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Earnings Call Transcript 2021-Q2

[Peter Nyquist, VP & Head of Investor Relations]

Hello, everyone, and welcome to this second quarter report 2021, standing here from the studio in Kista. Together with me here in the studio is our President and CEO, Börje Ekholm; and our CFO, Carl Mellander.As usual, after the presentation, we will have a Q&A session. And this is important, in order to ask questions, you need to sign up via telephone. So details can be found in today's press release and on our website, ericsson.com. Today, during today's presentation, we will be making forward-looking statements. These statements are based on our current expectation and certain planning assumptions, which are subject to risks and uncertainties. The actual result may differ materially due to factors mentioned in today's press release and discussed in this conference call. We encourage you to read about these risks and uncertainties in our earnings report as well as in our annual report. With that said, I would like to hand over the word to you, Börje. Please, Börje.

[E. Börje Ekholm, President, CEO & Director]

Great. Thank you, Peter. And good morning, everyone, and thanks for joining us at this video conference for the second quarter. We continue to see good momentum in our business, and it's based on the 5G rollout, but also on market share gains. So we saw organic growth of 8% during the quarter, and we could also strengthen the gross margin for the whole group to 43.4%. But before I step into the Q2 performance, I really want to highlight the efforts by our people to deliver this result during the second quarter despite the global pandemic that we've been operating with in several of our markets.Today, it's also clear that we are a leader in the 5G area. We have a very competitive portfolio. And today, we power 93 live 5G networks out of a total number of 169 globally. A few years back, we also made a strategic decision to try to de-constrain our supply chain, again, to be able to deliver to our customers. That means that we have invested in making our supply chain more flexible. And during the quarter, we have had no disturbances on our deliveries, and we've been able to keep up with the demand we've seen in the market. I would say the ability to deliver in combination with the significant efforts or investments we've made in the R&D area and combined, of course, with our strong efforts by our people have allowed us to perform well despite a very challenging environment during the second quarter.So let me go through a couple of key highlights on our strategic execution during the second quarter here. We have continued to show great progress in our product portfolio, and it's highlighted by the addition of the 5G mid-band and Massive MIMO support to our Cloud RAN portfolio.Cloud RAN is a critical element in our product portfolio as this will enable our customers to evolve their networks towards a cloud-native architecture and open-network architecture, leveraging automation and fully autonomous networks. Ericsson has always been and always will be a strong believer in openness in the mobile networks. And we will work in close partnership with our customers to leverage the benefits of the open architecture. We take the same approach to Open RAN solutions, and we are actively participating in the standard bodies in Open RAN.We also continue to see great momentum in the U.S., driven by strong demand for our 5G solutions, and we expect to continue as 5G is rolled out across the nation. And this was further highlighted, of course, by the signing we had this morning of a SEK 71 billion, 5-year contract with one of the largest operators in the world, and it's Verizon, of course. And this is the largest contract in the history of Ericsson. On the IPR side, we continue to see good momentum in signing up new licensors. And we are -- during the quarter, we have signed an agreement with Samsung that we believe is a very attractive agreement for us. And it kind of confirms the value of our portfolio. What we have also seen is that, that momentum continues with signing up additional contracts here during July. But despite the signing of the Samsung contract that also included revenues that's attributable to the first quarter, we saw a decline in total IPR revenues of about SEK 0.5 billion. We have previously communicated that it is a high risk that we would be allocated lower market share in China due to Sweden's decision to not allow Chinese vendors in the Swedish 5G network. And this can lead to a significantly lower market share going forward compared to what we have today, of course. And when we look at the second quarter, we have seen that our sales in Mainland China has fallen by about SEK 2.5 billion, and that's a 60% reduction compared to Q2 last year.We don't really know the definite outcome of the tenders that's ongoing. But we want to say that it's prudent for you to already now plan for a significant reduction in market share, both in Networks as well as Digital Services. And regarding Digital Services, we can see that a material loss in market share in China, in Mainland China, would lead to a delay in reaching the targets in Digital Services.We have, in addition, during this quarter, we have taken a write-off of SEK 300 million related to pre-commercial product development for the Chinese market. And this is basically pushing out the ability of us to reach breakeven that we predicted before. And I would comment on that we already before took a decision to increase our investments in R&D in order to capture the 5G opportunities that we see in front of us. So now we expect a limited loss in 2022, but it will also be a bit back-end heavy, so you will see a stronger development in the second half as the new portfolio start to generate significant revenues. However, we can also see that based on the strong portfolio we have in Digital Services and the strong momentum we have in the marketplace that we are going to, over time, compensate the Chinese volumes with other markets. So we're going to see a path to exceeding the previous targets of 4% to 7% EBIT margin that we said, but it will take a bit longer than we earlier forecasted. Finally, I want to just highlight the work we do on ethics and compliance. We are sparing no efforts in investing in our procedures, ways of working to make sure that we have processes that are fit for purpose. But most importantly, we're investing in creating a culture in the company where we are making sure that this will not happen again that happened in the past. And this is an area we're strongly committed to as a management team in the company because we believe this is going to be a long-term competitive advantage for us. Let me now move into the market area performance, starting with Middle East and Africa where sales declined by 10%, and this is mainly due to lower 5G investments in the Middle East and to an uncertain macroeconomic situation in Africa. Of course, this is, to a large extent, dependent on the global -- or the pandemic, COVID-19 pandemic. Despite the lower volumes in Mainland China, we saw North East Asia growing by 1%, adjusting for currencies. This was driven mainly by Networks and the continued 5G momentum in other markets in the market area or other countries in the market area.The 5G momentum continued in North America where sales increased by 11%, and this was driven both in Networks as well as Digital Services. In Europe and Latin America, sales increased by 14%. And if we break this down a bit, we can see that Europe grow 12% on the back of market share gains primarily, and we saw Latin America growing 28%. And that is a bit of a recovery compared to a very difficult second quarter last year that was heavily affected by COVID-19 pandemic.And finally, South East Asia, Oceania and India, where sales grew by 14%, that was primarily driven by significant investments in LTE and rollouts in India. So we -- however, I want to also say that we are seeing a bit of concerns relating to COVID-19 in Southeast Asia where many countries are heavily affected now, and we've had a very difficult situation in India that's now gradually improving. But we see other countries affected, so we do believe we can see a risk for a slowdown in the general economies in Southeast Asia. If we then move on to business segments. Networks grew organically by 11% despite the loss of volume in China and lower IPR revenues. And this reflect our strong product portfolio, and it has allowed significant gains in market share outside of China. And we continue to see good momentum as 5G is increasingly rolled out across the world.Gross margin increased to 47.9%, and that's compared to 40.5% last year. Of course, that's supported by strong operational leverage. But also, as you may recall, we took a write-down of pre-commercial product inventory and the initial 5G deployment in China in the second quarter of last year. In Digital Services, we saw double-digit growth in North America and Europe, while we can see that sales declined in the other market areas. For the full segment, sales were stable, and that's despite the reduction in volume in Mainland China as well as lower IPR revenues.Gross margin decreased to 37.9% compared to 43.6% last year. That is, to a large extent, explained by the write-off that we do to pre-commercial inventory in China of SEK 300 million. So that impacted gross margin by almost 4 percentage points. We see overall, otherwise, a good momentum in the business in Digital Services, and we're continuing to execute on the plan. But of course, as I said before, the breakeven and the reaching of 4% to 7% target gets pushed out because of lower volume in China.Our commitment to developing leading products here stands firm. And we're continuing to increase the investments in our R&D despite knowing that it will take a year to 2 years before we start to see those product developments converted into revenues in the P&L. But that will also allow us to grow outside of Mainland China that will, over time, compensate for the Chinese volumes. Sales in Managed Services decreased by 2% in the quarter, and that was due to lower sales as a result of the merger between 2 operators in North America, but also on planned contract exits in Europe. At the same time, we were able to increase gross margin to 19% from 17.2%. Also in Managed Services, we continue to invest in AI solutions for our customers, and that will further strengthen our competitiveness. In Emerging Business and Other, sales grew by 13%, and gross margin continued to strengthen. The most important part here is that we're continuing to deliver and Cradlepoint is continuing to deliver according to our plans, and we performed well. See that we have offerings now that can capture a good growth opportunity in enterprise segment that we forecast to be 20% to 30% over the coming several years. And we're very excited about the opportunities to further grow in that area. With that, I give the word over to Carl Mellander, our CFO.

[Carl Mellander]

Thank you, Börje, and good morning, everyone, from Stockholm. So we can really see that the strategy execution that Börje talked about is visible in our financials. So if we look at the P&L here, you see, again, that reported sales up to SEK 54.9 billion, which is an 8% growth organically then with growth in 4 out of 5 market areas, as we saw just now. This growth is mainly driven by the Networks business that grew 11%. So we reached this growth in spite of the decline in China then by SEK 2.5 billion that we mentioned earlier here. IPR revenues ended up at SEK 2.3 billion. That's part of the top line here. It's a decline of SEK 0.5 billion. But of course, the quarter as such is a bit boosted here by the revenue coming out of the recently concluded Samsung deal where we have revenues both from Q1 and Q2 -- into Q2.On a 4-quarter rolling basis, if you look at the graph there on the bottom left, we are around SEK 232 billion in the top line now. We continue on this picture to look at the gross margin, 43.4%, which is actually a 520 basis points improvement with strong improvement, as we saw right now from Börje, in 3 out of 4 segments. That's very encouraging.In Networks, this starts to be singled out again, we saw continued operational leverage, contributing to the higher margins with a very high gross margin at 47.9%, up from 40.5%. Digital Services then reported a decrease in gross margin here as a result of the write-down related to Mainland China that Börje mentioned. And excluding that gross margin, would have ended up at 41.7%, a more healthy level in the underlying business. And the underlying gross margin, this starts to be mentioned, 42.4% if you look at the 4-quarter rolling basis, which is really more relevant as individual quarters can vary up and down. OpEx, SEK 17.4 billion in the quarter. And as you see in the table here, R&D and SG&A amounted to SEK 17.5 billion. And then we have a positive impact of SEK 0.1 billion related to, positive, related to impairments of trade receivables. SG&A rather stable, as you can see, helped by currency, of course, but also impacted by the investments we make in compliance and security. The R&D side grew by SEK 0.5 billion. It's really coming from the Digital Services investments we do now in our cloud-native 5G portfolio as we have planned and communicated around earlier as well. And then we shouldn't forget that Cradlepoint performing on plan, but of course, adding also to the R&D and SG&A expenses.So this results then in an EBIT of SEK 5.8 billion, excluding restructuring, up from SEK 4.5 billion a year ago. This represents then a margin of 10.6%, which is then an increase of 240 basis points year-over-year. Again, the gross margin in Networks is the big driver for this improvement on bottom line as well. We have a graph there in the bottom also showing the EBIT margin on a rolling 4-quarter basis. We are at 13.4%, which has done well within the range of the 2022 target, which is between 12% and 14%. And I can add also, which is not on the slide here, that the EBITDA target of 15% to 18% that we have set up for the long term can now be compared with the actual performance in 4 quarters, which is 14%. So let's have a look at how these profits then translate into cash flow. And you can see here that cash from -- cash flow from operating activities increased by SEK 0.5 billion, of course, supported by IPR payments coming into Q2 rather than Q1, but also offset by certain tax payments where last quarter benefited from tax refunds to the tune of SEK 0.7 billion.So here, I think the important thing to talk about is working capital where we really continue to focus on lead times in our company and keeping capital efficiency in our company and specifically the focus on project deliveries. And the whole credit to cash cycle now has really enabled us to become more and more capital efficient while, at the same time, growing top line. And this is, of course, something we will continue to focus on going forward as well. Important also to mention when we talk about working capital is the inventory piece where we continue to monitor, obviously, the component situation and make sure that we have proper resilience so we can deliver on time to our customers, which we have done so far.So free cash flow, thereby, before M&A, came out at SEK 4.1 billion. This also is an increase then by SEK 0.8 billion year-over-year. And again, looking at the rolling profile here and comparing with long-term targets, we are now delivering free cash flow before M&A at 9.6% of sales. And as you know, the long-term target that we have discussed is between 9% and 12%, so we are within that range as well. When it comes to our cash position then, net cash increased by SEK 0.7 billion quarter-over-quarter, coming out, of course, of this free cash flow generated in the business, but also impacted or netted out by the dividend part 1 that was paid now, SEK 3.3 billion in the first -- for the first half of the dividend paid out. So net cash ended up at SEK 43.7 billion.And gross cash, there are a couple of movements there as well. We are now up to SEK 77.1 billion. As you know, we issued a EUR 500 million bond, an 8-year unsecured bond in the market during the quarter. We have also utilized a loan commitment from the European Investment Bank during the quarter, about $300 million as well, which also is there to support our R&D in 5G. So as a result of these events or actions regarding the debt portfolio, we have extended now the average maturity in the debt portfolio to 4 years from 2.2 years a year ago.Lastly, on this picture, I'd like to comment on return on capital employed, an important metric for us also, which amounted to 13.5% now compared with 9.9%. This is an increase, obviously, of around 4 -- almost 4 percentage points year-over-year, again, a combination of improved profits and capital discipline.I wanted to say a few words about IPR. And this period that we have had has been active when it comes to renewal renegotiations. Of course, we're very pleased with the renewal with Samsung. It's a global multiyear agreement, which confirms again the value of our patent portfolio. In addition to that, we signed up with one additional company for another renewal in July. So that falls out of the Q2 period, but still important to mention here because it will impact the Q3 numbers.So all in all now, our portfolio of license contracts amount to SEK 7 billion on an annual basis. And this is the starting point that you can see here in this bridge. And then there are a couple of factors that explain the difference, which is a question we often get, to the SEK 10 billion which we had in 2020. And I'll go quickly through them. Of course, we're exposed to FX movements here. That's the first bar here. We are impacted by the relative weakness of the U.S. dollar towards the Swedish krona. The other factor, of course, is the upcoming renewals of expired contracts that we are working on, as mentioned.And then the third bucket has to do with the fact that not all of the revenue in IPR is recurring. Some is nonrecurring, and this can vary between quarters and from time to time. And then finally, the fourth bucket is lower volumes from one of the licensees affecting the numbers as well. So to conclude on this, we do feel confident that the leading position we have in 5G on the patent side will create a foundation for growing the IPR revenue going forward.Now I'm going to round off with a few words on the planning assumptions. First of all, it's encouraging to see now that the Dell'Oro forecast for the market growth has increased dramatically, I would say, from 3% in their January report to 10% now for 2021. And you see here how that breaks down into different regions as well with North America, 12%; Europe, 9%; and China, 11%.Regarding our own top line, I just want to remind you that the normal seasonality is plus 5% from Q2 to Q3. But again, I want to point out that this varies, of course, with big fluctuations between quarters depending on deployment. Then we talk about the risk of losing a significant market share in China, of course. And under the planning assumptions in the report, you can find the quarterly numbers of sales in China. Over to IPR here. I mentioned already that SEK 7 billion is the annual volume of contracts that we have. And then gross margin, again, we're not guiding specifically on that. But just to reiterate that the gross margin can vary quite a lot between the quarters, so look rather at the rolling 4-quarter. Last point, Digital Services then. Considering the risk in China and also the fact that, which we've already said earlier, that 2021 is an investment year for Digital Services, we expect now a similar earnings level in Q3 that we just delivered in Q2, while we expect Q4 to become breakeven on an isolated basis for Digital Services. With that, thank you, and back to you, Börje.

[E. Börje Ekholm, President, CEO & Director]

Great. Thank you, Carl. So Ericsson continues to be well positioned to take advantage of the market momentum we see now as 5G is increasingly deployed around the world.We see the North American market moving very fast with a strong demand for 5G, and there will be a key opportunity now as the operators are building out mid-band spectrum that will be lit up at the end of the year. And as you all know, mid-band spectrum and buildout in mid-band is critical to give the end-user experience that you can get from a 5G network. So we are, of course, very excited about our position in the market and continue to work with the leading operators in North America to build out their networks. In Digital Services, we continue to see good momentum in 5G Core, and we have here been gaining footprint over the last few quarters. But we also recognize, to capture the opportunities that are in front of us, we need to invest in R&D. And costs will come before revenues. So we are continuing here, as Carl also highlighted, to ramp up our investments in R&D to capture the market opportunities. And we will see revenue start to be generated from this portfolio, call it, beginning of next year, but then ramping throughout next year. We also see that with 5G being built out and as 5G is increasingly built out in mid-band, it will be a platform for innovation. And that will especially be -- well, it will be for the consumer space, but it will especially be for enterprise spaces. And we are very excited and we are strong believers that with 5G, wireless communication can, for the first time, be the primary choice of technology -- access technology for enterprises and basically be the backbone of digitalizing enterprises for the future. We think this translates into a very exciting growth path for Ericsson.What we also see is that we are seeing a strong momentum in the business, as we've already said, but also the investments we made in a flexible supply chain allows us to capture the growth opportunities in the market. And it's thanks to the investment in a global supply strategy we've had for a long time that actually have allowed us to respond to customer needs very quickly and capture the extra demand that we see. So when we look ahead, we see that we're well positioned, that we have a strong business momentum, competitive product portfolio, so we feel very comfortable about the targets on group level for 2022. So with that, I think before moving over to Q&A, maybe you want to add something, Peter?

[Peter Nyquist, VP & Head of Investor Relations]

No, I think we're all happy with the presentation so far. And so we'll move into the next phase of this presentation here from the studio. So that will be the Q&A. So with that, I would like to connect with you, Richard, so you can open up the Q&A.

[Operator]

[Operator Instructions]

[Peter Nyquist, VP & Head of Investor Relations]

Thank you, Richard. And we have the first question here. It's from Ed Snyder from Charter Equity.

[Edward Francis Snyder, Managing Director and Principal Analyst]

A couple of them, if I could, please. First off, you mentioned O-RAN. But even if we ignore the interoperability and the system integration problems with a multi-vendor solution, which has never occurred before, it seems clear that a workable solution probably won't be ready for a year or 2. It kind of begs the question of what the point of O-RAN is.If 5G is maturing in China in terms of the buildout and the U.S. is committing now to systems for their deployments, it seems as if most of the big tenders will already be awarded and being built up before O-RAN even sees a practical solution. So would it be a 6G system? Or is there some sort of market dynamic that's going to drive carriers to move from systems they choose now to something that has not been used before and will have to be shook out halfway through 5G? And then I have a follow-up, please.

[E. Börje Ekholm, President, CEO & Director]

It's a great question, Ed. The reality is clearly O-RAN is something that will happen, and that's what we are investing for as well. We see, in reality, the first step to be the Cloud RAN portfolio as that will allow our customers to migrate towards an open architecture. And it will take a few years before we have a fully operational O-RAN solution, then we can debate how long it is. But there is a question of here and now of building out 5G coverage, and that's what we also see our customers doing.But of course, we need to work with our customers here to make sure that they have the best solution. And it can well be that O-RAN can have certain applications earlier where you have less performance demands, for example, could be rural coverage, for example. So there are pockets where we can see that come. But for sure, O-RAN will be a fundamental part of the 6G solutions. That's no question in my mind. But exactly how it's going to pan out, in the meantime, I think it remains to be seen. It depends on how the technology matures, clearly.You said you had a follow-up, Ed?

[Edward Francis Snyder, Managing Director and Principal Analyst]

And that does kind of dovetail my next question. So the U.S. is obviously in ascendancy now in the 5G rollout now that C-band auctions have been completed. But if you look at the different segments, you've got a lot of spectrum to clear. So it's going to be a multiyear process. And at the same time, I don't think the business plan has been proven well enough in China that you're going to see the same level of Massive MIMO mix versus macro.So 2 pieces, if I could. One, do you see that the rollout in the U.S. will favor more of a macro cell approach initially with MIMO to cover capacity and so you've got a lower mix of the high-density stuff? And two, does this dynamic change? If you look at, say, T-Mobile's Band 41 versus the C-band spectrum, which is higher, do we have a better chance of seeing either MIMO or maybe more macro in a 2.4-gigahertz environment than we do in, say, a C-band?

[E. Börje Ekholm, President, CEO & Director]

Thanks. Well, what we see, we see that, of course, we need to build out a very big coverage and big density of mid-band because ultimately, that is what's going to give the end consumer the user experience of 5G. So today, in many countries, we have been focusing on, call it, low-band buildout. In reality, that gives a 5G coverage. But in order to give the real performance benefits of 5G, you need mid-band and you need carrier aggregation across different frequencies.So we see right now that there will be a very big buildout, of course, of the C-band in North America. That is going to drive the market, and we will see that buildout happening. For sure, it's already starting to ramp, but it will continue throughout the year and into the next year. After that, we will start, of course, to see densifications of the network. So that's the next step. Exactly how this will be, it depends on customer, it depends on their specific situations. So I think that's a question best posed to them rather than I try to interpret their strategies, and I shouldn't really do that. So I do -- but we are very excited about the process we see in North America and the buildout. And we, by the way, we see a similar activity in multiple countries, being Australia, being Japan, being Middle East, for example. So a lot of things are moving in the 5G world.

[Peter Nyquist, VP & Head of Investor Relations]

Thanks, Ed, for those questions. Thank you. We'll move to Francois Bouvignies at UBS.

[Francois-Xavier Bouvignies]

My first question is maybe a clarification on China. So when I look at your comments, you said that you had lower volumes from delayed 5G deployment in China and that you had an impact -- negative impact of SEK 2.5 billion in the quarter. So my question is this SEK 2.5 billion of this delay, is it something that you're going to see as a delay coming back in the second half of the year? Or this negative impact this quarter, is this an evidence of already some market share impact, I mean, negative share impact because of the trade tension? Just wanted to clarify that if that's okay.

[E. Börje Ekholm, President, CEO & Director]

Yes. No, it's not coming back. It depends, of course, on how the ultimate tender will look like and the distribution in tender. But we have said and you see that we think it's prudent to plan for a significant reduction in market share. And if that is the case, it's not coming back. So what is the reality? We -- it's very hard to say. We know the geopolitical tension with Sweden. We know what goes on there. So what we see here is a reduction in the China volumes. And we can speculate and we can have a hypothesis, but the consequence is very clear on our sales volume and don't -- be prudent enough don't to assume it's coming back.

[Peter Nyquist, VP & Head of Investor Relations]

Okay, Francois?

[Francois-Xavier Bouvignies]

Okay, that's very clear.

[Peter Nyquist, VP & Head of Investor Relations]

Thank you.

[Francois-Xavier Bouvignies]

And can I have a follow-up?

[Peter Nyquist, VP & Head of Investor Relations]

Yes, sure. Sure.

[Francois-Xavier Bouvignies]

Yes. The follow-up is on Open RAN. And specifically, we are seeing a lot of projects in Open RAN, and the readiness is still not there. I mean with, I mean, Rakuten and Dish Network and other initiatives like Vodafone with recently, which I think is one of the big customers of yours. From what we see in the release or public statements, you don't seem to participate yet in this kind of project so far. So I was wondering, what would make you change your mind or what would be the trigger for you to participate more in the Open RAN? And why do you -- don't you participate today with a big project going on with your customers?

[E. Börje Ekholm, President, CEO & Director]

It's a couple of things going on here. First of all, and that's often not thought about, but we are actually the largest contributor to the O-RAN Alliance on standards. So we're already very active in that. But what we are doing now is that we recognize there is a need to build out the 5G networks around the world right now. So it's a here and now question where we do believe the purpose-built networks actually can deliver the performance that's required in 5G today. So we are simply saying, okay, by the time O-RAN is ready, we will also be there with solutions, but we don't feel it's the right time right now and divert focus from actually what goes on in the market.

[Peter Nyquist, VP & Head of Investor Relations]

Okay, Francois? Thank you. Let's move to next question from Peter Kurt Nielsen at ABG.

[Peter Kurt Nielsen, Lead Analyst]

A question related to Digital Services, please. It would appear that profitability here is highly dependent on volumes in China. Could you elaborate a bit on that, please, why we seem to be so dependent on China as you sort of update your guidance for Digital Services? And also, it would appear that you are investing or planning to increase your R&D spending more than previously anticipated within -- on the 5G Core side. Why is that? Have you've seen increased competition that are forcing you to this? Anything you can say on elaborating a bit on this, please?And just, if I may, give one follow-up. How has the lower volumes in China impacted the margins in Networks? It seems clearly it's been negative in Digital Services. Has there been a positive impact on margins in Networks because of the lower volumes in China?

[E. Börje Ekholm, President, CEO & Director]

Okay. If we start from the end, no, it's not been positively contributing to the Networks margins in the second quarter. But it is fair to say that the second quarter last year, we had a write-off of pre-commercial development, but we have a positive margin on what we ship in China. So we would have had better margins in Networks with China volumes in, to put it that way.Digital Services, no, it's not -- it's actually continuing according to the plan we've been operating with. So -- and you know that we have been ramping R&D. And of course, that takes a bit of time before you see it on the cost line. So we have added resources throughout the year, and we are in a way, to a much less extent now, adding resources in addition. But it's all according to the plan to make sure that we can capture the 5G Core opportunities that we actually see and that we are tendering for. So for us, this has been just part of the overall strategic plan for Digital Services. So if you tack on that the China volumes, and you can understand that Digital Services is a business, it's software-like with a very high R&D intensity. So of course, any volume change is very important for our ability to deliver a margin. And it is fair to say the Chinese volumes, if you look overall in telecom, they're probably 50% plus, 60% plus in many parts of the total global volume. So of course, we have a dependency on losing footprint in China that primarily hurts or is more exposed in Digital Services than it is in Networks.

[Peter Nyquist, VP & Head of Investor Relations]

Okay. Peter Kurt, thank you. We'll move to the next from -- question from Aleksander Peterc at Societe Generale.

[Aleksander Peterc, Equity Analyst]

I would like to delve a little bit into your IPR, if I may. You provided a very helpful slide here on this. So just to be clear, the SEK 7 billion run rate that you now have, that's for the current year. It's up from SEK 6.6 billion, if I remember right. And so this presumably reflects the deal that you have signed in here in July. Now my question is really on the expired contracts. Do you still expect some of that to come back on in IPR, so we get potentially to somewhere around SEK 8 billion going forward? And then, obviously, FX is here to stay, let's assume, and lower volumes from Huawei is here to stay as well. So we will land somewhere lower, but is there still some catch-up that you would expect?And one on IPR, if you could give us a feeling on how you think about the Apple negotiation, which is due by the end of this year. Do you have anything to say on that? And then just a second quick follow-up would be on the timing of the Verizon contract. How many years will that be rolled over approximately so we can gauge how much it will contribute.

[Carl Mellander]

Thanks, Aleksander. I can take that. First of all, the Verizon contract is over 5 years. And as Börje said, it's the largest contract ever in Ericsson's history. So that's a nice thing to announce today.When it comes to IPR, yes, certainly, we are working with the other not yet renewed licensees as well in order to get to agreements. And we signed one then early July. So that is going to help revenues going forward, and there will be a catch-up effect in Q3 from that as well. And we continue, of course, in the team to one by one settle the outstanding deals. When it comes to Apple, I would say it's far too early to talk about that. It will expire, as you say, at the end of the year. And the parties will, of course, come together to resolve that in the best possible way. But that's too early to comment on any specifics regarding that.

[Peter Nyquist, VP & Head of Investor Relations]

Thanks, Alex. We'll move to next question from Sandeep Deshpande at JPMorgan.

[Sandeep Sudhir Deshpande, Research Analyst]

My first question is, clearly, I mean when you look at your Networks business outside China, your market share gains are very -- I mean your growth in market share gains are very significant. Is the -- are these share gains, gains that you had made a couple of years ago or in the past? Or is this just new market share gains that are happening starting in the last 6 months associated with the geopolitical tension, et cetera, which is causing the share shifts between China and the rest of the world? And I have a follow-up as well.

[E. Börje Ekholm, President, CEO & Director]

What you see now coming through in the numbers are mostly the wins we had some time back. So it takes some period of time. It depends a bit on the contract, depends on the situation for it to flow through. So, so far, the most recent wins have only very limited impact on the numbers you see. And I know this is a focus on the overall market share situation, if it's geopolitically driven. I would say it's, of course, very hard to separate the 2. But we see that we win market share in markets where also all vendors are allowed as well as we win in markets where only Western vendors are allowed.So our overall market share gain, sure, part will be contributed to geopolitical situation. But I would also say here, it's the strength of our product portfolio that allows us to be truly competitive against any competitor right now. And you saw, for example, the recent win in Malaysia where we are able to build out the national 5G network. It's a very important contract win for us as well, indicating that we can win market share in many markets.

[Peter Nyquist, VP & Head of Investor Relations]

You had a second question, Sandeep?

[Sandeep Sudhir Deshpande, Research Analyst]

Yes. Just a quick follow-up. Now talking about the same geopolitical issues and the Digital Services business, given that you might not be able to have that 4% or 5% share that you currently have in that business from China, are there businesses within Digital Services, are there business units where you can now do reductions, et cetera? Because, I mean, Digital Services has been promised to be profitable for a very long time, and it hasn't delivered as such. And now that there is a structural -- potential structural change in one market, whether there needs to be a further thought process on the cost structure within the Digital Services business.

[E. Börje Ekholm, President, CEO & Director]

The -- it's a good question, and it's a good thinking. But I would say, if you look at the product portfolio, it's typically global products in there. So it's just because you lose volume in one market doesn't mean you can restructure in any way. We -- so in reality, it's just a loss of revenues. The R&D remains the same to say pretty much. So for us, we are -- that's why we're saying very clearly that due to the delay in -- or due to the risk of losing China volumes, it's likely that we need to push out reaching the targets because we need to compensate that sales that we lose in Mainland China by growth in other markets around the world. So when you see that, that's why you see the push out now.So I would say, from a strategic execution in Digital Services, we're continuing to deliver on the plan and on the objectives we set out a few quarters ago. But due to the geopolitical situation with -- between Sweden and China, we're saying, that will get pushed out now. And that's an unfortunate consequence, but we need to deal with it and develop the business in the other markets. But I will also say that the good thing is we're seeing good growth in Europe and North America in Digital Services. So we feel that we are going to grow into that loss of volume.

[Peter Nyquist, VP & Head of Investor Relations]

Okay. Thanks, Sandeep, for those questions. The next question will come from Fredrik Lithell at Danske Bank.

[Fredrik Lithell, Senior Analyst]

I just wanted to ask a little bit on Cradlepoint that you acquired some time back. What is the sort of the status of that unit right now? And how do you expect and see that this should progress going forward? And when should we expect that this unit would be not heavily loss-making anymore, but rather the opposite? And a little bit if you could talk about growth on that unit as well.

[Peter Nyquist, VP & Head of Investor Relations]

Do you want to take it?

[Carl Mellander]

Yes, thanks for the question, Fredrik. Cradlepoint is developing well. I must say, it's on track on the plans. And following basically what we said from the start that there will be a 1 percentage point impact on the EBIT margin in '21 and '22. And we -- as you saw perhaps in the report, it contributed now a bit positively from the final PPA calculation there. So now we are, going forward, we are in good shape, I think, to deliver and actually grow that business also outside of the main markets where they have been successfully establishing footprint so far. So I think Cradlepoint is a well-performing asset in our family now, and it's great to have them onboard.

[Fredrik Lithell, Senior Analyst]

Is that going to be sort of a little bit of a hub for further acquisitions that fits into that type of portfolio of products and services? Or how should we -- what should we expect from this unit, I mean, in terms of growth? And when it -- should it move out in the rest of the world in another way than what it did before and so on? So a little bit more, if you could, on the planning for that unit.

[Peter Nyquist, VP & Head of Investor Relations]

Do you want to take it, Börje?

[E. Börje Ekholm, President, CEO & Director]

I can start. You're absolutely right, it will be -- what we are seeing is that we can leverage the quality of products. It's been predominantly sold in North America so far with very limited presence outside. We're gradually now expanding globally, and that is a quite exciting opportunity as well. So growth we foresee to be quite good for Cradlepoint. What we're also seeing, and you hit on that, it becomes a bit of a hub for developing new solutions that we can actually go through their network of distributors to the market. So we're very excited about the opportunity we create with the acquisition of Cradlepoint to capture a larger and increasing share of the enterprise market.But we should also recognize that Cradlepoint is one piece that we need for enterprise. We're also looking at other growth opportunities in enterprise, being a dedicated network for corporations, campus networks, being in our global connectivity platform, IoTA. So there are a couple of additional opportunities. But we believe the market opportunity in enterprise is so large that we need to increase the investments in that area by also looking at the broader acquisitions outside of Cradlepoint.

[Peter Nyquist, VP & Head of Investor Relations]

Yes, thanks, Fredrik. The next question is from Dominik Olszewski from Morgan Stanley.

[Dominik P. Olszewski, Research Analyst]

Two of them. So from the Q2 revenue run rate that you're indicating, it looks like there's basically SEK 5 billion downside for sales in the second half in China to be sort of pro rata what we've seen in Q2. Could you please maybe talk about the regions and projects which could help to mitigate that downside in the second half, so other areas? Obviously, for example, overnight, you had Dell'Oro raising estimates for the rest of the world, North America, globally.And then the second question is, in the past, you've talked a lot about labor shortages, particularly in North America for tower crews. And obviously, today, we're in an inflationary backdrop to talk about labor shortages in certain regions. So could you talk about whether that's a constraint on deployment in the second half and into next year?

[Carl Mellander]

Maybe I'll take the first one first because, no, actually not labor shortages that we talked about before. It was really about rollout crews, feet on the ground, where that was actually limiting our volumes. We don't see that to be a limiting factor now. I think it's rather the site acquisitions from customers that determines the speed. And as you see, speed is very high at the moment. So we have sorted that problem out.

[E. Börje Ekholm, President, CEO & Director]

Yes. And if you look at our numbers, you see that we have grown -- if you take Networks, for example, or even the total company, we've had an organic growth of 8% despite losing 60% in the China volumes. So -- and we are growing in many markets for really 2 reasons. One is the build-out of 5G drives demand and that drives increasing demand, but also that we've been able to gain market share. And we started to talk about that already in 2018 or end of 2017. So that is something that we have systematically invested in to make sure that we can gain scale outside of China as well. And we believe that will contribute and help us to continue to grow even if the risk is very high that we will see significant loss of market share in China. So that's probably the best we can look at it now. So if you look at Q2, you'll still see that even excluding China, we have a very healthy development in the business.

[Peter Nyquist, VP & Head of Investor Relations]

Okay. Dom, thanks for those questions. We'll move to Dominik Olszewski -- no, sorry, that was the previous one. Amit Harchandani from Citigroup.

[Amit B. Harchandani, Director & Head of EMEA Technology Research]

Amit Harchandani from Citi. Two questions, if I may. My first question is on the topic of Networks margin. You have delivered solid margins in this quarter, last quarter, indeed, across 2020 versus your long term -- or rather 2022 guidance of 16% to 18%. Given what we have seen in China in terms of volumes and maybe potentially profitability profile of the Chinese business, is it fair for us to assume that the Networks margin going forward is more sustainable on average at the levels that we have seen over the past 6 -- 4 to 6 quarters? Or are there any factors which could still take you down to that 16% to 18% range? So your thoughts on that would be appreciated. And then I have a follow-up.

[Carl Mellander]

Thanks, Amit. Should I start, Börje? Yes. On the Networks margin, I think what we see is the result of work in R&D mainly where we are able to design out cost of the product and make it both, of course, attractive from a feature functionality point of view to -- for the customers, but also manage the cost situation. And you see the fruit of that in the ever-improving gross margin. We don't see any particular reason why that logic would change over time.Then as we always point out, it's, of course, individual quarters can change here and there because of how deployments are made and so on. But basically, I think our aim is to establish a stronger and stronger logic there with the cost side on the one hand and the competitiveness leading to the price side and in Networks to continue on good levels.

[Peter Nyquist, VP & Head of Investor Relations]

And you had a follow-up, Amit, you said or a second question?

[Amit B. Harchandani, Director & Head of EMEA Technology Research]

Yes. Yes, I did. My second question is with regards to what you have seen in China when the development is not ideal for you. I'm trying to understand, what are you hearing on the ground in terms of your customers, your partners? Is there -- I mean if you are going to lose share, do you get the impression that it's going more to the domestic competition? Do you get the impression it's foreign competition? Do you get a sense that they might be lobbying on your behalf and there's a way back in into China? How are you -- what is the feedback on the ground that you are getting? And what's the level of confidence that this is -- this might potentially even turn in your favor in the future?

[E. Börje Ekholm, President, CEO & Director]

It's -- there is an ongoing tender process right now in China. So it's a bit hard to speculate where that is going to go. Normally, the way they go, it's hard to know where you end up. But you have also seen there have been indications that would result in us significantly or getting a significantly lower share, and that's a bit what we point to. I think it's easier to comment on these things or more appropriate to comment on these things once we know how the tender process will fall out. But what we know, and it's the same thing across the world, is that if you look at the performance of our products, in-field performance, it is very good. We have a competitive portfolio. We are gaining footprint in other markets. So we quite, in that sense, feel that we have a strong proposition to customers. But let's discuss more about the China situation once we're through with the tender process.

[Peter Nyquist, VP & Head of Investor Relations]

Okay. Amit, thank you very much for those questions. We'll move to today's last question. It's from Daniel Djurberg at Handelsbanken.

[Daniel Djurberg, Research Analyst]

Two questions then, if I may. Starting with the Network gross margin was negatively impacted by a write-down of pre-commercial product inventory. My question is, and this was related to Mainland China, if you will see limited or lower volume in the current tender, how significant the inventory write-down risk lies ahead? Or was your write-down in Q2 also related to possibly lower volumes ahead?And also a question, if I may, would be on China again. And that would be, out of the SEK 1.5 billion in revenue you had in the quarter, how much would you say is sort of recurring to existing installments, software, et cetera? And how much is related to previous 5G deployments that will, so to say, disappear when done? It would be great to know.

[Peter Nyquist, VP & Head of Investor Relations]

I guess you mean the write-down you mean on Digital Services, right, not on Networks?

[Daniel Djurberg, Research Analyst]

Yes. Yes, on the...

[Peter Nyquist, VP & Head of Investor Relations]

Yes. Okay.

[Carl Mellander]

Exactly. So your second question then, how much is recurring? I mean there is, of course, a portion of support revenue for installed base. So we have to follow what happens with that. It's hard to determine exactly. And as Börje said, let's await the conclusion of this and then we can comment on how it played out, basically.On the other question, of course, we always scrutinize our balance sheet and make the impairments, if we need to, every quarter. Now in Digital Services, we arrived at the conclusion that this SEK 300 million write-down was the appropriate thing to do given where we are on that pre-commercial inventory. But now, of course, our balance sheet is what it is for the situation we have now, and we would have to consider that going forward. No material write-down risk that we see today in that context.

[E. Börje Ekholm, President, CEO & Director]

And it's worth to say in the rest of the business, we have -- it's global products again, so that kind of helps. It's really only when you have market-specific products, and that's what we have in this case.

[Carl Mellander]

Exactly.

[Daniel Djurberg, Research Analyst]

That's perfect. And if I may only, the very, very last question would be on Japan. Obviously, very strong again in this quarter, making up for China weakness quite a lot, I would say. Is it any -- would you then be worried post Olympics or something that has -- or do you expect this strong strength in Japan to continue also second half or in 2022? Or is it something that starts to fade off?

[E. Börje Ekholm, President, CEO & Director]

Yes, the -- I don't think the Olympics have actually had any impact on this. It's more the need for the operators to get -- first of all, to build out 5G to start to develop applications on top of and for the capacity need they have in the network to cope with the increasing traffic volumes. So I would not -- I mean there are always going to be a little bit swings between quarters in individual markets. But I would not say I would hang it up on the Olympic games.

[Peter Nyquist, VP & Head of Investor Relations]

Okay. Great. Thanks, Daniel. So before we close today's call or video call, I would like actually to hand over to Börje for any closing remarks.

[E. Börje Ekholm, President, CEO & Director]

Thanks, Peter, who is appropriately dressed in a tie today. So anyhow, we're very excited about our market momentum, and it has continued during the second quarter. But what we're more excited about is actually that 5G is gaining momentum around the world with increasing build-outs, and it's a here and now question. And with the investments we made in the product portfolio, making that a competitive offering to our customers as well as a competitive cost position that we've established over the last few years, we feel that we are in a strong position to capitalize on this increasing demand for 5G. And we're very excited about the future, the second part of this year, but also into 2022.

[Peter Nyquist, VP & Head of Investor Relations]

Thank you.

[E. Börje Ekholm, President, CEO & Director]

Thank you.