Earnings Call: Q2 2020

Jul 17, 2020

Welcome to Ericsson's Analyst and Media Conference Call for their Second Quarter Report. To view visual aids for this call, please log on to www.erickson.com/pressorw ww.erickson.com/investors. Call. Thank you, Jerry, and everyone, welcome to today's Q2 call. With me here in Stockholm, I have Bari Ekholm, President and CEO of Ericsson and Karl Melander, Chief Financial Officers. Before starting, I would like to read these words. During the call today, we will be making forward looking statements. These statements are based on current expectations and certain planning assumptions, which are subject to risks and uncertainties. The actual 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 in our annual report. With those words, I would like to hand over the word to Poriya. Please, Poriya? Thank you, Peter, and welcome, everyone, to our call for the Q2. The human toll from COVID-nineteen is increasingly clear. It's impacting lives for all of us, either directly or indirectly through the macro economy. However, despite the devastation from COVID-nineteen, we've delivered a solid quarter. I'm very proud of all my colleagues here at Ericsson that have been able to execute in the middle of this pandemic. We have reached the stage where we are now able to demonstrate how we can capture the benefit of our increased investments in R and D. We're demonstrating our technology leadership through customer momentum. We're increasing our market share in key markets and we now have 99 commercial 5 gs contracts and 54 live 5 gs networks performing across 27 countries. But I would say we're mostly proud of our infield performance of the equipment we deliver. We are winning contracts based on our technology leadership. And we have selectively grown our strategic contract over the past quarters, which are now showing profitability in line with our plans. And they are now a normal part of our business. So on this basis, we will no longer be reporting on the strategic contracts unless we see an extraordinary I'm very pleased to see that we have delivered a solid performance, which has been predominantly driven by the networks and digital services. Our sales are SEK 55,600,000,000 with an operating margin of 8.2%. During the quarter, we have increased our market position in Mainland China, winning contracts from all major players. This is important to us as a company as it provides us with the scale and equally important, China will be a driver of important features for the We have also seen an increase across several market areas, including Europe. In segment Digital Services, we've been impacted by COVID-nineteen and related market uncertainty, and we have also seen a decline in our legacy portfolio. However, we see a strong demand for our cloud native and 5 gs core portfolio. We won some significant Tier 1 customers, which will deliver revenues in 2021 and beyond. And in response to this strong market momentum, we've increased our we've decided to increase our R and D investments. As a result of these factors, we are not going to reach the single digit margins for 2020. That will slip by a few quarters. However, long term value created from the investments in R and D will more than compensate for this. It's difficult to predict the current market given the uncertainty we see as a result of COVID-nineteen. But with the current visibility, we remain confident and committed to our group targets for 2020 and 2022. Our free cash flow before M and A remained strong at SEK 3,200,000,000 in the quarter. We've not had a significant negative impact in the quarter from COVID-nineteen. However, the uncertainty that it brings does make forecasting a challenge. As we've said before, we're committed to conducting our business in the right way and we're pleased that during this quarter, we have now commenced the ownership following the settlement with the U. S. Authorities. This will help us further strengthen our ethics and compliance program. So we've seen some reduction in sales due to macroeconomic uncertainty and or the macroeconomic conditions and COVID-nineteen. We've seen that mostly in Latin America, Africa and India. So in Europe and Latin America, we've seen a reduction in planned exit of managed services contracts. However, this is partly offset by growth in network sales in Europe and that's due to market share gains coming from technology leadership. We see continued 5 gs deployments in Middle East, which has made a positive impact. In North America, there is continued 5 gs momentum, which generate increased sales in networks. However, digital services has decreased and managed services sales have also decreased as expected due to the operator merger. In Northeast Asia, we've seen strong sales growth for networks and digital services across all countries in the market area, primarily driven by 5 gs deployments in Mainland China. We continue in segment networks, we continue to see a strong momentum due to our 5 leadership. Organic sales were up 4%. Gross margin was 40.5%, which is after absorbing a large share of strategic contracts, including the write off we had in Mainland China. And the contracts we have in China will be profitable over the lifetime, but they've had a negative impact, actually larger than the right inventory write off during Q2. In digital services, our gross margin has improved to 43.6%, and that is due to a large increasing portion of software sales. However, overall sales declined, which is due to the classic portfolio as well as some COVID-nineteen effects. The new portfolio sales grew by 18%. And so we are in the middle of this transition from the classic portfolio to the new portfolio. In managed services, we've seen the variable sales declining, and that's really due to the operator merger in the U. S. But it's also explained by transfer of a contract to Ericsson Nikola Tesla in Croatia as well as some planned contract exits. But the underlying business is good and we see the increase in gross margin due to efficiency gains, but also that the continue to invest in R and D as we have done in AI and automation to support 5 gs and efficiency gains in service delivery. In emerging business, we see a continued sales growth and gross margin growth, and it has resulted in an improved operating income. Overall, sales decreased by 4%, and that's really explained by lower sales in Red Bee Media. During the quarter, we have also exited the Edge Gravity business because we did not deliver on the long term business case and we did not see long term value creation. IConnective is delivering good sales and solid profitability. With that, I'm going to give the word over to our CFO, Karl Melander. Thank you, Borja. Okay. Let's dive in a bit more to the numbers then, starting on the top line. So 55,600,000,000 dollars in the Q2 in net sales, that's flat organic development year on year. And looking at the parts, networks delivered organic growth of 4% year over year, strong 5 gs sales in China, but also continued growth in several other countries in Northeast Asia and parts of Middle East. Managed services declined by 12%, at managed service contract transfer in Europe and some of the planned exits of contracts. And then Digital Services, organic sales declined by 4%, with lower demand for legacy hardware, but also services partly related to COVID-nineteen. And this was then offset by higher sales of software, which certainly helped the gross margin as well. We'll get back to that. So if you look at the gross margin here improving by 150 basis points year over year despite the inventory write down, dollars 900,000,000 that we informed about earlier in June, and that affected gross margin here by 1.6%. The improvement year over year, you could say, driven by higher software sales and digital services and also efficiency gains in managed services, but also added to that, the higher IPR revenues in the quarter. Operating income improved to $4,500,000,000 excluding restructuring versus $3,900,000,000 and this means then 8.2 percent operating margin. And again, main driver for the improvement this line as well, reduced losses in digital services, reaching $7,700,000,000 versus 1 $300,000,000 negative last year due to a better gross margin as discussed. So looking at the graph there, you see the adjusted rolling 4 quarter operating margin now stands at 9.9%, obviously close to the 2020 target of over 10%. Just a final comment on this slide when it comes to net income. A couple of items. $700,000,000 in the quarter, and that's the edge gravity closure that Burj mentioned, but also related to the acquired Antenna business as we have announced earlier. And then of course, we have the FX effect there. So we have some positive currency hedge effect this quarter, making the financial net actually a positive number. This has not happened since Q2 2017. Okay. We move on. Looking at the gross margin then over time, and you can see here again the quarterly fluctuations due to items like mix, timing of projects and so on. But on a rolling the gross margin for 9 consecutive quarters. Primary driver, I would say, is still the R and D investments that we make, and that translates into competitive offerings and also cost efficiency, leading to a better position in the market but also better gross margin. So year over year here, the gross margin was 38.2%, up from 36.7%. And if you look at the Networks piece, again, I want to mention the inventory write down in China, their $900,000,000 And Networks also impacted by a general higher share of strategic contracts, including the Chinese 5 gs business. But then part of this negative impact was offset by a more favorable mix, but also what we call operational leverage, namely improvement elsewhere in the business. And then of course, we have IPR contributing with the growth in the quarter as well, dollars 2,800,000,000 of IPR revenues. Okay. I think we can move on to R and D and SG and A. So you see here R and D expenses then or investments rather increased year over year by $300,000,000 and this is due to higher investment in networks again. While in digital services, as we have talked about before, we continue to take out cost in the R and D portfolio and the legacy portfolio, but to capture then the business opportunities that we see currently and going forward. We have accelerated R and D in digital services and we'll continue to do so. SG and A, flat at $6,900,000,000 We continue with the investments in digitalization and compliance. But here, you can see this is basically offset in this quarter by less cost for traveling and similar given the situation we are in. When you model SG and A for the Q3, please remember that the Q3 2019 had a positive effect by a refund of social costs and that was SEK 0.9 billion. And lastly, not visible on this page, but still let me mention that there was no effect in this quarter impairment losses on trade receivables, so it's 0. Okay. Moving over to the cash flow, dollars 3 point $2,000,000,000 as Burri mentioned in the quarter. This is, of course, a key indicator for us when it comes to value creation in the company. And it's encouraging to see that we keep a good discipline in working capital. So here, net operating assets and liabilities remain stable in spite of the sequential growth we had in the second quarter. And further to that, I would say we did we made a $1,000,000,000 payment into the Swedish pension trust, that's included in these numbers, in the second quarter. And another SEK 2,000,000,000 is expected to be paid into that same trust in the third quarter. So now Ericsson has delivered positive free cash flow before M and A for 8 consecutive quarters. And if we this is if we exclude the DOJ SEC fine for a moment. And also looking at the rolling 4 quarter basis, back here, free cash flow has amounted to SEK 18,300,000,000 also there, of course, excluding the SEC DOJ fine. And this translates into 8 percent of the sales over the rolling 4 quarters. Okay. Moving on, the financial position here. Looking at gross and net cash to the left and the maturity profile of debt to the right in the graph here. You can see here net cash is $37,500,000,000 now and gross cash stands at $75,400,000,000 The debt matures over the next 5 years here with an average maturity currently of 2.2 years. And the next maturity comes now in the Q4 of this year. It's SEK8.7 billion, and we intend to repay this with cash on hand. And in addition, giving additional resilience, we have an undrawn committed facility of €250,000,000 plus, of course, since earlier also the US2 $1,000,000,000 long term revolving credit facility. You saw the good news earlier in June that the company was upgraded by Moody's to BA 1 with a stable outlook. So to summarize this position, I would say we have a resilient balance sheet giving us a strong financial first of all, on the targets for 2020 2022. Obviously, the effects of COVID-nineteen create certain uncertainties, and we remain humble when it comes to predicting the future here. But with the current visibility, we clearly maintain the full year targets for the group, as Burry said. And we also mentioned here the delay in target fulfillment in digital services as well. We will not comment on strategic contracts, as earlier said here, because this is a normal part of the business and those contracts are now developing according to plan. And the third point here on FX. Of course, FX impacts our financial results, especially than the U. S. Dollar change rate. And lately, we've seen the SEK exchange and against the U. S. Dollar. So obviously, we are not making any predictions here. But if the U. S. Dollar to SEK would stay at the current level around SEK 9.10, this would mean a headwind compared to the average of around $970,000,000 we had in Q2 now this year or compared to the average $9.55 during Q3 last year. So in our planning assumptions, you will find the rule of thumb that we usually use, how this impacts sales operating margin. With that, thank you. And I hand back to our CEO, Mr. Borje Thank you, Mr. Karl Melander. So we worked hard to lead in 5 gs, and we continue to underpin this through our strong performance. Our investments in R and D and for technology leadership has delivered strong performance and clear cost benefits. By consistently delivering against our promises and taking selective strategic contracts, we have regained and continued to gain market share across the globe. We have proven that strategic contracts are now profitable during the term and it is with this rigor in our business that we're establishing us as a market leader in 5 gs. Our business performance has provided us with much more flexibility to grow and capture the opportunity that 5 gs provides. And that includes, of course, expanding our footprint. We have now secured 99 and we're very close to 100 commercial agreements. And we have 54 live 5 gs network running with Ericsson equipment. And these numbers are, of course, changing daily, and you can follow them on our website. But we have a very strong momentum. The criticality of the network continues to be proven, And I would say that COVID-nineteen has further strengthened the need for countries to invest in communications infrastructure. And the importance of these investments really twofold. 1, of course, is to have individuals connect. But what you actually see is that the digital infrastructure is a launchpad for technology innovation and economic recovery. And we see 5 gs is the innovation platform for the future. Here, Europe and as a European company, we noticed this, Europe is falling behind. It's really time for Europe to start incenting investments in the digital infrastructure. And that includes, for example, addressing the question about spectrum prices. We have now completed a solid first half and with current visibility, we remain committed and confident in our financial targets for 2020 2022. Our world leading technology, coupled with our strong financial position, means that we are ready now to deliver on the promise of 5 gs across the world. Thank you. Thank you, Borje. So by that, the presentation has come to an end, but we will now move over to the Q and A session. So I would like, Jari, could you open up the Q and A session, please? Thank you. Ladies and gentlemen, at this time, we will begin the question and answer session. Level. Detailed information is provided in the report and Ericsson's Investor Relations and Media Relations teams will be happy to take additional questions and discuss further details with you after the call. Our first question comes from the line of Edward Snyder of Charter Equity Research. Please go ahead. Good morning, Ed. Thank you very much for taking my question. A couple if I could, Gloria. This is kind of an unprecedented time for not just COVID, but if you're looking at the network systems business, you've got a number of things happening that we've not seen in quite a long time or ever. You got the merger of T Mobile and Sprint going through in the United States, you've got the U. K. Indicating they're going to remove one of your competitors over the next several years. You've got an unprecedented lead in the new technology over your traditional competitors. Why shouldn't we expect this to inform your growth faster than the market's organic growth? I know you don't want to get out and predict out period too much, but I mean it seems like the cards are stacking up to see maybe a consistent period of better than normal growth for Ericsson at least into 2021. And then Carl, if I could, making additional investments in R and D and digital services, you're not going to meet your margin targets this year. And it sounds like the investments are going to pay off at some point. Can you help us understand where that pays off in terms of at or above your target margins? Would it occur this year, next year? What's your you must obviously have some planning assumptions on where these investments are going to yield the upside? Just trying to get your idea of where might be. Thank you. Thanks, Ed. I'll start. Now, we are optimistic about our industry. We believe the need for connectivity is there and the need for connectivity going forward is going to be even more. And I would say that has been proven with the pandemic. So we're the macro view for our industry, we're very positive on that. And within that positive view, what we have done over the last few years is to have a strong focus on gaining footprint as well and gaining growing faster than the market and gaining market share. And we believe with the portfolio we have, with a very competitive portfolio, we can actually win in front of the customer. So far, the geopolitical discussions have not it's hardly visible in our revenues, because our market share gain really has come from other players, so to say. And it's really a result of the technology investments we've made. And we believe those are going to continue to pay off as long as we focus on delivering and executing on the investments we are making. So we are optimistic about the future. And I guess maybe you could have one more. Yes, I can take hi, Ed. So on the second question, investments in R and D and digital services. First of all, the 2022 targets remain. So this is what we're aiming for. And I would say we make these investments out of a position of strength in that we see great traction core where we have recorded early wins with leading operators. That's a very good thing, and it requires some acceleration and an increase of the investments to meet the requirements and lead time requirements. That's a good thing. We are still going to obviously reach the 2020 target, but with a few quarters delay and from there ramp up further into 2022. So I think it's the right thing to do for long term value creation clearly, even if we have to move the time line forward a couple of quarters for target fulfillment. Okay. Thanks, Ed. We will move over to the next question, please. Our next question comes from the line of Alexander Peterk of Societe Generale. Please go ahead. Good morning, Alex. Hey, good morning. And thanks for taking the questions. Congratulations for great results. I just had a few. First of all, if you could be more specific on what exactly will receive more R and D attention in digital services, which kind of programs or products are going to get that? The second one is, if you could give us an idea of how long you take, you think, I mean, your informed opinion to take out the Huawei kit of European networks where the swaps will be required and whether that will cause any delays in near term 5 gs deployments in Europe in particular? And then the third one is just I'd just like to understand how the quarter came across for you guys because you did give us a warning on the Q2, and the results actually came out at levels at or slightly above where consensus was before that warning. So I'm kind of wondering, did you not get as much of a hit on margins that you thought? Or did anything else come through a lot better than you thought at the time that warning on the Q2? Thanks. We start at the end then with your question about why we communicated a big provision. When we we have to one decision, then we feel it's appropriate to talk about that and describe that to the market. And this was one of those where we had a very large cost. So you can count on us to be transparent on these things as they come. So I that's really the reason why we disclosed. Nothing else. If we look at the ultimate if you talk about swapping, etcetera, and how that is going to pan out, it's really up to the customer to decide. Our focus will remain on delivering a competitive solution to the customer, the best technology combined with with cost competitiveness to make our customers succeed in the market. That's the only way for us to drive the business and that's what we're going to continue to do. Then how long that is going to take? I think that's more an appropriate discussion to take with our customers rather than me commenting on that. The first question I Yes, develop on the R and D investment in the development. Which product areas? There are in reality, there are a couple of different areas where we see that as the market evolves even more to 5 gs, where we can capture a lot of market opportunities, the key driver here is within the 5 gs core, and that is where the most allocation will be. But we also see additional investments in other parts, such as BSS, for example, to capture the 5 gs billing opportunity. So there are a number of areas where we are, thanks to the ramp and the market traction of 5 gs that we have decided to increase our investments. But most the biggest part is in the 5 gs gs core. Thanks, Alex. Thank you. Thanks. We will continue to the next question, please. Our next question comes from the line of Daniel Dureberg of Handelsbanken. Please go ahead. Good morning, Daniel. Thank you and good morning. I have a question on China. You said that the China inventory write down was the actual impact was larger than that. And can you comment if this will risk continue into Q3 and also a little bit on second half if the gross margin recovery in China will follow your expectations? Thanks. Yes. What we have said and that still holds, we China, we expected a negative quarter and it was negative to more than the write off in Q2. But we also said that the second half, we would see it contributing to operating profit. It will still be dilutive on gross margin basis, but it will contribute positively to the operating profit. That still holds. So longer term, these contracts are profitable for us. But they are there is a negative initial impact. And if you remember, it was the same thing in 2017 that we disclosed at the time when we took a contract as well. Perfect. And also a short follow-up, if I may. We see a lot of news from the OpenRail around policy group, etcetera. And I was thinking if you can comment a bit more on your view on what you're seeing here with Nokia being quite vocal and other players and when you see or if you see time for Ericsson to work more and be more vocal on this ahead? You know that we are also working very actively in the Open RAN alliance and driving the standards of Open RAN. So we are also big believers of that. What we see is that in high performance applications, you need to solve a number of different use cases. Some of them demand very high performance. That's one segment you're going to see other segments that demand less performance and are less performance intensive. And I believe and we are well positioned to capture opportunities across that spectrum. That includes the purpose built basic for high performance as well as possibly open solutions for more lower end performance requirements. So we are focusing on delivering the solutions to the customer less about marketing. Next question comes from the line of Achal Sultania of Credit Suisse. Please go ahead. Good morning, Achal. Good morning, Peter. Hi, good morning, everyone. Gauri, just one clarification on the China comment that you're making. So we know that $900,000,000 impact write down. But if we exclude that write down, the China gross margin would still would have been negative in Q2. Is that bigger than the DKK 900,000,000 or less than that? And then secondly, like we know that it's going to be GM dilutive, but will gross margins in China turn positive in Q3 or Q4? Can you give some color on that? And then secondly on Go on. Yes. And then second question was on the seasonality comment that you have in the press release. Q3 has been very the seasonality has been quite varied. It is ranging between minus 2 to plus 8 sequential growth. And so you have not made any comment as to what you expect for seasonality this year, whether normal seasonal above or below. So just trying to understand what are the puts and takes regarding China, U. S. And FX? Does it all these uncertainties preclude you from like giving a precise guidance for Q3 seasonality at this stage? I believe there is a big pandemic ongoing, so one should be a bit cautious about giving precise guidance in a world of a pandemic. So the average seasonality, if we look between Q2 and Q3 is 4%, and that's what we have said. We're not going to say much more than that. On China, yes, there is there was a even if you exclude the inventory write down, there was a negative gross margin. But you can also understand that in the second half of the year, it has to be a positive gross margin as it contributes to operating profit. In Q3 as well, just to clarify that? Or only commenting about second half? Yes. You're asking in a world where a quarter is a completely arbitrary time You're asking about the specific time interval in the development of a contract that spans several years. Of course, there can be differences depending on exactly when things pan out, but the second half will clearly contribute to operating profit. Okay. That's good. Thanks, Borje. Thank you, Achal. So open for next question. Our next question comes from the line of Amit Hachandani of Citi. Please go ahead. Good morning, Amit. Good morning, Peter. Good morning, all. Amit Urchandani from Citi. A question and a follow-up, if I may. So my main question relates to the conversations that you have with your customers across different regions. Clearly, there's talk of 5 gs accelerating. And I was curious to understand what is the kind of features and functionalities that you are being talked about asked about the most in your conversations with customers in different regions? Is it dynamic spectrum sharing in the U. S? Is it open networks in Europe? Any other features in China? So just wanted to better understand what is the nature of current conversations and what are you focused on? And I have a follow-up. What you see is the customers are so far very much focused on getting the 5 gs equipment up and running and providing the additional capacity to the customers. So one of the key focus areas have been our dynamic spectrum sharing and getting that into the market. And that's been one important discussion and important focus area for us. Of course, what you mentioned about the openness will also be a topic that's under discussion. But so far, it's been predominantly on how to bring coverage of 5 gs as quickly as possible into the market. And here, that's probably one of the key reasons why we are also winning market share as we are first to deliver those type of solutions to the market. But we see that that's actually a global discussion. It's not only North America. It's the same in other markets as well. And you had a follow-up, Amit? Yes, indeed. So as a follow-up, note there is a commentary with regard to IPR in the release this morning talking about certain agreements up for renewal and payments being temporarily affected, but 5 gs is going to strengthen it. Could you maybe elaborate a bit more on how should we think about that? I presume this is more for 2021, but if you could cite some further color in helping us think about the same, that would be helpful. Thank you. Vicki, the IPR business is an important business for us. And what we have the agreements we have, they are typically time limited. And today, we have very few contracts that include 5 gs. So we're now entering a cycle with the ramp of 5 gs. So a number of contracts will come for renegotiation. So what we are going to do is to make sure we get the right value for our technologies long term. That means that there can be effects short term because we don't agree the other parties, so to say. And that's really what we're saying. But we are very committed to maximizing the value of our patent portfolio. And we will not enjoy any short term payoffs just to get uninterrupted flow of royalty payments. That's what we want to say. Thank you, Bodie. Thank you, Peter. Yes. Thank you, Amit. We will follow with the next question. Please, operator. Our next question comes from the line of Johanna Olkruist of SEB. Please go ahead. Good morning, Johanna. Good morning. Thank you very much. Congratulations to a strong report. First question relates to pick up on the patents. Just wondering, they were very strong in the quarter. And I'm just I realize that you still sort of remain your full year guidance. So were there sort of a one off payment in any term this quarter that will not repeat? Or how do you see that? And then just to try to dig in a bit more on the gross margin for the second half. I realize it's we talked a lot about China, China, but what you see on the remaining sort of business, if we exclude the China, do you see any positive or negative positive or negative drivers to the gross margin in second half from here? Thank you. IPR, maybe I can start here, Johanna. Hi, Karl here. On IPR, I mean, there are fluctuations over quarters given how contracts pan out in reality. What drove the growth now is some of the recent agreements we have with handset providers that we signed in the end of last year. But there are elements boosting this quarter. We keep the $10,000,000,000 number for 2020 totally unchanged. That's still the number we talk about. You can take the second. And on gross margin second half, I mean, as you know, Johanna, we don't guide specifically here. I think you should look at the rolling trend that we talked about here also in the presentation. Of course, there are puts and takes. China, we have discussed already that, that will let turn profitable into the second half. We also, of course, had the inventory write down in the second quarter, which will not repeat. And then it's a question of the mix, of course, in the second half, including commodity mix, business mix in general and how the markets will play out. So I think that's what we can say about the gross margin. Question. Our next question comes from the line of Sebastian Stebovich of Kepler Cheuvreux. Please go ahead. Just a quick question on your non strategic contracts in digital services. Where are you standing in the review of those contracts? How many contracts have been basically reviewed at the end of the Q1? And could you help us a little bit understand what was the losses from this contract in Q2 or in H1 since the beginning of the year? And when do you expect to have fully reviewed those non strategic contracts? And the follow-up would be on the competitive landscape and notably in Europe where we see growing number of countries starting or looking to ban Huawei from 5 gs? Do you see Samsung being a little bit more aggressive in Europe right now? Thank you. If we start with the number of contracts we have left, it's 9. They are going to be we had no impact really during Q2. Call it extraordinary. They're following plan and we're starting to box in as much as we can. There can, of course, be incidences going forward as it has in the past. We will disclose if that is the case. But we are working through. But some of these contracts, I think we've been quite clear, they're very long. Some of them are even 10 years. So they are going to be part of the business for a long time and continue to be, in that sense, margin dilutive because they are in reality, the reserves are there to bring gross margin to 0. So they will continue that. On the if we look at the ban question in Europe, for us, I think the key here is to remove uncertainty. What we have had for a period of time now is very uncertain, who is approved, who is not approved, what's going to happen, what's not going to happen. And that has creates an environment for our customers to that are not friendly for investments. So for us, Europe has been it's been a good market, but only thanks to share gains. So we've seen growth in the Q2 due to market share gains, not the general market. And I think here it's important that Europe, instead of thinking about 5 gs as a way as another telecommunications technology. It's actually digital infrastructure that's critical for the economy going forward. And the economic values of 5 gs should be factored into how you look at, for example, restarting the economies. Analogy here with 4 gs is quite stunning. The 2 Europe has lagged behind on 4 gs. So it's not a surprise that the tech disruptors and tech unicorns are American and Chinese because that's the 2 countries in the world that rolled out 4 gs earliest and first. So you need the right digital infrastructure for entrepreneurs and innovators to innovate on and develop new applications. So that's why the criticality for Europe is to have a stronger focus on building out 5 gs. We're not falling behind on the next generation of technology. You had the third question that I didn't aggressive in Europe specifically? We're really commenting more on our own business. So we have gained market share over the last 3 years. Almost if you look by Q3 2019, if you follow Del Oro, it's about 5% to 6%. So we have a a substantial market share gain. Most of that actually comes from not the Chinese competitors, but others. Thanks Sebastian. So we move to the next question please, operator. Our next question comes from the line of Peter Kurt Nielsen of ABG. Please go ahead. Hello, Peter Kurt. Thank you very much. Hi, Peter. Just a question, I believe it's the Digits and Services business, if I may return to that one and Karl's comments about the investments that will push up profitability. It obviously makes perfect sense. I'll just be interested in when this is obviously a business with a strong seasonality. And when you talk about pushing back the breakeven tile, I assume you mean on a 4 quarter rolling basis. Does it preclude that we could see a profitable quarter in the second half? I mean, obviously, Q4, which we would normally expect. And are you indicating that the normal seasonality is perhaps being evened out as we move into next year? Is that how we should beat your comments? Thank you. No, you should read it on the rolling 4 quarter basis. So Q4 is typically a much stronger quarter than other quarters and we have no that's what we continue to believe. Right. And individual quarters will vary in this business as we always say, and that remains true. That's great. Thank you. May I just ask a follow-up relating to Northeast Asia? You obviously sent in your comments on China here. Could you just elaborate a bit on what you're seeing in Japan and Korea? Are you still seeing good momentum here? We're seeing good momentum across the market area. So that, of course, it's driven by China, but the other parts of the market area are also very strong. Thank you. Thank you, Wittekut. And then we'll move to the next question, please. Our next question comes from the line of Fredrik Littell of Danske Bank. Please go ahead. Good morning, Fredrik. Good morning. Thank you. And congratulations to a healthy report. I have one many questions have been answered. I have one maybe for Karl. Can you elaborate a little bit on the OpEx level that you had in Q2? And if you had any sort of savings from the fact that we have a COVID-nineteen pandemic and you can't travel around and what have you? And a little bit, if you could elaborate on the full year sort of OpEx levels that you did also went back in connection with the Q4 report, If you could sort of update a little bit on that. Thank you. Yes. Hi, Fredrik. Absolutely. Yes, indeed, we see savings from less traveling. That's very natural for most, I suppose. And we also see it in our numbers. So as you saw then, if you look at the SG and A, it was flat year over year in spite of certain investments we make in digitalization, compliance, security to some extent, so offset by savings in, for example, travel expenses. So that's true. Now I think for the rest for the full year, we maintain what we have said before, which is that given those investments and given, of course, that we have added the acquired antenna business as well to the mix, OpEx would grow slightly over 2019. But of course, we still have the aim to reduce the percentage of net sales during 2020 even with the R and D ramp up that we talk about now in digital services. Our next question comes from the line of Sandeep Deshpande of JPMorgan. Please go ahead. Yes. Hi, Sandeep. Good morning. A couple of questions for me. Firstly, on the network side, can you talk about where there could be potential share shifts Europe going forward from here? How do you see your position, which is already very strong in Europe? So I mean, is there much that you can gain in Europe if there are going to be share shifts in Europe given what the potential changes that are occurring? And then and I'm talking forward looking from here. And then secondly, in digital services, can we understand where these R and D invest additional R and D investments are going into in terms of when you talked about the 5 gs core, I mean, and you already won contracts. So I guess those investments have already happened that is a cloud 5 gs core. So I'm trying to understand where you're investing further, which will potentially help you grow. So if you start with the market share shift in Europe, we probably are a touch north of 30%. So as far as I know, there are a lot to compete for as far as I can see. If you start to approach 100, it's a different story, but we're not there. So we're going to make sure we where there is an opportunity, we are going to position ourselves with our technology to try to win as much as possible. We will see how that pans out. It's really in the eye of the customer. And they are going to make an evaluation based on technology and commercial terms. And how that is going to pan out, we don't know. But of course, we are going to be as competitive as we can. If you look at DGS, yes, again, 5 gs core has been 1 in a number of customers and customer networks. But it's still a lot of customers remaining. And we what we want to do is to make sure that we are well positioned to win these new contracts as well. So that's typically not the ones we have already won. It's other contracts. R and D. Thank you. You're good with that Sandeep? So ladies and gentlemen, we are now going for the last question on this hour. So, operators, please. Our last question comes from the line of Domenick Olchevsky of Morgan Stanley. So from a strategic level, if we're looking at Europe, could you maybe just describe some of the puts and takes around whether some of the European operators could play for a delay, sort of they would cite costs and the time involved of swap outs? And what makes you confident that they don't play for time, therefore, and use that as an opportunity for transition to open RAN? And then sort of a second sub question related to that is just could you describe your operational capacity to actually deliver such swap outs if they were to start to emerge in the coming quarters? Would there be any bottlenecks operationally or by components from your perspective? Thanks. If we start with the latter one, we have over since basically 2018, we have tried to call it debottleneck our supply chain as much as possible and make it as flexible as possible and have as possible. That's why we've also been able to handle the COVID disruptions well without any real delays in shipments to customers. So with the volume we have today, we're basically churning out if you compare it to London a day in radios. So we don't believe our capacity is what would limit with the rate you could drive implementation of our technology in Europe. So we don't see that be a restriction. Ultimately, 5 gs rollout in Europe is I think it's a difficult question. The problem we have is that Europe is rapidly falling behind in the digital infrastructure. It's behind in the 4 gs penetration, probably by varies by country by call it in average 2 to 3 years. That has led to a lot of loss of economic value in Europe as a continent. Infrastructure. They come out of with a notable exception of Spotify, really, they come out of the U. S. Or they come out of China. If we are going to repeat that mistake in Europe, I think the European economy has a problem. So Europe, as a continent, needs to not be behind on 5 gs. And why is that so important? 5 gs is going to drive a lot of enterprise applications, being in healthcare, being in logistics, being in smart city planning, etcetera. So when you start to look at that, the big value of 5 gs is not the network, the network infrastructure, it's not the operators, it's actually the applications that run on top of the network. So if we are on purpose delaying 5 gs in Europe, then we are also hurting our economic future. And I think that's the realization that has to start to come to the surface in Europe. So what we should do is focus really on how do we drive the fastest rollout of 5 gs. Then the over end discussion, it's clearly there. We are going to be a participant in that as well. And as you know, we're already active. But for the high performance applications today, we do not see O RAN as a way to speed up the rollout. It's rather a way to slow down right now. But that we're going to be when O'Ran is ready, we're going to be there. Okay. You're happy with that, Don? Yes. Thank you very much. Thank you, Don. Before ending, I would like to give the word again to Borje to have a closing remark. So please, Borje. Thanks, Peter. So with this, we've put another solid quarter behind us with a good Q2. We have a strong portfolio today of leading products and solutions, and we are well prepared with capacity with product portfolio to roll out and to capture the benefits of 5 gs. So with that, again, thank you all for joining us. Thank you all. Thank you. And goodbye. This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.