a increase in overall traffic in the networks. So despite roaming being down, which is clearly affecting the market negatively, and to some extent, some of the mobility features are also down. But you see a quite large increase in overall traffic in the network. So it's -- in some countries, you're going to see exactly the situation you described. That's in countries with a very strong fiber network, for example. But there are a large number of countries with a very -- not at all similar, but they'd rather experience very heavy growth in traffic. So I think the picture is not as straightforward as usual. And in large parts of the world, we see that people hardly have a fixed line connection at home and rather rely on the mobile network for their -- all their connectivity needs. But if you live in a country with a poor mobile network, which actually many countries have also in Europe, of course, you're going to rely more on alternative means.

You good with that, Stuart?

Yes, I was just thinking that the vast bulk of revenues do come from countries with pretty established and strong fixed line networks. I don't understand that for India.

But in most of these countries -- but we have to look at the real pattern in the traffic, right? And the traffic actually increases. So does that mean that they may not benefit from all the features that you have from mobility, but you see the overall traffic increasing in the mobile network as well.

That's from the line of Paul Silverstein at Cowen.

Clarification. You all pointed out that with respect to the Chinese contracts, long term, it's net positive impacts on the bottom line, but adverse early on. And maybe I misheard, but I thought you also said that you're expecting most of the adverse impact to hit in Q2, then followed by, I thought you said benefit in the second half of the year. Do you literally -- do you expect to see an actual benefit in terms of net impact in the second half of the year? Or do you mean, do you expect to see improvement from the particularly severe impact in Q2, albeit still a negative impact throughout the year? I assume it's the latter.

Will you start there, Börje?

Yes, Q2 will be negatively impacted, clearly, as we have said here. So that's no question. And you will see improvement in the second part of the year, leading up to the full year forecast. When we know the full knowledge of the business in China, we can be more specific how it's going to impact, but we foresee the negative effect primarily in Q2 and then improving during the year.

Börje, just to be clear, when you talk about improve -- when you talk about improving, can it actually benefit in the second half of the year from a bottom line perspective?

Our plan is that -- I don't want to talk about specific quarters, except that we see the pain in Q2, right? But we also see that we can reach the full year target, right? So you have to kind of assume based on that, that at least we're taking a contract, which hurts us short term. Whether that hurts us in Q2 and Q3 or if it's going to be only Q2, I cannot say today because it ultimately depends on when delivery starts and how they look like. But we can clearly foresee a bit of a hurt in Q2 but reducing over the year. But it's not the business -- it's the rollout business, and that's in general for all operators. It's actually not a quarterly business. So it's a very artificial time line when we introduce quarters. So some go -- it may actually take 6 months to roll out the network or 7 months and then it's all of a sudden impacting 3 quarters. So it really depends on, and it's a bit early to know yet.

Yes. Maybe just to complement, Carl here, and reiterate the fact that one of the operators have decided, but the other 2 have not yet. So we -- it's really a bit too early or very much too early to talk about specific volumes. But I guess the assumption here is that we will have high volumes in Q2, and that's mainly what we're talking about. That's why it will weigh on the margins, especially in Q2. But then the rest of the volume will come in the later part of the year. So let's see when we have clarity from all operators in China.

That's from the line of Johanna Ahlqvist of SEB.

Congratulations to a strong result. I'm just wondering on -- we talk a lot about the margins, but I'm thinking the seasonality you guide for less than normal seasonality on sales in the second quarter. And I'm just wondering, given the fact that you just commented on high volumes in China in second quarter, how do you foresee -- I mean, normal seasonality is 11%. How much less -- what's lower, so to say? Is it 5%? Or is it -- because I guess then you need to assume that other countries, except China, will be much worse off. So I'm just wondering how -- if you can give any flavor on how you see seasonality in Q4, a bit on geographies or divisions?

And then just a second question, if I may, in terms of visibility on operators' CapEx spend. What is your visibility? Is it 3 months? 6 months? Or yes, how do you foresee that?

You start, Carl?

I can start. So when it comes to visibility, I would say we are, of course, extremely close to the customers now, not only to make sure that the networks are up and running and can cater for the traffic pattern changes and so on, but also on the investment plans, of course, on how to carry out rollouts and the deliveries during the rest of the year. I would say we have a pretty good understanding and visibility on those plans. Of course, there is an overall, as we say in the report, I mean, there's an overall uncertainty on the macro level, but we have, I would say, good visibility when it comes to customer plans, at least.

When you talk about the growth, I just wanted to say on the line what we say and what's important in the report is that, yes, we believe Q2 will be weaker than normal 11% seasonality, but it will still grow. That's our assumption. And the planning assumption we want to transmit to you as well. So we're not talking about a decrease here. We're still talking about a growth, but somewhat lower than the 11%, without commenting exactly what the specific geographies there.

But can you comment where you foresee less than normal seasonality? I guess, you expect more than normal seasonality in China, for instance.

Yes. I think probably in Latin America, for example, we will see less than normal seasonality. That's about it. Probably also maybe in Middle East and Africa as well, but let's see. I think China is definitely going to go. And the U.S. is rather flat this time because, as we said, the merger investments are not taking off until the second half. Börje?

No, I was going to say that we -- when you run a company of Ericsson, we have a number of markets that we think are going to be stronger. Some are going to be weaker, and it varies by quarter. And you saw Q4 had a different revenue mix than it has now. That's always going to be the case, and that's going to be the case for Q2 as well. And based on when we just formed the view of the overall interactions we have with customers, we are saying that, okay, we would see an acceleration in China. That will be one aspect, but we're going to see some deceleration in other parts so to formulate an overall guidance. And I don't think it's appropriate for us to start guiding by geography, by business area, because then you're going to hold us accountable to something that we actually look at as a totality with some variations in each part. So that's why we are not going to be more specific in guidance than you see.

That is from the line of Alex Duval at Goldman Sachs.

Congrats on the strong results. Just a couple of quick ones. Firstly, just wanted to understand, one of the Scandinavian telcos recently has been talking about potential component issues in the second half on vendors. Just wondered if you could give a bit more color on how you ensure that you safeguard the logistics components and a late situation there.

And then just quickly on Digital Services. Obviously, you talked about how we shouldn't look at this just quarter-to-quarter. I just wonder if you could give a bit more color in terms of the pipeline and how we should think about business opportunities there?

If we start with the supply situation, we -- this is -- in a way, it's an unprecedented situation with COVID-19 and disturbances on supply chains. And I don't know which operator you're talking about or which vendor they referred to. We can only comment from our situation. And of course, so far, we could manage Q1 without any problems. A lot of hard work on this by the supply people, but we could manage that. We foresee that we can manage the volumes in Q2 as well, thanks to the fully diversified production base we have in the company and the supplier base that's also diversified. We have also benefited, of course, with the very sharp interruption we got during Q2, because we have built up strategically bigger buffer stocks over the last 2 years. We've done that in order to try to unconstrain the supply chain as much as possible to reduce -- I mean, we have no chance of forecasting the pandemic to happen. So don't misunderstand me there. But we said it must be natural to try to unconstrain the supply chain due to the geopolitical uncertainty, the uncertainty of supply in general that we saw happening as a notion of all the geopolitical tensions rising and trade tensions rising. So that has helped us quite a lot in this pandemic to actually supply our customers what they need. We, as of today, we have -- we believe we can fulfill supply also in the second half of the year, because we have prepared for it, and we put ourselves in that position.

Will the lockdown and the restrictions go on for very long? Of course, then we will be increasingly stressed in the supply chain. But we will do our utmost to fulfill the customer's demand of equipment. And that's our strong commitment. And I talk for everyone in supply, we live and die by what we supply to our customers on a daily basis. And that will not -- we will not waver from that commitment.

And then if you look at -- yes, Digital Services, the key here is we made basically a couple of decisions. Now it's 2 -- 3 years back to invest in a cloud-native portfolio, and that has served us really well. So we see very good traction on 5G core and our dual mode 4G, 5G core and the whole 5G offering. That's why we are very comfortable on the turnaround plan of Digital Services. Fluctuations will be there by quarter, that's for sure. They are not going to go away, but we are very encouraged with the wins we see on the 5G side. We're also seeing very good traction on the DSS side. So we think the overall business we have now in Digital Services actually will have some very interesting developments over the next couple of years as the operators are building out their business into 5G as well as expanding their offerings in the enterprise. So we are -- we're very happy with the investments we made in Digital Services a few years back and the way the team is executing.

Thanks, Börje. Alex, you're happy with that?

Very happy.

We are getting close to the hour. We will have one final question coming up now, and then we will close for Börje's closing remarks.

That's from the line of Patrick Chan at Crédit Suisse.

So I have actually 2 questions, if I may. Just very quickly. So first question, just want to understand, do you think there's any scope of increasing the market share further in the U.S. post-emergency situation?

And the second one is, can you please talk about the latest on any progress of getting into even a stronger position in Japan by purchasing the remaining operators?

Okay, Börje?

Yes. If we start with Japan. We are -- we have a partnership there with Fujitsu, as you know. And we're working, of course, to see if we can strengthen our position further in Japan. It's a very important market for us, and we have invested quite heavily there over the past few years, including putting own research in Japan as well. And our ambition is to be a stronger player in the Japanese market, that's for sure. Where we end up, of course, we will fight hard to do that. But that's what we invest for. We will see where we end up, and then we can report after the fact. But we feel that we have a very competitive offering there as well.

The capital spend in the U.S., it's -- what's quite clear is it's been -- the uncertainty caused by the very long approval process for this merger have impacted us during the last few quarters. That's clear. What we see though is that the combined company, they will leverage the assets they have now in the merger and start to invest again. We see that in the second half of the year. Then, of course, we're going to fight hard to keep our position in that. And if we -- if our technology wins, we can be better. But let's see where that ends up over time here.

Okay. That ends the Q&A. But before ending this call, I would like to hand over again to you, Börje, with some closing remarks.

Thanks, Peter. So I'm only going to end by saying this is an unprecedented time we live in. And despite that, we can continue to execute on our strategy of technology leadership by investing in R&D to drive market-leading portfolio, and we could deliver a solid first quarter with good gross margin and a solid free cash flow. So with that, we feel that we are well positioned to manage a difficult environment. But we are very comfortable about our position and the long-term attractiveness of the market.

With that, thank you.

Thank you all, and stay well.

Thank you.

This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.