Telefonaktiebolaget LM Ericsson (ERIC) Q1 2021 Earnings Call Transcript

Telefonaktiebolaget LM Ericsson (ERIC 3.14%)
Q1 2021 Earnings Call
Apr 21, 2021, 3:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Peter Nyquist

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

Borje Ekholm -- Chief Executive Officer

It's great to be here, Peter. Yes, as everyone knows, we migrated to work-from-home more than a year ago, so this is, in reality, the fifth quarter of reporting virtually.

Peter Nyquist

Yep.

Borje Ekholm -- Chief Executive Officer

So, of course, it takes a strain on the organization. And on a personal note, I must say I'm immensely proud of the team at Ericsson and the way we've stepped up and actually deliver on customer commitments and performed so well in a very, very challenging environment. So I want to just start by acknowledging that a lot of people have worked hard.

Peter Nyquist

And you, Carl, you have actually now closed your fifth quarter remotely --

Carl Mellander -- Chief Financial Officer

Yes.

Peter Nyquist

Which is fantastic.

Carl Mellander -- Chief Financial Officer

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

Peter Nyquist

Great. So we're going to have this presentation, and then we will have a Q&A session after the presentations from Borje and Carl. And people that will ask questions have to join the conference by phone. First, I will just start by reading this text.

During today's presentation, we will be making forward-looking statements. These statements are based on our current expectation and certain planning assumptions, which are subject to risks and uncertainties. The actual results may differ materially due to factors mentioned in today's press release and discussed in this conference call. We encourage you all to read about these risks and uncertainties in our earnings report or in our annual report for 2020.

With that said, I would like to leave the word to you, Borje, to start the webcast.

Borje Ekholm -- Chief Executive Officer

Great. Thank you, Peter, and good morning and welcome, everyone, to this earnings call of the first quarter. So thanks for joining. At the year-end result in January, we could actually then show that we had finally completed our turnaround.

And what we also saw was that, now, invested -- return on invested capital is actually higher than the cost of capital. And that allows us now to focus on growing the business. And as we said, we're focused on growing in our core business, call it, networks, digital services, as well as managed services. But we're also focused on building an enterprise business and driving growth in the enterprise space.

And during the first quarter, we continued to execute on this strategy, and it includes, as always, investing in R&D for technology leadership. And that is really giving us, at the same time, a cost leadership. So there is no conflict between technology leadership and cost leadership. They go hand-in-hand.

And with that, we're able to strengthen our market positions substantially and gain footprint. Of course, the pandemic has meant a lot. It has -- but it has also fast-forwarded digitalization. It's clear we have to recognize that there is substantial human suffering in the wake of the pandemic.

Societies have closed down, impacting the economy. But also, we see the importance of high-speed Internet connectivity and connectivity overall. And that's where we come in. And we're, of course, very encouraged to see the process here of building out strong coverage in the world where we are a key contributor.

And we hope that we will see part of the recovery programs around the world being allocated to high-speed mobile broadband because, ultimately, that's a faster way to build out coverage. Over the last few years, I also want to say that we have invested quite substantial amounts in the -- constraining our supply chain. That gives us increased flexibility. You've seen, for example, the factory we've built in the U.S.

But we have also focused on increasing the flexibility in other parts of the supply chain. So even though we're in a pandemic with a very tight supply chain, for example, on semiconductors, we've been able to complete all customer deliveries on the committed time frames and according to schedules, as well as running our internal operations. So a big kudos to the organization for that. But let me jump into the business.

We have continued to consolidate our position as market leader in 5G with 136 commercial contracts and 85 live networks in 42 countries. What's also encouraging is that organically, FX-adjusted, we saw sales grew 10% during the first quarter. And if we actually add -- or adjust for the IPR revenues, organic growth was 14% in our business. So that is really driven by a strong growth in networks that, again, if you would adjust for IPR, actually grew 19% in the quarter, which is fairly significant growth.

It's also clear we exited the quarter on a very good footing and feel very good about 2021. We had a strong development the second part of the quarter after a bit softer in the middle. Despite the reduction in IPR revenues that we have guided about, we saw that the gross margin actually improved year over year to 42.9%, and that is the growth that we saw in all segments. So gross margin strengthened across the board.

EBIT margin was up to 10.7%, and that is despite significant cost to improve the business, significant cost to grow footprint, as well as a negative currency movement. And you know, 2021 is, overall, an investment year for us, possibly more so in digital services. So we're -- here, we're increasing the investments we do in R&D to have a competitive 5G cloud-native portfolio. And we're making great progress.

We see good traction with customers with many customer wins. But what's also clear is that we are incurring costs ahead of revenues, so we are seeing R&D expenses increase. We're seeing costs for new product introductions coming up, while revenues are not coming until later in the year, I would say at the earliest, in Q4. But we're really going to see revenues coming in 2022.

So this is a year of investments, but it's a year of investments according to the plan we have put out for digital services. If we look also on the cash flow, it's very strong. The -- if we adjust again for IPR revenues, which typically are paid -- a large part, majority are paid in the first quarter. So if we were to look beyond that, the underlying cash flow improved quite substantially, and it's actually one of the best Q1s we have in our history.

We also invest substantial effort in making sure that we have an ethically responsible business and we conduct our business in an ethical way. This is built upon individual accountability, as well as integrity. So here, we are spending a lot of time in the organization to make sure that we incorporate all lessons learned from the past troubles we've had and make sure we have the state-of-the-art, really great compliance program but, more importantly, that everyone has compliance as an integrated part in the way they behave and in the way we conduct business. And, you know, winning business, that's all what it's all about, but we are going to win business, make sure to play by the rules fair and square, and no debate about that.

If we look at the market areas, we saw good growth in four out of five market areas. Northeast Asia, we grew by 80%, which is really driven by the non-Chinese markets, primarily. If we look at -- the next one is Southeast Asia, Oceania, and India, where we saw good growth, driven by 5G in Australia, as well as 4G rollout in India, of a little touch more than 20%. Moving on to Europe, where we had good growth, 15% in Europe.

But that was partly offset by more flattish development in Latin America. And, of course, Latin America suffers from the pandemic and the macroeconomic effects following the tough situation with the COVID-19. If we then look – MANA had a strong development based on continued rollout of 5G. And there, we see, actually, good progress also on our cloud-native portfolio in digital services.

So we had a growth of 10% -- more than 10% organically. And we've been able to also strengthen our market position, which is, long term, going to be very attractive for us. We also saw the completion of the C-band auction, so we expect that to result in deployments during the second half of the year. And if we look then at our last market area, Middle East and Africa, we saw sales falling by 16%.

That is really an effect of the pandemic in Africa impacting the macroeconomic and the spend environment, but we're also seeing a slowdown in Middle East following the large investments last year. So one of the cornerstones of our strategy has been to grow gross margin, and it's a fundamental indicator of success or progress on the focus strategy. So it is encouraging that we continue to see our gross margin strengthen in the business, and we are able to see that strengthening despite lower IPR revenue. As a matter of fact, we fully compensate for the lower IPR revenue in the gross margin development.

We're all -- and by growing gross margin, we can continue to sustain very high R&D expenses. And we're doing that in order to make sure that our portfolio is competitive from a feature performance point of view but also cost-competitive. Of course, we continue to invest in the 5G rollout, and that's where we see benefit in our core business. But we're also seeing a very strong development, a strong demand for 5G and enterprise applications.

We're convinced here that with the 5G cycle is going to be a different cycle than the traditional or more, call it, consumer-driven cycle that we've seen in the past. And we believe the 5G cycle will be both longer and bigger due to entering a complete new application area with enterprise applications. What's encouraging is the progress we're making on our portfolio. And in Q1, we announced the ultra-lightweight, high-performance Massive MIMO radio portfolio.

We also continued to strengthen our position with the Cloud RAN. So we are continuing to invest in technology leadership for the benefit of our customers. Again, we have invested quite substantial amounts in making our supply chain resilient, and that pays off right now in having a good delivery performance with our customers and that we're keeping customer commitments. If we look at the R&D investments we're doing in digital services, has built a very competitive portfolio, and they will continue at a high level because, ultimately, we are going to see the cloud-native portfolio be an increasing part of revenues.

But again, it's encouraging to see that the overall business currency adjusted in digital services grew by 3% in the first quarter. Managed services. We also continue to develop the business, growing gross margin, but we're also continuing the investments in automation and AI in order to develop new solutions for our customers, where we see increasing traction that will, over time, change the margin profile of the business. With that, I'm going to give the word over to our CFO, Carl.

Carl Mellander -- Chief Financial Officer

Thank you, Borje. Thank you, and good morning again, everyone. Thanks for your time. So let's dive in a bit more to the numbers.

And you can see that our strategy execution, that Borje talked about, really show in our financials here in the first quarter. Net sales then came out at SEK 49.8 billion, which is a 10% organic FX-adjusted growth for the group, mainly driven then by networks with very high-growth numbers, as quoted by Borje, of course, based on continued demand for our 5G portfolio. IPR revenues declined by SEK 1.6 billion year over year due to these expired contracts that we are negotiating for renewal currently. And if we adjust for that, again, the organic growth is actually up to 14% for the -- for the group.

If you see -- if you look at the rolling four-quarter basis here, our sales is now tracking at just above SEK 232 billion. Gross margin then, 42.9%, which is an improvement of 250 basis points year over year, with improvements in all four segments, which is very encouraging indeed. Within both networks and digital services, we saw a good operational leverage, contributing to these higher margins and despite the lower IPR, as we talked about. And I think it's always good to look at the rolling four-quarter basis.

Borje showed it earlier that where gross margin comes in at 41.2%, steadily improving since 2017. Opex was SEK 16 billion, out of which SEK 15.7 billion, as you see here in the table for R&D and SG&A. SG&A was stable year over year. R&D saw a certain increase, about SEK 0.4 billion.

This is a result of the increased investment we do now in the cloud-native 5G portfolio in digital services mainly. But also, we have now, of course, incorporated Cradlepoint -- the Cradlepoint business into our numbers. So that also added some to the R&D investment line here. So this results then in an EBIT of SEK 5.3 billion.

This is 10.7% and 140 basis points improvement year over year. And I wanted to point out here that we are changing terminology from operating income and operating margin to EBIT and EBIT margin. And the main reason why we do that is that we are now introducing EBITA, as you know, for the long-term target. And speaking of which then the EBITA on a rolling four-quarter basis came out now at 13.3% compared then with a long-term target of 15% to 18%.

So if we move from P&L and look a bit more at the cash flow, how profits have been turned into cash. You see here the free cash flow before M&A is at SEK 1.6 billion. And on a rolling four-quarter basis, again, cash flow -- free cash flow comes out at SEK 21.5 billion, which is then 9.3% of net sales. And we can also put that in relation to the long-term target we have set up for free cash flow before M&A as a percentage of sales, which is 9% to 12%.

So we are in that range here on a rolling four-quarter basis. A few words on the net operating assets or call it working capital development in the quarter. We continue with strict discipline here. What we saw now in the quarter was a trade payables affected cash flow negatively with about SEK 4 billion.

This is really the result of a decision we have made to derisk the supply chain in this situation to buffer up a bit on critical components, but it's also an evidence of -- yeah, that we -- we're handling the semiconductor situation and ensuring that we can meet customer delivery deadlines. Inventory increased partly for the same reason, but also because we see rollout projects going on, and we're building, of course, new radios to be delivered to customers in the coming quarters as well. Trade receivables decreased a bit, and that's, I would say, along with the seasonal pattern after very strong sales in the fourth quarter. So I really wanted to point it out again, what Borje said regarding the free cash flow that the majority of IPR cash payments, incoming payment normally happens in the first quarter.

So now, of course, having these renewal negotiations ongoing, that cash flow did not come in. And if we add that back then, this Q1 is the strongest, at least since Q1 2014, which was actually also a bit out of the ordinary because then we received large license payments incoming in that specific quarter. So net cash then increased by SEK 1.1 billion in the quarter, bringing the net cash position to SEK 43 billion, as you can see here. And during the quarter, we repaid EUR 500 million bond.

You can see that in the gross cash, we did this with cash on hand. So now the maturity profile of our debt portfolio is three years, up from 2.7 years at year-end. To round off, if we take the next slide, just to highlight a few of the planning assumptions. And as usual, I want to refer you to the report for the full set of assumptions.

But if we first of all look at the market that we operate in, Dell'Oro now estimates the RAN market to grow by 3% in 2021, of which China, 4%; North America, 2%; and Europe by 3%. And if we look at our own reality regarding top line, to start with, historically, if we look at the three-year average, the seasonality on top line is plus 13% from Q1 to Q2. And as you know, though, and I really want to point that out that we can see large variations around this average number in reality. Then in segment networks, we want to point out that gross margin can be negatively impacted by a higher share of rollout projects now, which we have in the pipeline for the second quarter.

And moreover, when it comes to opex, we have a certain seasonality between Q1 and Q2. So opex typically increased from Q1 to Q2. And also here with a word of caution that that can vary quite substantially between the quarters depending on timing. On IPR.

In Q1, our IPR revenue was SEK 0.8 billion. And this volume, we can say, reflects very well the contract portfolio that we have. So we can assume similar in the second quarter until -- and as we go along until expired contracts are negotiated or renewed. Lastly, then within digital services, 2021 will indeed be an investment year with front-loaded costs and majority of the revenues from the new 5G core contracts coming late in the year.

And now for the second quarter, for these reasons, we expect a similar earnings level, second quarter as the first quarter. So with that, thanks a lot, and I hand back to you, Borje.

Borje Ekholm -- Chief Executive Officer

Thanks, Carl. So to conclude, the investments we made in a competitive product portfolio, together with the cost position we have, have actually created a strong platform to grow in our core business, networks, digital services, and managed services, but it also creates an opportunity to accelerate our enterprise applications business and developing new -- new solutions for enterprise. As we have said, 2021 is an investment year, we're taking the cost for Cradlepoint acquisition. We're increasing our spend on compliance, as well as security.

We're also increasing investments in the supply chain. I would also say there is here an element of investments to gain the footprint that we have invested in this quarter, but we are expecting to continue to do that going forward. I would also say at the same time that we're managing on the overall P&L level, but we have, as we've been clear, seeing an investment to position ourselves even better for 2022 and beyond in order to reach the long-term targets. What we also see is a very good order intake that we feel positions us very well for the full year, as well as for 2022.

And of course, that's what we build the business progress on. In enterprise, we're starting to see a good progress on our 5G IoT offering, but we're also seeing that Cradlepoint becomes integrated into our business and seeing the growth opportunities now materializing in the numbers from Cradlepoint. So that's encouraging to see. Again, thank you all for joining this morning.

And with that, I give the word back to you, Peter.

Peter Nyquist

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

Questions & Answers:

Operator

Ladies and gentlemen, at this time, we will begin the question-and-answer session. [Operator instructions]

Peter Nyquist

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

Operator

Yes.

Peter Nyquist

Yup. Let's see.

Operator

So I'll.

Peter Nyquist

Yes, present, please.

Operator

Our first question comes from Pedrag Savinovic from Carnegie. Please go ahead.

Peter Nyquist

Hi, Pedrag. Hi.

Pedrag Savinovic -- Carnegie Investment Bank -- Analyst

Thank you.

Peter Nyquist

Hi.

Pedrag Savinovic -- Carnegie Investment Bank -- Analyst

Hi, good morning all. Thank you for -- for taking my questions.

Peter Nyquist

Thank you.

Pedrag Savinovic -- Carnegie Investment Bank -- Analyst

I hear some audio feedback here.

Peter Nyquist

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

Pedrag Savinovic -- Carnegie Investment Bank -- Analyst

Yeah, I -- I am on mute -- on mute on the computer. But I'll -- I'll just go ahead.

Peter Nyquist

Please do. Please do.

Pedrag Savinovic -- Carnegie Investment Bank -- Analyst

So, on seasonality in -- in Q4 to Q1, I think in the last quarter you said the effect would be less pronounced. Now -- now, it is more. And -- and then given your comments, Borje, on -- on very strong order intake as well, it -- it seems that there's a timing effect. And so then, the seasonality effect be -- be less pronounced than from -- from this quarter to the second quarter? And my -- my second question is on -- on the margin side, which -- I mean, both the gross and EBIT margins there, they're undoubtedly quite impressive here.

So up to your view despite some [Inaudible]. Are there any -- any temporary effects, any -- any one-time to pass up quite for anything that we should be aware of that lifts the margin here, or -- or should we basically expect them higher base level going forward? Thank you.

Borje Ekholm -- Chief Executive Officer

You know, if we start with the second part, we have a -- we expand, and -- and you know that, focused on investing in R&D for technology leadership and cost leadership. And that's really the key driver of the gross margin. So it's a -- in -- in that sense, very clean and straightforward for gross margin. And based on the strength of the underlying business, what we see is that we're going to have the rollout networks like Carl described in -- in Q2 in networks that will temporarily affect the -- the -- the gross margin in networks.

But the journey we're on will continues to be strengthening our gross margin, that continues. So that is -- is no change and really no major -- you know, in that sense, one-time effect. So, temporarily, are positives. We have though a very big negative which is we have no I -- or very limited IPR revenues as you know.

So the -- the -- the strong performance is -- is despite that. If you look at the, you know, the -- the reality is our business, it's a bit hard to predict exactly when deliveries happen and deployments happen. What we saw in the first quarter was a bit softer in the middle of the quarter, while it continued at a very good pace in the end of the quarter. So we're -- we're comfortable with what we're entering into but we're not going to change the seasonality path and I think we're better off just saying what we see rather than trying to be, you know, detailed in our guidance.

Peter Nyquist

OK, Pedrag, you're good with that?

Pedrag Savinovic -- Carnegie Investment Bank -- Analyst

Very good, very clear. Thank you, guys.

Peter Nyquist

Thank you. I think we have the next question coming from Alexander Duval from Goldman Sachs. Hello, Alexander.

Alex Duval -- Goldman Sachs -- Analyst

Yes, hello. Good morning, everyone, and many thanks for the question. It looks like the third-party forecast you referenced in your report talked about the 3% brand market growth this year. I'm just wondering to what extent you might see potential upside risks to market growth? And if so, you know, what could be potential drivers of upside? Just listening to your commentary now, Borje, it looks like your emphasizing potential for growth, and clearly, you've got a very strong order intake.

Obviously, part of that leads to share gain. But just curious if there could be some updates in terms of the end market. And then secondly, a quick one on Japan. Clearly, that's an area of strength within Asia.

I wonder if you could talk a bit more about how you're positioned on 5G in the country now versus what you saw in the 4G cycle and should we be looking about as being prolonged for a few quarters? Many thanks.

Borje Ekholm -- Chief Executive Officer

Thanks, Alexander. Yeah, if we look at the, you know, the overall market forecast, I -- I -- I would be remiss not to say that we see a very strong market development overall, and probably on the, you know, more positive side than what the third party is kind of indicating, the Dell'Oro's forecast are indicating. I will -- I think that's fair to say. What we see driving of our growth primarily though is share gains.

So -- so we do believe that we have made substantial gains in market share that started a few years back and actually have continued during the first quarter. And we will not stop at that. We will continue to invest in our product portfolio to have the solutions that allow us to gain footprint in the market. We think that's important.

So that -- that we'd target to continue. How Dell'Oro will revise the market forecast, I really don't know. But I wouldn't be surprised if it's more on the positive side than the negative side. So put it that way.

Japan, we have over the last few years gradually strengthened our position in Japan. And so far, its 5G rollout has started, but we think we have the big bulk ahead of us there. So we continue to work with our customers to make sure that they rollout or -- or have the products from us to roll out in the market and -- and build their business. So we're -- we're -- we see positive signs on the Japanese market I would say.

They are one of the frontrunner markets on 5G, so I believe there -- we -- we have to be strengthening our position and take advantage of that.

Peter Nyquist

You're good with that, Alex?

Alex Duval -- Goldman Sachs -- Analyst

Many thanks.

Peter Nyquist

Thanks, Alex.

Alex Duval -- Goldman Sachs -- Analyst

That's great. Thank you.

Peter Nyquist

We'll move to the next question. It's from Aleksander Peterc from Societe Generale. Hello, Aleksander.

Aleksander Peterc -- Societe Generale -- Analyst

Yes, good morning and -- and thank you for -- for taking our questions and congratulations on keeping the gross margins at a really healthy level. So forgive me to -- to focus a little bit on the -- on the negative. I just like to understand the moving parts here. So -- so first on -- on I -- IPR.

It -- it does seem that 800 million per quarter were going to be the run rate for the full year, which is going to be a little bit below what you originally guided. So I wanted to -- if there's -- if there's any structural change there or is it just a temporary fall off? You do mention one licensee being lowest so I wonder if that's due to a political reason or anything like that. And then secondly, just on the second quarter, you -- you mentioned the 13% growth quarter on quarter with lots of variations. But I just like to understand if there is a risk more to the upside or to the downside, or is it symmetrical as you see it right now? Thanks a lot.

Borje Ekholm -- Chief Executive Officer

Yeah. That's a clever way to ask a question to get more guidance by the way. But -- but let's start with the other one on IPR. The reality is we have, you know, contract renegotiation.

It's with a couple of different parties, those we expected to impact. They have also impacted. But we also have one licensee that actually has significantly lower volume in the market, and that results in much less royalty revenues for us. And the -- and whether that, you know, to part -- partly, of course, that's an effect of geopolitics.

So you can safely assume that. Where -- where that will end up in the end of the year, we don't know. But -- but that's the effect we see. So we're saying, as a guidance going forward, look at Q1 as a good indicator for the future right now until we have, you know, renegotiated new contract terms with -- there are, again, several licensees we're renegotiating within parallel.

So how that is exactly going to pan out for the full year? You know, we report on that in -- I guess, Q1. We're not going to be forced by either timeline or anything else to that extent to close early. We will only, you know, agree to -- to -- to terms, you know, that -- that maximizes the value for us and not to self-induced timeline. So that's why I'm going to leave it open on the timeline question.

Then on the seasonality. You know, I think the -- the -- the best guidance is clearly to look at the history. And then I -- I think what you'll hear us saying is that we see a very strong positive momentum in the business. We should recognize we had growth in the first quarter of 10%.

So similar seasonality would kind of give you a fairly healthy growth in the second quarter as well. But, of course, we're very encouraged with the order intake, the way we see in the market now. So, you know, you have to make a bit of a judgment call. We always know it's fluctuations in delivering schedules, deployment schedules, etc.

But -- but we're very optimistic about Q2.

Peter Nyquist

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

Daniel Djurberg -- Handelsbaken Capital Markets -- Analyst

To stellar network performance in the quarter. I was wondering if you could talk a little bit -- you mentioned about the network deployments in Q2 that possibly could hit gross margins if they will come. To me, I read this like potentially large 5G deployments in China that could pickup. My question is really what kind of insight do you currently have on the vol --on current -- on future volumes and also the [Inaudible] you know, risks in the inventory because I guess you have needed to -- to build inventory on -- on the China deployment already.

If you could comment anything on this would be great. Thank you.

Borje Ekholm -- Chief Executive Officer

The reality is, you know, the China market, there was a big tender last year that we entered into and we'll know an increase market share. The next tender will probably come in the next few months. You know, that's bit unpredictable. So with that, you can conclude that we have no insight into how that would look.

These are driven by other market gains actually where -- where we see that we are going to have largest share of rollout contracts in the near term, that's going to impact our Q2 in networks for sure. You know, we shouldn't exaggerate it, but we're trying to say that -- that -- that portion is a bit larger than normally. The second question, maybe you should take it.

Carl Mellander -- Chief Financial Officer

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

Borje Ekholm -- Chief Executive Officer

But yeah, it's nothing extraordinary.

Carl Mellander -- Chief Financial Officer

No. Nothing extraordinary.

Borje Ekholm -- Chief Executive Officer

Nothing special.

Carl Mellander -- Chief Financial Officer

We will deal with that as we go along.

Peter Nyquist

OK. Great, Daniel. We will then move to the next question from Frank Maao from DNB. Good morning, Frank.

Frank Maao -- DNB Markets -- Analyst

Good morning. Thanks for taking my question. And just wanted to clarify a -- a little bit there on the last -- last question, also on -- on China, which actually -- my question was related to. So Mainland -- Mainland China was -- was flat for you, year on year.

And you mentioned the -- the tender that will probably come in a couple of months. We don't have any particular insight on them. But exactly, could you repeat what you said about the portion being a bit larger than normal? I didn't fully get that. Do you mean the portion that you have -- that you expect in the rollout in China? That's just really my -- my question.

Given that more -- further -- further to China, do you have any mix changes on -- on what's--what's going on in terms of the plans that operators have there? I know that there seems to have a certain skew toward 700 megahertz rollout to China rather than perhaps that much Massive MIMO this year. Would -- would that impact you and your competitiveness in a particular way in China? And finally, if I may, on the Massive MIMO -- second-generation massive MIMO product that you've -- that you've mentioned, could you give us some color on that? Has it been received by customers who also are evaluating the Chinese lenders Massive MIMO products, which -- which, you know, were pretty lightweight for the 64TRX, something like that. Even that was launched one year ago. So if you could give us some color on the reception there, please? Thank you.

Borje Ekholm -- Chief Executive Officer

If we -- if we start -- just to be clear, the -- the rollout in China during the first quarter, we don't see that to increase, right, during the second quarter. And we don't know anything about new contracts. So with that, you -- you must conclude that it -- it's not China-related. It's actually other markets where we see -- that we will have large rollouts or -- or we know we're going to have large rollout contracts in the second quarter.

And the proportion will be slightly higher. So you need to think about the scale of that deploymentand you will probably realize where it is. But that too is going to impact and the -- the impact was not super large but it's still going to impact. And you know, we can absorb quite a lot in our new cost structure.

So with the cost structure, we have on products as well as on services. We can absorb those large rollout contracts. But we want to be clear that we see those coming and they are, you know, going to impact earnings slightly in the -- in the near term. So very temporary but it's -- it's a very large size at the same time.

Then looking at China, yeah, how the deployment schedule is going to look like, how the tender structure is going to look like is unclear today. Clearly, our competitiveness in Massive MIMO is good and the reception on our new generation Massive MIMO is very positive on customers. And we're starting to see that gaining increasing momentum and we will start to see that rolled out in the -- or starting to roll out -- be rolled out in the next few months. So we're -- we're very encouraged with what you see and we do see that that the customers are putting us at very good competitiveness with this new generation Massive MIMO.

And I would say that you know, we clearly have a significant step on weight compared to where we were and compared to where competition was under former generations. So we're very encouraged about competitiveness.

Peter Nyquist

OK. Frank, thank you for your questions. We'll move to the question from Sebastien Sztabowicz from Kepler Chevreux. Hello, Sebastien.

Sebastien Sztabowicz -- Kepler Cheuvreux -- Analyst

Yeah. Yeah, hello, thanks for taking the question. On digital services, you are running the business on a rather elevated level of losses in the -- in the first half of the year with the acceleration of the R&D investment in the cloud-native 5G portfolio. How should we think about the spending or the level of loss in the back half of the year? Do you see any improvement coming in, or should we assume that the improvement will only come by 2022? And also, on the IPR litigation with Samsung, could you remind us a little bit the process and where you are standing in the litigation process with Samsung? Thank you.

Borje Ekholm -- Chief Executive Officer

If we start on the -- on the second one with the Samsung process, yes, we have multiple lawsuits going on between the companies in several different jurisdictions. So -- so of course, it's very hard to comment on the details of that. So I just want to say that, you know, we're gonna be focused on reaching a -- call it -- we are going to focus on maximizing the value of our IPR portfolio as much as we can and as much as we possibly can and that's what we're doing. And I feel it's -- it -- it's in the interest of us as a company to make sure that we don't self-imposed deadlines or self-imposed restrictions on those, you know, both mitigation strategies and negotiation strategies.

So let's -- when we have some material developments a year, you know, if we would agree, for example, of course, we will update to market at that point in time. But making predictions here and self-imposing constraints, I think, would not be right for our negotiating position. So we're going to continue to -- to run it like we do and I apologize, I know it's -- it's hard to be on the outside asking for information and getting nothing really. So I -- I recognized that and I feel that pain as well.

But we -- I think we have to run the negotiation in the way we do right now in order to keep our ability to negotiate.

Carl Mellander -- Chief Financial Officer

Digital, should I take that one?

Borje Ekholm -- Chief Executive Officer

Yeah. You can take digital.

Carl Mellander -- Chief Financial Officer

Yeah, I do say that.

Borje Ekholm -- Chief Executive Officer

OK.

Carl Mellander -- Chief Financial Officer

Well, Sebastian, yes. So you saw the EBIT on digital services SEK 1.5 billion now in the first quarter. And we -- and we say that's going to be on a similar level for the second quarter for the reasons that we talk about with early cost and -- and the revenues and the 5G contracts coming much late -- late in the year. So from that, you can deduce that the second half will improve.

And as you know, the fourth quarter is typically the strong -- clearly the strongest for digital services also because of seasonality topline being the highest. So second half, of course, that's our -- our ambition clearly is -- is going to be better than the first half for -- for those reasons.

Peter Nyquist

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

Dominik Olszewski -- Morgan Stanley -- Analyst

Yes. Good morning, everyone. Thanks for taking the questions. So maybe a shorter-term question and a longer-term question.

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

Carl Mellander -- Chief Financial Officer

Should I take opex? Yes. No, I would say we -- we won't see any -- any major changes. As you know, we are continuing the investments in R&D, and we've been clear on that. We can also look at the seasonality that we talked about in planning assumptions where opex typically comes up in the second quarter.

Then of course, it's a -- it's a special year when it comes to work from home and virtually no traveling except, of course, in certain customer delivery cases and so on. So -- so, therefore, of course, there's a big saving going on from that point of view, and let's see how that develops. I mean, nobody really knows how that can develop during the year. But we will -- as it looks like now, we will as employees in Ericsson continue to work from home during the rest of the year and we will not be resuming traveling as it looks right now.

But other than that, no major impact other than R&D investments that we do and increase in digital services.

Borje Ekholm -- Chief Executive Officer

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

Carl Mellander -- Chief Financial Officer

Yes. Oh, yeah.

Borje Ekholm -- Chief Executive Officer

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

Carl Mellander -- Chief Financial Officer

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

Borje Ekholm -- Chief Executive Officer

As well as most likely other costs like real estate will. They -- they haven't been lower yet, right?

Carl Mellander -- Chief Financial Officer

No.

Borje Ekholm -- Chief Executive Officer

Now, the office spaces are completely empty. But most likely this will be lower as we return after the pandemic. So I think -- when you think about cost structures and cost levels, there, you know, there are many opportunities and lessons learned from this period can actually reduce the run rate going forward. That's not happened yet.

Your India question, I think it's a very interesting question. Without getting you into geopolitics, that's a lot of speculation about us. I'll -- I'll let others do that part. But India is a very big market, clearly.

And the market where we have strengthened our position over the last two years and is something we continue to do and one of the reasons why we're growing in the market area Southeast Asia, Oceania, and Australia is actually India. So for us, that is a major focus market because that can give us scale. So that is an important area where we prioritize growing our footprint.

Peter Nyquist

Great. Dom, thank you for your question. And then we'll move to the next question from Richard Kramer at Arete. Hi, Richard, can you hear me?

Richard Kramer -- Arete Research -- Analyst

Yes. Can you hear me OK?

Peter Nyquist

Perfectly. Good morning.

Richard Kramer -- Arete Research -- Analyst

OK. So Borje, I have two basic questions. Once about the structure of the industry because you've spoken about gaining market share and the message from the operator is -- is the desire to preserve supplier diversity. And with the -- the euphorical situation you've referenced many times with the limitations on one of your principal competitors, and the introduction of a new large competitor in -- in U.S., how do you think about your customers looking at your market share and thinking that it needs to be limited that -- that you want to preserve more than just a few other options in the marketplace than maybe that's what's driving them to look at new modes of -- of supply like Open RAN? And then, I have a follow-up question about the enterprise business.

You know, it -- it seems -- it feels like it's a bit of tail wagging the dog because it's still a very, very tiny percentage of your sales. Can you flesh out a little bit more what your plans might be in the next few years to build out an enterprise sales channel and to build out the range for products that you would need to have a complete offer for enterprises beyond selling through the telco channels? Thanks.

Borje Ekholm -- Chief Executive Officer

That's a good question. You know, I -- I think what we need to recognize under the structure of the industry is clearly a desire to have multiple choices for our customers. And I think that we are going to see that and we plan accordingly. But I'm also convinced that if we can offer the best solutions to the market, the competitive product portfolio and cost structure, we -- we can continue to gain footprint as we sit right now.

We are never going to be 100% of the market or even remotely close to that. So, I -- I do think that we actually, even in today's market structure, still have an opportunity to -- to continue to gain. Not across the board, not everywhere, but I think we have a chance to gain footprint based on the portfolio we have. But -- but to say, there are going to be other competitors, and I -- I think that's healthy.

I actually believe that competition is -- is, you know, maybe tough short term, but actually longer term is -- is good for the industry. So, I don't -- I don't see that to be anything different moving forward with anything in the past. And actually, things, I think, to look at the consolidation in the market that -- that were clearly the case with other vendors that have reached way beyond 50% market share in many countries. For example, in Europe and around the world.

So, I -- I don't see where that really -- mid really is for market share. I don't think we're -- we're there yet. But at some point in time, it will be there for sure. The enterprise, you know, I want to just draw your attention to a very simple fact.

It's to start building out something, it will by May produce more into the pool. It's kind of unavoidable unless we will do a very big acquisition, for example. So, it's as if the tail wagging the dog, but it's unavoidable at the starting point, unless you do that big acquisition. We're not going to make that.

That's not the plan. Our plan is instead to build out new spaces and applications starting with the IoT global connectivity, starting with our dedicated network that we're investing quite heavily in and developing solutions for the market including the CBRS specimen area. But we're also seeing with our wireless WAN offering that we can create a very different network architecture to work from home, for example, or remote working. That has allowed us to do one-to-one which we call Wireless Office which -- which allow you to have full connectivity as a small and medium-sized company and round the world your applications without having your local area network.

And we think that is -- is a major opportunity for us in enterprises. I would also say our enterprise investments are always serving the benefit of -- of -- kind of two masters and that's us, i.e., it's going to grow the revenue for the service provider as well. So, whether we have to develop a full, independent go-to-market enterprise is a different story. But what we want to make sure is that it drives revenue for our service providers.

If you look at Cradlepoint, they actually have their channel, structured channel go-to-market. And that's something we're leveraging also for our connect -- dedicated network as well as longer-term IoT solutions. So -- so, we are trying to do a lot of demand creations through the go-to-market organization.

Peter Nyquist

Thanks. Thanks, Richard for those two questions. We actually turn now to William [Inaudible] of TV4. William, can you -- you hear us?

Unknown speaker

Yes, I can. Thanks very much. Borje Ekholm, you have not been particularly clear on the restriction between China and the Western world previously, but as you can see there's a number of cases where restrictions generated this pause at the moment. Does this worry you that Ericsson might increasingly get caught up in restriction with China?

Borje Ekholm -- Chief Executive Officer

There -- there is a lot of geopolitics going on and it -- it relates, of course, to a China-U.S. situation as well. So, with all of that kind of moving pieces, you know, it's clearly going to take up as well. It's no question.

Of course, for us, what we intend to do is to work on our own flexibility and the way we drive the business. That would probably be the only way we can really truly impact these trends. And -- but -- but I think it is concerning what we're seeing right now. And I want to just say one thing, we're in a network system where we actually have a global standard.

It allows us from going and to travel globally with one device. But the reality is -- what it does even more is it -- it can allow less-fortunate countries to have a full connectivity. So, what we see now is that we'll -- we have 8 billion subscribers around the world being able to connect on one standard, on one structure, and that's something, I think, is important that we preserve.

Unknown speaker

Thanks, and quick follow-up. China is -- China is to further increase 5g auctions. Is there a risk that Ericsson might be impacted badly in these auctions by doing it with these companies within diplomatic tension between the two countries?

Borje Ekholm -- Chief Executive Officer

No. I -- I want to say it's very, very simple. There's always the risk that really impacted in -- in what sense in different countries. But what we are going to do is we're going to work on our competitiveness, our competitive product portfolio, our competitive cost structure, and we are going to try as hard as we can to gain an increasing footprint in -- in the Chinese markets.

It's an important market for us, it's -- of course, it's the volume impact but -- but actually it's also a new and developing market. So, it's a -- it's an important way for us to learn what technologies are going to be needed for the future.

Unknown speaker

Thank you. We see you'll have to tread very carefully here.

Borje Ekholm -- Chief Executive Officer

We are running a company and we're trying to do that to -- to the best of our ability. I focus on running that, as well as the plan. Of course, the geopolitical situation is a very difficult situation and we are working on the areas we can impact. I -- I often say, and I think I've said this thing before again that the reality is the world falls down in two buckets.

One bucket that it can impact and one bucket that it can't impact. So, I focus, as I said before, that can impact our products, our solutions to customers, our cost structure, etc.

Peter Nyquist

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

So, hello, Johanna.

Johanna Ahlqvist

Hello. Thank you for -- for being the final one to ask a question. And since if I may, two ones. The first one relates to working capital and your main SIM card in the quarter principally above and impacted by 4 billion for the -- the price.

And I'm just wondering if you can give any value that we put this for -- for the full year. Will there be more of those type of actions or have you taken the ones necessary now? And then on competition, you mentioned in the report that you are sort of investing to place markets. So, I'm just wondering how is the price competition currently because it seems like you are growing totally nicely in Europe now with -- with markets being -- you move to price yourselves into -- to go in contact. Discuss that further, please.

And that, you know, if it was just a fact that when something has -- has taken over Huawei's price pressure in mobile phones, or how -- how is the price competition in the market currently? Thank you.

Borje Ekholm -- Chief Executive Officer

I'll take the first one. And -- thank you, Johanne, on -- on working capital then. I would say, that you can optimize different parameters here. And for us, it's more important to secure that we can deliver to customers on time.

That's also by the rate with -- for working capital because you get to accept this milestone from time and then you can invoice and -- and get paid also. And what they have decided to do is to invest so that we can meet those milestones in our company's handling supply's pricing globally. And we saw a dip in production there -- in the first quarter. We will continue to balance this as good as we can.

And I would say we prioritize, of course, always the customer delivery. We'll make sure that we have the inventory. We need the components, we need them, especially these QuickTel components so that we can meet those delivery deadlines. But that's a fairly -- easily a trade-off at the end of the day.

Exactly how it's been solved with the Palm Phone. I would say the -- the rollout pay for delivery pays over the year and -- but we'll do our best to manage the working capital and continue the discipline we have now I must say throughout the organization. On competition, I would say over the last several years, it -- it has remained a very competitive industry, undoubtedly it will not change. And so -- so, you know, that's where we base our platform.

What we have seen over the past few years and [Inaudible].

Peter Nyquist

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

Borje Ekholm -- Chief Executive Officer

Thanks, Peter. Yeah, I would just summarize and say that we continue to execute on our focus that we're doing. It is to invest in R&D, for technology, and course leadership. That allows us to be competitive and grow our core business.

And therefore, we're going to continue to be. We do believe there will be an inherent growth in the 5g market because 5g grow faster both to consumer, mobile broadband, as well as enterprises. So, we see that growth to come to near a bit longer than -- than normal and a bit faster and bigger than normal. So, we're very excited about those opportunities.

We continue to invest for market share gains that we have done over the past three years and we continue to see those opportunities on the back of a strong portfolio. But we're also very excited about the enterprise opportunities. It's still small in size but we see here with the offerings we are getting together, that we're starting to see that growth rate where we pursue both organic growth, as well as inorganic opportunities. So, with that, thank you very much for listening in and thank you very much for your interest.

Peter Nyquist

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

Duration: 61 minutes

Call participants:

Peter Nyquist

Borje Ekholm -- Chief Executive Officer

Carl Mellander -- Chief Financial Officer

Pedrag Savinovic -- Carnegie Investment Bank -- Analyst

Alex Duval -- Goldman Sachs -- Analyst

Aleksander Peterc -- Societe Generale -- Analyst

Daniel Djurberg -- Handelsbaken Capital Markets -- Analyst

Frank Maao -- DNB Markets -- Analyst

Sebastien Sztabowicz -- Kepler Cheuvreux -- Analyst

Dominik Olszewski -- Morgan Stanley -- Analyst

Richard Kramer -- Arete Research -- Analyst

Unknown speaker

Johanna Ahlqvist

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