Welcome to this investor update of 2019. This is an online-only event broadcast live from Stockholm, Kista. A few hours ago, we presented our Q3 earnings. We have shown great performance throughout the whole business of Ericsson, and all segments improved their results year-over-year. That's not the topic for this event. We will talk more about the strategic topic. We'll look at the targets in 2020 and 2022, and beyond on the strategy. Before moving to the main attractions for this event, I would like to say that there will be a replay available after we're closing this event around 6:00 P.M. Starting with welcoming our CEO, Börje Ekholm, and our Chief Financial Officer, Carl Mellander. Welcome.
Thank you.
Thanks.
Before I give the word to you, I need to read this statement. Before starting today's presenting and Q&A session, we'll, as always, continue forward-looking statement. These are based on our current expectations and assumptions, and are subject to risks and uncertainties that could materially affect our business and results. Please read more about these in our earnings report, as well as in our recent annual report. You can read more about this on the last page in these presentations. Before starting, I would like to make a short reflection. A question I received over the last month is why are we not holding a full-fledged or comprehensive Capital Markets Day and an investor update? I think you have to go back two years in time in 2017 in New York City. We presented financial targets for Ericsson for the first time in 12 years.
I remember there was a lot of discussion about those at the event and afterwards, particularly on the gross margin target of 37%-39%. No one actually thought we would be able to achieve that. Remember, we were hovering around 30% gross margin at that point. I guess after an extremely heavy year in 2017 with a lot of restructuring, we now have almost two years of deliveries and executions. I think today's result actually is a proof point to that. We delivered a gross margin of 37.8% and an operating margin of 11.4%, on and above the targets. Last year, we became a little bit firmer, and we talked about 2022 on the targets we introduced each then, and about 12%, more than 12%, we said, and also divided into the different segments.
I think we have two very eventful events before that. We have had, at those events, the whole leadership team participating and about 350 slides. There will be less today. We felt that this event is more showing and confirmation that we are on our way on delivering on our targets. The agenda for that will be that we will start off with Börje, who will lay out the strategic outlook. He will talk about strategic execution, the market environment, and the opportunities we have in 5G. Then he will go down to look at segments priorities, and end with the financial targets, with a little bit more focus on 2022.
Carl will continue with the target and the financial update. We'll look at the financial strategy execution, but also going down in deep dive in the targets for 2020 per segment. You will end with a more balanced restructure on free cash flow as well as the capital structure. We will have a Q&A session, which will end the session, and then you have some closing remark.
Hopefully we will be done around 5:00 P.M. Central European time.
By that, I would actually like to leave the word to you, Börje, to kick off this investor update.
Thank you, Peter.
I will return.
Thanks, Carl.
Thank you.
He needs to head out to collect some cash, so I guess we'll be missing him for a few minutes. As we just today have reviewed our Q3, and as Peter said, we will focus this presentation and this investor update on providing a longer term perspective of our business. We are today a much stronger company, both financially as well as technologically. We've stabilized our top line, continued to improve our margins, and are tracking towards our targets. Our strategy is working, and the proof is in the numbers. You all know we launched our focus strategy in 2017 with the intention to build a stronger Ericsson longer term. We're talking five, 10 years out. It was really built around four key areas: stabilizing financials, increasing investments in R&D for technology and cost leadership, growing market footprint, and cost efficiency.
We put out our targets for 2020 and 2022. We don't really manage to the targets, but it was a way for us internally as well as for the market to see that we're on track in our change and our transformation. Targets are set in %, but the reality is we're running the company to maximize the profits in absolute numbers. We are today confident in reaching the targets for 2020 as well as 2022. However, while the targets are important, and please make no mistake, we're committed to them, the end game is much more important, a stronger Ericsson 10 years from now. The execution of the strategy has resulted in a competitive portfolio driving improved gross margins. In addition, we've been able to record several important wins, which strengthens our future business.
We have also improved our cash flow generation capacity. We now have a solid financial position with net cash of SEK 37 billion. 5G is rolling out faster than we expected in 2017, led by the pioneers in North America and Northeast Asia. We've been ramping up to meet this development. As an example, we've increased in our supply setup in China, the U.S., as well as Europe. In addition to increased R&D investments in North America, we have a new state-of-the-art production facility in Lewisville, Texas, that will manufacture 5G equipment. Actually, we've made similar investments at our European production facilities as well. Over the past year, geopolitical considerations have really dominated the discussions. So far, we've not really seen any direct impact in our sales. If anything, we actually see increased uncertainty, and that is very rarely good for investments short-term.
Our focus remains on what we actually can impact, and that's what serving our customer needs in the best possible way. Part of becoming a stronger company has also been an increased focus on the ethics and compliance. You all know we've been under investigation by the U.S. authorities since 2013. On September 26, we announced that we took a provision of $1.2 billion to cover the current estimate of expenditures related to resolving the past failures. I am ashamed of our past conduct. We have really to recognize that we have failed, and I can assure you that we work hard every day to build a stronger Ericsson, where ethics and compliance are cornerstones in how we conduct our business.
Over the past two years, we've made significant investments in our ethics and compliance program, and we've taken action against employees who have transgressed our values and standards. With that introduction, let's look at today's agenda. We'll revisit our strategy and execution. We'll cover the market environment for 5G and IoT, and then look at segment priorities at a high level, finishing with our updated targets. Our focus strategy remains. We believe that the cost-efficient base is a foundational pillar for our business. Investing in R&D allows both the technology leadership and cost leadership. In addition, we're in a scale industry, and as such, market footprint is important, so we need to strengthen our position in the market. We believe that 5G will actually be a foundation for our customers to generate new revenue streams.
Customers that invest in their network will be best positioned to support future devices and applications. That's use cases we can't even predict today. For example, when operators began launching LTE, no one really thought about ride-sharing services that would disrupt the taxi services. The operators that actually launched LTE early, they benefited handsomely from increased market share, higher ARPU, and lower churn. That was an advantage that was actually sustained over time. We believe 5G will be similar. We believe investing in networks will enable new solutions for both customers and enterprises, and it's really the key to generating new revenue streams. I think sometimes many people, well, internally as well, don't realize how much we have transformed our workforce. Since we began our turnaround journey, a net of 18,000 in our workforce have left the company.
We've reduced management layer, and at the same time, we've invested in R&D. Today, about a quarter of the workforce is actually in R&D. That is underpinning our technology leadership. The combination of workforce reduction, while at the same time investing in R&D, I think demonstrates how significant the transformation has been of our organization. Gross margin continues to be very important indicator of our, what I would say, transformation, and it continues to stay in our target range, and operating margin continues to improve. Excluding the SEC DOJ provision and the tax refund, our underlying operating margin was 11.4%. We continue to drive commercial discipline. While we take strategic contracts with near-term dilutive effects on margins, we can still show a strong improvement on gross margin, primarily in networks.
The market environment is overall very positive to enable 5G. 5G adoption is accelerating and is a year ahead of what we actually expected just 2 years ago. Acceleration is driven by early adopters in the U.S., Korea, Japan, and China. One of these is, of course, a faster migration, is that 4G purchases have slowed substantially, and that's earlier than we anticipated. We may see some effect from this mixed change in the coming quarters. As you know, early in a technology generation, the cost level is typically higher, but we are still managing that within the strong gross margin in Networks. We are well-positioned to capitalize on this rapid shift with more than 4 million 5G-enabled base stations shipped to date. Let's now look at how the market is progressing by geography.
North America accounted for 39% of our net sales in 2018, and our strong performance continues and is fueled by the 5G momentum and market share gains. In North America, we had a strong Q3 and do expect some slowdown in Q4 or less seasonality. This is due to the uncertainty of one of the announced mergers and how the outcome will look like. We expect a continued strong market contribution in 2020 with wireless CapEx spend stabilizing at 2019 levels, in line with the guidance from Dell'Oro. In Northeast Asia, Chinese operators will begin 5G rollout at scale. We're fully committed and aim for an increased market share. Today, it's unknown what market share we will ultimately get, as well as the price level, so it's just not possible to guide at this point in time. These contracts are going to be big.
We are investing in R&D and supply chain capacity with the aim to increase our market share in China. Based on historical experience, we expect that margins initially will be challenging, but they will also turn positive over the lifetime of the contract. Outside of China, we expect continued strong business in 2020 in Northeast Asia from lead customers in Japan and Korea. In Southeast Asia, Oceania and India is one of the major growth markets for 4G, and demand for data continues to increase with 1 billion new 4G subscription over the next four years and a 60% year-over-year data growth. We see operators are forecasting to grow about 3% year-over-year, which will lead to a flat or slight decline in the CapEx investments. In particular in India, operator consolidation will make the market very competitive.
Ericsson has secured a leading position with the initial 5G contracts in Australia. We expect larger deployments across the rest of Southeast Asia as spectrum becomes available in a two-to-three-year timeframe. Aside from Southeast Asia, Africa is also growing in 4G. LTE penetration in Africa is still very low, actually less than 10% if you exclude South Africa. This presents an opportunity to expand our base, supporting our customers to modernize their networks. The African continent has pioneered technology for financial services. For example, mobile money penetration is at 10% of adults versus 2% average for the rest of the world. Ericsson is a partner with our customers to make this possible to the end consumer.
One thing that's often overlooked is in this market area, the Middle East and Africa, we will see sharp growth in 5G, and we expect there to be about 60 million 5G subscription by 2024. We see strong uptake in core modernization to improve cost position and prepare for 5G. In Europe, the regulatory environment, including high spectrum fees and the financial position of many operators, creates a challenging investment environment for us and other vendors. This has led to an increased interest in network sharing. Additionally, in Europe, the geopolitical situation drives a very competitive pricing dynamic. We continue to focus on technology leadership to create cost-competitive solutions, as well as helping our customers to invest in network quality. In Latin America, operators continue to spend in LTE and invest for network differentiation.
5G spectrum is likely to be auctioned in the first half of 2020, with limited deployment in the second half 2020 and beyond. 5G technology is built on mobile broadband, fixed wireless access, and IoT access technologies. We have seen, looking at the 4G life cycle, that operators that invest in their network have better performance, lower churn, and increased ability to differentiate. We actually expect in 5G, the ability to differentiate will become even greater as the network platform has more enhanced capabilities. We see 5G will open the door to connect many new devices and applications. Honestly, we don't know what all the use cases for 5G will be. That was the same, as I mentioned before, when 4G was introduced. At that time, we did not think about payments via social platforms or e-commerce on smartphones, or even new taxi services.
The same will hold true for 5G. What we do see in our own research, though, is that consumers have a high interest and willingness to pay for the new 5G-enabled services. 5G actually goes beyond mobility for just consumers, and that is the big thing with 5G. In addition to delivering advanced system mobile broadband, 5G is a platform for innovation so powerful that it will be the driving force behind the next big change in society, the Fourth Industrial Revolution. We're here, we're moving beyond connecting people to connecting machines, and actually everything that benefits from being connected. This will impact all sectors, creating a SEK 700 billion opportunity for operators in 2030. Over the coming years, we will see operators choosing different strategies to address these massive opportunities.
Ericsson will focus our growth areas on solutions that support our customers' new revenue streams, and also drive traffic to mobile networks and increase demand for network quality. We want to contribute to underlying business drivers of data growth and connected device growth. In this way, we support and build on the strength of our core business. That's why we're doubling down on our IT investments, IoT investments, and private LTE investments for industries. We have been seeing great market traction on our IoT platform, serving now more than 4,600 enterprises. We focus on connecting business outcomes and high-value use cases. For example, connected police cameras. In summary, operators will be able to expand from their business today, mobile connectivity, into new consumer and enterprise services. Actually, we see a tremendous opportunity for our technology as the market expands for our customers.
After a few years of relatively flat investments in the radio access networks, we believe we will now return to growth as our customers build network to address these new revenue pools. Overall, we're very excited about 5G, and we're of course, very excited about our position in 5G with 19 live networks across four continents. We see excellent network performance, have a large installed base, and see a growing device ecosystem. Let's now look at how these market dynamics impact our business units and their strategic priorities. In Networks, our priorities are unchanged. Invest in technology and cost leadership, selective market share expansion, acceleration of 5G with lead customers. During the year, we've made significant progress in all areas. We continue to execute on our contracts and build the ecosystem. Due to acceleration of 5G, we will deliver 70-plus radios this year.
We continue to invest in talent, adding about 500 R&D engineers this year. Digital Services is progressing in line with our plans. Profitability over growth remains our top priority, and we are comfortable with the targets to reach a low single-digit margin in 2020. We actually see underlying business improving quarter-over-quarter, and with now breakeven within reach. We never targeted to turn around faster than 2020, as we needed to continue to invest in a portfolio of modern products. Additionally, we focus on taking projects with a clear scope and strong alignment to our portfolio and capabilities. Focus portfolio investments in cloud native and automation. 5G acceleration with lead customers. Overall, we're happy with the progress we're making in 5G and on our critical contracts. Our portfolio direction is well-received by customers, and we're now on track to have 5G core 100% cloud native by Q1 2020.
When we look at our portfolio mix of classic to growth, we see a continued transition of our portfolio. Since 2016, we've shifted the mix from 55% to 68% of net sales in growth products and software. Since we met last year, we've continued to strengthen our Managed Services offerings with investments in artificial intelligence and automation. Our priorities going forward are leveraging data from network operations to shift from reactive to proactive network management. This improves network quality as well as performance. We're increasing our investments in AI, R&D. We're undergoing a large upskilling program and improving ways of working. Finally, we see continuous gains in service delivery. Earlier this year in Q1, we launched a new AI-based Managed Services offering, Ericsson Operations Engine, and we have just signed our first contract.
In segment Emerging Business and Others, basically consisting of our Media Business and Emerging Business, our growth focus is on the Emerging Business and in particular IoT, where we have doubled down as we see good traction with enterprises and connected device growth. Our IoT business is growing almost twice as fast as the estimated market growth of 20%-25% per year. We have lowered our 2020 operating income target for this segment to a loss of SEK 1.5 billion-SEK 2 billion, as we don't think the break-even target is relevant as we select to scale up a couple of businesses in there. As you can see on this a bit busy slide, perhaps, we have adjusted our sales ambition for 2020 by SEK 20 billion to SEK 230 billion-SEK 240 billion.
This is driven by an increasing uptake on 5G, Kathrein acquisition, and growth in emerging business and iconectiv together, of course, with some currency tailwind. Operating margin target for 2020 remains at more than 10%. This includes the change target for emerging business, as we double down on IoT, the short-term dilutive impact from strategic contracts, and the initially higher cost level for newly introduced 5G products. With the increased investments in IoT, the target for segment emerging business, as I said before, we have lowered that from a break even to negative SEK 1.5 billion-SEK 2 billion. Carl will, in his presentation, come back with more details covering the 2020 numbers. We have also selected to clarify the 2022 operating margin target to a range of 12%-14%, compared to previously greater than 12%.
The target is based on that we believe that we can continue to grow faster than the market and to leverage our investments in market position and R&D, supporting a strong growth margin. The margin of 12%-14% will obviously be supported by all segments. Very important is, of course, Digital Services moving from low single digits to an operating margin of 10%-12%. With that, I'm going to give it back to you, Peter.
Thank you, Börje. An interesting presentation, particularly laying out opportunities in 5G, which I think is an extremely important topic when we meet investors. With that, let's see how this looks more in details when you go into the numbers. Börje, I would like to have Carl back here to the table.
Thank you.
And he will give an-
Thank you, Börje.
update on the financial strategy execution target breakdown by segment, move to the balance sheet and look at free cash flow and the capital structure. With that, give it away.
Absolutely. Thank you, Peter. Are we doing okay so far?
We are doing great.
Börje was brilliant.
Yeah.
I was out collecting some cash, of course. I'm not dehydrated by it. Anyway, thanks, Peter. I would say two years ago, when we started this journey, the last couple of chapters in the Ericsson history, we also set out some financial priorities and strategies, and we've been since then busy executing on those. Those were really to secure financial resilience of the company, but also to enhance both profit and cash generation abilities in Ericsson. Also on top of that, to improve the transparency in how we report, how we account, how we assign accountability. We want to make Ericsson an easy company to understand and to invest in. This strategy execution is on track. Since we set those ambitions, we have de-risked the balance sheet significantly. We have worked a lot on securing sufficient liquidity to take us through the turnaround phase.
As you have seen today, our gross cash position is SEK 76 billion. We also took cost out. The SEK 10 billion program that we talked about was executed on time, and, of course, that both improved competitiveness, but also was very visible in the margins. When it comes to cash flow generation, we have done a lot when it comes to working capital improvements. We'll come back to that a little bit later. We also introduced new incentives to rally the entire company behind the need for cash flow generation and for capital efficiency as well. We have incentives of economic profit and cash collection, et cetera. One evidence or proof point of this work is the free cash flow that we have generated now so far this year, which is SEK 11.8 billion. A pretty strong improvement from last year.
Now looking forward, we focus on growing the business again in a selective, disciplined, and profitable way, capturing opportunities out there. Of course, meanwhile, continuing to strengthen profitability and the cash flow generation. Looking at some of the numbers then. This strategy execution is visible also in the numbers. If we start to the left side on this slide here, you see that for five quarters in a row, we have reported organic growth following a period of downturn, both in the market and in Ericsson top line. In the middle, again, the gross margin development that Börje showed as well is quite clear. We have established a level since then, about 700 basis points higher than what we used to have during quite some quarters.
On the right there, you see that if we look at the rolling four-quarter basis, we have improved operating income over now seven consecutive quarters. Today, we reported on the 11.4% operating margin. Looking at the segment performance, how have the segments contributed to this improvement so far? Starting with the Networks, we do have organic growth in Networks. North America, but also Northeast Asia, are strong growth areas for us there. This really proves the strategy also. The investment in R&D has actually generated better competitiveness in our portfolio, but also improved our margins while doing that. Digital Services also contributing, delivers growth in the new portfolio, while Legacy is tailing off as expected. Significant cost savings have also contributed to increasing the profit also in Digital Services.
Managed Services, thirdly then, a slight sales decline, but this is of course expected as we have exited from a number of contracts that we identified already in 2017, and that has gone rather well. Profitability has come up as a result of that, and that also enables now the increased investment in R&D within Managed Services. Finally, Emerging Business and Other, also contributing. We have slightly lower sales and gross margin because of the divestment of MediaKind. That's on the other hand, improving the operating margin. We show continued sales growth in the Emerging Business part of that portfolio. Let's look at how we perform when it comes down to cash generation and our cash position.
Thanks to improved profit, of course, but also, as I said before, a disciplined capital efficiency focus, we have been able to increase the free cash flow before M&A. As you can see here in this graph, it's SEK 15 billion on a rolling four-quarter basis, which means four to five times the average of the preceding three years. Of course, this has strengthened the cash position as well. Now SEK 76 billion in gross cash, SEK 37 billion of net cash, and this is despite some of the headwinds that we have had here with, for example, restructuring cash out that we had to take to execute on the turnaround as well. Rating, to the right here, we've had two pieces of good news during Q3. Both S&P as well as Moody's have upgraded the outlook from stable to positive, and that's a good sign.
The third agency, which is now a fully solicited rating agency for Ericsson, has us on investment grade already. Let's see where we go from here when it comes to rating. Moving on then, Börje presented the targets before. I intended to drill down a little bit more, especially focusing on 2020, and how we will achieve those ambitions and from where we stand today. Starting then with this picture showing again the sales increase. We up the sales expectation with SEK 20 billion for the reasons explained. FX is there, of course, but also the market momentum and our positioning in 5G, which gives us reason to increase the ambition on top line. The Kathrein acquisition we mentioned also before adding pieces of top line to the Networks business.
We kept the more than 10% target for operating margin, and we should here remember that then absorbs the change targets in Emerging Business and Other, which comes from doubling down on investment in IoT. It also absorbs the short-term dilutive effect in the margin from advancing our market position. Thirdly, I would say it also absorbs certain initial costs, which typically come in a technology shift, certain initial costs there. We are able to absorb all of that within the target of more than 10%. We have also increased the target for free cash flow, and there we so far use only words. We said positive earlier last year, and now we are a little bit more bold, and we say strong as a target for free cash flow generation.
Finally here, just note that if you sum up the sum of the parts here, the segments ranges, you get a group total range of between 10%-13% operating margin, which is the same as last year in spite of the effects that we talk about. To provide a bit of a reference here to see where are we today in relation to 2020 targets and where are we coming from, we provide some data points on that now. You can see basically as a key message here is that the current performance, based on the 4 quarter rolling numbers, show that the strategy execution works. All numbers here have moved in the desired direction. We are growing. Our gross margin is up, to a large extent through the increased investment in R&D, which you also can see is happening here.
While SG&A is tracking downward, thanks to the efficiency measures we take, and free cash flow has improved on 28%. We are tracking towards those targets. Let's move it over now to a breakdown of the targets per segment. This is a one-slider summarizing all of it, and basically where we are changing top-line and bottom-line targets. When it comes to Networks, we are changing the top-line target, and when it comes to Emerging Business and Other, we are adjusting both top-line and bottom-line. I will go through them one by one there, we can go to the next picture here, again, starting with Networks, where we now target a top-line level of between SEK 160 and SEK 164. That's quite a large increase of net sales for Networks. We are at SEK 152 now, if we look at the fourth quarter rolling.
Here, this is underpinned, as said, and by an ambition to grow faster than the market. The market has turned around, obviously. We have growth numbers projected from various entities, but our intention is to grow faster than that in Networks, and we think our position warrants that perception. I should just point out more as a logistic here that all the graphs I will show now point to the midpoint of the range, just as that's clear. Looking at operating margin and in segment Networks, we are in the target range already. Again, there are some key factors to consider when you look at this. First of all, there's a regional mix change that may happen, will happen. We are expecting larger 5G deployments in China to come on stream in 2020.
Of course, we don't know what market shares will be allocated and how that will play out, but it's a factor to consider. We also see the strategic contracts that will continue have an impact in 2020. Of course, on the other hand, it is our job to work on operational leverage or other improvements to keep the margins up. All of those factors put us on the target level of 15%-17%, which is unchanged from last year. Continuing with networks, there's one important factor here, I believe, which is the mix between hardware, software, and the services. There is a point here that we used to be very exposed to mix shifts between these three categories. Actually now, thanks to the investment in the Ericsson Radio System, hardware margins have improved.
Efficiencies in service delivery, on the other hand, have also given improved margins in services. We are less vulnerable for swings here. You can see that, in fact, hardware share of total sales has increased quite a lot at the same time as the gross margin in Networks then is up some 800 basis points. Moving on to strategic contracts. We get asked some questions about this, so we thought we would include a little bit more of explanation here, even more than was said earlier here by Börje. Basically, we take strategic contracts to strengthen our market position where we have a technology advantage and where we have a possibility to enlarge the footprint in front of 5G, the 5G investment cycle. The reason is, of course, to build a stronger Ericsson long term. That's quite clear.
Some of them, some of these contracts have an initially lower margin, but always long-term value-creating, of course. We only take value-creating deals, and they are all managed within the 2020 targets as well. Furthermore, sometimes we get the question, how does this compare with the European Modernization, which many people remember as a difficult time when it comes to margins? I must say, there are some fundamental differences here between what we see now and the European Modernization quite some years back. First of all, this is about technology leadership, not price war. Second of all, I would say we have now a competitive product and services offering, which is quite different from them. We have a competitive cost structure there, which means that we are able to take on this on a completely different level, let's put it that way.
Far, we have recorded several important wins, and the early ones are already starting to turn around and prove the model that it's worth taking a little bit of initial margin dilution to get to value creation a little bit longer term down the road. Moving over to Digital Services here. You can see the growth ambition here up to SEK 41 billion to SEK 43 billion. This is really driven by organic growth in the portfolio here, which consists in the new portfolio then of cloud native 5G solutions and automation solutions. Of course, operating margin target remains at low single-digit. We're extremely determined on this target, and so is the entire organization in Digital Services. The main improvement factor there comes from the gross margin.
One of the factors to mention there is a bit of a mix shift as well there, that solutions that are easier and faster to install will lead to less system integration efforts. That will shift a bit of the mix from services to software, and within software as well, onto more recurring software. We believe that that is one of the most important things to drive the margin up here in Digital Services. Of course, we will continue with the hard effort to resolve and address the remainder of the 45 strategic contracts. We have 16 of those left to do. Again, we are still committed to the target to having resolved 75 of them by year-end. We will continue that hard work, and of course, that will also help improving the margins over time.
To show then in Digital Services how we're tracking towards profitability. We're clearly not there yet. That's quite obvious. Even with half a billion of loss in this quarter, I think the trajectory is very good, but we're not there yet. That's quite clear. We see the sales improvements coming through now, both North America, but also Northeast Asia, and this good momentum in the growth portfolio. This is very encouraging. The legacy business is now down to less than one-third of the total. Although that will continue to slide, it has less and less of an impact on the totality. Operating margin also shows a positive trend, of course, supported by all the factors that I've mentioned earlier. Managed Services, our third segment in this order here, you see that sales stays rather flat. The target is SEK 23 billion-SEK 25 billion.
Again, the contract exits do play a role here. There is some organic growth in the mix here as well to reach within this range. To understand the operating margin development, we have to adjust for a certain provision we made in Q1 this year. When we received a long-awaited cash from a customer, we could dissolve a provision for that. When we adjust for that, you see that we are at 6.4% operating margin in Managed Services, and target is between 5% and 8%. The good thing here is that further improvement in efficiency will enable us, or you could say, will finance investments in R&D, and moving Managed Services more and more close to a technology play as well. As Börje mentioned, we have launched the Operations Engine, for example, based on artificial intelligence, machine learning, and we will continue that journey.
In Emerging Business and Other, sales is currently at SEK 7.3 billion rolling four quarters. Also this in line with the updated 2020 ambition, which we increased SEK 1 billion to SEK 6 billion-SEK 8 billion. Of course, as mentioned before, sales here is negatively impacted by the divestment of MediaKind business. We will drive operating income improvements by working with the portfolio there. Again, I think the most important thing here is around the investments that we do in new solutions, new products that have the ability to scale, and that will also support our operator customers, and the core business of Ericsson as well. Now, moving into free cash flow and our capital structure. This is a picture or a continuation of a picture that we showed at the Capital Markets Day last year in New York as well.
It's an attempt to show how we go from an operating income down to free cash flow and all the components in between, just to get a feeling for what are the moving parts here. Last time I went through them one by one, I will not do that now. Just to say that if we assume an operating income of 12%, what we consider a strong cash flow would be an 8% free cash flow before M&A. Looking at where we are today, you could see that when it comes to the first three quarters this year, so year to date, we are at 7.3% free cash flow generation of top line.
In other words, you can see we have started to move in this direction towards the 8%, and some of the individual line items here are getting closer to what a normal or a good ambition level could be. I would say that the one swing factor is working capital. We put a lot of effort into that throughout the organization. Of course, with growth and with changes in contract structures and so on, this is something we really have to pay attention to, not to have that increase. As you see here, the ambition over cycle is to have no increase of working capital.
Speaking of which, if we look one level down on working capital as well, or working capital days, we see that we have actually beaten now the target of 100 working capital days, which we had for many years as a long-term target. We are now at 92 year to date. We've been quite successful in getting this as a big topic into the whole organization to be efficient when it comes to lead times, both in the product but also in the service delivery in the field. It's about terms and conditions, of course, in contracts. We've also made efforts into enhanced way of handling credit risk. We work a lot with that and our collection of cash from customers, very intense work as well every day. We've added incentives also for many people in the company. Everyone entitled to short-term incentive have economic profit.
Many people have cash collection targets as well. I think this helps promote the eagerness, let's say, to work on these aspects as well. In addition to, if you look at the bottom left graph here, yes, we have an operating margin improvement, but we're also improving the capital turnover. You can see quite dramatic improvement there if you look at that, especially if we exclude cash from the definition of when we look at capital turnover, which is probably the more interesting way of doing it. Okay. I'd like to describe a little bit around capital allocation.
We have put here together a picture of capital allocation over the six last years and divide it into the phases that we have talked about in connection with the capital structure, the downturn phase, then where we are now in the turnaround phase, and then the repositioning phase. You can see here that basically during the downturn, we allocated out more cash than what we generated as a company. You see percentages there in the bottom that some years even 120% of generated cash was allocated to different uses. When we came into the turnaround phase and we basically started the new strategy here, we decided to tighten several of the valves here in terms of resource allocation so that we could put additional funds on R&D instead. This has worked.
Now we have allocated less than what we generate, which means we are building the cash position in the company, which was another important goal that I talked about before. This has worked pretty well. Going forward now, of course, we plan to maintain this focus on the one hand, efficiently generating cash flow, and on the other hand, remaining disciplined when we allocate and how we allocate for maximum value creation. In summary, when it comes to capital structure, again, you see these phases here. We have now established a set of capital ambitions. We should support our strategy here. Free cash flow, as said then, we have a target of delivering strong. Net cash should be positive. We are SEK 37 billion. Credit rating, we are over time going to go for an investment grade.
We think that's a good sign of quality of the company. As mentioned before, that one out of three agencies have us rated as investment grade today. To close off, this is something we could call the CFO priorities, but perhaps financial priorities for value creation in Ericsson. The first one is clearly around delivering a strong free cash flow, and we work hard every day on doing that and paying attention to that. Once we have generated cash flow, of course, again, I said, it's about how we allocate capital in a disciplined, structured way, capturing opportunity in a good way for value creation. The third aspect is to ensure that we have financial resilience in Ericsson so that we can withstand downturns in market if that would happen or other risks.
We want to be a strong, solid company with a resilient balance sheet. The fourth is to really continue and accelerate the transformation now for competitiveness, digitalize processes, and work hard on transformation, constant transformation of our company. I think with these priorities and a sharp focus on strategy execution, technology leadership, and financial performance, I think we do have a solid path towards the targets for 2020 as well as 2022. To end, maybe I just wanted to say that I find it personally pretty amazing what our 95,000 employees have achieved so far. You can feel the determination among everyone in the Ericsson family to continue building a stronger Ericsson and continuing to create great value. Thank you, and back to you, Peter.
Thank you, Carl, and thank you for a very good presentation. I think also coming back to how we started with some proof points from Q3, and we talked about operating model, we talked about growth model. I think another strong achievement is cash flow, the SEK 5.5 that we actually generated in Q3.
I agree.
Which I think is proof that we are delivering and the focus we have on cash flow today.
It's good to see that profit actually comes through an efficient machinery to generate free cash flow as well.
Yes.
It's a good proof point.
Thank you. What I would like now is Börje to come back to the table.
I'm back.
You're back. Welcome back.
Thank you.
With that, actually, we are now moving to the Q&A session. As I said in the start, we should focus the Q&A on the strategic issues. We had the call this morning, which is also recorded, so you can listen into that with the Q3 topics and Q3 questions. By that, operators, can you open for the Q&A session, please?
Yes, of course. Thank you. Ladies and gentlemen, if you wish to ask a question, please press zero and then one on your phone keypad now to enter the queue. If you want to remove yourself from the queue, just press zero and then two. Our first question is over to the line of Achal Sultania of Credit Suisse. Please go ahead.
Hi, good afternoon. Just coming back to the China debate. I guess, how should we think about the ramp of China 5G going into next year? Obviously, you're talking about some headwinds initially. Just given your understanding with how 4G rolled out and how much impact it had on your gross margins for how longer, can you give us some sense of is it going to be a six-month, nine-month headwind?
Going forward, that headwind starts to go away as the mix improves. Any color on that would be helpful. Thank you.
Thanks for your question. The reality is it's today very difficult to say when it will start, how long the rollout phase will be. The reality is if you look at it's a massive build-out that's going to happen leading up to 2025 in China. Exactly how that's going to look like, we don't know. What we have said is that we still believe the targets we put in place for 2020 as well as 2022, we can manage within. That's why it's harder for us to judge anymore. If there would be deviations, we would, of course, come back and tell you more details, but that's where we are.
Okay. Thank you. Thank you, Börje.
Thank you, Achal. We're open for the next question.
Question is over the line of Pierre Ferragu of New Street Research. Please go ahead. Your line is open.
Hi, everybody. Thank you very much for taking my question. Can you guys hear me well?
We hear you perfectly.
We hear you.
Can you guys hear me well?
Yes, we do.
Oh, okay. Thank you. My question was specifically on the U.S. market and taking a step back and looking at the last couple of years, if I'm not too wrong in terms, in local currency, you grew your business about 30% in the region, and your main competitor was on the same period about flattish. Objectively, like a very significant market share gain in dollar terms. My question is, what's behind that? Because you can gain share in dollars if you're kind of lucky, you're like at the right place where spending is increasing and your dollar share is increasing.
You're fading in and out. It's very hard to hear your question, Pierre. I don't know if it's the line or if it's you're too close to the microphone, I don't know, but you fade in and out a bit.
Oh, I'm sorry. Is it better now?
Much better.
Much better.
Okay. My question was specifically about the U.S. market. When I look back at the last two years there, your revenues in local currency have been up like 30%, while your competitor was actually flattish on the same period. It's a very significant market share gain in dollars, and my question is, what's behind that? Is that mostly because you've been lucky, you've been in places in the U.S. where spending has increased? Have you actually effectively gained competitive business against your competitor and increased your footprints in that market over the last two years?
We have actually, on the back of a strong product portfolio, actually gained market share over the past two years in the U.S. That's what you see coming through our numbers.
Okay, great. Thank you very much.
Thank you, Pierre. We move over to the next question.
The next question is over the line of Johanna Adde at SEB. Please go ahead. Your line is open.
Thank you. First question relates to your 2022 margin target. You mentioned that you expect Digital Services to do 10%-12% margin. I'm just wondering whether you can say anything about what sales you expect to reach that 12%-14%, on a group level that is. Carl, a question to you on the cash flow calculation. If you can say anything on, do you expect any negative impact from provisions in 2020? I know you guided for SEK 9 billion negative this year, so how does that impact fit into your calculation on cash flow in 2020? Thank you.
Would you like to take that first?
I suggest you.
Well, we can say what we base our target for 2022 on is actually that we're going to grow faster than the market. Our ambition is to outpace the market growth in this period. As it is further out in time, it depends on what the market will grow. The second question to you.
Of course, certain amount remains in the provisions which still going to have to be cashed out. I think we talk about that in the report and planning assumptions as well. As you have seen though, during this year, we have reduced restructuring provisions quite dramatically. We guide for about 1% of net sales during 2019, which would translate into cash in 2020. When it comes to the large provision now that we have made, of course, for the SEC and DOJ matter, we believe that that will go out already this year, it depends a little bit, of course, or it depends to a high extent on the discussions we have with these authorities. Let's see what side of new year that will have to go out.
Are you happy with that, Johanna?
Yes, absolutely. Thank you.
Thank you.
Thank you.
The next question, please.
The next is over to UBS and David Mulholland. Please go ahead, sir, your line is open.
Hi. I just wanted to understand your thought process in China a little differently, because obviously you've set out very clear targets on what you think the business can do in terms of sales and margins next year. Obviously, you don't know what's going to happen with the China contracts, but can you at least help us understand what would be needed or what is assumed in getting to the SEK 230 billion-SEK 240 billion? If China ends up bigger, is it on top of that and maybe dilutive margins? You think you can get to the base level from your targets as a starting point? Just want to understand the thought process around what's embedded in your targets.
What we have said, it's just to step back to that, first of all, the guidance for 2017 or targets, we put out the targets for 2020 in 2017. It's quite some time back. Of course, it's always a bit of uncertainty as we get closer. It should be less, the reality is it's hard to know exactly how much China will be or how it's ultimately going to play out. Our ambition is we're trying to be a higher market share, we've said, than we have today. You can assume that the swing, to some extent, actually depends on what we ultimately will get in China. Our ambition is there to get more than we have. We'll take it from there. It's going to impact earnings short term, we can manage within the targets we put out.
You good with that, David?
Thanks very much.
Thank you.
Thank you.
Next question.
The next question is over to the line of Fredrik Lithell at Danske Bank. Please go ahead. Your line is now open.
Yeah, thank you. Thanks for taking the question. Can I start with the 2022 margin guidance? When you had your Capital Markets Day in November 2018, you also then had a 2022 guidance of more than 12% for the group. When you also did reflect on what that meant for the business divisions, you actually ended up at 12%-14% in some type of sum of the parts calculation already then. Just wondering what has changed, or if you could give some more detail on the specific divisions on the 2022 operating margin guidance. Thank you.
I guess, just as you said, it added up, if you did the sum of the parts into 12-14. What we do feel though is we feel very confident about being above the 12. We wanted also to say that we are comfortable with the target ranges we put out on each business segment in our company.
Yeah.
That's why we feel that we are going to be here, despite that we will, during this period, also carry investments in emerging business. We are going to continue to see footprint expansion. We may even see increased R&D investments at the time. We want just to make sure that you all understand that we're very committed to the target and try just to be a little more precise.
Okay, thank you. Just a follow-up. If you would put that into the various divisions, if you are more comfortable today with putting out 12-14, where is it within Networks you feel more comfortable compared to a year back? Is it that you see the swing factors in Digital Services, for example, playing your way there? Where would you find that higher confidence?
We look at the overall business. The overall guidance is put there as a way to describe where we think we are going to be and what we target to be in 2022. I would also encourage you not to think of 2022 as an end game. It's not the end game for us. The end game for us is well beyond 2025. For us, we're running the company to maximize the economic value and the profit of the company in 2025 and beyond. 2022 is just a touch point on that journey. That means we're still committed to the targets, and we're going to be above the 12, that's for sure. On the other hand, we need to also understand it's on that journey.
We may want to elect to invest and use some of the profit we have in the short term to actually invest to create a stronger company longer term. Do I feel that that is going to be where I have more confidence? The reality is I'm very comfortable about the business areas and business segments we're in, that we can reach the guidance we've given on each of the parts, right? I feel quite comfortable about that overall picture. I'm sure we're going to see new applications, new use cases coming up, and those we'll discuss over time. Are you good with that, Fredrik?
Okay, thank you very much.
Thank you, Fredrik.
Yeah, absolutely.
Good. Thank you. We will move further in this Q&A to the next questions. Operator, please go ahead.
Thank you. That is the line of Daniel Djurberg at Handelsbanken. Please go ahead, Daniel. Your line is open.
Thank you very much. I will go back to Digital Services. Can you comment a little bit on 2022 targets there, the ambition to go to 10%-12% margin? Is it still with cost out ambitions, or is it more of a software leverage of something to reach those levels. Start there. Thanks.
If you look at the whole business within Digital Services, already now we're converting it into more of a software model. That's what you see with the new product. That's already happening. The portfolio, we're on the way to becoming 100% cloud native in the coming, call it 12 months, give or take some. That's already happening, and that's why we're also comfortable that we will see expanding margins in Digital Services. That's what we see in our new growth portfolio, and that's what we will see becoming even more predominant in 2022. We feel that we're on track to that target range. I'll bring back 2017 when we talked about low single-digit margins in Digital Services at the time. It was a few that actually believed us, and I feel that when we put something out, we're very committed.
We're going to try to deliver on that as much as we can, and the same thing applies for a 2022 target today.
That's great. Can I just ask also on the network portfolio strategy that you highlighted at the last Capital Markets Day, is that still valid, i.e., in terms of the converged transport segment? Is it mainly partnerships there? Also, can you comment on the existing partnerships, how they are developing?
Yes, you can say the strategy that we put out on partnership is still there on the transport. We're working together with Juniper quite extensively. The partnership with Cisco is still there, and we work together on select opportunities. That's the way we serve the transport segment. Now we have, of course, a portfolio on our sales with mobile backhaul, et cetera. We rely on the partnership for the rest.
Thank you.
Thank you, Daniel. We will continue with the next question.
Is over the line with Sandeep Deshpande of J.P. Morgan. Please go ahead. Your line is now open.
Yeah. Hi. I'd like you to address this in the industrial internet opportunity. Firstly, regarding the internet, the industrial opportunity, how do you see the radio market performing in that market? Do you have an estimate of how the radio market, as you know, hasn't grown in the last decade, or grown very little in the last decade? How does that expand with that opportunity over the next five years or whatever time period you're looking at? Secondly, what parts of that opportunity you would like to address as such? There are very many elements of that opportunity, of course. You are going to address it, you've said in the past, through the telcos. Are you also going to do other things separately from the telcos, or are the telcos going to directly set up the networks for those companies?
The final question I have is on margin, because the potential from this opportunity is really quite significant on the margin front, if this market grows very significantly. How do you see margin progress in this opportunity once it starts to develop? Thank you.
Thanks. It's a very good question. We are very excited about this opportunity, because what we see is that 5G connectivity with the reliability and security will be needed in many enterprise applications, and it can actually substitute a lot of fixed wired connectivity today. Here, we see this as a massive opportunity. We're talking about a market size that can well be 30% higher than the current, call it, the mobile broadband connectivity. We see this as a massive opportunity. Exactly how it's going to look, we don't know yet, but we also know that we, for example, have partnerships with some select operators around the world. For example, we have with Deutsche Telekom and T-Systems to go after the enterprise connectivity opportunity. So far, when you build a new factory, most of the connections are typically wires.
There are miles of wires in a connected factory today. That's where we see the opportunities to substitute that with wireless connectivity. We think the licensed spectrum has a unique competitive advantage compared to unlicensed spectrum, because you have no problem with interference, you can have more security in there, and it's actually baked into the end-to-end solution already. We see that as a great opportunity. We'll continue to serve it through the operators and together with the operator. That doesn't mean every operator will be successful or that every operator will target this opportunity. We see select operators like Deutsche Telekom, like Three here in Scandinavia, going after that opportunity, and we like to partner with them. With the margin profile, it's still a market that's in its definitional stages, but I do believe it can have quite attractive margin profile down the road.
Okay, Sandeep.
Thank you.
Thank you, Sandeep. We'll continue with the next question.
In that case, we are over the line of Simon Leopold at Raymond James. Please go ahead.
Thank you very much for taking the question. I wanted to try to get a better appreciation for your expectation that you gain market share in the. I guess I'm really trying to understand where it comes from, in that we assume China will be dominated by domestic Chinese. Your market share gains in China, we're assuming, are rebalancing among the Western vendors. I'm making this assumption that China is a very big market, which gives the Chinese domestics an advantage in terms of just global market share. Maybe if you could double-click on sort of where the market share is coming from in your gains. Thanks. Hopefully, that makes sense.
It makes sense. I don't really focus on from whom we're gaining the market share. For us, it's more important to gain the market share. As you note, if you're looking for 4G, the reality is the Chinese market is about 60% of LTE market or more than 60%. We think 5G will be similar. For us, we today have less than 10% of 4G. We're trying to be clearly above that in 5G, and we're determined to achieve that. Who we gain it from is not really my question. Maybe to add there, we have already several important wins, I mean, which we see the competitiveness of the portfolio, so this is not something new. You can follow the progress in what we announce as well, and that we expect to continue, of course. Yeah.
We had an important win in 2017 with the Narrowband IoT, for example. Yes, we took some cost short-term for that contract, but actually now it's giving us a strong contribution to the business. You good with that, Simon?
Thank you.
Thanks, Simon.
Yeah. No, I appreciate it. It's a difficult question.
Yeah.
Thank you.
Thanks. Operators.
We are now over to Frank Ma at DNB. Please go ahead. Your line is now open.
Yes, hello. Can you hear me?
Yes, we hear you perfect.
Hello?
Hello.
Perfect. Okay. Yes. I would like to dig a little bit more into the Networks' gross margin. You talked about you being more resilient than in the past when it comes to the mix effect. A couple of issues there. I mean, software, you have about 1 million Ericsson Radio System base stations out there in your operative footprint today that are software upgradable to 5G. You can upgrade them to DSS, and et cetera. You basically have over the next few years, a significant pipeline in potentially quite high margin, I would assume, software upgrades on that.
Could you please discuss that a little bit, as to whether or not that is kind of a tailwind that helps you offset the impact of the negative gross margin factors that you have discussed, like strategic contracts and the 5G hardware margins being potentially a little lower in the beginning? My second question is on the latter point, on the hardware 5G margins being a bit lower in the beginning. What kind of equipment are you referring to there? Because the hardware that you are already shipping is both 5G and 4G ready, so to say. Are you referring to massive MIMO radio units, millimeter wave? Where is the lower margin equipment coming into the equation here? That would be my second question. If I may, just a third question, perhaps to Carl.
On the sales bridges that you showed, I didn't see any FX impact on those bridges when it comes to how you bridge the rolling nine months 2009 figures to the 2020 target. If you could comment on the FX assumption within those. Thank you.
Sure. Carl will take all three while I just make a short stop.
Okay. I think on the sales bridge that you talked about, I assume you refer mainly to networks there. We're actually comparing the actual situation, the four quarter rolling actuals with the target level there is no major FX effect between the two. Actually, of course, we've had effects of FX between the last target definition and today. That's one thing, between actuals and target, there's not much to talk about when it comes to FX. When it comes to the pipeline of software, I think, of course, it's correct that all our radios shipped since 2015 in Ericsson Radio System are upgradable to 5G with software remotely, which is a good, of course, competitive advantage in our portfolio. He's right.
Of course, we will try to capture all of that opportunity as we now move into 5G, and as that infrastructure will need to be upgraded to software. That's clearly a factor in the mix here. I think, yeah, exactly what products. I mean, it's about, of course, densification. The good thing with the Ericsson Radio System is that you can reuse the hardware that is already there. From that point, of course, with 5G, you still need also new hardware for new frequency bands, and you need new hardware to densify the network as well. It's going to be a mix of new hardware and software to power up the existing infrastructure, but also the new. I hope that answered your question.
Are you good with that, Frank?
Okay.
Thank you.
Well, yeah, I was hoping to get something more about what kind of hardware really, because you are selling hardware all the time, and you have been talking about basically, Börje has mentioned on the previous quarter that is quite difficult to distinguish actually between your 5G sales and the 4G.
That might be because it's very little.
Yeah, the reason for that.
That's what I'm a bit confused by.
Exactly.
Yeah.
Let me just comment on one thing then. The blurred line here between 4G and 5G that we talked about, it's because of the fact what I mentioned already, that the 4G portfolio is 5G ready and can be upgraded. The question is, when you try to distinguish between 4G and 5G in our shipments, it's not that clear cut anymore. That's the argument we make there. I think we'll have to come back on specifics on product.
Okay. Thank you.
Thank you, Frank. We will continue with the next question. I think that's from Jörgen, I guess. Please, operator.
Yes, of course. That's Jörgen Rudén at Nordea. Please go ahead.
Yes, hello. Thank you for taking my questions. I have a couple of ones. Maybe if I start with capital allocation, looking at the picture that you showed, the 2020 to 2022. If you could give some flavor on how you prioritize between organic opportunities, M&A opportunities, and return, starting to grow your dividends again. You've also indicated that you will have a strong free cash flow during that period. Second question is maybe a little bit more on the business/technical side. We hear from a lot of actors in the industry that standalone 5G could take a little bit more time. We also hear that Release 16, 17 has dragged on a little bit. If you could help us on how those interrelate, and then what happens if standalone 5G launches from operators are delayed, and they're forced to go with non-standalone. How does that affect your business?
If you could help on that. Thank you.
Sure. I can start, and maybe you take the standalone thing. On the capital allocation, we are disciplined around decisions here, and we go for value creation. I would say we have improved the way we work with the M&A portfolio as well and tying it much closer to the strategic direction that we are on. We are there to capture opportunities, be it bolt-on acquisitions or other types of acquisitions. All of them, of course, strictly evaluated from a value creation point of view. I think organic growth, we invest some SEK 38 billion in R&D. Of course, the majority of our output in terms of product and offering comes out of that machinery. That's quite clear, and there we have increased, as you've seen. That's proving itself.
On top of that, of course, when the time is right, when the object is right, we will also be able to capture non-organic opportunities. You also asked about dividend, and of course, that's not an issue really for us. Our job is to generate sufficient cash flows that can be allocated to various parts then. Of course, let's see. We will see what the board and the AGM decides when it comes to dividend.
Just touching on one thing in capital allocation and M&A, I think it's important to look what we have done also. We've made acquisitions, we have acquired when we see it's better to buy than try to make, so to say. For example, in the antenna, we made the Kathrein acquisition.
Yeah. Perfectly.
We bought CENX last year. That gives us technology for closed loop automation, for example. When we have gaps, we will look at opportunities to fill them.
Yeah.
If you look at the standalone, non-standalone question, let's say so far, of course, you see non-standalone networks. That's what we are seeing on the first deployments, standalone is likely to happen first in a market like China, where we can get a fairly sizable build-out upfront. For us, we are trying to position ourselves for the standalone networks, the reality is, for some of the use cases, you will not get the level of performance unless you have standalone networks. The world is clearly going to migrate there, it is, as you also know, taking time, the overall timelines on 5G is accelerated, I would say, by at least 12 months. Is also standalone compared to plans in 2017. Now it sleeps a bit, I don't think it's going to sleep a whole lot.
We see the world being non-standalone and standalone going to coexist for a period of time.
If you could expand a little bit on, okay, compare an operator that's going non-standalone now versus one that's going standalone. How do they differ in their
investment mix or investment pattern?
It's a bit too early to tell, as so far, we don't really have any operator launching a standalone network. The reality is the 4G footprint will matter in non-standalone as you use the 4G network for signaling. The footprint you have in 4G matters in non-standalone. In standalone, you can argue it doesn't. It all depends a bit how your starting point and how much you're going to build out the network. To get the coverage today on 5G, you really need non-standalone, and that's why you see those being first in line here. You see device ecosystem being launched, et cetera, for non-standalone. It's a bit hard to predict your question in detail yet.
Yeah. Well, that's what I'm asking, because you probably have these discussions with your customers. On a similar note, maybe earlier in kind of the technology cycle, the dynamic spectrum sharing, we had some questions here during the morning, how will that change the investments from your customers? Will they be able to ramp up their investments quicker because of being able to use existing spectrum? When would we see effects of that, in particular for the U.S.?
What we see, we are working, as you know, with a couple of operators on dynamic spectrum sharing. When we launch new features, we have to work with a small group of customers. That's what we do. You are going to see dynamic spectrum sharing being launched. What we see the big benefit here is that you can utilize the spectrum and actually get very rapidly a big coverage. For example, Swisscom in Switzerland is leveraging our spectrum sharing in order to get 90% population coverage by year-end. That is not achievable unless you do dynamic spectrum sharing. The introduction of 4G, when you have to otherwise allocate spectrum and determine, is very inefficient.
The benefit with dynamic spectrum sharing is that it's much more efficient because you actually only use the part of the spectrum for 5G, depending on devices in the cell on 5G or 5G enabled. It's a way to actually make the introduction faster of a new technology, and that's what we see it's being leveraged for. You okay with this, Jörgen?
That's helpful. Thank you.
Thank you, Jörgen.
Yeah.
Thank you. We will continue with the next question.
Which is over the line of Stefan Slowinski of Exane BNP Paribas. Please go ahead.
Yeah, thank you. Good afternoon. I've got two questions. First one is on IPR. What are your assumptions there in terms of growth of IPR going forward, and what do you see as the risks to those assumptions being either too high or too low? I've got a second.
Do you want to take the questions?
Yes. I can talk about IPR. Yeah, as you saw this morning then, about SEK 9 billion is the current volume of the IPR portfolio. This year, we are probably going to see something like SEK 9.5. Going forward, we haven't modeled any dramatic growth in IPR so far. We hold that on a rather conservative level. I think you're aware of some of the things we do to grow this portfolio, including signing up with new handset players, et cetera, but also capitalizing on licenses within the IoT space, for example. 5G is going to add to the portfolio as well of patents now to monetize. We're rather conservative in the modeling on IPR.
Mm-hmm. Are you assuming some success with those new areas, but then some tailing off of existing, or are you just assuming no success at all in the areas that you're trying to push into?
Without going into the specifics of it, I can say we are conservative in the modeling of IPR revenue going forward, a couple of coming years.
Okay, great.
It is fair to say that we have so far very few 5G contracts, right?
Oh, yeah.
That will come, but we have not modeled that.
My second question was around the emerging and other business area, and how you see that in terms of what's under the hood and the potential for value creation there. You guided for SEK 1.5 billion-SEK 2 billion of losses for that business next year. Arguably, the market's valuing that as kind of a net negative for you today. We've seen M&A recently in the edge computing space, and you have Edge Gravity. Obviously, you have a financial partner in iconectiv. You have a financial partner in MediaKind. Red Bee's breakeven. How do you move from this business being a net negative to crystallizing value from this by the 2022 timeframe?
It seems like a perfect question for you, Carl.
You think so? Okay. I think the whole idea in this part of our business is to create value, of course, build attractive solutions for the future, scalable solutions. I think what we have decided now to do is to really double down on IoT. IoT is showing very promising signs already with the growth that we talked about also in the quarterly report this morning. It's a promising area, and of course, we see already that our business there is growing, albeit from a small low level, but still generating growth also for us. That's one of the key elements here that will bring more value creation in this portfolio. We will work very active here.
It's also an element of incubation here, innovation, where we work actively to qualify ideas and kill off those that don't work in a disciplined way, but also scale up where we think we can generate new business. It's a mix of all of that, and let's see what structural moves we would take over the next couple of years.
It's also fair to say that when you look at opportunities we have in there, what we've seen is that some we scale on our own, some we partner on, like we've done on iconectiv, for example, we partnered. We also have a couple of other opportunities where we are looking to partner. Like, for example, we're using blockchain for some clearing functions that we're looking to partner with a couple of operators on, for example. There are different ways to monetize the value. It's really given or being driven by, do we think we are the best possible owner to drive the value here? Or if somebody else is better, we'd rather have somebody else drive that.
That's why you saw us enter the partnership on Media Solutions. We thought that could better be accommodated somewhere else. We're doing it on iconectiv. We're doing it on a couple of other opportunities. This will all shape up over the next few years.
One opportunity where we think we are uniquely positioned to scale up is IoT.
Yeah.
Which is really a global connectivity platform and associated services where we can help our customers to scale up, but we also can generate a business for ourselves that can be quite substantial over time as we move into billions of connected devices.
We see very good traction here already.
Yeah. You'll probably see us both kill individual initiatives, scale others, and maybe do structural moves on a third category. All of that will happen going forward.
I understand also the market's concern that it's a negative value, but we are very value-driven. This is a unit that actually consists of profitable parts like iconectiv, and it consists of investment areas. Now we see the investment areas be bigger than the profitable part. That's why we say it's going to be a loss next year. The reality is we're not here to invest in IoT with continuous losses. We do that because we see it can scale into a profitable business.
I do think that we, over time, is going to show the value, and I understand we haven't done it yet, but we will.
Can you-
Would you consider any divestitures of any components?
Yeah. We have already done divestitures. It all depends on who is the best owner, what maximizes the value.
You are likely to see divestitures here. You're likely to see partnerships. You're likely to see some closedowns. You're likely to see a couple of efforts scaling on our own. It all depends on what drives the value for us. That's why we want to be very clear. We don't think it's appropriate to have a margin target on this entity.
We'd rather want to run this more as a, for lack of a better word, like a venture capital operation or a private equity fund. It's more that's the mindset when we look at value creation here.
Right. You good with that, Stefan?
Okay. All right. Thank you, guys.
Okay. Thanks, Stefan. We'll move further. I think we're getting close to the end of the queue here, so please.
Okay. Well, that will be Peter Nielsen at ABG. Please go ahead, sir. Your line is open.
Thank you very much. In your earlier comments, Börje, running through the geographical outlook, you sort of suggested that U.S. wireless CapEx will remain at a high but stable level next year versus this year. Is that also how you see it in terms of the U.S. contribution to your own numbers next year? Obviously in dollars, but basically flat versus 2019, please. Thank you.
Yeah. No, you can go ahead.
Yeah, no.
That's what we get here.
Exactly. Okay. Yes. Of course, North America already performing on a very high level. We've had a very strong development so far, and we believe that this strong development is going to continue with this caveat for the very short term that Börje talked about earlier regarding merger and the impact on CapEx short-term. Basically for 2020, we believe that this high level of investment will continue, and that the same goes for our part of that.
Okay. Thank you.
Thank you, Peter. On my list, operator, it seems, too, that we don't have any further question. Could that be correct?
That is correct, sir.
That's very good.
Thank you for all the good questions, and thank you especially for keeping them on a strategic level. If you have further questions on the report, et cetera, you can always reach out to the IR team 24/7. By that, I actually would like you, Börje, to conclude this investor update.
Thank you. Thanks, Peter. Thanks, Carl. Yeah, I would say we are in a super exciting industry. As we progress into the 5G world, we see many new applications emerging in both consumer as well as the enterprise space. These new applications will be the use cases that benefit from the capabilities of 5G. We feel we are very well-positioned with a strong product portfolio and a competitive cost structure, we are today winning business. Our ambition is clearly to build a stronger Ericsson longer term with a focus on the absolute profitability in krona. We're investing in R&D, we're expanding our footprint to fully capitalize on our technology. Where we are, we're confident of delivering on our targets for 2020 as well as 2022. They are, as we have discussed today, they're intermediate checkpoints on the journey to building a much stronger company longer term.
With that, thank you all for participating today. Thanks, Peter. Thanks, Carl.
Thank you.
Thank you, Börje.
Thanks, all.
Thank you.