Ericsson

Thank you very much and hello everyone and welcome to this Q4 call or year end call.

With me here today I have our CEO Börke Ekholm and our CFO Carl Melander.

Before we start the call I would like to make this statement.

During the call today we will be making forward looking statements. These statements are based on our current expectations and certain planning assumptions which are subject to risk and uncertainties.

The press release of the actual result made different material due to factors mentioned in today's press release and discussed in this conference. So we can encourage you all 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 start this call by handing over the word to our CEO, Börje Ekholm. Please, Börje. Thank you, Peter. So good morning, everyone, and thank you all for joining us today. Before I go into the year-end performance in greater detail, I would like to recognize our people. And, you know, a company is always about the people, and I think 2020 more than ever. We as a company migrated to work remotely in March last year, and our people really stepped up and delivered to all our customers with minimal to actually no disruptions. We have also seen some good progress in our business for quite some time, but with the financial performance for 2020, we can now say that we're through the turnaround phase. And of course, this turnaround is also contributable to the engagement and commitment from all of our people. We have now reached a return on capital employed at 17%, which is above the cost of capital so we can now focus our attention on growth as a key value driver of course while maintaining a financial discipline but let me now go through some overall conclusions of our performance during 2020 the increased r d has made our portfolio very competitive and cost efficient and this has allowed us to gain market share in many markets And we actually see market share gains from all competitors today. We exceeded our year-end financial targets for 2020, as well as our targets for 2022, about two years early. We have delivered a strong free cash flow before M&A. And actually, if we look at our history, we see that this is the strongest free cash flow we have ever had as a company. We also completed the acquisition of Cradlepoint during Q4, and that's an important step, as you all know, for establishing our enterprise offering, especially targeting the rapidly growing demand for wireless WANs. In addition, we started to invest in increasing our resiliency and flexibility of our supply chain, and we really started that several years ago. We did that for other reasons, so no crystal ball on predicting a pandemic, but that has been critical in managing our customer commitments during 2020. And we've been able to do that despite working from home and in the middle of a pandemic. The health and well-being of our people has been at the front and center in how we have made decisions during 2020. So one example is that we decided very early on to migrate to remote working. Across the year, about 80% of our workforce have operated virtually. Of course, the impact and the toll on our people cannot be ignored from working remotely, but we are doing as a company what we can to support those of us who are most affected by the pandemic. In addition, we took a decision in early March not to apply for any government pandemic-related support programs as we wanted to make sure that we drive the business out of its fundamentals and take the right decisions for the long-term future of the business, not impacted by any government support programs. With our performance and solid long-term outlook, the Board of Ericsson has decided to recommend the shareholders to increase the dividend to 2 kronor per share. And that's an increase of 50 öre, I should say, in English. So before going into each market area, I just wanted to make some overall comments about the markets. it's now clear that 5G is increasingly gaining momentum around the world. And we're seeing front-runner countries to rapidly build out the 5G networks as it is a platform to digitalize their economies. But I think it's even more encouraging to see that operators who have built out a good coverage are seeing an increasing ARPU and thus a reversal of the decline over the last few years. For frontrunners, 5G can be a source of additional revenues, as well as to establish the operator as a market leader. This is actually not surprising, as it was very similar to what happened when 4G was rolled out, where frontrunners saw higher ARPU, greater market share, and lower churn. We have also seen many wins across the market areas for our private networks for enterprises, which actually start to strengthen our enterprise presence. So some comments on each market area. We saw strong growth for the Northeast Asia market area. This was naturally driven by China. That is now the largest 5G market in the world with clearly more than 100 million subscribers. But we also saw gains in many of the other markets in the market area. Continued strong momentum in 5G drove a good performance in North America. This was partly offset by downward pressure of the loss of a managed services contract due to the operator consolidation earlier in 2020. We have seen market share gains in the U.S. but we have also seen break-in deals in Canada that will support long-term growth for us. In Southeast Asia, Oceania and India, we saw growth driven by several countries, but most noticeable Australia and India. Europe and Latin America had a bit of a mixed picture. We saw overall a positive growth in the market area, and that was driven by the growth in Europe, which was partly offset by a decline in Latin America. The growth in Europe was driven by market share gains, and Latin America, the decline really caused by the macroeconomic uncertainty due to the pandemic. We also see that we so far have had limited 5G rollouts in Europe, and we are a bit concerned that Europe is falling behind the front runners in in China, Australia, North America and the Middle East. Finally, in Africa, we saw in the market area, Africa and the Middle East, we saw sales declines. That was really in Africa related to effects of the COVID-19 and the macroeconomic uncertainties. And in the Middle East, due to timing of customer investment decisions, actually in 2019, that ended 2019 on a strong note. However, we see increasing traction from our efforts to increase market share in the market area, and we expect that to be visible in the next few years. Moving on to the business segments. For networks, sales grew organically by 20%, driven by 5G rollouts and market share gains. Gross margin was 43.5% in Q4, up from 41.1% the year before. For the whole 2020, operating margin was 19%, which is well ahead of our targets of 15 to 17%. I would say network's performance reflect our increasing technology leadership and strong 5G portfolio. grew to 41% from 38.1% from the year before, from 2017 at the start of our turnaround to today. If you do a like-for-like comparison, our gross margin has increased from 29% to 42%. We continue to execute on the turnaround plan, and our operating income for Q4 was positive and that actually is the best result we've seen to date, which we view as an indication that our turnaround is on track. Our cloud native 5G core portfolio has a very high win ratio and will start to generate revenues in the next 12 to 18 months ahead. So far, we've only seen R&D costs with this new portfolio, so we are encouraged by the traction we have. and expect to see revenues coming here gradually during the year. Sales in managed services continue to decline, which is this year a result of the consolidation in the US market, but also some contract exits in Europe. However, gross margin grew to 17.7% from 15.8% a year earlier, and full year operating margin ended at 8.1%, ahead of our range of 5-8%. We continue to invest in R&D, in managed services, to drive automation and AI that will help our portfolio to grow in the future. Emerging business and other sales grew in enterprise offerings such as the IoT platforms, complemented by the acquisition of Cradlepoint that was announced in Q3 and closed in Q4. Gross margin improved to 33.8%, driven by operational leverage from growth and lower costs. Cradlepoint's underlying business develops in line with plans And we continue to be encouraged by the customer reception and see good long-term growth opportunities. However, reported sales and costs for Cradlepoint are impacted by purchase price allocations. And we have also said that that will have a negative effect on operating income with about one percentage in 2021, mostly coming from amortizations, but also from investments in growing the business. until we start to see earnings improve. With that, I give the word over to Carl. Thank you, Birgit. And good morning, good afternoon, everyone here from Stockholm. And let's then start to look at the P&L for the full year 2020. And here you see that with an organic FX adjusted growth of 5% year over year, net sales reached 232.4 billion. which is then within the target range of between 230 and 240 billion, and mainly driven by continued high demand for our 5G portfolio in the networks business that grew by 10%. Especially the hardware revenue grew strongly, and this is a welcome result of the growing footprint that we see currently. Northeast Asia grew by 30%, FX adjusted, and North America, as well as Southeast Asia, Oceania, and India also contributed to the growth in the year. Gross margin, as you see, improved 310 basis points year-over-year to 40.6, and good to see that we have improvement in all segments, and thereby also clearly beating the gross margin ambition range we set up in 2017. Operating income, 29.1 billion, as you see, excluding restructuring, an improvement of... 7 billion or 32% over last year and this is if we adjust for the 10.7 billion charge related to SSE DOJ in 2019. So this operating income then leads to an operating margin of 12.5 and this means we reached and exceeded the 2020 target of operating margin over 10% as Börje said And again, the main contributor to the improvement here we see is, again, the network side of the business with a 19% operating margin for the fiscal year. An absolute key metric, obviously for me, but for all of us in the company, is the free cash flow before M&A. And this came out at $22.3 billion. This is a level we have not seen before. And earnings per share, we also listed this here, diluted, came out at 5.26 Swedish kronor, also that level that we haven't seen at least during the last 10 years, perhaps longer. Return on capital employed for the full year was 17%. That's an increase from 6.7. Both these numbers include the cash position, but If we, and this might be more appropriate actually, if we exclude the cash, the retirement capital employee would even have been at 32% in the full year. But let's have a closer look at Q4. Next slide, please, here. So in the fourth quarter, net sales reached 69.6 billion. This is an organic growth of 13%. Again, driven by networks that grew 20% based on this continued high demand for the 5G portfolio. The largest growth, as you saw before, in Northeast Asia, but also North America, contributing with the double-digit growth, and after in Southeast Asia, China, and India. Growth margin here, 350 basis points improvement to 14.6, also for the quarter. And again, also looking at the quarter, encouraging to see that all segments improve year over year, with a main contribution from networks. Operating income then 11 billion excluding restructuring and an operating margin 15.8. Again, repeating myself, but networks also have the main driver with the 21.5% operating margin that networks segment delivered. But I also want to special mention here again of digital services that actually deliver the best operating income to date, the profit of half a billion. cash flow 12.8 billion. We'll come back to that a bit later. But let's have a look at the trend on gross margin if we take this slide here. And you can really see the result of execution of the focused strategy here in this graph. And you see here the gross margin development over the years in distinct quarters, but also rolling. And we have said this many times, but of course, it is really the increased R&D investments that has been the main driver here for technology and cost leadership and also competitive advantage and gross margin improvement. So here, if we break this down a little bit, networks, gross margin improved 200 basis points following even better operational leverage. Digital services improved during the year 420 bits to 42% with more software share sales. many services, improved efficiency achievements, improvement of 310 bits here. And lastly, emerging business and other with a gross margin that improved actually 840 basis points to 28%. And Cradlepoint contributes here, and maybe just a side note, being somewhat personally involved in Cradlepoint as well, I must say I'm quite impressed by the Cradlepoint leadership and Now we have full speed there with excellent collaborations with other parts of Ericsson also to create value. Okay, let's look at SG&A and R&D. R&D came out at 10.5 billion. It's a slight decrease year over year, mainly following positive effects. And here, of course, we have added now cradle point since November, so two months of cradle point both in R&D and also in SG&A, which is next year. That came out 7.4 billion as you see that. a reduction of 0.8 billion year over year. And this reduction is mainly explained by less traveling, less trials cost and other external spend, but also some provision release. We have a provision release for customer financing and also some FX support that support this number. And all of this more than offset and they added SDNA from the acquired cradle point. We also show impairment losses on trade receivables here, just to illustrate that that can really swing between quarters. In Q4, we had a positive impact, 0.3 billion. And this follows collection of high-risk receivables from customers. As you see, last quarter, this number was a negative 0.2 billion. And this is really to illustrate that this item will fluctuate over quarters based on our updated risk assessments and changes in exposure collections from high risk receivables and so on. Let's move over to cash flow and the financial position. I've mentioned then free cash flow before M&A in the quarter was 12.8 billion and it's really a result of a combination here of course increased profit levels but also then in combination with working capital efficiency Working capital days now is down to 65 from 75 days a year ago. And I must say, I believe we have rather impressive focus now among the colleagues across market areas, business areas on cash flow generation. So this brought full year cash flow before emanated 22.3. And as I think we mentioned several times already on this call, although free cash flow definitions may have changed over time, this seems to be the strongest or is the strongest cash flow in the history of the company. So this led to a net cash at the end of the year then, 41.9 billion up from 34.5, and gross cash then landed rather flat at 72 billion, and this then in spite of acquisitions, dividends, pension trust contributions, and loan repayments during the year. We continue to execute here on our capital structure strategy for flexibility and resilience, as we described before. And in that context also, I'd like to highlight that we were, of course, very pleased with the rating upgrade we got in November from Standard & Poor's to investment grade, triple B minus, stable outlook. And the key trigger for the upgrade and rating was really free cash flow. in turn a result of growth reduced cost and improved capital efficiency so now we have investment grade ratings both from Standard & Poor's and Fitch. We mentioned the board's dividend proposal already just to add that this means 6.7 billion to be paid out and in two equal installments just like 2020 in April and October respectively. Okay I will round off now just a few words on planning assumptions and I'm just going to highlight a few of them but As usual, please refer to the report for the full set. First of all, on the market we operate in then, we usually cite Deloro, and we will do that now as well. Deloro expects the run market to grow by 3% in 2021, up from 2% previously, of which China up 4%, North America 2%, and Europe up 3%. And regarding top line then, historically Q1 is our weakest sales quarter. And if we look at the last three years, normal seasonality or average seasonality has been minus 24% from Q4 to Q1. And this Q1, we expect that the seasonal effect might be somewhat less pronounced due to the 5G investments and rollouts that are ongoing. IPR, importantly, as you know from the press release in December and with ongoing renewal negotiations and other factors that we mentioned in the release, we may see an impact on operating income by between one and one and a half billion per quarter. For Q1 specifically, we expect that impact to be at the higher end of this range. Networks segment, we expect a similar mix, Q1 to Q4. FX typically decrease from Q4 to Q1 due to seasonality. And I want to point out again with large variations between the years. Also want to remind about the FX rule of thumb. And then finally, a reminder that we expect cradle point, as Burya mentioned, to negatively impact group operating margin in 2021 and 2022 by around one percentage point. With that, thank you so much. And back to you, our CEO, Mr. Buryakon. Thank you, Mr. Karmelander. We are proud of our performance during 2020, but I would also say we're not happy at all as we see a lot of improvement areas in the business. And we run the business focusing on driving the long-term margin improvements and growth And we really see the targets for 2022 as a milestone, simply on the way to reaching the long-term targets of 15% to 18% EBITDA margin. 2021 will, however, be an investment year with investments that will underpin our long-term growth as well as our long-term margins. And this includes such areas as IPR, cradle point, but also continued investments in the business. And as we have gone through already in December, we announced that we have important IPR negotiations and renewals ongoing that will impact or that will defer revenues for a period of time. But we see that we, through focusing on maximizing the long term value of our portfolio, can actually significantly improve our IPO revenues. We will also continue to invest in R&D to broaden the product portfolio and maintaining a strong customer offering, but also driving a further improved cost position. We do note that Cradlepoint will have a negative effect in 2021, primarily due to amortizations, but also investments in growth. And we also see that in order to further strengthen our platform, we continue to increase our investments in compliance, but also security. What we have also seen during the last few years is that the value of increased footprint is clearly paying off in expanded gross margin, and that's something we intend to do, to capitalize on our very competitive portfolio and the current market conditions. The effects from COVID and continued geopolitical uncertainty, they of course remain, but we believe we're well positioned to manage any potential effects with improved flexibility and resilience in our operation. And we continue to invest for further improving the flexibility and resiliency. 5G is now a reality and we are a global leader with 127 contracts as well as 79 live networks. Our continued presence in the largest, as fast as growing markets around the world are critical to support technology leadership and thus supporting our long-term financial targets. I want to also say that from an industry point of view, it's critical that we hold together the global standard and not fragment that. because the global standard has actually allowed the world to connect eight billion subscribers onto one uniform standard. We are increasingly seeing that many countries are accelerating the investments in the 5G network as they see the innovation on top of the network can easily create value that's five to ten times the network investments and allow them to transform and digitalize their companies to leverage this new platform. We hope that Europe will see this value as well before we fall too far behind the more aggressive countries and frontrunner countries. We are committed to the targets for 2022, but as we have said, we see 2021 as an investment year that creates a very strong platform for future growth and for reaching the long-term targets of 15% to 18% EBITDA margin. We're confident in our ability to do so based on a strong underlying performance and resilience in the business built during the turnaround and visible in the financial performance for 2020. Thank you again for listening in. And with that, I hand back to Peter for all your questions. Thank you, Börje.

so operator we can now open for the Q&A session and we will continue that to around 10 o'clock Central European time so please operator ladies and gentlemen at this time we will begin the question and answer session if you would like to ask a question please press 0 1 on your push-button sign if you would like to decline from the polling process please press 0 2 As always, please limit yourself to one question at a time, and please keep your questions at a broad level. Detailed information is provided in a report, and Ericsson's investor relations and media relations team will be happy to take additional questions and discuss further details with you after the call.

Thank you, operator.

So the first question we will have here from Alexander Patek from Societation. So Alexander, please.

Yes, good morning. I hope you can hear me well. Yes, you're perfect. Great, thank you. So I just have one question on your 22 targets and then a very quick follow-up, if I may. So the first question is, given the strong network margins that you have now, can you explain why we should more cautiously model 22? Obviously, at midpoint of your targeted margin, that's 200 basis points below what you achieved in 2020. So if you could tell us what will drag these margins down Do you have strong market share ambitions and if you could quantify them? Or are you enjoying particular tailwinds now that will disappear? And if you could quantify that as well. And then the quick follow-up will be just on IPR. I see a lot of disparity in how we model this. So maybe a good, kind of a guidance on how many quarters we should take the missing IPR out of your bottom line, and that would achieve a more consistent consensus for 2021 in particular. Maybe you would like to give us a bit firmer guidance in understanding that that can change as and when litigation is resolved. Thanks very much.

If we comment on target for 2022, You know, we run the company not focused on 2022, but much rather on the long term. So, you know, we have a clean result for Q4. There's not really any specific tailwinds in any way. So it's not that we think that is going to change. It's just that we see that we will continue to invest in the business in order to drive the long term margin target of 15 to 18%. That's what we are focused on. So 2022 is merely a milestone on that journey. And we have not spent a lot of time looking through the details of 2022. So, you know, view that only as a stepping stone to a much higher margin target. And, you know, on the IPR, I appreciate your question and I understand the difficulty. But I would encourage you to think how long is a rope. It's very unclear when you look at just that pile. So, you know, it's very hard for us to say how many quarters this will go on. We have given you the guidance that it's about 1 to 1.5 billion per quarter. And we will update you as we move along on that journey. But rest assured, our focus is again not on closing a dealer-specific quarter, but much rather on maximizing the net present value of our patent portfolio. And that's what we will focus on, not on an individual quarter. Thank you very much. Thank you, Alexander. We will move to the next question. Daniel Huber from Handelsbanken. So please, Daniel.

Thank you very much and a big congratulations for this strong report. I have a question on your near-term planning assumptions. You expect less visible seasonality quarter on quarter on back of the strong 5G momentum. I was wondering if you should expect this when it comes also to the North American market. If you could comment on that, that would be great. Thank you.

North America. Thanks, Daniel. The momentum continues in North America. It's been strong throughout this year. And now, of course, we also see maybe for a bit more long term that the feedland auctions have been completed, as you know, and that will lead to investments in that spectrum band as well. But that's more towards the end of the year. short term we see that the momentum will continue in in north america and we we um we are a big part of the rollout so if you know for all the clear ones there and so that will continue perfect thank you so much and then we'll go back to the queue okay do that on it thank you and we will move to the next question which is from alex devan from goldman sachs hi alex

Yes, good morning everyone and congrats on the robust results. I had a couple of quick questions. Firstly, you've talked about market share gains from all competitors. I wondered to what extent can that continue this year and what are the key functions or attributes of your product that are allowing this? In the past, you've talked about ease of rollout and things like dynamic spectrum sharing. I wondered if you could talk about what will be the key factors and the extent to which you can maintain or extend your lead as presumably others will want to catch up Also, it looks like North America and China have been key drivers of growth this year, but as we go into 2021, it seems like you're talking about market growth for the European market. I wondered what you're seeing in Europe that gives you that confidence, given your comment just now that there could be a risk that Europe could be lagging behind others. What are Telco saying to you, and to what extent do you see 5G helping to underpin the digital economy in Europe? Many thanks.

If we start with the market share gains, I would say what we see now is our deployments in the field. When we can make comparisons, we clearly have a very strong performance, which I think is the key driver why we see this attractiveness for our customers. The other thing, we have... invested over the past few years in improving our TCO costs, so the total cost of ownership for our customers. And that, of course, is an important aspect when they look at our product compared to competitors. And, of course, we have over the last few years shown that we deliver on the roadmap commitments we have made. which made the customers also appreciate the roadmap we show, but also, of course, our ability to execute on that. So I would say we're seeing these gains now happening in several markets around the world. And I think it shows the investments we've made for a long time in R&D and we increased in 2017. If you look at Europe, why you hear us be a bit more upbeat is really that we see the market share gains. It's more driven by the market share gains than the general market growth for our outlook in Europe. What we're hoping for is, of course, that we will start to see some more 5G rollouts on a bigger scale in Europe during 2021. But that would further underpin growth in Europe. So most of what we're seeing so far is really attributable to share gains. And of course, share gains that you cannot expect to continue forever. So it is really important that we start to see the market come back to an underlying growth for the long term. But we think the migration to 5G is inevitable. It's attractive for the consumer, kind of generates value for the end user, but it also addresses the cost position from growing data traffic in the networks. So this is a migration that will happen. It's more, and we see that in all other markets. So we believe it's likely to happen in Europe as well. Okay, Alex.

Thanks.

Thank you. And then we'll move to the next question, which comes from Sebastian Stabovic from Kepler Fibre. Hi, Sebastian.

Yeah, hello, and thanks for taking the question. One question in China. Could you please make an update on this market? Do you have any 5G tender ongoing there? And if yes, when do you expect the results from those 5G tenders? And a quick one on the component shortage that is affecting the semiconductor industry. Have you seen any impact so far, and how do you see the situation evolving for your specific supply chain and sourcing? Thank you.

So your second question was about the supply chain development?

Component shortage, yeah. Component shortage that is affecting the industry.

Yeah, component shortage. If we start in China, there are continuous ongoing tenders there. So far, we've seen some, we read the press like everyone else, so we see what goes on there. But in addition, we've possibly seen some hesitation and uncertainties among our customers. But so far, no significant impact at all. And we continue to drive the business forward. And we believe our customers would like us in the network. And we see that kind of overall moving along in a quite good way. And as I said before, China is aggressively rolling out 5G. So we are, you know, it's an important market for us to be present in for more from a technology leadership point of view than possibly the volume. But we are continuing to invest and see no reason to not do that. If we look at the supply chain, And you're right, the semiconductor market is rather tight. But you may also remember that we took decisions already in 2018 to, in a way, deconstrict our, whatever you want to call it, remove as much restrictions in our supply chain and actually create more supply chain flexibility. So we are not seeing... any effects now we can continue to supply our customers with what they demand and you know if if the current conditions continue for for years of course we're going to have issues as well but right now we feel very comfortable about our delivery capabilities okay Sebastian thank you we will move to the next question which comes from Peter Robert at Swedish television So please, Peter, can you hear me?

Yes, thank you very much. Mr. Boyer, I would like to ask you about China. You are gaining market share there. You are widening scope there on the full year. But what happened after 20th of October last year when the Swiss authorities decided to close out on Hawaii?

Yeah, as we said, we continue to see a demand in China. We read the press like you do, but we continue to invest in the business, and we have so far not seen any material effects on the business. Okay, Peter?

Yeah, but can I do another question? Have you taken any other steps during China because of what happened in Sweden?

What we have done, and we just went through that, is that we have invested in flexibility and resiliency in our business. That's something we have continued to do during 2020. And that allows us to be flexible to manage different type of implications that we can see in the business, being this question, being other questions. So that is something we are continuously doing. But otherwise, you know, our business continues and we continue to invest in the business like we always have. Okay, Peter.

Okay, and we'll move on.

Thank you. We'll move to the next question. And the next question is from Ashal Sutani at Credit Suisse.

Hello, Ashal. Can you hear us?

Yeah, hi. Good morning, everyone. Thanks for the question. Morning. A couple of questions. First, on the competitive landscape, when we think about Huawei getting restricted from a number of countries, ZTE still falling behind on 5G, What is the situation when it comes to telco operators trying to find alternative suppliers, be it Samsung? Have you seen Samsung, when you go for these 5G bids in Europe, are you seeing Samsung coming up as a credible competitor in the long term? And then secondly, on the Open RAN situation, obviously there's been a lot of talk about Open RAN, especially in Europe. A number of telcos have come together and formed an alliance So how positioned Ericsson is in that open world environment, Open RAN environment in the future? And how should we think about the change in your business model if and when Open RAN starts to get massively adopted? Thank you.

You know, on your first question, I think it's, you know, it's fair from our point of view where We're focusing on Ericsson. We're focusing on that business. And, you know, how the market looks and how our customer looks at different vendors, I think that's a question better asked to them than to us. So that is, I think, a little bit hard for me to address. What I can say is that it continues to be a competitive market around the world. And, you know, we've seen... Some vendors be aggressive on price, driving price discussions, etc. But I think overall it's no change compared to how it's been in 2018, 2019 and 2020. So that kind of is a general background to the whole industry. So I think you can rest assured that the market will continue to be competitive going forward. I know the discussion on Open RAN, and you all know that we have also championed and pioneered increased openness and cross-industry collaboration as a way to speed up innovation. So for us, we're involved in Open RAN. We're one of the key contributors in the work in that forum. But at the same time, we see right now that speed to market as well as price performance reasons, the integrated solutions will continue to be a majority of the network deployment for the coming years. And, you know, this is in reality driven by the two large areas in North America as well as in China, where they are pushing ahead on deploying 5G now. So, you know, the discussion when kind of open RAN is, and that architecture is going to be truly competitive. I think it's a bit hard to address right now, but it's not a near-term question. We don't see it really ready for prime time, except for some low-performance applications or segments in the market. I think instead here, the discussion ought to be, especially here in Europe, shouldn't we drive forward on 5G networks now? And otherwise, if we don't do that, we expose the whole industry in Europe to fall behind due to the disruption that actually happened in the consumer market on 4G that will now happen in the enterprise market with 5G. And I think that's a more healthy debate to be had in Europe. What can we do to speed up that deployment?

Thanks, Bori. Okay.

Thanks, Achal. Then we'll move to the next question, and the next question is from Johanna Ahlqvist from FCB. Good morning, Johanna.

Good morning. Two questions, if I may. The first one, tag along on previous questions on competition, but do you see, I mean, two of your competitors are struggling a bit on the product side. Do you see any irrational pricing behavior in the market as of now due to that? And the second question relates to OPEX, which was quite low in the quarter, as you say, partly related to less traveling due to the pandemic. But when you plan for 2021 on your OPEX, do you assume some sort of traveling resuming and things going back to normal that OPEX will come up a bit, leaving all patent disputes and effects aside? Or how should we look upon OPEX in 2021? Thank you.

Thanks, Johanna. When it comes to OPEX going forward, what we can say in general, and you know, we don't really guide specifically on individual lines and so on in the P&L, but if you look at 2021 OPEX, we don't expect any massive moves compared with 2020. But of course, we have talked about a certain number of items that a cradle point, of course, is added. We only have two months of cradle point in 2020 and of course the full year 21. And then we have talked about litigation costs as well in relation to the IPR negotiations or renewals and so on. So there are certain items like that. But overall, I would say 2020 is probably a fairly good guide for 2021 as well. When traveling will resume and to what extent, very hard to say. I guess that's something everyone in the world thinks about. I suppose a reasonable estimate is that we will not go back to pre-COVID travel levels, but it's likely to increase a bit from 2020 whenever we can say that we are out of the pandemic. We can even say on travel that some parts of the world have traveled as normal. Also this past quarter. So don't think travel has gone to zero. No, it's not. And of course, we are still rolling out networks in the world. And some countries definitely have come out of lockdown situations and so on. So there has been travel. But of course, on a very different level than pre-COVID. If you look at the question on competition, the... You know, I would say the pricing environment is not that different. It's been the same pretty much throughout 2020. So we've been able to work in that environment and still, as you have seen, increase gross margins. So there are some, you know, what I would label aggressive and possibly irrational pricing behaviors in the market, but that's been throughout the year. So it's nothing that has really changed in the end of the year. It's been there. I don't know what to say. We've been able to work in that environment thanks to a competitive product portfolio, but also a very good cost position that we achieved by investing in R&D again to drive down the cost of the products. So I feel I don't expect any dramatic changes in the market behavior going forward. But it, of course, has elements of aggressiveness, but that it always has. Okay.

Thank you. Thank you.

Thank you. We move to the next one.

And the next question is from Fredrik Savonik at Carnegie. Fredrik, can you hear us?

I can hear you. Good morning to all. And thank you for taking my My questions, again, on the market share gains here, you mentioned you take some from all competitors. Could you elaborate a bit on the regions where you see the highest share gains? And also, if you can mention something on order inquiries overall, which has not yet led to an order win, so to speak, as of the beginning of this year as well. And a follow-up on another discussion on the software part, I see it's 22% in 2020, up 1% from last year and has risen steadily. Can you talk about what you expect here in the coming five years is 30% realistic here? Thank you.

You know, if we start with the latter part, one of our strategies have been to increase the software content. So that is actually one of our focus areas. So we continue to do that. And where that is going to take us at the end of the day, except that it's going to be an increasing portion, as you have seen in the past, and that will continue to increase. We're consistently working on that. And that is one of the key parts which allows us to say that our target for a long-term margin is going to be 15% to 18%. That will be underpinned by growing software content. Market share gains. Yes, market share gains. It's clear that we see market share gains in Europe. That is what has allowed us to get back to growth in Europe. The underlying market we don't see really growing. So Europe is a clear market share gain. We've also seen strong gains in North America, where it is a part of the strong growth profile we've seen in the U.S., and we have share gains there with a couple of operators in both the U.S. as well as Canada. We also, and it's well publicized, we have a market share gain in China as well. So we have a larger share of 5G than we had of 4G. So that is also driving our growth. We're seeing increased market share as well in Australia. We're seeing it in other parts of Asia as well. So the market share gains, it's not that it's really isolated to one market or one segment. It's actually across the board. What makes us comfortable is also that we're seeing or we're comfortable with believing at least that we can strengthen our business. It's what we see on the, what I would say would be pre-order, i.e. discussions with customers on deployment plans, chances to win additional market share. So we see actually a very robust development there. And that makes us believe that we have a very strong position right now and we want to capitalize on that. But don't leave the question thinking that it's an isolated market share gain that drove all of this. No, it's actually much more widespread.

Okay, Fredrik.

We'll move to Fredrik Guitel at Danske Bank. Fredrik, can you hear me?

Hi, Fredrik. You disappeared there. Then we'll move to the next one. Frank Mare at DNB. Hello, Frank. Good morning.

Good morning. Good morning. I think most of my questions have been partially answered at least. If you could help me a little bit about how to think about the gross margins for 2021. I think you indicated that you are comfortable in general with your ability to meet price pressure, for instance, in North America and elsewhere with due to your investments in R&D that allows you to continue to reduce hardware costs and so on. Do you expect that to continue this year? And the second point or question relating to this is whether or not you expect a similar commodity mix and business mix this year as you had in 2020. Thank you.

Good, okay. Thanks, Frank. Yeah, so on the gross margin side, of course, there are, as usual, puts and takes. And you mentioned some of them yourself, including constantly taking out costs out of the portfolio. That will continue. That's a relentless effort, of course, in R&D to accomplish that. And you have seen the historical development of gross margin. It's really... supported to a very large extent by the fact that we have a cost structure that is more and more competitive. And that will continue, of course. And then we have flagged that for certain things that will impact the next year, including the IPR, of course, which is also impacting gross margin, so we have to take that into account. But otherwise, I think we're proud of the gross margin development so far, and we will certainly fight to continue in this direction as well in 2021 and beyond.

Thanks, Frank.

We'll move to the last question. Yeah, thank you, Frank. There was a second. Commodity mix for the full year 2021. That was a question, right? Yeah. But I think what we saw in the fourth quarter when it comes to commodity mix is also that the hardware portion was large. And that's, as I think I said before, that's actually a very good sign because it's an evidence or a result of gaining footprint. And that we expect to continue now as 5G deployments continue. So at least in the beginning of the first half or so of 2021, we will see large hardware volumes being delivered. And that's a good thing. And then coming back to the last question there on software, of course, that's the overall ambition to continue to increase the software share in our offering. And that goes both for networks and digital services business, as well as emerging business and other, of course. Okay, then. Thank you, Frank. We'll then move to the last question for this session. We have Fredrik Littell back here, Danske Bank. Fredrik, can you hear us now?

Yeah, I can hear you clearly. I hope you can hear me as well. Perfect. Yeah. Just a follow-up on the market share gains. Sorry for pushing one more of those questions. But outside of Europe and North America, where it is probably so that some operators are also leaning more towards you and maybe... uh nokia instead of the chinese can you see market share gains in more neutral aspects are you sort of on on technology technology aspects and total cost of ownership in in other regions would be interesting to hear sort of where you stand towards maybe your toughest competitor thank you thank you as i said we see market share gains

across the board right it's not isolated to individual countries where there have been um you know restrictions so so i would say when you look you know there are a number of countries around the world where we have strengthened our position and that makes us see that we gain that footprint based on the technology we can offer. And it's still a competitive market, so it's no way granted that everything will go to us. But we can see that we are having a disproportionate win ratio. So that's why I feel very comfortable about our competitiveness of the portfolio, not only from a product feature and roadmap point of view, but also from a cost point of view. And that's equally important in a competitive market. So, you know, you see our market share gains that may not be visible in numbers yet, but it is in Africa, it's in Asia, it's in Latin America as well.

Okay, that's very clear.

Thank you very much for that. Thank you, Fredrik.

So, thank you for all good questions today. But before we close the call, I know that Boris wants to have some final remarks. So, please, Boris.

Well, one thing, Peter, is different from you telling me that I have to. So I just want to end by saying we're proud of the delivery of a solid 2020. We're not happy. That's because we see a lot of improvement areas, and we are continuing to invest in those improvement areas. So we are committed on the targets for 2022 as a milestone to reaching the long-term EBITDA margin target of 15% to 18%. where we're really investing and spending the effort to make sure that we deliver. With that, thank you all for listening in, and I wish you a great rest of the Friday and a happy weekend.