Ericsson

Good morning and good afternoon and welcome to this webcast covering the first quarter of 2021. With me here in the studio in Kista I have our CEO Börje Ekholm and our CFO Carl Melander. It's great to see you here Börje. I guess you've been working quite a lot from home recently.

It's great to be here, Peter. Yes, as everyone knows, we migrated to work from home more than a year ago. So this is, in reality, the fifth quarter of reporting virtually. Yeah. So, of course, it takes a strain on the organization. And on a personal note, I must say I'm immensely proud of the team at Ericsson and the way we've stepped up and actually delivered on customer commitments and performed so well in a very, very challenging environment. So I want to just start by acknowledging that a lot of people have worked hard.

Exactly. And you, Carl, you have actually now closed your fifth quarter remotely. Yes. Which is fantastic.

That's true. And not only, as Börje said, have we delivered to customers and so on during this period, but also all the internal processes work really well. So, yeah, we closed the books in the same time as usual, in spite of everyone working from home. So I share your pride, Börje, actually, in our great people. Yeah.

Great. So we'll have this presentation and then we will have a Q&A session after the presentations from Börje and Carl. And people that will ask questions have to join the conference by phone. first i will just start by reading this text during today's presentation we will be making forward-looking statements these statements are based on our current expectation and certain planning assumptions with our which are subject to risk and uncertainties the actual results made different material due to factors mentioned in today's press release and discussed in this conference call We encourage you all to read about these risks and uncertainties in our earnings report or as in our annual report for 2020. With that said, I would like to leave the word to you, Börje, to start the webcast.

Great. Thank you, Peter. And good morning and welcome everyone to this earnings call of the first quarter. So thanks for joining. At the year-end result in January, we could actually then show that we had finally completed our turnaround. And what we also saw was that now return on invested capital is actually higher than the cost of capital. And that allows us now to focus on growing the business. And as we said, we're focused on growing in our core business, call it networks, digital services, as well as managed services. But we're also focused on building an enterprise business and driving growth in the enterprise space. And during the first quarter, we continue to execute on this strategy. And it includes, as always, investing in R&D for technology leadership. And that is really giving us at the same time a cost leadership. So there is no conflict between technology leadership and cost leadership. They go hand in hand. And with that, we're able to strengthen our market positions substantially and gain footprint. Of course, the pandemic has meant a lot, but it has also fast-forwarded digitalization. It's clear we have to recognize that there is substantial human suffering in the wake of the pandemic. Societies have closed down, impacting the economy. But also we see the importance of high-speed technology. internet connectivity and connectivity overall. And that's where we come in, and we're of course very encouraged to see the process here of building out strong coverage in the world where we are a key contributor. And we hope that we will see part of the recovery programs around the world being allocated to high-speed mobile broadband, because ultimately that's a faster way to build out coverage. Over the last few years, I also want to say that we have invested quite substantial amounts in de-constraining our supply chain. That gives us increased flexibility. You've seen, for example, the factory we've built in the US, but we have also focused on increasing the flexibility in other parts of the supply chain so even though we're in a pandemic with a very tight supply chain for example on semiconductors we've been able to complete all customer deliveries on the committed time frames and according to schedules as well as running our internal operations so a big kudos to the organization for that but let me jump into the business We have continued to consolidate our position as market leader in 5G with 136 commercial contracts and 85 live networks in 42 countries. What's also encouraging is that organically, FX adjusted, we saw sales grew 10% during the first quarter. And if we actually add or adjust for the IPR revenues, organic growth was 14% in our business. So that is really driven by a strong growth in networks that, again, if you would adjust for IPR, actually grew 19% in the quarter, which is fairly significant growth. It's also clear we exited the quarter on a very good footing and feel very good about 2021. We had a strong development the second part of the quarter after a bit softer in the middle. Despite the reduction in IPR revenues that we have guided about, we saw that the gross margin actually improved year over year to 42.9%. And that is a growth that we saw in all segments. So gross margin strengthened across the board. EBIT margin was up to 10.7%. And that is despite significant costs to improve the business, significant costs to grow footprint, as well as a negative currency movement. And you know 2021 is overall an investment year for us, possibly more so in digital services. So we're here, we're increasing the investments we do in R&D to have a competitive 5G cloud-native portfolio. And we're making great progress. We see good traction with customers, with many customer wins. But what's also clear is that we are incurring costs ahead of revenues. So we are seeing R&D expenses increase. We're seeing costs for new product introductions coming up, while revenues are not coming until later in the year. I would say at the earliest in Q4, but we're really going to see revenues coming in 2022. So this is a year of investments, but it's a year of investments according to the plan we have put out for digital services. If we look also on the cash flow, it's very strong. If we adjust again for IPR revenues, which typically are paid, a large part, a majority are paid in the first quarter. So if we were to look beyond that, the underlying cash flow improved quite substantially. And it's actually one of the best Q1s we have in our history. We also invest substantial effort in making sure that we have an ethically responsible business and we conduct our business in an ethical way. This is built upon individual accountability as well as integrity. So here we are spending a lot of time in the organization to make sure that we incorporate all lessons learned from the past troubles we've had and make sure we have a state of the art, really great compliance program. But more importantly, that everyone has compliance as an integrated part in the way they behave and in the way we conduct business. And, you know, winning business, that's all what it's all about. But we are going to win business, make sure to play by the rules, fair and square, and no debate about that. If we look at the market areas, we saw good growth in four out of five market areas. Northeast Asia, we grew by 80%, which is really driven by the non-Chinese markets primarily. If we look at the next one, it's Southeast Asia, Oceania and India, where we saw good growth driven by 5G in Australia as well as 4G rollout in India of a little touch more than 20%. Moving on to Europe, where we had good growth, 15% in Europe, but that was partly offset by more flattish development in Latin America. And of course, Latin America suffers from the pandemic and the macroeconomic effects following the tough situation with the COVID-19. If you then look, MANA had a strong development based on continued rollout of 5G. And there we see actually good progress also in our cloud-native portfolio in digital services. So we had a growth of 10%, more than 10% organically. And we've been able to also strengthen our market position, which is... long-term going to be very attractive for us we also saw the completion of the c-band auction so we expect that to to re result in deployments during the second half of the year And if we look then at our last market area, Middle East and Africa, we saw sales falling by 16%. That is really an effect of the pandemic in Africa impacting the macroeconomic and the spend environment. But we're also seeing a slowdown in Middle East following the large investments last year. So, you know, one of the cornerstones of our strategy has been to grow gross margin. And it's a fundamental indicator of success or progress on the focus strategy. So it is encouraging that we continue to see our gross margin strengthened in the business. And we are able to see that strengthening despite the lower IPR revenue. So matter of fact, we fully compensate for the lower IPR revenue in the gross margin development. By growing gross margin, we can continue to sustain a very high R&D expenses. And we're doing that in order to make sure that our portfolio is competitive from a feature performance point of view, but also cost competitive. uh of course we continue to invest in the in the 5g rollouts and that's what we see benefit in our core business but we're also seeing a very strong development a strong demand for 5g in enterprise applications we're convinced here that With the 5G cycle, it's going to be a different cycle than the traditional or more consumer-driven cycle that we've seen in the past. And we believe the 5G cycle will be both longer and bigger due to entering a complete new application area with enterprise applications. What's encouraging is the progress we're making on our portfolio. And in Q1, we announced the ultra-lightweight, high-performance, massive MIMO radio portfolio. We also continue to strengthen our position with the Cloud Run. So we are continuing to invest in technology leadership for the benefit of our customers. Again, we have invested quite substantial amounts in making our supply chain resilient, and that pays off right now in having a good delivery performance with our customers and that we're keeping customer commitments. If you look at the R&D investments we're doing in digital services, has built a very competitive portfolio and they will continue at a high level because ultimately we are going to see the cloud-native portfolio be an increasing part of revenues. But again, it's encouraging to see that the overall business currency adjusted in digital services grew by 3% in the first quarter. Managed services, we also continue to develop the business, growing gross margin, but we're also continuing the investments in automation and AI in order to develop new solutions for our customers, where we see increasing traction that will over time change the margin profile of the business. With that, I'm going to give the word over to our CFO, Carl.

Thank you, Birgit. Thank you. And good morning again, everyone. Thanks for your time. So let's dive in a bit more to the numbers. And you can see that our strategy execution that Börje talked about really show in our financials here in the first quarter. Net sales then came out at 49.8 billion, which is a 10% organic FX adjusted growth for the group, mainly driven by networks with very high growth numbers as quoted by Börje, of course, based on continued demand for our 5G portfolio. IPR revenues declined by 1.6 billion year over year due to these expired contracts that we are negotiating for renewal currently. And if we adjust for that, again, the organic growth is actually up to 14% for the group. If you look at the rolling four-quarter basis here, our sales is now tracking at just above 232 billion Swedish kronor. Gross margin then, 42.9%, which is an improvement of 250 basis points year over year, with improvements in all four segments, which is very encouraging indeed. Within both networks and digital services, we saw good operational leverage. contributing to these higher margins, and despite the lower IPR, as we talked about. And I think it's always good to look at the rolling four-quarter basis. Börje showed it earlier, where the gross margin comes in at 41.2%, steadily improving since 2017. OPEX was 16 billion, out of which 15.7, as you see here in the table for R&D and SG&A. SG&A was stable year over year. R&D saw a certain increase, about 0.4 billion. This is a result of the increased investment we do now in the cloud-native 5G portfolio in digital services mainly. But also, we have now, of course, incorporated Cradlepoint, the Cradlepoint business, into our numbers, so that also added some to the R&D investment line here. So this results then in an EBIT of 5.3 billion. This is 10.7% and 140 basis points improvement year over year. And I wanted to point out here that we are changing terminology from operating income and operating margin to EBIT and EBIT margin. And the main reason why we do that is that we are now introducing EBITDA, as you know, for the long-term target. And speaking of which, then the EBITDA on a rolling four-quarter basis came out now at 13.3%, compared then with the long-term target of 15 to 18%. So if we move from P&L and look a bit more at the cash flow, how profits have been turned into cash, you see here the free cash flow before M&A is at 1.6 billion. And on a rolling four-quarter basis, again, free cash flow comes out at 21.5%, which is then 9.3% of net sales. And we can also put that in relation to the long-term target we have set up for free cash flow before M&A as a percentage of sales, which is 9% to 12%. So we are in that range here on a rolling four-quarter basis. A few words on the net operating assets, so-called working capital development in the quarter. We continue with strict discipline here. What we saw now in the quarter was that trade payables affected cash flow negatively with about 4 billion. This is really the result of a decision we have made to de-risk the supply chain in this situation, to buffer up a bit on critical components, but it's also an evidence of that we're handling the semiconductor situation and ensuring that we can meet customer delivery deadlines. Inventory increased partly for the same reason, but also because we see rollout projects going on and we're building, of course, new radios to be delivered to customers in the coming quarters as well. Trade receivables decreased a bit, and that's, I would say, along with the seasonal pattern after very strong sales in the fourth quarter. So, I really wanted to point it out again, what Börje said regarding the free cash flow, that the majority of IPR cash payments, incoming payments, normally happens in the first quarter. so now of course having these renewal negotiations ongoing that cash flow did not come in and if we add that back then this q1 is the strongest at least since q1 2014 which was actually also a bit out of the ordinary because then we received large license payments incoming in that specific quarter So net cash then increased by 1.1 billion in the quarter, bringing the net cash position to 43 billion, as you can see here. And during the quarter, we repaid a 500 million euro bond. You can see that in the gross cash, we did this with cash on hand. So now the maturity profile of our debt portfolio is three years, up from 2.7 years at year end. To round off, if we take the next slide, just to highlight a few of the planning assumptions, and as usual, I want to refer you to the report for the full set of assumptions. But if we first of all look at the market that we operate in, Deloro now estimates the RAN market to grow by 3% in 2021, of which China 4%, North America 2%, and Europe by 3%. And if we look at our own reality regarding top line, to start with, historically, if we look at the three-year average, the seasonality on top line is plus 13% from Q1 to Q2. And as you know, though, and I really want to point that out, that we can see large variations around this average number in reality. Then in segment networks, we want to point out that gross margin can be negatively impacted by a higher share of rollout projects now, which we have in the pipeline for the second quarter. And moreover, when it comes to OPEX, we have a certain seasonality between q1 and q2 so opex typically increase from q1 to q2 and also here with the word of caution that that can vary uh quite substantially between the quarters depending on on timing On IPR, in Q1, our IPR revenue was 0.8 billion. And this volume, we can say, reflects very well the contract portfolio that we have. So we can assume similar in the second quarter until, and as we go along, until expired contracts are negotiated or renewed. Lastly, then, within digital services, 2021 will indeed be an investment year with front-loaded cost and majority of the revenues from the new 5G core contracts coming late in the year. And now for the second quarter, for these reasons, we expect a similar earnings level second quarter as the first quarter. So with that, thanks a lot. And I hand back to you, Burge. Thanks, Karin.

So to conclude, the investments we made in a competitive product portfolio, together with the cost position we have, have actually created a strong platform to grow in our core business, networks, digital services and managed services. But it also creates an opportunity to accelerate our enterprise applications business and developing new solutions for enterprise. As we have said, 2021 is an investment year. We're taking the costs for cradle point acquisition. We're increasing our expense on compliance as well as security. We're also increasing investments in the supply chain. i would also say there is here an element of of investments to gain the footprint that we have invested in this this quarter but we are expecting to continue to do that going forward i would also say at the same time that we're managing on the overall p l level but we have as we've been clear seen a investment to position ourselves even better for 2022 and beyond in order to reach the long-term targets What we also see is a very good order intake that we feel positions us very well for the full year as well as for 2022. And of course, that's what we build the business progress on. In enterprise, we're starting to see a good progress on our 5G IoT offering, but we're also seeing that Cradlepoint becomes integrated into our business and seeing the growth opportunities now materializing in the numbers from Cradlepoint. So that's encouraging to see. Again, thank you all for joining this morning. And with that, I give the word back to you, Peter.

Thank you, Börje. So we will now start the Q&A session. And so I would like to welcome the operator. Akasar, do you hear me?

Yeah. Ladies and gentlemen, at this time, we will begin the question and answer session. If you'd like to ask a question, please press 01 on your push-button phone. If you'd like to decline from the polling process, please press 02. If you are streaming from the webcast, please mute your webcast audio whilst asking a question to minimize audio feedback.

So let's see here. Do we have anyone on the call for questions? Operator, can you see anyone? Yes. Let's see. Yes, present please.

Our first question comes from Petrak Sanovic from Carnegie. Please go ahead.

Hi, Petrak. Hi. Thank you. Hi. Hi, good morning all. Thank you for taking my questions. Thank you. I hear some audio feedback here.

I guess you need to turn off your computer at the same time.

No, no, I... Yeah, I am on mute or muted on the computer, but I'll just go ahead. Please do. On seasonality in Q4 to Q1, I think in the last quarter you said the effect would be less pronounced, now it is more. And given your comments on very strong order intake as well, it seems that there is a timing effect Shouldn't the seasonality effect be less pronounced than from this quarter to the second quarter? And my second question is on the margin side, which I mean, both the gross and EBIT margins, they're undoubtedly quite impressive here. So up year-to-year despite an IPR decline, are there any temporary effects, any one-time capacity upgrades or anything that we should be aware of that lifts the margin here? Or should we basically expect a higher base level going forward. Thank you.

If we start with the second part, we have spent and focused on investing in R&D for technology leadership and cost leadership. And that's really the key driver of the gross margin. So it's, in that sense, a very clean and straightforward gross margin. And based on the strength of the underlying business, what we see is that we're going to have the rollout networks like Carl described in in q2 in networks that will temporarily affect the the gross margin in networks but the journey we're on with continuously strengthening our gross margin that continues so that is is no change and really no major um in that sense one-time effects or temporarily positives we have though a very big negative which is we have no uh or very limited ipr revenues as you know so the the the strong performance is is despite that if you look at the The reality is our business is a bit hard to predict exactly when deliveries happen and deployments happen. What we saw in the first quarter was a bit softer in the middle of the quarter, while it continued at a very good pace in the end of the quarter. So we're comfortable with what we're entering into, but we're not going to change the seasonality pattern. I think we're better off...

they are saying what we see rather than trying to be you know detailed in our guidance okay frederick you're good with that very good very clear thank you guys thank you i think we have the next question coming from alexander deval from goldman sachs hello alexander

Oh, yes. Hello. Good morning, everyone. And many thanks for the question. It looks like the third party forecast you referenced in your report talk about 3% round market growth this year. I was just wondering to what extent you might see potential upside risks to market growth. And if so, what could be potential drivers of upside? Just listening to your commentary now, it looks like you're emphasizing potential for growth. And clearly, you've got a very strong order intake. Obviously, part of that's due to share gain. But just curious if there could be some update in terms of the end market. And then secondly, a quick one on Japan, clearly that's an area of strength within Asia. I wondered if you could talk a bit more about how you're positioned on 5G in the country now versus what you saw in the 4G cycle. And should we be looking at that as being prolonged for a few quarters? Many thanks.

Thanks, Alexander. Yeah, if we look at... you know the overall market forecast i i i would be remiss not to say that we see a very strong market development overall and probably on the you know more positive side than what the third party is kind of indicating or the laurels forecasts are indicating i will i think that's fair to say what we see driving of our growth primarily though is share gains So we do believe that we have made substantial gains in market share that started a few years back and actually have continued during the first quarter. And we will not stop at that. We will continue to invest in our product portfolio to have the solutions that allow us to gain footprint. uh in the market we think that's important so that that will target to continue how delora will revise the market forecast i really don't know but i wouldn't be surprised if it's more on the positive side than the negative side so put it that way japan we have over the last few years gradually strengthened our position in japan And so far, 5G rollout has started, but we think we have the big bulk ahead of us there. So we continue to work with our customers to make sure that they roll out or have the products from us to roll out in the market and build their business. So we see positive signs on the Japanese market, I would say. They are... one of the front-runner markets on 5G. So I believe we have to be strengthened in our position and take advantage of that.

You're good with that, Alex? Many thanks. That's great, thank you. We'll move to the next question. It's from Alexander Petrek from Société Générale. Hello, Alexander.

Yes, good morning and thank you for taking the questions and congratulations on keeping the growth margins at a really healthy level. So forgive me to focus a little bit on the negatives. I'd just like to understand the moving parts here. So first on IPR, it does seem that at $800 million per quarter, we're going to be at a run rate for the full year, which is going to be a little bit below what you originally guided. So I wondered if there was any structural change there, or is it just a temporary fall off? You do mention one licensee being lower, so I wonder if that's due to geopolitical reasons or anything like that. And then secondly, just on the second quarter, you mentioned a certain percent growth quarter on quarter with large variations. But I'd just like to understand if there's a risk more to the upside or to the downside, or is it symmetrical as you see it right now? Thanks a lot.

Yeah, that's a clever way to ask the question to get more guidance, by the way. But let's start with the other one on IPR. The reality is we have contract renegotiation. It's with a couple of different parties. Those we expected to impact, they have also impacted. But we also have one licensee that actually have significantly lower volume in the market. And that results in much less royalty revenues for us. And whether that, you know, partly, of course, that's an effect of geopolitics. So you can safely assume that. where where that will end up in the end of the year we don't know but but that's the effect we see so we are saying as a guidance going forward look at q1 as a good indicator for the future right now until we have you know renegotiated new contract terms with and there are again several licenses we're renegotiating with in parallel so how that is exactly going to pan out for the full year We'll report on that in, I guess, Q1. We're not going to be forced by either timeline or anything else to that extent to close early. We will only agree to terms that maximizes the value for us and not the self-induced timeline. So that's why I'm going to leave it open on the timeline question. Then on the seasonality... I think the best guidance is clearly to look at the history. And then I think what you hear us saying is that we see a very strong positive momentum in the business. We should recognize we had growth in the first quarter of 10%. So similar seasonality would kind of give you a fairly healthy growth in the second quarter as well. But of course, we're very encouraged with the order intake, the way we see in the market now. So, you know, you have to make a bit of a judgment call. We always know it's fluctuations in delivery schedule, deployment schedules, etc. But we're very optimistic about Q2.

Great. Thanks, Alexander, for those questions. We will now move to the next question from Daniel Djurberg at Handelsbanken. Good morning, Daniel.

Thanks to Stella Network Performance and the reporter. I was wondering if you could talk a little bit, you mentioned about the network deployments in Q2 that possibly could hit cross margins if they will come. To me, I read this like a potentially large 5G deployment in China that could pick up. So my question is really, what kind of insight do you currently have on future volumes? And also, if you see any risk in the inventory, because I guess you have needed to build inventory on the China deployment already. If you can comment anything on this, it would be great. Thank you.

The reality is the China market, there was a big tender last year that we entered into and won an increased market share. The next tender will probably come in the next few months. That's a bit unpredictable. So with that, you can conclude that we have no insight into how that would look like. These are driven by other market gains, actually. uh where where we see that we are going to have a larger share of rollout contracts in the near term that's going to impact our q2 in networks for sure um you know we shouldn't exaggerate it but we're trying to say that that that portion is a bit larger than normally The second question maybe you should take.

Yes, you asked about the risk in inventory. But I would say, no, I mean, this is business as usual, of course, to assess the inventory in every closing. And we take the measures we have to, given the risks that we sit on.

But, yeah, it's nothing extraordinary.

No, nothing extraordinary. Nothing special. We deal with that as we go along.

Okay, great, Daniel. We'll then move to the next question from Frank Mauer at DNB. Morning, Frank.

Good morning. Thanks for taking my question. And just wanted to clarify a little bit there on the last question also on China, which is actually what my question was also relating to. So mainland China was flat for you year on year and you mentioned the tender that will probably come in a couple of months. We don't have any particular insight on when but Exactly. Could you repeat what you said about the portion being a bit larger than normally? I didn't fully get that. Do you mean the portion that you expect of the rollout in China? which is really my question. Further to China, do you see any mixed changes on what's going on in terms of the plants that operators have there? There seems to be a certain skew towards 700 MHz roll-up in China, rather than perhaps that much massive MIMO this year. Would that impact your competitiveness in any particular way in China? And finally, if I may, on the second-generation massive MIMO product that you mentioned, could you give us some color on that has been received by customers who also are evaluating the Chinese lenders massive MIMO products, which were pretty lightweight for the 64. TRX and even that was launched one year ago. So if you could give some color on the reception there, please. Thank you.

If we start just to be clear, the rollout in China during the first quarter, we don't see that to increase during the second quarter. And we don't know anything about new contracts. So with that, you must conclude that it's not China related. It's actually other markets where we see uh that we will have large rollout or we know we will have large rollout contracts in the second quarter and the proportion will be slightly higher so you need to think about then the scale of that deployment then you will probably realize where it is but that is going to impact um you know the the impact is not super large but it's still going to impact and you know we can absorb quite a lot in our new cost structure so with the cost structure we have on products as well as on services we can absorb those large rollout contracts but we want to be clear that we see those coming and they are you know going to impact earnings slightly in the in the near term it's a very temporary but it's it's a very large size at the same time Then looking at China, yeah, how the deployment schedule is going to look like, how the tender structure is going to look like is unclear today. Clearly, our competitiveness in Massive MIMO is good and the reception on our new generation Massive MIMO. is very positive from customers and we're starting to see that gaining increasing momentum and we will start to see that rolled out in the or starting to roll down be rolled out in the next few months so we're we're very encouraged with what we see and we do see the that the customers are putting us at a very good competitiveness with this new generation massive mimo and i would say that you know We clearly have a significant step on weight compared to where we were and compared to where competition was on the former generations. So we're very encouraged about that competitiveness.

Okay, Frank, thank you for your questions. We'll move to the next question from Sebastian Stadomovic from Kepler Chevreux. Hello, Sebastian.

Yeah, hello, thanks for taking the question. On digital services, you are running the business on rather elevated level of losses in the first half of the year with the acceleration of the R&D investment in the Cloud95G portfolio. How should we think about the spending or the level of loss in the back half of the year? Do you see any improvement coming in or should we assume that the improvement will only come by 2022? And also on the IPR litigation with Samsung, could you remind us a little bit the process and where you are standing into the litigation process with Samsung? Thank you.

If we start on the second one with the... samsung process yes we have multiple lawsuits going between the companies in several different jurisdictions so so of course it's very hard to comment on detail of that so i just want to say that you know we're going to be focused on reaching a We are going to focus on maximizing the value of our IPR portfolio as much as we can and as much as we possibly can. And that's what we're doing. And I feel it's in the interest of us as a company to make sure that we don't self-impose deadlines or self-impose restrictions on those IPRs. both litigation strategies and negotiation strategies. So when we have some material developments, i.e. if we would agree, for example, of course we'll update the market at that point in time. But making predictions here and self-imposing constraints I think would not be right for our negotiating position. So we're going to continue to run it like we do. And I apologize. I know it's hard to be on the outside asking for information and getting nothing, really. So I recognize that, and I feel that pain as well. But I think we have to run the negotiation in the way we do right now in order to keep our ability to negotiate.

You saw the EBIT on the digital services, minus one and a half billion now in the first quarter, and we always say that it's going to be on a similar level for the second quarter, for the reasons that we talk about with early cost and the revenues in the five-year contracts coming much later, late in the year. From that, you can deduce that the second half will improve. And as you know, the fourth quarter is typically clearly the strongest for digital services also because of seasonality, top line being at the highest. So second half, of course, that's our ambition clearly is going to be better than the first half for those reasons.

Thank you, Carl. And thank you, Sebastian, for that. And we'll move to the next question from Dominic Olszewski at Morgan Stanley. Dominic, can you hear us?

Yes. Morning, everyone. Thanks for taking the questions. So maybe a shorter-term question and a longer-term question. So in the shorter term, maybe you could just update us on your thoughts around the OPEX trajectory into the rest of the year. Obviously, you've described 2021 as an investment year. So interested in your thoughts there. And also particularly, obviously, one quarter further, so we have perhaps better visibility on employees returning to office and how that affects your thinking on those costs. And then secondly, longer term, there have been some recent reports about challenges for Chinese equipment vendors in serving markets like in India. So I'm very curious about your thoughts and plans around growth in India and whether that presents a next market share opportunity for China. for Ericsson. Thanks.

Should I take OPEX? Yes. No, I would say we won't see any major changes. As you know, we are continuing the investments in R&D, and we've been clear on that. We can also look at the seasonality that we talked about in planning assumptions, where OPEX typically comes up in the second quarter. Then, of course, it's a special year when it comes to work from home and virtually no traveling, except, of course, in certain customer delivery cases and so on so so therefore of course there's a big saving going on from that point of view and let's see how that develops i mean nobody really knows how that will develop during the year but we will as it looks right now we will as a employees in ericsson continue to work from home during the rest of the year and and we will not be resuming traveling as it looks right now But other than that, no major impact other than the R&D investments that we do and increase in digital services.

What you may add is that, of course, we need to learn from this period.

Yes.

So we can probably save on a lot of the other costs because we can work remotely.

Definitely. So the ambition is, of course, even when we resume life as normal, the new normal or the now normal, as we say, travel will, of course, be lower than they were before. pre-pandemic because we have learned so much in how to interact both with customers and internally

as well as most likely other costs like real estate. They haven't been lower yet, right? Now the office space are completely empty, but most likely these will be lower as we return after the pandemic. So I think when you think about cost structures and cost levels, there are many opportunities and lessons learned from this period that we can actually reduce the run rate going forward. That's not happened yet. Your India question, I think it's a very interesting question. Without getting into geopolitics, that's a lot of speculation about that, so I'll let others do that part. But India is a very big market, clearly, and a market where... we have strengthened our position over the last few years and it's something we continue to do and one of the reasons why we're growing in the market area southeast asia oceania and australia is actually india so for us that is a major focus market because that can give us scale so that is an important area where we prioritize growing our footprint

great dom thank you for your questions and then we'll move to the next question from richard kramer at arete hi richard can you hear me yes can you hear me okay perfectly good morning okay so uh boria i have two basic questions one

about the structure of the industry because you've spoken about gaining market share, and the message from the operators is the desire to preserve supplier diversity. And with the geopolitical situation you've referenced many times with the limitations on one of your principal competitors and the introduction of a new large competitor in the U.S., How do you think about your customers looking at your market share and thinking that it needs to be limited, that they want to preserve more than just a few other options in the marketplace, and maybe that's what's driving them to look at new modes of supply like Open RANs? And then I have a follow-up question about the enterprise business. You know, it feels like it's a bit the tail wagging the dog because it's still a very, very tiny percentage of your sales. Can you flesh out a little bit more what your plans might be in the next few years to build out an enterprise sales channel and to build out the range of products that you would need to have a complete offer for enterprises beyond selling through the telco channel? Thanks.

It's a good question. You know, I think what we need to recognize on the structure of the industry, it's clearly a desire to have multiple choices for our customers. And I think that we are going to see that and we plan accordingly. But I'm also convinced that if we can offer the best solutions for the market, the competitive product portfolio and cost structure, we can continue to gain footprint as we sit right now. We are never going to be 100% of the market or even remotely close to that. So I do think that we actually, even in today's market structure, still have an opportunity to continue to gain, not across the board, not everywhere, but I think we have a chance to gain footprint based on the portfolio we have. but but as you say there are going to be other competitors and i i think that's healthy i actually believe competition is you know maybe tough short term but actually longer term is good for the industry so i don't i don't see that to be anything different moving forward than it's been in the past And actually, it's interesting to look at the consolidation in the market. That was clearly the case with other vendors that have reached way beyond 50% market share in many countries, for example, in Europe and around the world. So I don't see where that limit really is on market share. I don't think we're there yet, but at some point in time, it will be there for sure. Enterprise, you know, I want to just draw your attention to a very simple fact. If you start building out something, it will by nature be small in the beginning. It's kind of unavoidable unless we would do a very big acquisition, for example. So if you think that's tail wagging the dog, yeah, but it's unavoidable starting point. unless you do that big acquisition. We're not going to make that. That's not the plan. Our plan is instead to build out use cases and applications, starting with the IoT global connectivity, starting with our dedicated networks that we're investing quite heavily in developing solutions for the market, including the CBRS spectrum in the U.S., But we're also seeing, with our Wireless One offering, that we can create a very different network architecture to work from home, for example, or remote working. That has allowed us to launch one which we call Wireless Office, which allows you to have full connectivity as a small and medium-sized company and run all your applications remotely. without having a local area network. And we think that is a major opportunity for us in enterprises I would also say our enterprise investments are always serving the benefit of kind of two masters in that sense. It's going to grow the revenues for the service provider as well. So whether we have to develop a full independent go to market to enterprise is a different story. But what we want to make sure is that it drives revenues for our service providers. If you look at Cradlepoint, they actually have a channel structure, a channel go-to-market, and that's something we're leveraging also for our dedicated network as well as longer-term IoT solutions. So we are trying to do a lot of demand creation through the go-to-market organization.

Thanks, Richard, for those two questions. We actually turn now to Jens Nordström at TV4. Jens, can you hear us?

Yes, I can. Thanks very much. Maria Kolm, you have not been particularly keen on addressing friction between China and the Western world previously, but as we can see, there's a number of cases where this friction generates real sparks at the moment. Does this worry you that Ericsson might increasingly get caught up in this friction with China?

There is a lot of geopolitics going on, and it relates, of course, to a China-US situation as well. So with all of that kind of moving pieces, you know, it clearly can affect us as well. It's no question. Of course, for us, what we can do is to work on our own flexibility, the way we drive the business. That will probably be the only way we can really, truly impact these trends. But I think it is concerning what we're seeing right now. And I want to just say one thing. We're in an ecosystem where we actually have a global standard. It allows us on the call here to travel globally with one device. But the reality is what it does even more is it can allow less fortunate countries to have a full connectivity so what we see now is that we we have eight billion subscribers around the world being able to connect on one standard on one structure and that's something i think is important that we preserve

Thanks. Thank you, Jens.

Quick follow-up. China is preparing for new 5G auctions. Is there a risk that Ericsson might be impacted badly in these auctions by being a Swedish company due to diplomatic tension between the two countries?

You know, I want to say it very simply. There is always a risk that we're impacted in auctions in different countries. But what we are going to do is we're going to work on our competitiveness, our competitive product portfolio, our competitive cost structure, and we are going to try as hard as we can to gain an increasing footprint in the Chinese market. It's an important market for us. It's a Of course, it's a volume question, but actually it's also a leading deployment market. So it's an important way for us to learn what technologies are going to be needed for the future.

Thanks, Jens.

Do you feel you have to tread very carefully here?

We are running a company and we're trying to do that to the best of our ability. I focus on running that as well as we can. Of course, the geopolitical situation is a very difficult situation and we are working on the areas we can impact. I often say, and I think I said that to you before, Jens, that The reality is the world falls down in two buckets, one bucket that you can impact and one bucket that you can't impact. So I focus the attention on the part I can impact, our products, our solutions to customers, our cost structure, etc.

Thank you, Jens, for those questions. We are getting closer to the hour, so we have time for one final question. And that is from Johanna Ahlqvist at SEB. So, hello, Johanna.

Hello. Thank you for being the final one to ask a question. I think, if I may, two ones. The first one relates to working capital. And you mentioned, Carl, in the quarter trade payables impacted by $4 billion to de-risk the supply chain. I'm just wondering if you can give us any guidance what you predict for the full year. Will there be more of those type of actions or have you taken the ones necessary now? And then on competition, you mentioned in the report that you are sort of investing to take market share. I'm just wondering, how is the price competition currently? Because it seems like you're growing pretty nicely in Europe now with market share gains. Do you need to price yourself in to gain contracts? Is that still the case? And is it the fact that, for instance, Samsung has taken over Huawei's price pressuring role in a sense, or how is price competition in the market currently? Thank you.

I take the first one. Thank you, Johanna. On working capital then. I would say, of course, you can optimize different parameters here. And for us, it's more important to secure that we can deliver to customers on time. That's also, by the way, good for working capital because you get to acceptance milestones on time and then you can invoice and get paid also. and what we have decided to do is to invest so that we can meet those milestones in a sometimes challenging supply situation globally and we saw a bit of that in the in the first quarter we will continue to balance this as good as we can and i would say we prioritize of course always the customer delivery so make sure that we have the inventory we need the components we need on especially this critical component so that we can meet those delivery deadlines that's that's a fairly easy trade-off at the end of the day exactly how it plays out that depends on i would say the the rollout pays the delivery pays over the year and but we'll do our best to manage working capital and continue the discipline we have now i must say throughout the organization

On competition, I would say over the last several years, it has remained a very competitive industry, and that is really not changed. So that's what we base our plans on, what we have seen over the past few years and continue to see.

Thanks, Joanna. And before we end this webcast, maybe some final remarks from your side, Börje.

Thanks, Peter. Yeah, I would just summarize and say that we continue to execute on our focus strategy. It is to invest in R&D for technology and cost leadership. That allows us to be competitive and grow our core business. And that's what we are going to continue to do. We do believe there will be an inherent growth in the 5G market because 5G goes after both the consumer mobile broadband as well as enterprises. So we see that growth to continue a bit longer than normal and a bit faster and bigger than normal. So we are very excited about those opportunities. We continue to invest for market share gains. that we have done over the past few years, and we continue to see those opportunities on the back of a strong portfolio. But we're also very excited about the enterprise opportunities. It's still small in size, but we see here with the offerings we're getting together that we're starting to see a healthy growth rate. where we will pursue both organic growth as well as inorganic opportunities. So with that, thank you very much for listening in and thank you very much for your interest.

Thank you, Börje. And by that, we will conclude this webcast.