Earnings Call: Q2 2021

Jul 16, 2021

Hello, everyone, and welcome to this Second Quarter Report 2021. Standing here from the studio in Schista. Together with me here in the studio is our President and CEO, Borje Ekholm and our CFO, Karl Melander. As usual after the presentation, we will have a Q and A session. And this is important. In order to ask questions, you need to sign up via telephone. So details can be found in today's press release and on our website, eriksson.com. During today's presentation, we will be making forward looking statements. These statements are based on our current expectation 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 annual report. With that said, I would like to hand over the word to you, Borje. Please, Borje? Great. Thank you, Peter, And good morning, everyone, and thanks for joining us at this video conference for the Q2. We continue to see good momentum in our business and is based on the 5 gs rollouts, but also on market share gains. So we saw organic growth of 8% during the quarter and we could also strengthen the gross margin For the whole group to 43.4%. But before I step into the Q2 performance, I really want to highlight the efforts by our people to deliver this result during the Q2 despite the global pandemic that we've been operating with in several of our markets. Today, it's also clear that we are a leader in the 5 gs area. We have a very competitive portfolio and today we power 93 live 5 gs networks out of a total number of 169 globally. A few years back, we also made a strategic decision to try to deconstrain our supply chain, Again, to be able to deliver to our customers, that means that we have invested in making our supply chain more flexible. And during the quarter, we have had no disturbances on our deliveries, and we've been able to keep up with the demand we've seen in the market. I would say the ability to deliver in combination with the significant efforts or investments we've made in the R and D area And combined, of course, with our strong efforts by our people, have allowed us to perform well despite a very challenging environment during the Q2. So let me go through a couple of Key highlights on our strategic execution during the Q2 here. We have continued to show great progress in our product portfolio. And it's highlighted by the addition of the 5 gs mid band and massive MIMO support to our Cloud RAN portfolio. Cloud RAN is a critical element in our product portfolio as this will enable our customers to evolve their networks towards a cloud native architecture and open network architecture leveraging automation and fully autonomous networks. Ericsson has always been and always will be a strong believer in openness in the mobile networks, And we will work in close partnership with our customers to leverage the benefits of the open architecture. We take the same approach to Open RAN solutions and we are actively participating in the standard bodies in Open RAN. We also continue to see great momentum in the U. S. Driven by strong demand for our 5 gs solutions, and we expect to continue as 5 gs is rolled out across the nation. And this was further highlighted, of course, by the signing we had this morning of The 1,000,000,000 5 year contract with 1 of the largest operators in the world and it's Verizon, of course. And this is the largest contract in the history of Ericsson. On the IPR side, we continue to see good momentum in signing up new licensors. And we are during the quarter, we have Signed an agreement with Samsung that we believe 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 Q1, We saw a decline in total IPR revenues of about NOK 500,000,000. We have previously communicated that it is high risk that we would be allocated Lower market share in China due to Sweden's decision to not allow Chinese vendors in the Swedish 5 gs network. And this can lead to a significantly lower market share going forward compared to what we have today, of course. And when we look at the Q2, we have seen that our sales in Mainland China has fallen by about NOK 2,500,000,000 And that's a 60% reduction compared to Q2 last year. We don't really know the definite outcome of the tenders that's ongoing, But we want to say that it's prudent for you to already now plan for a significant reduction in market share, both in networks as well as digital services. And regarding digital services, We can see that the material loss in market share in China, in Mainland China, would lead to a delay in reaching the targets in digital services. We have in addition, during this quarter, we have taken a write off of NOK 300,000,000 related to pre commercial product development for the Chinese market. And this is basically pushing out So now we expect a limited loss in 2022, but it will also be a bit back So you will see a stronger development in the second half as the new portfolio start to generate significant revenues. However, we can also see that based on the strong portfolio we have in digital services and the strong momentum we have in the marketplace that we are going to over time compensate the Chinese volumes without the markets. So we're going to see a path to exceeding the previous targets of 4% to 7% EBIT margin that we said, but it will take a bit longer than we earlier forecasted. Finally, I want to just highlight the work we do on ethics and compliance. We are sparing no efforts But most importantly, we're investing in creating a culture in the company where we are making sure that this will not Happened again, that happened in the past. And this is an area we're strongly committed to as a management team in the company because we believe this is going to be a long term competitive advantage for us. Let me now move into the market area performance, Starting with Middle East and Africa, where sales declined by 10%, and this is mainly due to lower 5 gs investments In the Middle East and to an uncertain macroeconomic situation in Africa, of course this is to a large extent dependent on the global of the pandemic COVID-nineteen pandemic. Despite the lower volumes in Mainland China, We saw Northeast Asia growing by 1%, adjusting for currencies. This was driven mainly by networks And the continued 5 gs momentum in other markets in the market area or other countries in the market area. The 5 gs momentum continued in North America where sales increased by 11%, and this was driven both In networks as well as digital services. In Europe and Latin America, sales increased by 14%. And if we break this down a bit, we can see that Europe grow 12% on the back of market share gains primarily And we saw Latin America growing 28%, and that is a bit of a recovery compared to a very difficult second quarter last year That was heavily affected by COVID-nineteen pandemic. And finally, Southeast Asia, Oceania and India, where 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 concerns relating to COVID-nineteen in Southeast Asia, where many countries are heavily affected now and we've had a very difficult situation in India that's now gradually improving, But we see other countries affected. So we do believe we can see a risk for a slowdown in the general economies in Southeast Asia. We then move on to business segments. Networks grew organically by 11% Despite the loss of volume in China and lower IPR revenues. And this reflect 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 gs is increasingly rolled out Gross margin increased to 47.9% and that's compared to 40.5% last year. Of course, that's supported by strong operational leverage. But also, as you may recall, we took a write down of precommercial product Inventory and initial 5 gs deployment in China in the Q2 of last year. In digital services, We saw double digit growth in North America and Europe, while we can see that sales declined in the other market areas. For the full segment, sales were stable, and that's despite the reduction in volume in Mainland China as well as lower Gross margin decreased to 37.9% compared to 43.6% last year. That is to a large extent explained by the write off that we do to pre commercial Inventory in China of NOK 300,000,000. So that impacted gross margin by almost 4 percentage points. We see overall otherwise a good momentum in the business in digital services, and we're continuing to execute on the plan. But of course, as I said before, the breakeven and reaching a 4% to 7% target gets pushed out because of lower volume in China. Our commitment to developing leading products here stands firm and we're continuing to increase the investments in our R and D Despite knowing that it will take year to 2 years before we start to see those product developments converted into revenues in the P and L. 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 lower sales As a result of the merger between 2 operators in North America, but also unplanned contract exits in Europe. At the same time, we were able to increase gross margin to 19% from 17.2%. Also in managed services, we continue to invest in AI solutions for our customers and that will further strengthen our competitiveness. In 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 deliver and Cradlepoint is continuing to deliver according to our plans And we performed well, see that we have offerings now that can capture a good growth opportunity in 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 in that area. With that, I give the word over to Karl Melander, our CFO. Thank you, Borje, and good morning, everyone from Stockholm. So we can really see that the strategy execution that Borje talked about is visible in our financials. So if we look at the P and L here, you see again that reported sales up to SEK 54,900,000,000 which an 8% growth organically then with growth in 4 out of 5 market areas as we saw just now. This growth is mainly driven by the networks business that grew 11%. So We reached this growth in spite of the decline in China then by SEK 2,500,000,000 that we mentioned earlier here. IPR revenues ended up at SEK 2,300,000,000. That's part of the top line here. It's a decline of SEK 500,000,000. But of course, the quarter as such is a bit boosted here by the revenue coming out of the recently concluded Samsung Deal where we have revenues both from Q1 and Q2 into Q2. On a 4 quarter rolling basis, if you look at the graph there on the bottom left, we are around SEK232,000,000,000 in top We continue on this picture to look at the gross margin, 43.4%, which is actually a 520 Basis points improvement with strong improvement as we saw right now from Bury in 3 out of 4 segments. That's very encouraging. In networks, it deserves to be singled out again. We saw continued operational leverage contributing to the higher margins with A very high gross margin at 47.9%, up from 40.5%. Digital Services then reported a decrease in gross margin here as a result of the write down related to Mainland China that Peri mentioned. And excluding that gross margin, we would have ended up at 41.7%, a more healthy level in the underlying business. And the underlying gross margin deserves to be mentioned 42.4% if you look at the 4 quarter rolling basis, which is really More relevant as individual quarters can vary up and down. OpEx, SEK 17,400,000,000 in the quarter. And as you see in the table here, R and D and SG and A amounted to SEK 17.5 billion and then we have a positive impact of SEK 0.1 billion related to positive related to impairments of trade receivables. SG and A, rather stable, as you can see, helped by currency, of course, but also impacted by the investments we make in compliance and security. The R and D side grew by SEK 500,000,000. It's really coming from the digital services Investments we do now in our cloud native 5 gs portfolio as we have planned and communicated around earlier as well. And then we shouldn't forget that Cradlepoint performing on plan, but of course adding also to the R and D and SG and A expenses. So this results then in an EBIT of SEK 5,800,000,000 excluding restructuring up from SEK 4.5 A year ago, this represents a margin of 10.6%, which is then an increase 2.40 basis points year over year. Again, the gross margin in Networks is the big driver for this improvement on bottom line as well. We have a graph there in the bottom also showing the EBIT margin on a rolling 4 quarter basis. We are at 13.4 Which is then well within the range of the 2022 target, which is between 12% 14%. And I can add also, which is not on the slide here, that The EBITA target of 15% to 18% that we have set up for the long term can now be compared with the actual performance in And you can see here that cash flow from operating activities increased by SEK 500,000,000. Of course, supported by IPR payments coming into Q2 rather than Q1, but also offset by certain Tax payments were last quarter benefited from tax refunds to the tune of SEK 700,000,000. So here, I think the important thing is to talk about this working capital where we really continue to focus on lead times in our company and Keeping capital efficiency in our company and specifically the focus on project deliveries And the whole credit to cash cycle now has really enabled us to become 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 going forward as well. Important also to mention when we talk about working capital is the inventory piece where we continue to monitor Obviously, the component situation and make sure that we have proper resilience that we can deliver on time to our customers, which we have done so far. So free cash flow thereby before M and A came out at SEK4.1 billion. This also is an increase then by SEK0.8 SEK 1,000,000,000 year over year. And again, looking at the rolling profile here and comparing with long term targets, we are now delivering free cash flow Before M and A at 9.6% of sales. And as you know, the long term target that we have discussed is between 9 And 12,000,000, so we are within that range as well. When it comes to our cash position then net cash increased by SEK0.7 quarter over quarter Coming out, of course, of this free cash flow generated in the business, but also impacted or netted out by the Dividend Part 1 that was paid now SEK3.3 billion in the first for the first half of the dividend paid up. So net cash ended up at SEK 43,700,000,000 and gross cash, there are a couple of movements there as well. We are now up to SEK 77,100,000,000. As you know, we issued a SEK 500,000,000 bond, an 8 year unsecured bond in the market During the quarter, we have also utilized a loan commitment from the European Investment Bank during the quarter, about 300 $1,000,000 as well, which also is there to support our R and D and 5 gs. So as a result of these events or actions regarding the debt portfolio, we have extended now the Average maturity in the debt portfolio to 4 years from 2.2 years a year ago. Lastly, on this picture, I'd like to comment on return on capital employed, an important metric for us also, which amounted to 13.5% now Compared with 9.9 percent, this is an increase obviously of around 4 almost 4 percentage points year over year. Again, A combination of improved profits and capital discipline. I wanted to say a few words about IPR. And this period that we have had has been active when it comes to renewal renegotiations. Of course, we're Very pleased with the renewal with Samsung. It's a global multiyear agreement, which confirms again the value of our patent portfolio. In addition to that, we signed up with 1 additional company for another renewal in July. So that falls out of the Q2 period, but still important to mention here because it will impact the Q3 numbers. So all in all now, our portfolio of License contracts amount to SEK 7,000,000,000 on an annual basis, and this is the starting point that you can see here in this bridge. And then there are a couple of factors that explain the difference, which is a question we often get to the SEK 10,000,000,000 which we had in 2020, and I'll go quickly through them. Of course, we're exposed to FX movements here, that's the first bar here. We are impacted by the relative weakness of the U. S. Dollar towards the Swedish krona. The other factor, of course, is the upcoming renewals of expired contracts that we are working on, as mentioned. And then the 3rd bucket has to do with the fact that not all of the revenue in IPR is recurring. Some is non recurring and this can vary between quarters and from time to time. And then finally, the 4th bucket is lower volumes From one of the licensees affecting the numbers as well. So to conclude on this, we do feel confident That the leading position we have in 5 gs on the patent side will create a foundation for growing the IPR revenue going forward. Now 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 Deloro forecast for the market growth has increased dramatically, I would say, from 3% in the January report to 10% now for 2021. And you see here how that breaks down into different regions as well with North America 12% Europe 9% and China 11%. Regarding our own top line, I just want to remind you that The normal seasonality is plus 5% from Q2 to Q3. But again, I want to point out that this varies of course with big fluctuations quarters depending on deployment. Then we talk about the risk of losing a significant market share in China, of course. And under the planning assumptions in the report, you can find the quarterly numbers of sales in China. Over to IPR here, I mentioned already that SEK 7,000,000,000 is the annual volume of contracts that we have. And then gross margin again, we're not guiding specifically on that, but just to reiterate that gross margin can vary quite a lot between the quarters. So look rather at the rolling 4 quarter. Last point, digital services then. Considering the risk in China And also the fact that which we've already said earlier that 2021 is an investment year for digital services. We expect now A similar earnings level in Q3 that we just delivered in Q2, while we expect Forward to become breakeven on an isolated basis for digital services. With that, thank you and back to you, Borje. Great. Thank you, Karl. So Ericsson continues to be well positioned to take advantage of the market momentum we see now as 5 gs is increasingly deployed around the world. We see the North American market moving very fast With a strong demand for 5 gs and it will be a key opportunity now as the operators are 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 in mid band is critical to give the end user experience that you can get from a 5 gs network. So we are of course very excited about our position in the market and continue to work with the leading operators in North America to build out their networks. In digital services, we continue to see good momentum in 5 gs core, and we have here been gaining print over the last few quarters. But we also recognize to capture the opportunities that are in front of us, we need to invest in R and D And costs will come before revenues. So we are continuing here, as Karl also highlighted, to ramp up our investments in R and D to capture the market opportunities. And we will see revenue start to be generated from this portfolio, Call it beginning of next year, but then ramping throughout next year. We also see that with 5 gs being built out and as 5 gs is increasingly built out in mid band, It will be a platform for innovation. And that will especially be well, it will be for the consumer space, But it will especially be for enterprise basis. And we are very excited and we are strong believers that with 5 gs, Wireless communication can for the first time be the primary choice of technology access technology for enterprises and basically be the backbone of digitalizing enterprises for the future. We think this translates into a very exciting growth path for Ericsson. What we also see is that we are seeing a strong momentum in the business, as we've already said, but also the investments we made in a flexible supply chain allows us to capture the growth opportunities in the market. And it's thanks to the investment in a global supply 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 targets on group level for 2022. So with that, I think before moving over Q and A. Maybe you want to add something, Peter? No, I think we're all happy with the presentation so far. And so we'll move into the next phase of this presentation here from the studio. So that will be the Q and A. So with that, I would like to connect with you, Jed, so you can open up the Q and A. Thank you. Schuster. Thank you, Richard. And we have the first question here. It's from Ed Schneider from Charter Equity. So please, Ed. Good morning. Good morning. Thanks for the question. A couple of them if I could please. First off, you mentioned O RAN, but even if we Ignore the interoperability and the system integration problems with a multi vendor solution, which has never occurred before. It seems clear that a workable solution probably won't be ready for a year or 2. It kind of begs the question of what the point of O RAN is. If 5 gs is Now maturing in China in terms of the build out in the U. S. Is committing now to systems for their deployments. It seems as if most of the big tenders will already be awarded and being built up before ORAD even See it's a practical solution. So would it be a 6 gs system or is there some sort of market dynamic that's going to drive carriers to move from Systems they choose now to something that has not been used before and will have to be shook out halfway through 5 gs? And then I have a follow-up please. It's a great question, Ed. The reality is, clearly, Oron It's something that will happen and that's what we are investing for as well. We see in reality the first step to be the Cloud RAN 5 gs coverage. And that's what we also see our customers doing. 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 Ova Grande can have certain applications earlier where you have less performance demands, For example, it could be rural coverage, for example. So there are pockets where we can see that come. But for sure, Oron will be a fundamental part of the 6 gs solutions. That's no question in my mind. But exactly how it's going to pan out in the meantime, I think remains to be seen. It depends on how the technology matures clearly. You said you had a follow-up, Question. So the U. S. Is obviously in ascendancy now in the 5 gs rollout now that C band auctions have been completed. But if you look at Different segments. So you've got a lot of spectrum to clear. So it's going to be a multi year process. And at the same time, I don't think the business plan has been proven Well enough in China that you're going to see the same level of massive MIMO mix versus macro. So two pieces if I could. 1, Do you see that the rollout in the U. S. Will favor more of a macro cell approach initially With the mine motor cover capacity and see the lower mix of the high density stuff. And 2, does this dynamic change if you look at Say, Timo's band 41 versus the C band spectrum, which is higher, do we have a better chance of Seeing either MIMO or maybe even more macro in a 2.4 gigahertz environment than we do in C band. Thanks. Thanks. What we see, we see that, of course, we need to build out a very big coverage and big Density of mid band, because ultimately that is what's going to give the end consumer the user experience of 5 gs. So today in many countries, we have been focusing on, call it, low band build out. In reality, That gives a 5 gs coverage. But in order to give the real performance benefits of 5 gs, you need mid 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 C band in North America, that is going to drive the market. And we will see that build out happening For sure, it's already starting to ramp, but it will continue throughout the year and into the next year. After that, we will start of course to see densifications of the network. So that's the next step. Exactly how this will be depends on Customer depends on their specific situations. So I think that's a question best posed to them rather than I Try to interpret their strategies and I shouldn't really do that. So I do but we are very excited about the process we see in North America and the build out. And we by the way, we see a similar activity in multiple countries being Australia, being Japan, being Middle East, for example. So a lot of things are moving in the 5 gs world. Thanks, Ed, for those questions. Thank you. Thank you. We'll move to Francois Bougainier at UBS. Hello, Francois. Hi, good morning everyone. Good morning. My first question is maybe a clarification on China. So when I look at your comments, you said that you had lower volumes from delayed 5 gs deployment in China And that you had an impact negative impact of €2,500,000,000 in the quarter. So my question is this €2,500,000,000 or this delay, is it something that you're going to See, you know, it's a delay coming back in the second half of the year. Or this negative impact this quarter, is this An evidence of already some market share impact, I mean negative share impact because of the twin tension. Just wanted to clarify that. Is that okay? No, it's not coming back. It depends of course on how the ultimate Tender will look like and the distribution in tender, but we have said and you see that we think it's prudent to plan for A significant reduction in market share. And if that is the case, it's not coming back. So what is the reality? We It's very hard to say. We know the geopolitical tension with Sweden. We know what goes on there. So what we see here It's a reduction in the China volumes and we can speculate and we can have a hypothesis, But the consequence is very clear on our sales volume. And don't be prudent enough, don't to assume it's coming back. Okay, Francois? That's very clear. Thank you. Can I have a follow-up? Yes, sure. Or is it that's it? Yes. The follow-up is on Open RAN and specifically, we are seeing a lot of projects in And the readiness is still not there. I mean, with Rakuten and Dish Network and other initiatives like Vodafone, we saw recently, Which I think is one of the big customers of yours. From what we see in the release of public statements, you don't seem to in this kind of project so far. So I was wondering what would make you change your mind What would be the trigger for you to participate more in the Open RAN? And why don't you participate today You know, with a big project going on with your customers. You know, it's a couple of things going on here. First of all, and that's Often not thought about, but we're actually the largest contributor to the overall alliance on standards. So we're already very active in that. But what we are doing now is that we recognize there is a need to build out the 5 gs networks around the world right now. So it's a here and now question where works around the world right now. So it's a here and now question where we do believe the purpose built Networks actually can deliver the performance that's required in 5 gs today. So we are simply saying, okay, by the time Oron is ready. 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 the market. Okay, Francois. Thank you very much. Thank you. Let's move to next question from Peter Kurtengiensson at Sista. A question relating to digital services, please. It would appear that profitability here is highly dependent on volumes in China. Could you elaborate a bit on that, Please, why we seem to be so dependent on China as you sort of update your guidance for digital services? And also, it would appear that you Investing or planning to increase your R and D spending more than previously anticipated within on the 5 gs core 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, please? And just if I may give one follow-up. How has the lower volumes in China impacted the margins in Networks? It seems clearly it's been negative Has there been a positive impact on margins in networks because of the lower volumes in China? Thank you very much. Okay. If we start from the end, no, it's not been positively contributing to the networks margins in the 2nd quarter. But it is fair to say that the Q2 last year, we had a write off of pre commercial development, But we have a positive margin on what we ship in China. So we would have had better margins in Networks with China volumes in, to put it that way. Digital Services, no, it's not it's actually continuing according to the plan we've been operating with. So and you know that we have been ramping R and D. And of course, that takes a bit of time before you see it on the cost line. So we have added resources throughout the year and we are in a way to much less extent now adding resources in addition. But it's all according to the plan to make sure that we can capture the 5 gs core opportunities that we actually see And that we are tendering for. So for us, this has been just part of the overall Strategic plan for digital services. So if you tack on that the China volumes and you can understand that Digital Services is a business. It's software like with a very high R and D intensity. So of course, any volume change It's very important for our ability to deliver a margin. And it is fair to say the Chinese volumes, If you look overall in telecom, they're probably 50% plus, 60% plus in many parts of the total global volume. So of course, we have a dependency on losing footprint in China that primarily hurts or is more exposed in digital services than it is in networks. Okay, Peter Cook. Okay. Thank you very much. We'll move to the next question from Alexander Petrik at Satish General. Hello, Alex. Yes. Good morning. Good morning, Hakush, can you hear me well? Yes. Perfect. Good morning. Thank you very much and thanks for the question. I would like to delve a little bit into your IPR, if I may. You So just to be clear, the SEK 7,000,000,000 run rate that you now have, that's for the current year, it's up €6,600,000,000 if I remember right. And so this presumably reflects the deal that you had signed in here in July. Now my question is really on the expired contracts. Do you still expect some of that to come back on in IPR so we get Potentially to somewhere around SEK 8,000,000,000 going forward and then obviously FX here to stay, let's assume, and lower volumes from Huawei that's here to stay as well. So we'll land somewhere lower, but is there still some catch up that you would expect? And while on IPR, if you could give us a feeling on How you think about the Apple negotiation, which is due by the end of this year? Do you have anything to say on that? And then just a second quick follow-up would be on the contract. How many years will that be rolled over approximately so we can gauge how much you will contribute? Thanks a lot. Thanks, Alexander. I can take that. First of all, the Verizon contract is over 5 years. And as Burry said, it's the largest contract ever in Ericsson's history. So that's a nice thing to announce today. When it comes to IPR, yes, certainly we are working with the other not yet Renewed licenses as well in order to get to agreements. And we signed 1 then early July, so that is going to Help revenues going forward and there will be a catch up effect in Q3 from that as well. And we continue, of course, in the team to 1 by 1 settle the outstanding deals. When it comes to Apple, I would say it's far too early to talk about that. It will expire, as say at the end of the year and the parties will of course come together to resolve that in the best possible way. Well, 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 Sandeep Deshpande at JPMorgan. Hello, Sandeep. Yeah. Hi. Good morning. Thanks for letting me on. My first question is clearly, I mean, when you look at your networks business outside China, your market share gains are very I mean, your growth in market Schuster. Again, they're very significant. Is the are these share gains that you had made 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 tensions, etcetera, Which is causing the share shifts between China and the rest of the world. And I have a follow-up as well. What you see now coming through in the numbers are mostly the wins we had some time back. So it takes some period of time, depends a bit on the contract, depends on the situation for it to flow through. So far, the most recent wins have only very limited impact on the numbers you see. And I know this is a focus on the overall market share situation if it's geopolitically driven. I would say it's of course very hard to separate the 2, but we see that we win market share in markets where also all vendors are allowed As well as we've been in markets where only Western vendors are allowed. So our overall market share gain, Sure, part will be contributed to geopolitical situation. But I would also say here, it's the strength of our product portfolio that allows us to be truly competitive against any competitor right now. And you saw, for example, the recent win in Malaysia where we are able to build out the national 5 gs network. It's a very important contract win for us as well indicating that we can win market share in many markets. Had a second question, Sativ. Yes. Just a quick follow-up. Now talking about the same geopolitical issues and the digital Schusten. Given that you might not be able to have that 4% or 5% share that you currently have in that business from China. Are there businesses within digital services? Are there business units where you can now do reductions, Schusten. Schusten, etcetera. Because I mean digital services has been promised to be profitable for a very long time and it hasn't delivered as such. And now that there is a potential structural change in one market, whether there needs to be a further thought process On the cost structure within the digital services business? It's a good question and it's a good thinking. But I would say, If you look at the product portfolio, it's typically global products in there. So it's just because you lose volume in one market doesn't mean you can Restructure in any way. We so in reality, it's just a loss of revenues. The R and D remains the same to say pretty much. So for us, we are that's why we're saying very clearly that due to the delay in or due to the Risk of losing China volumes. It's likely that we need to push out the reaching the targets Because we need to compensate that sales that we lose in Mainland China by growth in other markets around the world. So when you see that, that's why you see the push out now. So I would say from a strategic execution in digital services, We're continuing to deliver on the plan and on the objectives we set out a few quarters ago. But due to the geopolitical situation with between Sweden and China, we're saying that will get pushed out Now and that's an unfortunate consequence, but we need to deal with it and develop the business in the other markets. But I will also say that the good thing is we're seeing good growth in Europe and North America in digital services. So we feel that we are going to grow into that loss of volume. Okay. Thanks Sandeep for those questions. The next question will come from Fredrik Litterl at Danske Bank. Good morning, Fredrik. Good morning. Thank you for taking my question. Hope you're all well. I just wanted to ask a little bit on Cradlepoint that you acquired at some time back. What is the sort of the status of that unit right now? And how do you expect and see that this Should progress going forward and when should we expect that this unit will be not heavily loss making anymore, But rather the opposite. And a little bit if you could talk about growth on that unit as well. Thank you. Do you want to take your job? Thanks for the question, Fredrik. Cradlepoint is developing well. I must say, it's on track on the plans. And following basically what we said from the start that there will be a 1 percentage point impact on the EBIT margin in 2021 and 2022. And we as you saw perhaps in the report, it Contributed now a bit positively from the final PPA calculation there. So now we are Going forward, we are in good shape, I think, to deliver and actually grow that business also outside of the main markets where they have been Successfully establishing footprint so far. So I think Cradlepoint is a well performing asset in our family now, and it's great to have them on board. 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 should we what should we expect from this unit in, I mean, in terms of growth and When it should it move out in the rest of the world in another way than what it did before and so on. So a little bit more if you could on the planning for that unit. You want to take it? Thank you. I can start. Yes. You're absolutely right. It will be what we are seeing is that we can leverage the Quality Products has been predominantly sold in North America so far with very limited presence outside. We're gradually now expanding globally and that is a quite exciting opportunity as well. So growth We foresee to be quite good for Craterpoint. What we're also seeing and you hit on that, it becomes a bit of a hub for developing new solutions 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 Cradlepoint to capture a larger and increasing share of the enterprise market. But we should also recognize that Cradlepoint is one piece that we need for enterprise. We're also looking at other growth opportunities in enterprise, Being in dedicated network for corporations, campus networks, being in our global connectivity platform, IoTA, So there are a couple of additional opportunities, but we believe the market opportunity in Enterprise is so large that we need to Schisten. The investments in that area by also looking at the broader acquisitions outside of Cradlepoint. Okay. Thank you. Very clear. Thank you. Thanks, Fredrik. The next question is from Dominik Olszernfrzewski from Morgan Stanley. Hi, Don. Yes. Good morning, everyone. Thanks for taking the questions. The 2 of them. So from the Q2 revenue run rate that you're indicating, it looks like there's basically €5,000,000,000 downside Sales in the second half in China will be sort of pro rata what we've seen in Q2. Could you please maybe talk about the regions and projects which could help to mitigate Downside in the second half, so other areas. Obviously, for example, overnight, you had Deloro raising estimates for the rest of the world, North America, globally. And then a second question is, in the past, you've talked a lot about labor shortages, particularly in North America for tower crudes. Obviously, today we're in an inflationary backdrop to talk about labor shortages in certain regions. So could you talk about whether that's a constraint on deployment in the second half and into next Maybe I'll take the first one first because no, actually not Labor shortages that we talked about before, it was really about rollout crews, feet on the ground, where that was actually limiting our volumes. We don't see that Very high at the moment. So we have sorted that problem out. Yes. And if you look at our numbers, you see that we have grown. If you take networks, for example, or even the total company, we've had an organic growth of 8% despite losing 60% in the China volumes. 1 is the build out of 5 gs drives demand and that drives increasing demand, but also that we've been able to gain market share. And we started to talk about that already in 2018 or end of 2017. So that is something that we have Systematically invested in to make sure that we 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 will see significant loss of market share in China. Schuster. So that's probably the best we can look at it now. So if you look at Q2, you'll still see that Even excluding China, we have a very healthy development in the business. Okay, Dom. Thank you. Thanks for those questions. We'll move to Dominic Olszewski no, sorry, that was the previous one, Amit Harshadani from Citigroup. So hello, Amit. Good morning, Peter, and good morning, all. Amit Harshandani from Citi. Two questions, if I may. My first question is on the topic of Networks Margins. You have delivered solid margins in this quarter, last quarter indeed across 2020 Versus your long term rather 2022 guidance of 16% to 18%, given what we have seen in China In terms of volumes and maybe potentially profitability profile of the Chinese business, is it fair for us to assume that the networks margin going Forward is more sustainable on average at the levels that we have seen over the past 4 to 6 quarters. Are there any factors which could still take you down to that 16% to 18% range? So your thoughts on that would be appreciated. And then I have a follow-up. Thanks, Amit. Should I start, Perje? Yes. On the networks margin, I think what we see is the The result of work in R and D mainly where we are able to design out cost of the product and make it both of course Attractive from a feature functionality point of view to for the customers, but also manage the cost situation. And you see the fruit of that in the Ever improving gross margin. We don't see any particular reason why that logic would change over time. Then as we always point out, it's of course, Individual quarters can change here and there because of how deployments are made and so on. But basically, I think our aim is to establish A stronger and stronger logic there with the cost side on the one hand and the competitiveness leading to the price side and in networks to continue on good levels. And you had a follow-up, Amit, you said, or second question? Yes. Yes, I did. My second question is with regards to what you're seeing in China. Well, the development is not ideal for you. I'm trying to understand what are you hearing on the ground in terms of Your customers, your partners, is there I mean, if you're going to lose share, Do you get the impression that it's going more to the domestic competition? Do you get the impression it's foreign competition? Do you get a sense that they might be lobbying on your behalf and there is way back in into China? How are you what is the feedback on the ground that you're getting? And what's Level of confidence that this is this might potentially even turn in your favor in the future? I think it's easier to comment on these things or more appropriate to comment on these things once we know how the tender process will fall out. But what we know and it's the same thing across the world is that if you look at the performance of our products, In field performance, it is very good. We have a competitive portfolio. We are gaining footprint in other markets. So we're quite In that sense, Phil, that we have a strong proposition to customers. But let's discuss more about the China Since we'll move to today's last question, it's from Daniel Gilbert at Handelsbanken. Good morning, Daniel. Good morning. Thank you for letting me in. Yes, two questions then, if I may. Starting with Network gross margin was negatively impacted by a write down of pre commercial product inventory. My question is And this was related to Mainland China. And if you will see limited or lower volume in the current tender, How significant inventory write down risk lies ahead? Or was your write down in Q2 also Related to possibly lower volumes ahead. And also a question, If I may, would be on China again and that would be out of the SEK 1,500,000,000 in revenue you had in the quarter. How much would you say is sort of recurring to existing installments, software, etcetera? And how much is related to previous 5 gs deployments that will, so to say, disappear when done would be great to know. I guess you mean the breakdown you mean on digital services, right, not on networks? Yes, yes, on digital. Yes, okay. Exactly. So your second question, how much is recurring? I mean, there is, of course, a portion of support Revenue for installed base, so we have to follow what happens with that. It's hard to determine exactly. And as Borje said, Let's await the conclusion of this and then we can comment on how it played out basically. On the other question, of course, we always Schisten. Scrutinize our balance sheet and make the impairments if we need to every quarter. Now in digital services, We arrived at the conclusion that this SEK 300,000,000 write down was the appropriate thing to do given where we are on that pre commercial inventory. But now, of course, our balance sheet is what it is for the situation we have now and we would have to consider that going forward. No material write down risk that we see today in that context. No, and it's worth to say in the rest of the business we have It's Global Products again. So that kind of helps. It's really only when you have market specific products and that's what we have in this case. Exactly. That's perfect. And if I may only the very, very last question would be on Japan, obviously very strong again in this quarter, Making up for China weakness quite a lot, I would say. Is it any should one be worried Post the Olympics or something that has or do you expect this strong strength in Japan to continue also second half or in 2022, is it something that starts to fade off? Yes. I don't think the Olympics have actually had an impact on this. It's more the need for the operators to get, 1st of all, to build out 5 gs to start to develop applications on top of and for the capacity need they have in the network to cope with the increasing traffic volumes. So I would not I mean, there are always going to be a little bit swings between quarters in individual markets, But I would not say I would hang it up on the Olympic Games. Okay, great. Thanks, Daniel. So before we close today's call or video call, I would like to actually to hand over to Borje for any closing remarks. Thanks, Peter, who is appropriately dressed in a tie today. So anyhow, We're very excited about our market momentum and it has continued during the Q2. But what we're more excited about is actually that 5 gs is gaining around the world with increasing build outs, and it's a here and now question. And with the investments we made in the product portfolio, Making that a 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 in a strong position to capitalize on this increasing demand for 5 gs. And we're very excited about The future, the 2nd part of this year, but also into 2022. Thank you. Thank you.