Welcome to Ericsson's Analyst and Media Conference Call for their second quarter report. To view visual aids for this call, please log on to www.ericsson.com/press or www.ericsson.com/investors. Ladies and gentlemen, when you would like to ask a question, please press 01 on your push-button phone. If you wish to decline from the polling process, please press 02. As a reminder, replay will be available one hour after today's conference. Peter Nyquist will now open the call.
Thank you, Gary. Everyone, welcome to today's Q2 call. With me here in Stockholm, I have Börje Ekholm, President and Chief Executive Officer of Ericsson, and Carl Mellander, Chief Financial Officer. Before starting, I would like to read these words. During the call today, we will be making forward-looking statements. These statements are based on current expectation and certain planning assumptions, which are subject to risks and uncertainties. The actual result may differ material due to factors mentioned in today's press release and discussed in this conference call. We encourage you to read about these risks and uncertainties in our earnings report, as well as in our annual report. With those words, I would like to hand over the word to Börje. Please, Börje.
Thank you, Peter, welcome everyone to our call for the second quarter. The human toll from COVID-19 is increasingly clear. It's impacting lives for all of us, either directly or indirectly through the macroeconomy. However, despite the devastation from COVID-19, we've delivered a solid quarter. I'm very proud of all my colleagues here at Ericsson that have been able to execute in the middle of this pandemic. We have reached the stage where we are now able to demonstrate how we can capture the benefit of our increased investments in R&D. We're demonstrating our technology leadership through customer momentum. We're increasing our market share in key markets, and we now have 99 commercial 5G contracts and 54 live 5G networks performing across 27 countries. I would say we're mostly proud of our in-field performance of the equipment we deliver. We are winning contracts based on our technology leadership.
We have selectively grown our strategic contract over the past quarters, which are now showing profitability in line with our plans. They are now a normal part of our business. On this basis, we will no longer be reporting on the strategic contracts unless we see an extraordinary impact. I'm very pleased to see that we have delivered a solid performance, which has been predominantly driven by the networks and digital services. Our sales are SEK 55.6 billion with an operating margin of 8.2%. During the quarter, we have increased our market position in mainland China, winning contracts from all major players. This is important to us as a company as it provides us with the scale, and equally important, China will be a driver of important features for the futures. We have also seen an increase across several market areas, including Europe.
In segment Digital Services, we've been impacted by COVID-19 and related market uncertainty. We have also seen a decline in our legacy portfolio. We see a strong demand for our cloud native and 5G core portfolio. We won some significant tier 1 customers which will deliver revenues in 2021 and beyond. In response to this strong market momentum, we've decided to increase our R&D investments. As a result of these factors, we are not going to reach the single-digit margins for 2020. That will slip by a few quarters. The long-term value created from the investments in R&D will more than compensate for this. It's difficult to predict the current market given the uncertainty we see as a result of COVID-19. With the current visibility, we remain confident and committed to our group targets for 2020 and 2022.
Our free cash flow before M&A remains strong at SEK 3.2 billion in the quarter. We've not had a significant negative impact in the quarter from COVID-19. 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'll now commence the monitorship following the settlement with the U.S. authorities. This will help us further strengthen our ethics and compliance program. We've seen some reduction in sales due to macroeconomic uncertainty and the macroeconomic conditions and COVID-19. We've seen that mostly in Latin America, Africa, and India. In Europe and Latin America, we've seen a reduction in planned exit or managed services contracts. This is partly offset by growth in network sales in Europe, and that's due to market share gains coming from technology leadership.
We see continued 5G deployments in Middle East, which has made a positive impact. In North America, there is continued 5G momentum, which generate increased sales in networks. However, digital services has decreased, and managed services sales have also decreased as expected due to the operator merger. In Northeast Asia, we've seen strong sales growth for networks and digital services across all countries in the market area, primarily driven by 5G deployments in mainland China. In segment networks, we continue to see a strong momentum due to our 5G leadership. Organic sales were up 4%. Gross margin was 40.5%, which is after absorbing a large share of strategic contracts, including the write-off we had in mainland China. The contracts we have in China will be profitable over the lifetime, but they've had a negative impact, actually larger than the inventory write-off during Q2.
In digital services, our gross margin has improved to 43.6%. That is due to a large increase in portion of software sales. However, overall sales declined, which is due to the classic portfolio, as well as some COVID-19 effects. The new portfolio sales grew by 18%. 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. The underlying business is good, and we see the increase in gross margin due to efficiency gains, but also that the investment in R&D is driving a different portfolio composition with higher value-added services.
We intend to continue to invest in R&D, as we have done in AI and automation to support 5G and efficiency gains in service delivery. In emerging business, we see a continued sales growth and gross margin growth, and it has resulted in an improved operating income. Overall, sales decreased by 4%, and that's really explained by lower sales in Red Bee Media. During the quarter, we have also exited the Edge Gravity business because we did not deliver on the long-term business case, and we did not see a long-term value creation. iconectiv is delivering good sales and solid profitability. With that, I'm going to give the word over to our CFO, Carl Mellander.
Thank you, Börje. Let's dive in a bit more to the numbers. Starting on the top line. SEK 55.6 billion in the second quarter in net sales. That's a flat organic development year-on-year. Looking at the parts, the networks delivered organic growth of 4% year-over-year. Strong 5G sales in China, continued growth in several other countries in Northeast Asia and parts of Middle East. Managed services declined by 12%, as mentioned by Börje, due to lower variable sales in North America post-merger, a managed service contract transfer in Europe and some other planned exits of contracts. Digital services organic sales declined by 4%, with lower demand for legacy hardware, services partly related to COVID-19. This was then offset by higher sales of software, which certainly helped the gross margin as well.
We'll get back to that. If you look at the gross margin here, improving by 150 basis points year-over-year, despite the inventory write-down, SEK 900 million that we informed about earlier in June, and that affected gross margin here by 1.6%. The improvement year-over-year, you could say, driven by higher software sales in digital services and also efficiency gains in managed services, but also added to that, the higher IPR revenues in the quarter. Operating income improved to SEK 4.5 billion, excluding restructuring versus SEK 3.9 billion, this means then 8.2% operating margin. Again, main driver for the improvement on this line as well, reduced losses in digital services, reaching then SEK 0.7 billion versus SEK 1.3 billion negative last year due to a better gross margin, as discussed.
Looking at the graph there, you see the adjusted rolling four-quarter operating margin now stands as 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 there. Restructuring was SEK 700 million in the quarter, and that's the Edge Gravity closure that Börje mentioned, but also related to the acquired antenna business, as we have announced earlier. Of course, we have the FX effect there. We have some positive currency hedge effects this quarter, making the financial net actually a positive number. This has not happened since second quarter 2017. Okay. We move on. Looking at the gross margin then over time, and you can see here again the quarterly fluctuations due to items like mix, timing of projects, and so on.
On a rolling four-quarter basis, the gross margin continues to show a steady improvement here and now stands at 38.3%. Now we have improved the gross margin for nine consecutive quarters. Primary driver, I would say, is still the R&D investment 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. Year-over-year here, the gross margin was 38.2%, up from 36.7%. If you look at the Networks piece, again, I want to mention the inventory write-down in China, the SEK 900 million. Networks also impacted by a general higher share of strategic contracts, including the Chinese 5G business. 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.
Of course, we have IPR contributing with the growth in the quarter as well, SEK 2.8 billion of IPR revenues. Okay, I think we can move on to R&D and SG&A. You see here, R&D expenses then, or investments rather, increased year-over-year by SEK 300 million, and this is due to higher investment in Networks again. While in Digital Services, as we have talked about before, we continue to take out cost in the R&D portfolio and the legacy portfolio. To capture then the business opportunities that we see currently and going forward, we have accelerated R&D in Digital Services and will continue to do so. SG&A, flat at SEK 6.9 billion. We continue with the investments in digitalization and compliance. 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&A for the third quarter, please remember that the Q3 2019 had a positive effect by a refund of social costs, and that was SEK 0.9 billion. Lastly, not visible on this page, but still let me mention that there was no effect in this quarter from impairment losses on trade receivables. That was zero. Okay, moving over to the cash flow. SEK 3.2 billion, as Börje mentioned, in the quarter. This is, of course, a key indicator for us when it comes to value creation in the company. It's encouraging to see that we keep a good discipline in working capital. Here, net operating assets and liabilities remain stable in spite of the sequential growth we had in the second quarter. Further to that, I would say we made a SEK 1 billion payment into the Swedish pension trust.
That's included in these numbers in the second quarter. Another SEK 2 billion is expected to be paid into that same trust in the third quarter. Now Ericsson has delivered positive free cash flow before M&A for eight consecutive quarters. This is if we exclude the DOJ/SEC fine for a moment, and also looking at the rolling four-quarter basis back here, free cash flow has amounted to SEK 18.3 billion. Also there, of course, excluding the SEC/DOJ fine, and this translates into 8% of the sales over the rolling four quarters. Okay, moving on. The financial position here, looking at gross and net cash to the left and the maturity profile of debt to the right in the graph here. You can see here net cash is SEK 37.5 billion now, and gross cash stands at SEK 75.4 billion.
The debt matures over the next five years here with an average maturity currently of 2.2 years. The next maturity comes now in the fourth quarter of this year. It's SEK 8.7 billion. We intend to repay this with cash on hand. In addition, giving additional resilience, we have an undrawn committed facility of EUR 250 million plus, of course, since earlier also the $2 billion long-term revolving credit facility. You saw the good news earlier in June that the company was upgraded by Moody's to Ba1 with a stable outlook. To summarize this position, I would say we have a resilient balance sheet giving us a strong financial position and a well-diversified debt maturity profile. Next slide, we look at some of the highlights from the planning assumptions. Please refer to the report for the full set of planning assumptions.
A couple of comments here, first of all, on the targets for 2020 and 2022. Obviously, the effects of COVID-19 create certain uncertainties, and we remain humble when it comes to predicting the future here. With the current visibility, we clearly maintain the full-year targets for the group, as Börje said. 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. The third point here on FX. Of course, FX impacts our financial results, especially the US dollar-SEK exchange rate. Lately, we've seen the SEK strengthen against the US dollar. Obviously, we are not making any predictions here.
If the US dollar to SEK would stay at the current level around 9.10, this would mean a headwind compared to the average of around 9.70 we had in Q2 now this year, or compared to the average 9.55 during Q3 last year. In our planning assumptions, you will find the rule of thumb that we usually use, how this impacts sales and operating margin. With that, thank you, and I hand back to our CEO, Mr. Börje Ekholm.
Thank you, Mr. Carl Mellander. We worked hard to lead in 5G, and we continue to underpin this through our strong performance. Our investments in R&D and for technology leadership has delivered strong performance and clear cost benefits. By consistently delivering against our promises and taking selective strategic contracts, we have regained and continue to gain market share across the globe. We have proven that strategic contracts are now profitable during the term, and it is with this rigor in our business that we're establishing us as a market leader in 5G. Our business performance has provided us with much more flexibility to grow and capture the opportunity that 5G provides, and that includes, of course, expanding our footprint. We have now secured 99, and we're very close to 100 commercial agreements, and we have 54 live 5G network running with Ericsson equipment.
These numbers are, of course, changing daily, and you can follow them on our website. We have a very strong momentum. The criticality of the network continues to be proven, and I would say the COVID-19 has further strengthened the need for countries to invest in communications infrastructure. The importance of these investments is really twofold. One, of course, is to have individuals connect. What you actually see is that the digital infrastructure is a launch pad for technology innovation and economic recovery. We see 5G is the innovation platform for the future. Here, Europe, and as a European company, we notice this. Europe is falling behind. It's really time for Europe to start incenting investments in the digital infrastructure. That includes, for example, addressing the question about spectrum prices.
We've now completed a solid first half, and with current visibility, we remain committed and confident in our financial targets for 2020 and 2022. Our world-leading technology, coupled with our strong financial position, means that we are ready now to deliver on the promise of 5G across the world. Thank you. Thank you, Börje. By that, the presentation has come to an end, but we will then move over to the Q&A session. I would like, Gary, could you open up the Q&A session, please?
Thank you. Ladies and gentlemen, at this time, we will begin the question and answer session. If you would like to ask a question, please press 01 on your push button phone. If you would decline from the polling process, please press 02. As always, please limit yourselves to one question at a time, and please keep your questions at a broad 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.
Morning, Ed.
Good morning. Thank you very much for taking my question. A couple, if I could. Börje, this is kind of an unprecedented time for not just COVID, but if you're looking at the network systems business, you've got a number of things happening that we've not seen in quite a long time, or ever. You got the merger of T-Mobile and Sprint going through in the U.S. 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 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. Carl, if I could, making additional investments in R&D and digital services, you're not going to meet your margin targets this year, and it sounds like the investments are going to pay off at some point. Can you help us understand where that pays off in terms of at or above your target margins? Would it occur this year, next year? 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 that might be. Thank you.
Thanks, Ed. I'll start. We are optimistic about our industry. The need for connectivity is there, the need for connectivity going forward is going to be even more. I would say that has been proven with the pandemic. The macro view for our industry, we're very positive on that. Within that positive view, what we have done over the last few years is to have a strong focus on gaining footprint as well, growing faster than the market and gaining market share. 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 are hardly visible in our revenues, because our market share gain really has come from other players, so to say. It's really a result of the technology investments we've made.
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. We are optimistic about the future.
I guess maybe the second one.
I can take. Hi, Ed. On the second question, investments in R&D and digital services. First of all, the 2022 targets remain. This is what we are aiming for. I would say we make these investments out of a position of strength in that we see great traction in the new portfolio, not least when it comes to 5G core, where we have recorded early wins with leading operators. That is a very good thing, it requires some acceleration and an increase of the investments to meet the requirements and lead time requirements. That is a good thing. We are still going to obviously reach the 2020 targets, with a few quarters delay, from there, ramp up further into 2022.
I think it's the right thing to do for long-term value creation, clearly, even if we have to move the timeline forward a couple of quarters for target fulfillment.
Okay, thanks, Ed.
We will move on to the next question, please.
Our next question comes from the line of Aleksander Peterc of Société Générale. Please go ahead.
Morning, Alex.
Hey, good morning, and thanks for taking my question. Congratulations on the great results. I just have a few. First of all, if you could be more specific on what exactly will receive more R&D attention in digital services, which kind of programs or products are going to get that? The second one is, if you could give us an idea of how long you take, you think, in 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 5G deployments in Europe in particular. The third one is I'd just like to understand how the quarter came across for you guys, because you did give us a warning on the second quarter, and the results actually came out at levels at or slightly above where consensus was before that warning.
I'm kind of wondering, did you not get as much of a hit on margins as you thought? Or did anything else come through a lot better than you thought at the time of that warning on the second quarter? Thanks.
We start at the end then with your question about why we communicate to the big provision. We have as a guiding principle to be transparent. When we take very large costs that are subject to one decision, then we feel it's appropriate to talk about that and describe that to the market. This was one of those where we had a very large cost. You can count on us to be transparent on these things as they come. That's really the reason why we disclosed. Nothing else. If you talk about swapping, et cetera, 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 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. 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 missed.
Yes, development on the R&D investment.
Which product areas. In reality, there are a couple of different areas where we see that as the market evolves even more into 5G, where we can capture a lot of market opportunities. The key driver here is within the 5G core, and that is where the most allocation will be. We also see additional investments in other parts, such as BSS, for example, to capture the 5G billing opportunity. There are a number of areas where we are, thanks to the ramp and the market traction of 5G, that we have decided to increase our investments. The biggest part is in the 5G core.
Thanks, Alex.
Thank you.
Thanks. We will continue to the next question, please.
Our next question comes from the line of Daniel Djurberg of Handelsbanken. Please go ahead.
Morning, Daniel.
Thank you.
Thank you, and good morning. I have a question on China. Börje, you said that the China inventory writedown, the actual impact was larger than that. Can you comment if this will risk to continue into Q3? Also a little bit on second half, if the gross margin recovery in China will follow your expectations. Thanks.
What we have said, that still holds. China, we expected a negative quarter, it was negative to more than the write-off, in Q2. We also said that the second half, we would see it contributing to operating profit. It will still be dilutive on a gross margin basis, it will contribute positively to the operating profit. That still holds. Longer term, these contracts are profitable for us.
Perfect.
There is a negative initial impact. If you remember, it was the same thing in 2017 that we disclosed at the time when we took a contract as well.
Right. Perfect. Also a short follow-up, if I may. We see a lot of news from the Open RAN Policy Coalition, et cetera. 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. Thanks.
You know that we are also working very actively in the Open RAN Alliance and driving the standards of Open RAN. 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. I believe we are well-positioned to capture opportunities across that spectrum. That includes the purpose-built basic or high performance as well as possibly open solutions for more lower-end performance requirements. We are focusing on delivering the solutions to the customer, less about marketing.
Thanks, Daniel. We continue to next question, please.
Our next question comes from the line of Achal Sultania of Credit Suisse. Please go ahead.
Morning, Achal.
Morning, Peter. Hi, good morning, everyone. Börje, just one clarification on that China comment that you're making. We know that SEK 900 million impact on writedown. If we exclude that writedown, the China gross margin still would have been negative in Q2. Is that bigger than the SEK 900 million or less than that? Secondly, we know that it's going to be GM diluted, will gross margins in China turn positive in Q3 or Q4? Can you give some color on that? Secondly, on
Go on.
Yeah. Second question was on the seasonality comment that you have in the press release. Q3, the seasonality has been quite varied. It is ranging between minus 2 to plus 8 sequential growth. You have not made any comment as to what you expect for seasonality this year, whether normal seasonal, above, or below. Just trying to understand what are the puts and takes regarding China, U.S., and FX. Does all these uncertainties preclude you from 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. 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, even if you exclude the inventory writedown, there was a negative gross margin. 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. Are you only commenting about second half?
Yeah. You're asking in a world where a quarter is a completely arbitrary time interval. You're asking about a 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. The second half will clearly contribute to operating profit.
Okay. That's clear. Thanks, Börje.
Thank you, Achal. Open for the next question.
Our next question comes from the line of Amit Harchandani of Citi. Please go ahead.
Morning, Amit.
Good morning, Peter. Good morning, all. Amit Harchandani from Citi. A question and a follow-up, if I may. My main question relates to the conversations that you have with your customers across different regions. Clearly, there's talk of 5G accelerating, and I was curious to understand what is the kind of features and functionalities that you're being 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? I just wanted to better understand what is the nature of current conversations and what are you focused on? I have a follow-up.
What you see is the customers are so far very much focused on getting the 5G equipment up and running and providing the additional capacity to the customers. One of the key focus areas have been our Dynamic Spectrum Sharing and getting that into the market. That's been one important discussion and important focus area for us. Of course, what you mentioned about openness will also be a topic that's under discussion. So far it's been predominantly on how to bring coverage of 5G as quickly as possible into the market. 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. We see that that's actually a global discussion. It's not only North America, it's the same in other markets as well.
You had a follow-up there, Amit.
Yes, indeed. The follow-up, I note there is a commentary with regards to IPR in the release this morning talking about certain agreements up for renewal and payments being temporarily affected, but 5G is going to strengthen it. Could you maybe elaborate a bit more on how should we think about that? I presume this is more for 2021, but if you could cite some further color in helping us think about the same, that would be helpful. Thank you.
The IPR business is an important business for us. The agreements we have, they are typically time-limited. Today we have very few contracts that include 5G. We're now entering a cycle with the ramp of 5G. A number of contracts will come for renegotiation. What we are going to do is to make sure we get the right value for our technologies long term. That means that there can be effects short term because we don't agree with the other parties, so to say. That's really what we're saying. We are very committed to maximizing the value of our patent portfolio, and we will not enjoy any short-term payoffs just to get the uninterrupted flow of royalty payments. That's what we want to say.
Thank you, Börje. Thank you, Peter.
Yeah. Thank you, Amit. We will follow with the next question. Please, operator.
Our next question comes from the line of Johanna Ahlqvist of SEB. Please go ahead.
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 realized that you still sort of remain your full year guidance. Were they a one-off payment in any term this quarter that will not repeat, or how do you see that? Just to try to dig in a bit more on the gross margin for the second half. I realize we talked a lot about China, but what do you see on the remaining business? If we exclude the China, do you see any positive or negative drivers to the gross margin in second half from here? Thank you.
Yeah. Do you think?
Well.
On IPR, maybe I can start there, Johanna. Hi, Carl here. On IPR, 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. There are elements also of fluctuations between quarters that we saw boosting this quarter. We keep the SEK 10 billion number for 2020 totally unchanged. That's still the number we talk about.
You can take the second one.
On gross margin, second half, as you know, Johanna, we don't guide specifically here. I think you should look at the rolling trend that we talked about here also in the presentation. Of course, there are puts and takes. China, we have discussed already that that will turn profitable into the second half. We also, of course, had the inventory write-down in the second quarter, which will not repeat. 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. I think that's what we can say about the gross margin. Okay, Johanna?
Thank you. Yeah, perfect. Thank you.
Thanks.
Thanks. We'll move over to the next question.
Our next question comes from the line of Sébastien Sztabowicz of Kepler Cheuvreux. Please go ahead.
Morning, Sébastien.
Hello, everyone. 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 second quarter? Could you help us a little bit understand what were the losses from this contract in Q2 or in H1 from the beginning of the year? When do you expect to have fully reviewed those non-strategic contracts? The follow-up would be on the competitive landscape, and notably in Europe, where we see a growing number of countries starting or looking to ban Huawei from 5G. Do you see Samsung being a little bit more aggressive in Europe right now? Thank you.
If we start with the number of contracts we have left, it's nine. We had no impact really during Q2. Call it extraordinary. They're following plan, 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. We are working through. Some of these contracts, I think we've been quite clear, they're very long. Some of them are even 10 years. 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 zero. They will continue that. If we look at the ban question in Europe, for us, I think the key here is to remove uncertainty.
What we've had for a period of time now is very uncertain. Who's approved, who's not approved, what's going to happen, what's not going to happen. That has created an environment for our customers that are not friendly for investments. For us, Europe has been a good market, but only thanks to share gains. We've seen growth in the second quarter due to market share gains, not the general market. I think here it's important that Europe, instead of thinking about 5G as a way, as another telecommunications technology, it's actually digital infrastructure that's critical for the economy going forward. The economic values of 5G should be factored into how you look at, for example, restarting the economies. The analogy here with 4G is quite stunning.
Europe has lagged behind on 4G. It's not a surprise that the tech disruptors and tech unicorns are American and Chinese, because that's the two countries in the world that rolled out 4G earliest and first. You need the right digital infrastructure for entrepreneurs and innovators to innovate on and develop new applications. That's why, the criticality for Europe is to have a stronger focus on building out 5G, so we're not falling behind on the next generation of technology. You had a third question that I didn't write down. Did I miss that?
The question was on the market share, basically, the market share aggressiveness from Samsung. Do you see Samsung being a little bit more aggressive in Europe specifically?
We're really commenting more on our own business. We have gained market share over the last three years. Almost, if you look by Q3 2019, if you follow Dell'Oro e, it's about 5%-6%. We have a substantial market share gain. Most of that actually comes from, not the Chinese competitors, but others.
Thanks, Sébastien. 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 related to the digital services business, if I may return to that one and Carl's comments about the investments that will push up profitability. It obviously makes perfect sense. I'm just interested, this is obviously a business with a strong seasonality. When you talk about pushing back the break-even time, I assume you mean on a four-quarter rolling basis. Does it preclude-
Yes
that we could see a profitable quarter in the second half? I mean, obviously Q4, which we would normally expect. Are you indicating that the normal seasonality is perhaps being evened out as we move into next year? Is that how we should read your comments? Thank you.
No, you should read it on a rolling four-quarter basis. Q4 is typically a much stronger quarter than other quarters, and that's what we continue to believe.
Right. 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 center 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. That, of course, it's driven by China, but the other parts of the market area are also very strong.
Thank you.
Thank you. Very good. I will move to the next question, please.
Our next question comes from the line of Fredrik Lithell of Danske Bank. Please go ahead.
Good morning, Fredrik.
Good morning. Thank you, and congratulations to a healthy report. Many questions have been answered. I have one maybe for Carl. Can you elaborate a little bit on the OpEx level that you had in Q2, and if you had any sort of savings from the fact that we have a COVID-19 pandemic and you can't travel around and what have you? A little bit, if you could elaborate on the full year sort of OpEx levels that you did also back in connection with the Q4 report. If you could sort of update a little bit on that. Thank you.
Yeah. 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. As you saw then, if you look at the SG&A was flat year-over-year in spite of certain investments we make in digitalization, compliance, security to some extent. Offset by savings in, for example, travel expenses. 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. Of course, we still have the aim to reduce the percentage of net sales during 2020 still, even with the R&D ramp-up that we talk about now in digital services.
Okay. Thank you.
Thanks, Fredrik.
That's clear.
Yep. Thanks, Fredrik. We'll move to the next question, please.
Our next question comes from the line of Sandeep Deshpande of JPMorgan. Please go ahead.
Good morning, Sandeep.
Yeah. Hi.
Good morning. A couple of questions from me. On the network side, can you talk about where there could be potential share shifts in Europe going forward from here? How do you see your position, which is already very strong in Europe? 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? I'm talking forward looking from here. Then secondly, in digital services, can we understand where these additional R&D investments are going into, in terms of, you talked about the 5G core, and you're already one contract. I guess those investments have already happened. That is the cloud 5G core. I'm trying to understand where you're investing further, which will potentially help you grow.
If you start with the market share shift in Europe, we probably are a touch north of 30%. As far as I know, there are a lot to compete for, as far as I see. If you start to approach 100, it's a different story, but we're not there. We're going to make sure 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. Of course, we are going to be as competitive as we can.
If you look at DGS, yes, again, 5G core has been won in a number of customers and customer networks. It's still a lot of customers remaining. What we want to do is to make sure that we are well-positioned to win these new contracts as well. That's typically not the ones we have already won. It's other contracts. For us, increasing the pace of innovation here, increasing the pace of feature development is an important way to win customer business, and that's why we're increasing R&D. Thank you.
You're good with that, Sandeep? Ladies and gentlemen, we are now going for the last question on this hour. Operators, please.
Thanks. Our last question comes from the line of Dominik Olszewski of Morgan Stanley. Please go ahead.
Hi. Good morning.
Hi, Dominik.
Hi, Peter. Hi, everyone. Thanks for taking the question. 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. What makes you confident that they don't play for time therefore and use that as an opportunity for transition to Open RAN? 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.
Since basically 2018, we have tried to call it de-bottleneck our supply chain as much as possible and make it as flexible as possible and have as little restrictions as possible. That's why we've also been able to handle the COVID disruptions well without any real delays in shipments to customers.
With the volume we have today, we're basically churning out, if you compare it to a London a day in radios. We don't believe our capacity is what would limit with the rate you could drive implementation of our technology in Europe. We don't see that to be a restriction. Ultimately, 5G rollout in Europe is, I think it's a difficult question. The problem we have is that Europe is rapidly falling behind in the digital infrastructure. It's behind in 4G penetration, probably by, varies by country, by call it in average 2-3 years. That has led to a lot of loss of economic value in Europe as a continent.
If you look at tech unicorns, tech disruptors, that actually leverage the mobile infrastructure, they come out of, with a notable exception of Spotify, really, they come out of the U.S. or they come out of China. If we are going to repeat that mistake in Europe, I think the European economy has a problem. Europe as a continent needs to not be behind on 5G. Why is that so important? 5G is going to drive a lot of enterprise applications, being in healthcare, being in logistics, being in smart city planning, et cetera. When you start to look at that, the big value of 5G is not the network, the network infrastructure. It's not the operators. It's actually the applications that run on top of the network. If we are on purpose delaying 5G in Europe, then we're also hurting our economic future.
I think that's the realization that has to start to come to the surface in Europe. What we should do is focus really on how do we drive the fastest rollout of 5G. The O-RAN discussion, it's clearly there. We are going to be a participant in that as well. As you know, we're already active. 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. That we're going to be, when O-RAN is ready, we're going to be there. Okay, you're happy with that, Dom?
Yes. Thank you very much.
Thank you, Dom. Before ending, I would like to give the word again to Börje to have a closing remark. Please, Börje. Thanks, Peter. With this, we've put another solid quarter behind us with a good Q2. We have a strong portfolio today of leading products and solutions, and we are well prepared with capacity, with product portfolio to roll out and to capture the benefits of 5G. With that, again, thank you all for joining us. Thank you all. Thank you. Goodbye.
This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.