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Ericsson (ERIC 2.64%)
Q4 2019 Earnings Call
Jan 24, 2020, 3:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Welcome to Ericsson's Analyst and Media Conference Call for the Fourth Quarter Reports. [Operator Instructions] Peter Nyquist will now open the call.
Peter Nyquist -- Vice President, Investor Relations
Thank you operator and hello everyone and welcome to today's call, Q4 call. With me here today, I have our CEO Borje Ekholm and our CFO Carl Mellander. So this short statement first. During the call today, we will be making forward-looking statements. These statements are based on current expectation, certain planning assumptions, which are subject to risks and uncertainties. Actual results may differ materially due to factors mentioned in today's press release and discussed in this conference.
We encourage you all 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 call to our CEO Borje Ekholm. So please Borje.
Borje Ekholm -- President and Chief Executive Officer
Thanks, Peter. Welcome and thank you for joining us for this report for the fourth quarter. And again, Q4 marks another quarter of execution on the focus strategy, building on technology leadership, cost leadership, product-led solutions and global skill and scale. We continue here to benefit from our strength and competitiveness as we grow faster than the market with [Phonetic] maintain strong gross margin. Our underlying business fundamentals remain strong and we feel we have a very solid competitive position. Topline grew organically during 2019 with 4% and 1% during 4Q. We are in the beginning of a technology shift and our investments to lead in 5G is now starting to yield results.
Today, we have 79 contracts and 24 live 5G networks, and we see that we now win new contracts based on our leading technology. The rollout of 5G continues in North America with good underlying growth. However, [Indecipherable] related to the announced merger has reduced sales in one account during the Q4. However, the decline in North America was compensated by good demand in Northeast Asia and the Middle East. We maintained a solid gross margin of 37.1% overall and 41.1% in Networks. The sequential reduction in gross margin in Networks was fully attributable to the Kathrein business that we acquired during the quarter.
When we win new footprint, the overall margin in those contracts are positive and contributes to our long-term margin targets, but the initial margin is challenged. However, we also see during this last quarter that the initial low margins have been fully compensated by operating leverage, showing the strength of our underlying business.
As I said, the acquisition of Kathrein closed during the quarter. This is a very important acquisition for us, as it will allow us to strengthen our antenna capabilities and improve our ability to supply integrated site solutions. We're now working on integrating Kathrein into Ericsson and thereby establishing and building a leading portfolio of antenna solutions. But the contribution during the fourth quarter was a negative on our operating margin. So if you look for the operating margin, excluding restructuring and the fine to the US authorities, it was 9.7% for the full 2019, actually putting us very close to the target for 2020 one year early.
And the fourth quarter was impacted by a couple of decisions we took. One is clearly the Kathrein acquisition that raised opex. But that we see will pay off over time through the strength and competitiveness in the antenna space. The other area where you see very discrete increases and it's in opex is for digital transformation. And that's critical investment for us to digitalize the internal ways of working and the way we interact with customers, fully in line with our focus strategy. We take these investments to take the next step in automating our processes. And we will see them gradually pay off during 2020 and into the future through better cost efficiencies. So that is clearly investment program, that, of course, has bumped up opex in the short term, but it should help lower longer-term opex.
The other area that we're investing in is of course security as well as our compliance program. And that's impacting also the opex short term. The underlying business continues to be strong in Networks and the gross margin, as I said, was the solid 41.1% during the quarter. The operating margin was sequentially reduced to 14.5% during Q4, and that's due to the Kathrein acquisition, as well as Networks share of the higher investment I just went through. For the full-year, however, we are at 16% operating margin, which is in the range. And we're also very comfortable with the outlook.
Digital Services, we continue to execute on the turnaround plan. And this past quarter, they reached positive operating income, despite provisions of about SEK300 million for critical projects. And you know, we have now resolved three-quarter of the 45 initially identified critical projects.
The next item, free cash flow before M&A was SEK7.6 billion for the year. That's after the payment of the fine to SEC, DOJ. And if we were to look at cash flow before the fine, the free cash flow was the highest since 2010, showing the underlying strength of the business. And the Board proposes a dividend of SEK1.50 per share. And that is to confirm the confidence in our strategy and ability to execute and reach the targets set for 2020 as well as 2022. Short comments on the market for -- during the fourth quarter. We can see that overall, the market in North America was very strong, except in the accounts affected by the uncertainty of the announced merger. And therefore, the sales overall shrank FX adjusted.
Europe was flat after growth in Networks was offset by contract exits. Latin America declined as large contracts were finished in 2018. Southeast Asia, Oceania, and India grew based on strong demand for 4G. Northeast Asia grew following strong 4G, and I will say 5G deliveries to prepare the network for 5G. And here, we suffered also from Digital Services that fell due to lower sales of legacy products. Middle East and Africa grew driven by growth in the Middle East. Look -- for the full-year, We saw that North America was very strong, of course driven by the initial demand for 5G. We saw Northeast Asia be very good. Europe fell due to contract exits for Europe and Latin America. And here, Latin America fell due to timing of large projects.
Southeast Asia, Oceania and India fell slightly. And this is explained by decline of legacy products in India within Digital Services. Middle East, Africa was flat.
With that, I'm going to give the word over to Carl.
Carl Mellander -- Senior Vice President, Chief Financial Officer and Head of Group Function Finance and Common Functions
Thank you, Borje, and good morning, good afternoon to everyone. Thanks for taking the time. Let's look at the full-year performance to start with then, where we reached SEK227.2 billion in net sales and this corresponds to 4% organic growth. Gross margin at 37.5% is within the 2020 target range already. And the operating margin here at 5% was of course including the SEC-DOJ settlement. But if we exclude that, the operating margin was 9.7%, which is also close to the 2020 target as Borje said. The full-year operating income number SEK22.1 billion, again adding -- having added back the SEC-DOJ settlement cost, and that's more than double the profit of 2018. Net income, positive number, improved to SEK1.8 billion, driven by the higher operating income of course, but also lower financial net and earnings per share diluted here came out at SEK0.67.
Free cash flow again SEK7.6 billion for the full-year. And also here, if adjusted for SEC-DOJ payment, we delivered SEK17.8 billion free cash flow before M&A, which is four times higher than that of 2018. Zooming in on the fourth quarter, net sales SEK66.4 billion, 1% up organically year-over-year. And here the operating margin 9.7%, was impacted by couple of items. We made a partial release of the SEC and DOJ provision. I'll come back to that, SEK0.7 billion, there was also a non-cash element coming from the wind-up of the legal structure of a former joint venture we had, ST-Ericsson, which is included here in the cost was a negative SEK0.3 billion. But we can exclude for that, and then the operating income is SEK6 billion and operating margin thereby 9%.
Also you see net income improved here to SEK4.5 billion from a negative minus SEK6.5 billion last year. And finally then free cash flow before M&A in the quarter was a negative minus SEK1.9 billion. But of course obviously in that amount, we have absorbed the SEK10.1 billion payments to SEC and DOJ. Let me guide you through how the SEC and DOJ settlements have affected the accounting. This is a bit of technicality but could be good to know. So the settlement was fully covered by the provision we took in the third quarter. We paid out the SEK10.1 billion now during December. And that obviously reduced the provision with the same amount, but then the interest component of the settlement came out lower than we had estimated when we made the provision and this means that we could dissolve further SEK0.7 billion of the provision. And that then again had an impact on the P&L now in the fourth quarter positively. So now we still remain with SEK0.6 billion of provision for this purpose and that will then cover future monitoring costs in this connection.
Let's look quickly at the segment performance, starting with the largest segment, Networks. We see organic growth year-over-year of 2%. Sequentially, we grew Networks by 13%, but that's a bit lower than the historical seasonality, which is typically 18%. As Borje described, this was really affected by -- or impacted by the uncertainty in the US with one account coming in a bit lower, but the underlying business fundamentals in North America remain strong. I think that deserves repeating. So also encouraging to see then that while North America was somewhat weaker, several other markets stepped up and compensated here, and we saw particularly strong market growth in Japan and Saudi Arabia, for example as they prepare to launch 5G.
So gross margin in Networks stable, above 41%, solid, but with a certain decline then quarter-over-quarter. I'll come back to that shortly. Operating margin 14.5% was down year-over-year and quarter-over-quarter. And in a minute, I'll go through a bit more on the key items behind that development, but for the full-year, as you see in the graph, Networks delivered an operating margin of 16%, excluding restructuring, and this is right in the middle of the 2020 targets of between 15% and 17%. 5G leadership momentum continues. We have now 78 with an -- 79 I believe commercial 5G agreements, I'm checking this morning and 24 live 5G networks. So that's going well as well. And here, we have earlier talked about strategic contracts. So I wanted to update you all on that as well, and the rationale for those contracts. And as you know now, in essence, these are selected few contracts that allow us to capture opportunities in the market to advance our position, and coming often typically with lower initial margins, but positive and value creating, of course, overall. And several quarters in a row, we have shown the impact of these contracts now, and what we do there is we net the impact of the contracts against, what we call, operational leverage, so other offsetting profit improvement measures.
So essentially, we look at the sequential gross margin development. And in Q4, as you can see here, the net effect was zero of strategic contracts and operational leverage and the whole effect sequentially is explained by Kathrein, as Borje mentioned before. Kathrein obviously is going to gradually improve over 2020. That's worth adding as well.
So digging a bit further into Networks, I wanted to show this graph as well. So again, full-year performance very solid, with 16% operating margin, and also Q4 gross margin can be deemed solid at 41.1%, but here, I wanted to show a bit more on how operating margin has developed over the year. I think this is relevant to understand the bigger picture here. And as you see there, year-to-date operating margin has been rather stable at around 16%, with some fluctuations between quarters. And Q3 was of course a very strong quarter for Networks with 18.4% isolated operating margin. And you also can see in the graph how this was supported by a low opex ratio. While in Q4, opex came back to bit higher levels, but fairly in line with previous quarters also, and that of course is visible then in the operating margin. So what we should consider here and you see the bullets to the right; one, Kathrein about SEK0.5 billion of impact. That's 1 percentage point or so, and we have the investments that we have decided to make in digitalizing the enterprise, but also compliance and security. But then we also have customer financing reevaluation and some impairment of accounts receivable and that's an effect of SEK0.3 billion in the quarter. Actually, that was a positive number in the third quarter. We are obviously investing also in R&D. So if you look year-over-year, we've added also some SEK900 million or so in R&D. And lastly, the lower seasonality on topline also finds through here. Again, the full-year performance in Networks, strong.
Digital Services, I think the main news items here is that the result was positive in the quarter. Borje mentioned it already, it's actually SEK42 million although we use billion SEK here with one decimal. It looks like it's 0.0, it's actually SEK42 million positive. So I think that's a great testament to the turnaround efforts in Digital Services. We see good momentum in the portfolio, customers migrating to 5G and sales were good here in OSS and Cloud infrastructure, not least. There was some decline of organic sales due to core sales in Northeast Asia coming down somewhat, but gross margin stable 38.1%. And I think what we see now is the continued impact from cost reductions and efficiency gains in Digital Services. And that continues. We are working on rationalizing the portfolio on the legacy side and reinvesting that part of it at least into the new 5G cloud-native portfolio.
Yeah, 10 contracts remain. Out of the critical ones, all the other ones have been handled now according to plan. And I just want to highlight here when we look forward that we of course are very committed to the target of low-single digits operating margin for 2020, but it might not be linear journey through the quarter. It can vary between the quarters, of course, depending on sales mix and business mix, etc.
Okay, Managed Services. And I'll speed up a little bit. Sales, SEK7 billion in the quarter, relatively flat if you adjust for FX, but with an improved gross margin year-over-year. This is fundamentally a stable business in Ericsson, but we can have some fluctuations in margin between the quarters due to the level of add-on sales for example that we deliver to customers and the timing of costs. So gross margin declined a little bit because of that, but full-year, we should look at the full-year here I think, 6.3% operating margin and this is even excluding positive one-off we had in the first quarter, and even this number is fully in line with the 2020 target for profitability.
Okay. Emerging Business & Other. We had some extraordinary items and we have described them before, it's the provision release and the ST-Ericsson legal wind-down. But if we exclude those special items, we see that this segment has improved its performance in 2019. We see organic growth and reduced losses both full-year and in the fourth quarter. So we should bear in mind also when we look at organic growth, we have adjusted not only for FX, but also for the 51% divestment of MediaKind.
We talked about strong momentum in the third quarter and in the investor update, this continues. So sales growth in IoT almost twice the market growth and now we have more than 5,000 enterprises on the IoT platform. So this is going well and right in line with our strategy.
Finally, we have iconectiv, that's our software-based number portability solution. That also continues to deliver profitable growth in both the fourth quarter and the full-year.
Opex, R&D and SG&A, here in R&D, obviously, we continue to focus investments in 5G, cloud-native AI, and you see how R&D has shifted here between the segments. Well, we are investing in Managed Services and Networks and reducing in the other two segments.
In SG&A, in the middle, if we had a one-off item of SEK0.2 billion, when it comes to customer financing, and then the SEK0.4 billion, which is around the corporate projects for the items that we have talked about earlier. Of course, there is also a negative FX element on both R&D and SG&A worth to keep in mind. On the right side, you can look at the graph here showing the yearly development of R&D and SG&A. You see that SG&A is down about SEK1 billion per year. So obviously lower absolute amount, but also lower percentage of sales and R&D meanwhile up in absolute money terms, which is part of our -- key part of our strategy I would say, but stable or even down in percentage.
So for 2020, we do expect some higher operating expenses than in '19. And this is driven by these investment areas, but also the fact that we have included the new Kathrein business. Of course, the ambition, at the same time that we have is to grow topline more than expenses. In other words, expenses as a percentage of sales should come down.
Okay. Free cash flow, quickly. I think we've said most of it already, but coming in at four times better than 2018 if we adjust for SEC and DOJ. We have had very strong focus on working capital efficiency again this year. I must say especially [Phonetic] the good result here, good cash collection, etc. and working capital days now down to 75 days, which is the lowest I can remember.
We ended the year with SEK34.5 billion in net cash and more than SEK72 billion gross cash. So that's supporting one of the fundamentals here in the strategy to provide resilience for our company.
Okay, so then to our planning assumptions here. And I really want to refer you as usual to the full report, but to mention very few ones here. Dell'Oro, which we listen to when it comes to the RAN market estimates that that market will grow by 4% in 2020, and '19, they have estimated grew 5.5%. So our Networks business grew a bit faster than that in 2019. And for sales in Q1, our average sales here when it comes to seasonality is minus 25%, but it's worth considering that Q4 was impacted by the US uncertainty we talked about. So the base is lower, meaning that the seasonality effect into Q1 should be somewhat better, lower negative percentage then.
IPR, we have signed a couple of new IPR contracts during the year. So the new base is SEK10 billion if you look at the contract stock we have compared with the SEK9 billion we have mentioned before. We also talked about Kathrein quite a lot and its impact here; obviously gradually improving during the year, but still we expect loss -- that to be loss-making for the full-year. Then OpEx finally. Typically, we see a decrease here in -- between the quarters, Q4 to Q1. Last two years, average decrease was SEK2.3 billion. But as we have said several times, we expect somewhat higher level than compared to 2019 this year. So that is it for me. Thank you so much. And I hand back to Borje.
Borje Ekholm -- President and Chief Executive Officer
Thanks Carl. So in closing, we launched our focus strategy in 2017 with the ambition to build a stronger Ericsson longer term. The first ambition was of course to turnaround the company and return to growth. And we can now see that the increased investments in R&D is paying off. We established ourselves as a leader in 5G with 79 commercial contracts and 24 live networks across four continents.
We continue -- our ambition is to grow faster than the market and we will continue to see a faster growth, and we are winning contracts here based on technology merits, which has allowed us to maintain a solid gross margin. During the quarter, we've been able to reach an agreement with the DOJ and SEC. And with this agreement, it allows us to move forward building Ericsson with the focus for the long term. So we continue to increase our investment to ensure that we have a compliance program that is fit for purpose and we are fully committed to our zero-tolerance policy and building a compliance program that's world-class, so it includes work on changing our culture, updating processes, improving third-party management, vesting of senior executives, et c.
The Board proposes to increase dividend to SEK1.50 per share, reflecting a strong confidence in our strategy and ability to deliver on our financial targets. So we will keep focusing on building a stronger company longer term. We will make the trade-off to long term perspective for a short-term gain. Having said that, we are comfortably tracking toward our financial targets for 2020 and 2022. Thank you.
Peter Nyquist -- Vice President, Investor Relations
Thank you, Borje. So by that, we are now ready for the Q&A. So operator, I invite you to open that session, please.
Questions and Answers:
Operator
Thank you. Ladies and gentlemen, at this time, we will begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Edward Snyder at Charter Equity Research. Please go ahead, your line is open.
Peter Nyquist -- Vice President, Investor Relations
Good morning, Ed.
Edward Snyder -- Charter Equity Research -- Analyst
Good morning.
Borje Ekholm -- President and Chief Executive Officer
Good morning.
Edward Snyder -- Charter Equity Research -- Analyst
The question about the US market, especially regarding the T-Mobile-Sprint merger, which I would expect should be decided within the next month or so. If they should get approval for the merger, how do you see that impacting capex spending? I know it's been kind of put on hold, but if it does get approved, they are going to change plans on how they're going to deploy especially 5G and band 41, etc. So one, how long do you think you will take to return to a more normal capex profile for that? Two, what happens with the margin profile of your business in North America when you start seeing more aggressive build-outs in the, I'll call, sub-six for lack of better word, but AT&T's been talking about deploying on FirstNet and then T-Mobile with you on band 41, but if that becomes a reality, we start seeing 5G equipment actually and bands deployed in the infrastructure. What does that do to the margin profile? Thanks.
Borje Ekholm -- President and Chief Executive Officer
As we said, the merger -- the announced merger has impacted Q4 clearly, but I would also say that the -- what drives capex need in this industry, it's really a couple of things; one is of course the technology shift from 4G to 5G. We're in the beginning of that. The second one is the data growth. So the underlying need to invest in capacity hasn't really changed. So we don't really see in short term that it's more important that the outcome is resolved. And whichever way it goes, we believe that reduced uncertainty will actually lead to spending because there is a need to do that. But of course the investments will vary depending on the outcome. So that's why, it's very hard to speculate about. So let's see where that brings us. If you look at the margin profile, we have -- and we talked about this for quite some time. We have tried to make Ericsson less exposed to our geographic mix and mix between markets and mix between technologies in that sense and business segments. And I think when you look at the fourth quarter, you see an unusually low North American share. We still have sequentially a strong gross margin. So I think it indicates that we have a much less geographic mix or business mix exposure than we've ever had in the past. So that's where we are going to continue to work on because a resilient company has less of those. I don't know, variability depending on mix.
Peter Nyquist -- Vice President, Investor Relations
Okay. You're happy with that Ed?
Edward Snyder -- Charter Equity Research -- Analyst
Yes, thank you very much.
Peter Nyquist -- Vice President, Investor Relations
Thank you. So we are open for the next question.
Operator
And that comes from the line of Achal Sultania of Credit Suisse. Please go ahead, your line is open.
Peter Nyquist -- Vice President, Investor Relations
Good morning, Achal.
Achal Sultania -- Credit Suisse -- Analyst
Hi, good morning, Peter. Good morning, everyone. Just a couple of questions. First on the Kathrein. Obviously, you're losing a lot of money right now, SEK200 million gross profit loss, SEK500 million EBIT loss in Q4. Just trying to understand what's the path and the timing of trying to get this business back to profitable levels. Is it about -- more about the new product launches? Is it about trying to launch those new products with the antenna systems as we go into 5G? Can we actually expect that business to be breakeven by the end of this year?
And then, secondly on the opex side, can you help us understand when you talk about slight increase in 2020, what is the right opex base we should use for 2019 because there have been a number of moving parts, one-off items in 2019? So just trying to get a sense of what are the puts and takes for 2020 opex. Thank you.
Borje Ekholm -- President and Chief Executive Officer
Yeah. If I start with Kathrein, I'll let Carl to comment on the opex. But with Kathrein, it's a couple of effects we've had during the fourth quarter. So when we took over the -- or we took over the business, we didn't have the permits to operate in the factory. So we had actually stopped supply in the beginning of the quarter. That's what you see -- the effect of that you see in gross margin and we will always ensure the safety of our -- of the people working for us. So for us, we did not want to operate the facility without fire permits. So that's one effect we had in Q4. Then so -- that -- you just keep that in mind. We also see that Kathrein was impacted by the uncertainty in the US as well. So you should put that aside and say that was what we saw in gross margin.
Achal Sultania -- Credit Suisse -- Analyst
Yeah.
Borje Ekholm -- President and Chief Executive Officer
When we now move into 2020, we expect to have a loss for the full-year. And we do that because we are investing in building a strong roadmap within antenna, and within a bigger product offering. So you will see us gradually improve through the year, but the year will overall clearly be negative, but we are establishing a very strong competitive position and competitive offering in antenna solutions. It's probably going to take 12 months, 18 months before we're there, but that's the plan we're working according, and we think this is going to be even more important in the 5G world when we can offer fully integrated site solutions.
On the opex...
Carl Mellander -- Senior Vice President, Chief Financial Officer and Head of Group Function Finance and Common Functions
On the opex, yes, hi Achal, I can take that then. So I mean, as you know, we don't guide on opex typically, but we have said now that if you start with a baseline for 2019, it's about SEK64 billion or so. We are saying that we will increase that a bit. And of course the ambition here is to grow the topline more as I said in order to decrease the percentage of opex to net sales, but some of the moving parts you asked about, I mean we do have Kathrein obviously, brought in and both SG&A and R&D comes from them. And then, we have the three areas that we talk about here; digitalization, which will yield return longer term of course in a more efficient enterprise, but also compliance and security.
So I would say, I mean we -- obviously we work with constant efficiency measures as well to be as efficient as possible in the SG&A side. In R&D, it's also about improving productivity and not necessarily decreasing the amount of investment because I think definitely we have proven that the investments in R&D have yielded results and strongly improved the gross margin and competitiveness. So, we will manage this in a good way, all within the 2020 targets.
Achal Sultania -- Credit Suisse -- Analyst
Okay. Thank you, Carl.
Peter Nyquist -- Vice President, Investor Relations
Achal, are you happy with that?
Achal Sultania -- Credit Suisse -- Analyst
Yeah. Thank you, Peter.
Peter Nyquist -- Vice President, Investor Relations
Thank you, Achal. We are open for next question please. Operator?
Operator
Thank you. The next question comes from the line of Daniel Djurberg of Handelsbanken. Please go ahead, your line is open.
Peter Nyquist -- Vice President, Investor Relations
Good morning, Daniel.
Daniel Djurberg -- Handelsbanken Capital Markets -- Analyst
Good morning, and thank you for taking my question. First, congratulation to strong cash conversion here in the quarter and then also on the improvement in Digital Services. Just a short follow-up on Kathrein, should we expect given what you stated recently just that H1 will be slightly better or will it get even a little bit worse than getting better second half? That was the first question.
Borje Ekholm -- President and Chief Executive Officer
Yeah. We showed -- this is a gradual process. So what we have seen during Q4 is this loss of production, but also investments in the product portfolio. Investments in the product portfolio will clearly continue. So the ambition is to get back more to normal production. We think we are going to focus the product portfolio and invest for the future and that's going to carry some costs throughout the year with a bigger loss first part of the year than the second part. So we should see -- you can probably assume similar to Q4, give or take.
Daniel Djurberg -- Handelsbanken Capital Markets -- Analyst
Perfect. May I also just ask you about China and the five-year procurements. You commented about the initial launches of 5G impacting growth in the area. Can you say anything about what you expect for the 2020 uptake, and also if you have seen anything on the market share so far would be great?
Borje Ekholm -- President and Chief Executive Officer
The procurement in China has not been concluded. So we have -- and we don't know when it will be. So it's a bit hard to speculate, but what I can say is we have -- our ambition is to strengthen our position in 5G than 4G and that ambition, where we have and we're going to continue to focus on delivering on that.
Daniel Djurberg -- Handelsbanken Capital Markets -- Analyst
Perfect. [Speech Overlap] Okay, thank you. I will go back in line. Thank you.
Borje Ekholm -- President and Chief Executive Officer
Okay.
Peter Nyquist -- Vice President, Investor Relations
Okay, operator, let's move to next question.
Operator
Thank you. The next question comes from the line of Amit Harchandani of Citigroup. Please go ahead, your line is open.
Amit Harchandani -- Citigroup -- Analyst
Good morning, everyone.
Peter Nyquist -- Vice President, Investor Relations
Good morning.
Amit Harchandani -- Citigroup -- Analyst
Amit Harchandani from Citi. Good morning, Peter. Thanks for letting me on. My question really goes back to the resilience of the Networks gross margin that we saw in Q4, which is I guess particularly noteworthy given the lower contribution from North America. For the full-year, your Networks gross margin was, I believe, around 41.8%. You've talked about -- at least you've referenced Dell'Oro talking about the market growing 4%, so there should be some leverage coming through for you on the topline. Is it a fair assumption to make that you will be able to manage the impact of strategic contracts. And given the growth in the RAN market, your gross margin for Networks should at least be flattish year-on-year in 2020 or put it other way, how would you advise us to think in terms of gross margin evolution for Networks over the course of 2020?
Carl Mellander -- Senior Vice President, Chief Financial Officer and Head of Group Function Finance and Common Functions
I will take it?
Borje Ekholm -- President and Chief Executive Officer
You take.
Carl Mellander -- Senior Vice President, Chief Financial Officer and Head of Group Function Finance and Common Functions
But I think what we have shown now during Q4 also is that we are able to compensate for strategic contracts with other operational leverage. We don't expect that to dramatically change. Of course, we are fully committed to the targets that we have set up, including the bottom-line of 15% to 17%, and we will deliver on that. There are puts and takes there with strategic contracts and China but we are also working on improving obviously the underlying operation in Networks. So [Speech Overlap].
Borje Ekholm -- President and Chief Executive Officer
And I would say, what we do now is we are also working on changing the way we work in the company and improving our ways of working through digitalizing the company more than in the past. That should -- the whole ambition with those investments is actually that it should lead to efficiency gains and lower cost levels in the future. So we've taken some costs during Q4 in order to deliver those benefits '20, '21 [Phonetic] and beyond. So when you look at 2020, you can -- and as Carl described, I think it's a good way to think about it, but longer term, we should see a lower ratio of opex to sales and the strong gross margin. And I've said it before, gross margin is the best indication of the competitive product portfolio. So that's why we -- it's a very important metric for us to follow. So of course we are -- it's -- we are happy to see that we can reduce some of the geographic mix, and in addition, see a good gross margin despite taking some contracts with the challenged short-term margin in there, but they will contribute to 2022 and beyond. So we feel very comfortable about 2022.
Peter Nyquist -- Vice President, Investor Relations
Okay. You're good with that Amit?
Amit Harchandani -- Citigroup -- Analyst
Thank you, Peter. Thank you, gentlemen.
Carl Mellander -- Senior Vice President, Chief Financial Officer and Head of Group Function Finance and Common Functions
Thank you.
Peter Nyquist -- Vice President, Investor Relations
Thank you, Amit.
Borje Ekholm -- President and Chief Executive Officer
So we will continue with next question please.
Operator
The next question comes from the line of Johanna Ahlqvist of SEB. Please go ahead, your line is open.
Peter Nyquist -- Vice President, Investor Relations
Good morning, Johanna.
Johanna Ahlqvist -- SEB Enskilda Jorgen Wetterberg -- Analyst
Good morning. Thank you for taking my question. Maybe two if I may. The first one relates to opex again. I'm just trying, you mentioned that the base is SEK64 billion, and I'm just trying to understand the magnitude of the opex increase because you have some one-offs in 2019. And just sort of putting back those one-offs would imply an increase of at least SEK1 billion and then adding more cost for Kathrein to that would get us to SEK2 billion higher opex. So I'm just wondering are you really expecting an underlying increase in opex. Are these sort of the one-off effects not be there anymore and the addition of Kathrein or how should we think about it? Just to get the magnitude. That's the first question. If I may, I have another one after that.
Borje Ekholm -- President and Chief Executive Officer
Sure. Okay. I will start. But I would say, I mean, we are also doing efficiencies of course to deliver what I said before. There will be an increase in the absolute number, but -- and of course there are one-offs included. I'm fully aware of that in the 2019. And there will always be one-offs, but that's not really what is there of course. So essentially, there will be certain increase because of the investments and because of Kathrein, but again thanks for the efficiency measures we are taking, we are aiming to reduce the percentage of net sales. And yeah, that's what I can say.
Johanna Ahlqvist -- SEB Enskilda Jorgen Wetterberg -- Analyst
Okay. And my second question, if I may, was just on gross margin again because -- are you -- given the fact that you expect higher opex level for 2020, I guess you need to feel pretty confident in the fact that you can keep the gross margin on fairly the same levels at 2019 for the Group. So I'm just wondering how big negative impact do you expect or incorporate from China? Is it a negative initial gross margin or is it just the low initial gross margin because I guess that will have an important driver in either way? Thank you.
Borje Ekholm -- President and Chief Executive Officer
You know Johanna it's a great question. We cannot -- it's very hard to comment on China yet, because we don't really know what market share we will get, what prices will be. So we'll have to come back on that. Of course, we factored in costs. When we guide for 2020, we have made certain assumptions that include costs to -- that affect gross margin negatively, but still reaching guidance, but depending on what the outcome will be, we cannot comment. So realistic case based on increasing our market share in China, will have a negative effect on gross margin. We factored that into the guidance for 2020.
Johanna Ahlqvist -- SEB Enskilda Jorgen Wetterberg -- Analyst
Perfect, that's clear. Thank you.
Borje Ekholm -- President and Chief Executive Officer
Thank you Johanna. And we will move to the next question please.
Operator
And that comes from the line of Fredrik Lithell of Danske Bank. Please go ahead, your line is open.
Peter Nyquist -- Vice President, Investor Relations
Good morning Fredrik.
Fredrik Lithell -- Danske Bank -- Analyst
Thank you. Good morning. Thank you for taking my question. Many questions have been answered, but on the cash flow generation, you have improved many of your metrics, worked well with the working capital metrics in the year of 2019. Are there still a lot to do for you there or do you see that you have sort of reached a level where it's difficult to squeeze any additional out of those if we sort of take the operational side apart?
Carl Mellander -- Senior Vice President, Chief Financial Officer and Head of Group Function Finance and Common Functions
I think we have made very big strides actually on working capital during this year. We continue with that definitely. And there is more to do. It's about lead times in projects' contract delivery, so in terms and conditions and also the cash collection machinery I would mention, which has been very effective during 2019. And that will certainly continue as well. So yeah, the effort is 100% on to continue to deliver good capital efficiency. And of course in a growth scenario, what we've tried to do is to still keep the working capital at bay, if you like, even during growth. But of course, that puts another challenge into the mix, if the whole business is growing.
Fredrik Lithell -- Danske Bank -- Analyst
Okay, thank you. And maybe a question for Borje then on China again. I know it's difficult to answer, but sort of when you think about this situation with the initial phase, which we have seen many times before with pressure on the margins when you roll out. What sort of time frame are you expecting that to be on this? Is it going to be a year or two, or how do you sort of see that playing out if you would say that it starts now, would it take a year or two? How do you sort of think about that? Thank you.
Borje Ekholm -- President and Chief Executive Officer
It's very hard to say in reality how long the rollout will be, but if you look at the -- if you think about 4G, it took a few years to build out a complete nationwide coverage. So you can probably assume that this is going to have something similar, but it's very hard to speculate. What we have done is we have based a case on the historic experience and you've seen the way we said in 2017. I think it's the same thing now. We have factored something similar in and then we will have to see where it comes out, and we will hope, of course, we can gain market share. But we will see.
Fredrik Lithell -- Danske Bank -- Analyst
Okay, thank you.
Peter Nyquist -- Vice President, Investor Relations
Thank you, Fredrik. Please, next question.
Operator
The next question comes from the line of Jorgen Wetterberg of Nordea. Please go ahead, your line is open.
Peter Nyquist -- Vice President, Investor Relations
Good morning, Jorgen.
Jorgen Wetterberg -- Nordea Bank -- Analyst
Good morning. Thank you gentlemen for letting me on. So a quick question on the Digital Services contracts. You're right that you have some pressure from continued impact from the BSS strategy. And we know that you have these major trouble contracts that you took provisions for last Q4 with 0% gross margin. When can we expect those to kind of go away? And how should we think about relief on gross margins from those in 2020? Thank you.
Borje Ekholm -- President and Chief Executive Officer
Some of these contracts are actually very long. They're actually there. So even if we deliver and convert them into revenue-generating contracts, there will be a margin drag for a long time. Some of them are even 10 years. So these are going to have an impact quite a long period of time. Our ambition is still that we will see Digital Services be profitable this year, low-single digit margins and then reach double-digit margins in 2022, that is including a drag from those long-tail contracts. So there is -- we have -- we've said this before. I think the execution in Digital Services has always been focused on establishing a competitive product portfolio longer term, and that's why we have said the improvements come gradually and of course that factors in the drag from some of the contracts, which will live there for another decade. So I think over the last few quarters, you've seen us systematically deliver on that. And that's something we will continue to do. Then, you can always hope for some of these contracts to generate additional sales, additional revenues as you have a footprint depending on how the customer scales their business, etc. And then the margin profile can change. But as of now, we are focused on delivering on the plan we have put in place.
Jorgen Wetterberg -- Nordea Bank -- Analyst
Okay, thank you. [Speech Overlap]
Peter Nyquist -- Vice President, Investor Relations
Thank you, Jorgen. So let's move to the next question.
Operator
And that is from the line of Stefan Slowinski of Exane BNP Paribas. Please go ahead, your line is open.
Peter Nyquist -- Vice President, Investor Relations
Good morning, Stefan.
Stefan Slowinski -- Exane BNP Paribas -- Analyst
Good morning, thanks for taking my question. I've just got two quick ones on cash. Maybe the first one for Carl. You had $18 billion of free cash in 2019, about 8% of revenues. Can you help us understand more of the outlook for 2020? We've got the restructuring guidance you've given, but should we expect any other significant changes in capex or working capital movements? You need to increase inventories, for example, to prepare for China. Anything else that we should expect to impact cash flow in 2020?
Carl Mellander -- Senior Vice President, Chief Financial Officer and Head of Group Function Finance and Common Functions
As you know and we talked about this at the investor update. We have provided this illustrative bridge coming from 12% operating margin, which is 2022 target and down to 8% and describing then how the various components there between will impact. I think we stick to that one. Now, we were very successful, I would say, in 2019 in delivering a good cash flow. So we are -- on those parameters that we mentioned in that bridge, we over-performed on several, not least on working capital. I think in that bridge, we put working capital stable in absolute -- or in percentage, I should say, so sort of neutral on working capital. I think that's a decent ambition to have going forward. When it comes to capex, as you asked, I mean no major shifts. We are investing in the US production for example. So there could be a small variations there, but nothing major to mention. We have very big focus on generating cash flow. And I think that's -- we see the result of that in 2019 now. So the whole organization is much more geared towards producing cash flow and that includes working capital, but also discipline in capital in general and in both allocation and spending on these various items, and we will continue to work on that. That whole area also, I should say, supported by the incentive schemes that we have in the company. So that's also giving a lot of results actually where we have working capital, we have cash collection. We have economic profit, which is a value creation metric then for most people with short-term incentives. So that certainly helps as well. It's a big focus area.
Stefan Slowinski -- Exane BNP Paribas -- Analyst
Okay. Maybe [Speech Overlap] Yeah, just a follow-up question maybe for Borje on that, which is with the cash flow, I mean you've got the SEC fine behind you. Most of the major restructuring has been done and you have this net cash position. It could be as high as SEK50 billion by the end of this year, even after paying the dividend. So, is there more you can do to optimize the balance sheet? And do you need to have SEK50 billion of net cash?
Borje Ekholm -- President and Chief Executive Officer
It's a better problem than the opposite that we had I think in 2017. Everyone told us we needed to raise equity. So we will come back on this. I think it's important for us to have a strong financial position given the industry we are in. And we see that when we meet customers, when they look at our long-term plans and they look on our ability to be a long-term competitor, they look at our financial position. So it is important. Maybe we can do something on that. It's something we haven't looked at right now. We've been focused on making sure we get the business in much better shape and then we can take the next steps. So let's come back and discuss that at a later point.
Stefan Slowinski -- Exane BNP Paribas -- Analyst
Understood. Thank you.
Peter Nyquist -- Vice President, Investor Relations
Realizing that we have a long line of questions coming out, I would actually now -- we will take the last question. And again, for those on this line, you can always reach out to the IR team or the press team, meet our journalist, but we will now take the last question for the call. So, please operator.
Operator
Thank you. And that question is from the line of Peter Kurt Nielsen of ABG. Please go ahead, your line is open.
Peter Kurt Nielsen -- ABG Sundal Collier -- Analyst
Thank you very much. If I can just return to the opex and the decision to invest in digitalization of business processes. I have -- I don't recall having heard you speak of this before. Obviously, one of your competitors have spoken of the need for similar investment. Could you have discussed briefly what has driven your sort of decision to invest in this, the need? How long will this investment be? Is it a one-year horizon? And is the impact, which Carl illustrated for Q4, I think was minus SEK400 million, roughly sort of a good guide for what we should expect in the coming quarters? Thank you.
Peter Nyquist -- Vice President, Investor Relations
Thank you, Peter Kurt.
Borje Ekholm -- President and Chief Executive Officer
Yeah. It's -- these are -- if you think about, it's actually that we increase cost level short term, that should result in lower cost level over time. That's what we do. That's the reason why we do it and it includes a couple of different things or it's a number of different projects, but we feel that we need to automate lot about our own order processes, visibility of customer orders, the way we run projects.
All of this should result in efficiency gains down the road. And that's what we invest for, but the reality is, when we do these investments, we talk about in the light of serving the customer in a better way. It's all about making sure that the customer gets the service, the customer gets the delivery on time, the quality on time, right the first time, etc. And why haven't we started doing it before? Well, we said that first, let's get our basic processes in order before we automate them. And we felt during the year of 2019, we got the house in order, and we got the business in shape. So we said we can during the year of '19 take the next step and see if we cannot [Phonetic] get further efficiency gains and kind of improvement through digitalizing our business. That's why we took the decision during Q4 or during Q3, Q4. Then going forward, you can probably expect a similar level as we had in Q4 and gradually see the improvements coming through toward the end of the year.
Peter Kurt Nielsen -- ABG Sundal Collier -- Analyst
Understood. Thank you very much.
Peter Nyquist -- Vice President, Investor Relations
Thank you Peter Kurt. Before handing over for conclusion from Borje, some practical things. First of all, we have our event in Barcelona for the investor community and obviously also customers, on the 24th and 25th of February and you can find more information about on our website how to join that. And secondly, this time, we only have one call. We don't have an afternoon call. However, this call will be recorded and posted during the morning on our web. So you can listen in again on that.
So by that, I will actually leave over to Borje to conclude this call. Please.
Borje Ekholm -- President and Chief Executive Officer
So thanks, Peter and thank you everyone for joining. So we -- with the focus strategy we put in place, we now have a very strong underlying business. We took some investments during Q4 that we will see yield result in the future, and we see that we are comfortably on track to delivering on the targets we set for 2020 and 2022, but that is only a first goal toward building a much stronger Ericsson longer term. So with that, thanks for joining us this morning.
Peter Nyquist -- Vice President, Investor Relations
Thank you.
Carl Mellander -- Senior Vice President, Chief Financial Officer and Head of Group Function Finance and Common Functions
Thank you.
Operator
[Operator Closing Remarks]
Duration: 59 minutes
Call participants:
Peter Nyquist -- Vice President, Investor Relations
Borje Ekholm -- President and Chief Executive Officer
Carl Mellander -- Senior Vice President, Chief Financial Officer and Head of Group Function Finance and Common Functions
Edward Snyder -- Charter Equity Research -- Analyst
Achal Sultania -- Credit Suisse -- Analyst
Daniel Djurberg -- Handelsbanken Capital Markets -- Analyst
Amit Harchandani -- Citigroup -- Analyst
Johanna Ahlqvist -- SEB Enskilda Jorgen Wetterberg -- Analyst
Fredrik Lithell -- Danske Bank -- Analyst
Jorgen Wetterberg -- Nordea Bank -- Analyst
Stefan Slowinski -- Exane BNP Paribas -- Analyst
Peter Kurt Nielsen -- ABG Sundal Collier -- Analyst
