Telefonaktiebolaget LM Ericsson (ERIC) Q1 2022 Earnings Call Transcript

Telefonaktiebolaget LM Ericsson (ERIC -0.67%)
Q1 2022 Earnings Call
Apr 14, 2022, 3:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Peter Nyquist

Hello, everyone, and welcome to today's call covering the Q1 result in 2022. With me here in the studio in Stockholm, I have our CFO, Carl Mellander; and on a link from New York, I have our CEO, Borje Ekholm. So as usual, we'll end this presentation with a Q&A session, and in order to ask questions, you can join the conference by phone. More details around that will be found on our website, ericsson.com/investors.

So I will start with this message. During today's presentation, we will making forward-looking statements. These statements are based on our current expectations 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 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 to our president, CEO, Borje Ekholm. So please, Borje, you can start.

Borje Ekholm -- Chief Executive Officer

Thank you, Peter, and good morning, everyone. And a big thank you to all of you for joining us. I'm very pleased to present a solid quarter. We continue to see good results from our strategy execution, both within our core mobile infrastructure business, but also as we expand into the enterprise space.

Before I go into the details of the quarter, I'd like to point out some new products we actually have released, Interleaved AIR 3218 and Radio 4490 that you can see on the screen. These products form part of our leading 5G portfolio, which as is really at the core of our success. So let me begin with some of the quarter's key events. And of course, I have to start with the invasion of Ukraine by Russia and the continued aggression and marks a significant setback for the world.

I'm really heartbroken by the consequences for those directly impacted. The war is devastating for our whole society. After the invasion in February, we realized that our business in Russia could not be sustained, and we suspended all deliveries to Russia already at that point in time. Over the weekend, the exemption for public telecom networks has been removed from the EU sanctions.

So on Monday, we announced that we have suspended all -- or suspended our affected business in Russia indefinitely. This is a complex matter as telecommunication networks are part of the critical infrastructure. And as you know, many Western governments have pointed -- pointed out the importance of maintaining Internet access and the flow of information for the people of Russia. So we will monitor the situation closely.

We will continue to engage with the authorities as we suspend our business in Russia indefinitely in an orderly fashion. We have recorded a probation related to Russia for the impairment of assets and other extraordinary costs of 900 million in the first quarter. From an overall business perspective, we continue to execute on our strategy and we see strong business momentum with continued share gains. In the quarter, we saw -- we saw organic sales growth of 3%.

As you already well know, the situation regarding the global supply chains is challenging. But to ensure that we can deliver, we've made proactive investments in buffer inventory among other things. We're also investing in diversifying our supplier base due to the geopolitical environment we're in, and that's an environment that we foresee to continue for quite some time. These diversification drives, of course, some short-term costs, but it also establishes great resiliency in the company as it improves our ability to deliver to our customers.

And the actions we have taken have allowed us to deliver on our customer commitments during the quarter. We simply see that low sales cost more longer term than carrying excess inventory a few quarters. We have also continued to invest in R&D to strengthen our market position and that will allow us to gain share. And we've seen that in this quarter again.

But we were also endorsed and I think that's important by Gartner, who named us to lead their 5G network infrastructure in their magic quadrant. We are focusing our increase in R&D investments to maintain a strong competitive position. We're investing in Cloud RAN next generation, A6, as well as our cloud-native core portfolio and service orchestrations. These investments in R&D will generate a strong return longer term, but it of course impacts the profitability short-term as they are not yet revenue generating.

Gross margin came in at 42.3%. Underlying business performance is solid, as the gross margin includes the effect of one large software contract that normally is recorded in Q1, but this year was pushed into Q2. The effect of this contract is about 0.9 billion Swedish krona. The software contract pushed into Q2, impacted also network's gross margin, which reached 44.7%.

And the impact of this software contract is 0.9 billion on gross margin in networks as well. Indigenous services, we saw encouraging sales development in the cloud-native 5G core portfolio with double-digit growth. However, we're not satisfied with the overall results in the quarter. We need to improve faster, and we increased focus on accelerating sales growth and addressing efficiency to improve profitability.

Our EBITDA margin for the group was 11%, excluding a fair market revaluation under provision related to Russia. In the quarter, we also received communication from the DOJ about the breach notice related to our DPA, and we are currently engaging -- with the DOJ about this matter. What I can say now is that, it's our assessment that the resolution will likely result in monetary and other measures. However, the magnitudes of these cannot at this time be reliably estimated.

As this process is ongoing, we remain limited in what we can say about the historical events covered in the Iraq investigation and related matters. Let me now turn to the customer and market side of our business where we continue to see a very good momentum. As we are now hopefully starting to transition out of the pandemic, I'm also happy to start interacting more face to face with our customers. And you know that what gives energy and this job is actually meeting both our people, but also the customers as that's a great way to see what happens in the business and drive our own improvements.

And now we're getting back to that more business as usual. And we continue to see good momentum in our interaction with customers. Overall, sales growth in Southeast Asia, Oceania, and India decreased by 17% year-over-year. That was due to timing of orders and project milestones.

We saw very strong, continued momentum in North America, where sales were up 9% year-over-year, driven by continued very high demand for 5G solutions across all segments. And the U.S. customers continue to be at the forefront of 5G deployment. So, for example, we see customers indicating good traction in fixed wireless access as a new use case.

Sales in Northeast Asia declined by 20% year-over-year, primarily as a result of project timing in Japan. However, we continue to see good opportunities in Japan, which is a highly developed market with dense networks and high demands on capacity. I would here like to point out that the increased sales in mainland China, and this is driven by timing of orders there. In Middle East and Africa, sales decreased by 9%.

This was due to lower investments in 5G in the Middle East, and was partly compensated or partly offset by growth in Africa. Overall, we're seeing encouraging momentum in the African market. And finally, in Europe and Latin America, sales increased by 15%, with Europe seeing an 18% increase. And this strong development was driven by networks as a result of continued market share gains.

And it's great to see that we're now back to strong growth in Europe. Let me talk a bit about our strategy execution. Our core business remains to extend our leadership in mobile networks. An example here is our Massive MIMO portfolio that has proven to be highly competitive.

It seems -- [Audio gap]

Peter Nyquist

Hmm. I think we lost Borje here. For a few minutes to see if we can reconnect here with Borje. As I said in the beginning here, Borje's on a link directly from New York.

Clear it up to create some challenging -- challenges here. But let's see if we can reconnect with Borje in a few seconds here.

Carl Mellander -- Chief Financial Officer

Keep on going. And so we look forward to hearing the continuation here of Borje to talk about strategy execution. Both on the mobile network side, of course, and the core business that Borje was just talking about now. But then also, which is so encouraging of the enterprise piece.

We might have Borje back --

Peter Nyquist

I can start hearing Borje in my ear at least. Now he's back. Yeah, Borje, you're back.

Borje Ekholm -- Chief Executive Officer

You hear me?

Peter Nyquist

Yes.

Borje Ekholm -- Chief Executive Officer

So I don't know where I lost you, but --

Peter Nyquist

Strategy execution --

Borje Ekholm -- Chief Executive Officer

Maybe -- Yeah. So, let's go into the strategy execution. And you know that our strategy and -- the focus strategy we have remains to extend our leadership in mobile networks. And and here, you know the example, of course, that we invest in Massive MIMO portfolio and that's proven to be highly competitive and one of the reasons for our market share gains.

But I also want to highlight the -- that we foresee a longer investment cycle in our core business compared with previous mobile generations. And that's because 5Gs road applications will drive continued need to increase capacity as basically new applications migrate to wireless access. And I think also here we want to highlight there what we see is, of course, that the continued investment that the operators are doing in capex is, of course, important. But it is fair also to say that, it's only a portion of that overall capex that goes into active components.

So what we see is that for the future, as the network needs to densify and capacity needs to increase, that the portion of active components that we can supply and our addressable market actually will increase of the operators capex. And that's why we're very confident and very comfortable about the strong outlook for the market segment we are working in with 5G. And we continue to invest for this, what I would call a "bright and growing market." And we have continued to increase our R&D, leading to the RAN market share gains that we see outside of China, but also to the increase in our profitability. We've launched new RAN product and solutions, including Next Generation A6.

We have a strong progress toward enabling our customers and our paths toward sustainability and have the lowest carbon footprint possible. So for example, our new RAN solutions consume 25% less power compared to current products. We're also expanding our leadership in 5G core with 16 out of the 20 largest operators globally using Ericsson 5G core. We've signed over 60 contracts and we have 12 live networks, which is far ahead of our nearest competitor.

Sales are now growing as 5G are getting launched around the world, but it's still from a very low base. Dedicated networks and Cradlepoint are the foundation of our enterprise strategy. Ericsson has taken significant steps toward growth here. Cradlepoint is now showing 52% yearly subscription billings growth with a strong momentum in the 5G portfolio.

Dedicated networks is gaining momentum, and we've launched Ericsson private 5G, which is fast and easy to deploy and easy to operate, and offers a lifecycle assured solution. With Global Network platform, we aim to create the new market for network APIs, that will enable developers to use the advanced network capabilities enabled by 5G, basically putting the 5G network at the fingertips of the developers. Given the new opportunities and assets from the intended acquisition of Vonage, we're getting strong traction and interest with our customers, and we're accelerating the execution to deliver network API's. Recent milestone was our announcement of the end user boost, which is an application that allows for better network quality when it's needed with a press on about them.

So for example, when doing an important video call, so it's not dropping like it happened to me just a few seconds ago or a few minutes ago, or for that matter, for gaming. The interest level is very high. And the announcement that we did together with smartphone in Hong Kong generated more than 150 million unique visitors on our webpage. In short, we believe the market for network APIs will be very large and we can lead that and create that market.

So we continue to work to close the Vonage acquisition during the first half of 2022. With that, let me leave the word over to you, Carl, to go through the financial details of our report.

Carl Mellander -- Chief Financial Officer

Thanks, Borje, and good morning, good afternoon to everyone. And I just wanted to reiterate to start with here that we deliver a solid quarter today and there are some one offs, but the underlying business is really encouraging with great business momentum. But let's drill into some of the numbers here. Starting with the top line, 55.1 billion Swedish kronor net sales, this is an organic growth of 3%.

Reported sales grew by 11%, but we do have a strengthening dollar here underlying. So organic is 3% growth, as said. And you saw in Borje's world map earlier where particular growth comes from, where the North America growing by 9% in constant currency and Europe, Latin America by 15%. We have won market share during the quarter as well, especially in Europe, in line with with the strategy that we have.

IPR revenues came out at 1.4 billion. This is an increase of 0.6 billion year-over-year, driven by renewal -- of license agreements. And this was in line with the guidance that we had provided already in the Q4 report for Q1. And we keep the same guidance also for the second quarter between 1 billion and 1.5 billion of IPR revenues.

And as you know, of course, this guidance is based on our dependent on the timing of renewals, and the terms and conditions of new agreements and so on. But we do remain very confident in our strong 5G position and the leading patent portfolio that we have. Gross margin and excluding -- restructuring charges, there was a decline of 60 basis points year-over-year to 42.3%. And Borje discussed some of the items here, but of course, we are actively investing in the supply chain resilience and we do have the lower software in the mix.

So we come back to that a little bit more later as well on gross margin. R&D, we increase investments as Borje said, it came out at 10.7 billion. This quarter, that's a 1.1 billion increase year-over-year. Half of that is related to effects, but the investment we do here is again in Cloud-RAN and next generation A6 for industry leading radio performance, better power-saving possibilities and footprint reduction.

In the quarter, we had the two one off items. I should mention those as well. Again, one is the provision we made in connection with the Russia business, that's the 0.9 billion. And also we had a financial investment revaluation under our Ericsson ventures umbrella, and that's a 0.3 billion revaluation.

And together those represent 1.1 billion, then both reported in other income and expenses. That brings us to EBIT, so EBIT -- excluding restructuring charges came out at 4.8 billion, and this is a 0.7% in EBIT margin. But however, remember these one off items that we had, of course, including what effects we had in gross margin, which I will come back to, but also the one off items that are impacting. So excluding the one offs EBIT would have been at 5.9 billion in the first quarter, which represents an improvement by 0.6 billion year-over-year in absolute terms.

When it comes to tax rate, we had an effective tax rate in the quarter of 29%. And you also see here on the slide, the net income came out at 2.9 billion, following the provision to Russia notice. And then free cash flow before M&A, minus 1.7 billion in the quarter. And this is following the active buildup of a buffer inventory for certain critical or vital components that we have decided to do.

But if you look at the rolling four quarter free cash flow before M&A, we are at 28.8 billion Swedish kronor. This represents 12.1% of net sales, which can be compared with our long-term target that's, you know, which is 9% to 12%. So we're ahead of that long-term target, still in free cash flow before M&A. Finally on this slide here, the rolling fourth quarter EBITDA margin, if you look at that, excluding restructuring, again, is 14%.

And this can be compared with our long-term target of EBITDA -- 15% to 18%. But let's look at the segments a bit more, starting with the networks there. And here we are encouraged by the 4% organic growth in the quarter, and we were able to deliver on customer commitments in terms of deliveries. Thanks to all the hard work on the supply chain resilience that we have done.

Borje mentioned earlier, I'll just repeat what Borje mentioned, the 1 billion in software here. And this is a discrete contract that usually comes into the first quarter. Now, it's pushed into the second quarter, of course, it has a large impact on the gross margins -- of the networks. And I also wanted to point to the, again, the rolling-four-quarter EBIT here report that is in that was 21.3% after Q1.

In digital services, gross margin excluding restructuring, again decreased to 70 basis points to 42.9%. This is a result of initial deployment cost in the 5G core contracts, which we are, of course, extremely happy to have won and that we are now implementing for customers. EBIT came out at minus 4 -- minus 1.4 billion, excluding restructuring charges. And again, as Borje mentioned, we're not satisfied with the overall performance here, of course, financially.

So the target of limited loss for 2022 is challenging, given the increases in R&D that we see in the service orchestration, but also the cloud native 5G portfolio. That's why we are increasing our focus now on accelerating sales, both sales growth, but also addressing efficiencies through automation and other measures. In managed services, EBIT margin excluding restructuring ended up at 11.8%, and this is partly and importantly a result of increased network optimization sales. And this happens in the wake of 5G buildouts where optimization services are demanded and requested by the customers.

This helps our gross margin in managed services. There was also an element of timing of costs there impacting positively the margins in managed services, which actually recorded the highest EBIT margin since the inception of the segment. And lastly, on the bottom right side here of the slide, you see emerging business and other. And as I said previously, we had this 0.3 billion hit from the Ericsson ventures reevaluation.

But instead, if we focus on the underlying business in emerging business and other, we saw good progress, especially in Cradlepoint, and also dedicated networks as I said before. And and the last two quarters, in fact, we saw record growth in Cradlepoint, and the business momentum here with the new portfolio also tied into 5G is accelerating. We launched a new version of the Ericsson private 5G within dedicated networks. This is a solution in a box fully software upgradable obviously, easy-to-install and manage, completely -- 5G ready, of course.

And this has been deployed already with many enterprise customers and we see good traction also on that offering. So, let's have a look at the gross margin, again, I commented at briefly before, but we find it useful to look at this rolling-four-quarter picture as well on gross margin. And you see the rolling-four-quarter gross margin now is 43.3%. And I think we've talked about the reasons behind here.

So I will not repeat them. We talked about the software, the 1 billion software. We talked about the supply chain investments that we do, and also the initial deployment costs for the 5G quarter contracts in digital services. So now, I suggest we move to the next one, which is really looking at how have earnings then come out in free cash flow.

And as usual, I can say, managing working capital remains really a focus area for us. It's a strong focus. We talked about the investments in the supply chain in networks previously, and this is also visible here in the working capital in inventory build up. We expect, rather, elevated inventory levels to remain the next few quarters.

But remember, this is a value creating investment that we do in order to meet customer commitments. And obviously, the cost for doing this is far better than missing deadlines or missing customer commitments. So this is a good investment that we are making. As customary in Q1, I can also mention we had cash outflows for accrued employee incentive related expenses, and these effects are partially offset by a very good cash collection in the quarter and also an increase in contract liabilities related to customer contracts and also IPR payments.

So free cash flow before M&A, this is a key metric for us that Ericsson came out at 1.7 billion, negative, as you see, mainly due to their buffer inventory that we have decided to build. And I already mentioned the rolling 28.8 billion free cash flow, which is 12.1% of net sales. So after this quarter, we maintain a solid cash position ahead of the planned Vonage acquisition. Net cash came out at 65.2 billion, and the gross cash is now 104.2 billion Swedish kronor following the Eurobond, the 750 million Euro that we placed in the market in February.

So with that, thank you so much. And I hand back to you, Borje.

Borje Ekholm -- Chief Executive Officer

Thank you, Carl. So to sum up, we report a solid quarter with good underlying performance, but I would also say we know that we can do better. So while we're navigating a challenging environment, we will continue to be well-positioned to take the next step in our strategic journey. As we move forward, we will focus will continue to focus on executing on our -- strategy to extend leadership in mobile networks, but also expand into enterprise in a focus way.

The mobile infrastructure will remain our core, and we will not spare any effort to strengthen our position in here. We saw a solid underlying performance in the quarter and we're excited about our outlook. Technology leadership will be driving our competitiveness, and we will continue to invest in leading R&D and be on the forefront. And in this picture here, you'll see some of our new products, Radio 4490 and Massive MIMO Air 6428.

We are encouraged by the growth we see in North America and Europe built on 5G momentum, but also share gains. And of course, our ambition is to continue to grow and develop this business, both based on market growth as well as market share gains. On the IPR side, our strong 5G position and leading patent portfolio makes us well-positioned to conclude the outstanding renewals. On the enterprise side, we're seeing equally good development.

Our portfolio of prepackaged enterprise solutions, with Cradlepoint and dedicated networks -- see very good traction overall. And we continue to work toward closing the Vonage acquisition in the first half of 2022, and to start developing the global network platform. We're confident that these investments we're doing, both in our core business and the enterprise space as well as, of course, our cultural journey we're going through, we'll make Ericsson a stronger, more resilient company, while at the same time put us on a higher growth trajectory. We have a solid business today and we're on track of reaching our long-term target of an EBITDA margin of 15% to 18%, no later than 2 to 3 years.

Finally, I want to thank all of my colleagues in Team Ericsson who made this possible. To put it simply, you rock. And with that, I would like to conclude this part of the presentation and hand back to Peter for your questions.

Peter Nyquist

Thank you, Borje. I am longing for the days when we will transform days on a 5G platform, maybe once and in future. Let's move to the Q and A. So, Nash, we are ready for the Q&A session.

Questions & Answers:

Operator

Thank you. [Operator instructions]

Peter Nyquist

So, we'll start here. I can't really see a visible. Maybe, Nash, you could help me with the first questioner who stepped from.

Operator

Our first question comes from the line of Aleksander Peterc from Societe Generale. Please go ahead.

Peter Nyquist

Hi, Alex.

Aleksander Peterc -- Societe Generale -- Analyst

Good morning, and thank -- Hi, good morning, good morning to you all, and thank you for this question. I just have a couple of points of clarification. First of all, given that you have 1 billion SEK of software sales and networks slipping from Q1 into Q2, should we therefore assume that your second quarter sequential growth may come in ahead of the usual seasonality? I see like probably about 3 to 4 percentage point boost as a result of this slippage. Is this the right way of looking at it? Secondly, on the inventory, so I understand your investment there.

Can you tell us if you now happy with your inventory levels? Or will this investment into resilience continue in the remainder of the year? And then just finally, a point of detail on your IPR revenue run rate, excluding the impact of delays in renewals to your normal run rate, should we think now there's a positive effects impact there, given the current exchange rates? Or the old levels that you have given previously still prevail? Thanks a lot.

Peter Nyquist

Maybe, Borje, you can start with the software comments? On --

Carl Mellander -- Chief Financial Officer

[Inaudible] yeah, please.

Borje Ekholm -- Chief Executive Officer

Now you can take it. You're all ready and gearing up. I see.

Carl Mellander -- Chief Financial Officer

Yeah, exactly. But I think, thanks, Alex, on the [Inaudible] question to start with. And of course, as you know, in every quarter, there are many puts and takes and we typically don't guide the specific outcome, of course, on topline, but we usually just refer to what the three-year average seasonalities. In this case, it is true that this specific 1 billion in software is getting moved and we are we are certain of that into the second quarter.

But as you know, there are many puts and takes in every quarter. And we have to, of course, win everyday to get to the final results. So -- I would just look at the total seasonality there and then you make your own calculations or assumptions based on that. Then on the inventory levels, are we happy? I mean, we see this as something that we that is a value creating investment, given the situation we have globally on the supply chain.

In other words, we are building up this buffer stock so that we are able to meet this customer commitments. Should the global situation on components change, of course, -- this will also be -- we will be able to to decrease those levels again and get up to a faster turnover of inventory. But for the next couple of quarters, few quarters, we believe that this elevated level of inventory will remain. And then on IPR, I don't want to, I don't know if you want to comment on that, Borje.

But I mean, this really has to do with the renewal, that we have in the pipeline at the moment. And I don't think we can comment so much on that, which ones they are. And only to say that we are progressing those -- in the speed that is possible between the two parties. And we will, of course, come back and inform you when whenever we have something new to tell.

Borje Ekholm -- Chief Executive Officer

Yeah. I think the only thing to add there is the -- for us, it's really important to protect the long-term value in the contract. So we're going to do what we can -- to defend the value of the investments we make in a market leading IPR portfolio with more than 60,000 patents. So we're -- and -- it's also involves court processes.

So let's keep you updated as we progress. But -- we're comfortable with the position we're in.

Peter Nyquist

Thanks, Alexander. We'll move to [Inaudible] from [Inaudible].

Unknown speaker

Hi, Peter. Thank you, operator, and thanks for taking my questions. So first, I'd like to ask about the higher R&D costs for the quarter. What can you say about this cost level generally for the remainder of 2022? Is this for Q1 alone? Or should we expect a new base effect for the rest of the year? And then secondly, thinking generally about cost inflation, what is your ability here to pass higher costs to customers? And I guess, Ericsson usually likes to charge more for innovation and product launches, but you spent some time on talking about very nice launches in networks and [Inaudible].

And so question is, in general, ability to pass cost excluding your products? And also, to what degree portfolio innovations receive uptake in orders within a year that would help you manage the logistics costs or input costs? Thank you.

Borje Ekholm -- Chief Executive Officer

I can start on both of them. On the R&D level, you can safely assume we're going to continue at a higher level. And the reason for that is, of course, that we are going to be technology leaders in the mobile infrastructure. So you see our child drawn investments, you'll see the age investments, you'll see the 5G core portfolio service orchestration.

We're going to keep pushing ahead. And we believe that the long-term return on those investments are very high. And just to draw the analogy to 2017, we're up [Audio gap] more than, call it 10 billion kronor on a run rate R&D, and that's has resulted in significantly improving profitability in the company. So the return on these type of investments that we're doing may take a few years to materialize, but they are significant and we see the same thing with the investments we make here now in Cloud RAN service orchestration, etc.

So we're -- we think this is the right way to execute for a technology company in order to get paid through gross margin. So the commitment to lead on technology, we're not wavering from that. But we also see that that's going to pay off in gross margin longer term. Regarding the cost inflation, and you're right, this is a challenge.

The costs are increasing and we see that on salaries, we, of course, see that on components as well. We've had fairly high increases also in the first quarter, but you also see the solid underlying performance. And the important part here is that when you look at the cadence of new products that we're introducing, we're actually that's what we use in order to protect or increase our gross margin longer term. So I believe in technology, it's really about staying at the forefront, using product substitution in order to define the future gross margins.

And that's what we intend to do. That's why you see us also, for example, investing in the future A6, because that's going to help us drive quality, better performance, but also then better ability to -- price. So that's why -- that they go kind of your two questions, as a matter of fact, go hand in hand.

Peter Nyquist

Thanks. [Inaudible]

Carl Mellander -- Chief Financial Officer

Oh, I think, Borje you said it's all.

Peter Nyquist

Great. And we'll move to Peter Kurt Nielsen at ABG. Hello, Peter Kurt.

Peter Kurt Nielsen -- ABG Sundal Collier -- Analyst

Hello, Peter, and thank you for for the opportunity. I'd like to turn to digital services, please. Over the past couple of quarters, your commentary -- on digital services in your confidence and outlook has been significantly more positive. Now we seem to be taking a step back.

In addition to the increased R&D spend, can you elaborate a bit on what are the challenges here? And it sounds like you're seeing some unanticipated challenges here. Also, an anticipated need -- for higher speed. Can you elaborate a bit for us to better understand -- why the outlook is now become a bit more cautious than it has been in the past, particularly given -- your positive commentary over the last couple of quarters. That will be appreciated.

Thank you.

Peter Nyquist

Borje?

Borje Ekholm -- Chief Executive Officer

Yeah. No, -- it's a great question. Thank you for that. We see a bit when it's off the top line, that's well, that's the reality.

And we see, though, very strong growth in our underlying 5G portfolio. It's a good development in our BSS Solutions. So -- there are positives and there are some slippages in here. We're just a bit more cautious on the out on the outlook, and we feel that we really need to put even more emphasis on sales execution and drive top line better than we were able to do during the first quarter.

We believe the product portfolio we have is very competitive. We have 16 out of the 20 largest operators. So we're -- we believe we have a strong position, but we clearly need to execute better. And that's where you see our hesitation here and that's what is impacted.

It's not really a change in market outlook. We still see a very strong market outlook for our solutions and our competitiveness. But we have not been successful in our execution, basically.

Peter Nyquist

Thank you, Borje, and thank you, Peter Kurt. We'll move to Sebastien Sztabowicz from Kepler Cheuvreux. Hi, Sebastien.

Sebastien Sztabowicz -- Kepler Cheuvreux --Analyst

Yeah. Head of the one, and thanks for taking the question. One question on the business trends for the coming quarters. How do you see as a business developing in your [Inaudible] what you call markets for the coming quarters, where do you see some specific opportunity and where do you see some potential challenge continue to work on to maybe the contract or the underlying trend.

The second one is, on the annual contract slippage. What kind of visibility do you have to find it in Q2 or is it something that you've done or there is still some of in your understanding of this 1 billion connect contract? Thank you.

Carl Mellander -- Chief Financial Officer

[Inaudible] the second one, at least. We are -- certain that this will come in. It's moved from first to second quarter. That specific one.

The market comment is, do you want to start, Borje?

Borje Ekholm -- Chief Executive Officer

You can start.

Carl Mellander -- Chief Financial Officer

No, maybe I just to kick it off then. When we look at the projections now that have been updated from the law or, again, reflecting this very good momentum in 5G deployments, you see that now -- the growth for 2022 is predicted at 5%. So it's upgraded again, and 8% in North America. And I think, Borje talked about this before as well.

The need for densification in North America, and the fact that also the C-band, the second part of the C-band spectrum is coming out. Now in 2023, which means starting gearing up already now. Also I think, North American momentum definitely to continue. Then just to mention perhaps one more example of the markets, India, which -- where 5G spectrum will become available later during this year is, of course, a massive market in general, and one that we have great hopes for as well.

And when it comes to increasing the footprint. Borje, anything to add?

Borje Ekholm -- Chief Executive Officer

You can add what we see is that 5G is increasingly getting rolled out across the world. And Carl said, you see the U.S., of course, accelerating. But you see India as well, you see Europe starting. So this is happening now, and we believe we're very well-positioned in that market and we feel pretty confident about the growth outlook.

We're the clear market leader now outside of China. So for us, we are going to continue to invest -- in driving that. But I think it's important to highlight also is that, 5G as an access technology. We believe will be both a higher level than other Gs before, but also a longer investment cycle.

And the reason for that is, of course, that we start to onboard. You use cases onto wireless access technology. So think here about fixed wireless access, it's going to drive traffic. We see a very rapid uptake in markets where fixed wireless access is launched.

So example, in North America, I mentioned one, but we also see new applications in the sense of enterprise use cases and private networks integrated to the macro network will drive more traffic onto the wireless access networks. We see augmented reality applications coming online now that will drive traffic that didn't exist before. So we see in a way, 5G becoming a much more ubiquitous technology than 4G was. And therefore, we're also seeing a different investment pattern than we've seen before.

That's why we're very excited about the outlook for wireless technology. And that it will actually play a bigger role in the future than even if it was big in the past and allow the consumer to digitalize. We see it as even more important going forward.

Peter Nyquist

Thanks, Borje, and thanks, Sebastien. We'll move to Francois Bouvignies at UBS. Good morning, Francois.

Francois Bouvignies -- UBS -- Analyst

Good morning, everyone. Can you hear me, OK?

Peter Nyquist

Perfect.

Francois Bouvignies -- UBS -- Analyst

OK. Good. It's actually perfect because Borje, it's a follow up to your point. So, when you look a bit beyond 2022 and maybe 2023, and the RAN market grows, -- when we listen to the U.S.

operators, some of them are talking about maybe peak investment in 5G in 2022. At the same time, we see the Chinese operators that full 2022 are talking about lower investment in 5G because of some say, "lack of applications". So, how can we look at the U.S. market specifically in '23, given these comments? I mean, the how can be different -- than maybe the Chinese market.

Maybe you can explain why we wouldn't see the same trend? And then the Chinese market in the U.S., if there is any specific reason behind that? And the second thing is on the Enterprise, how much do you estimate your enterprise channel is as a percentage of revenues today? And what is the growth rate? If you can give us some color around your current exposure to what the enterprise business today as a whole would be very helpful. Thank you very much.

Peter Nyquist

Please, Borje.

Borje Ekholm -- Chief Executive Officer

Yeah. If we start with the first question and -- it's a great question, where of course it is -- as your question indicates a bit of uncertainty. But if you look at what is happening here, it's a couple of things going on. First of all, China has actually built out a very good network already now.

So that has already, in a way happened. So in order for that to drive additional capex, it really needs to get more traffic onto. So the China is a few years ahead of the rest of the world. So I think we are likely to see applications now starting to be developed on the Chinese network that are going to drive traffic.

But they will be -- because of the capacity they already have in the 5G network, they are ahead of the West. If you look at the U.S. specifically, what we see there -- is actually a very -- we see the C-band buildout continuing into 2023, as Carl said before, and that will, of course, drive capex. But the other thing we also see and that's important is, we see also a shift in capex need into more active components into densification of the network, i.e., in wireless capex, a lot of the capex, only three quarters of the capex goes into fiber, concrete, steel towers, etc.

And that the bulk of capex, our part is a small portion. And that portion, we believe, given the development of the underlying traffic in the network, actually will continue to grow. And that's what we also see when we look at North America as the networks becomes increasingly loaded with new traffic. They will also continue to expand capacity in the network.

And that's why -- we're still seeing 2023 as a very good year for wireless capex.

Peter Nyquist

Good. Thanks, Francois. We'll move to [Inaudible] -- on enterprise?

Borje Ekholm -- Chief Executive Officer

We didn't answer the --

Peter Nyquist

OK. Sorry. Sorry.

Borje Ekholm -- Chief Executive Officer

Maybe, Carl can take that?

Carl Mellander -- Chief Financial Officer

Francois, thanks for the question. And no, I can just say, it's relatively small scale, of course, of Ericsson's total business today, but it is a fast growing sector. And that's why we are obviously attracted into it and focus so much on the enterprise side as part of the strategy as well. And we have talked about the overall addressable market for our customers growing very rapidly into the future.

And we believe probably this is as large as the consumer side or as the CSP side as well going forward. Of course, it would take a little bit of time and as Borje said, we are certainly working and engaging with many, many enterprise sectors, etc., to stimulate that demand and show what is possible with 5G. And we see great interest also from the enterprise side. So I would say, today rather small base, but high ambitions and a high growth rate in that market going forward, which is underpinning our statements that we believe that the fifth generation wave is going to be stronger for -- longer.

This is what will come in addition to the traditional RAN business stuff.

Peter Nyquist

Thanks, Carl. Then we will move to [Inaudible] Industries. So please, [Inaudible].

Unknown speaker

Thank you, Peter. Good morning, and thank you for taking my question, and congratulations on a strong underlying performance. I have two questions, if I may. The first one regards with Borje said earlier on in the call that the -- resolution of the DOJ matters likely would result in monetary and other measures.

I'm interested in what you can say about what other measures potentially could be? The second question is regarding digital services. You say that you're happy -- with what you have, but it's a question of deliverance. So my question there is, do you see any need for a possible changes in structure or leadership within digital services? Thank you.

Borje Ekholm -- Chief Executive Officer

Maybe you take the first, Carl, and I can answer the second one. The reality is, we have been on a journey to execute indigenous services. This is an area where we've had the losses for a long period of time. And so, of course, we need to look at what can we do to improve, say, this execution, what can we do to improve our delivery of competitive products to the market? But what I'm also trying to say is, we have a very strong portfolio today.

The team has done an outstanding job at getting that portfolio on to the market. And when you look at winning 16 out of the 20 largest operators on 5G core, for example, that's a pretty good achievement. That's actually something to be very proud of as a company. So, what we see in the numbers is we need to do further better than that right? Then that's why we're also signaling it's a challenging target, but we're also improving or increasing our efforts to improve sales execution even further.

We have more to do also on the portfolio. We can invest in automation and service orchestration to have a competitive product portfolio. And here we have more to do, but we will continue to do that and execute to the best of our ability. And so the commitment on our side to reach a satisfactory margin out here in the next few years is the same as before.

But we see a bit of a need to improve that execution following Q1.

Carl Mellander -- Chief Financial Officer

OK. Hi, [Inaudible]. On your DOJ question -- Hi. As we say, we are engaging with the DOJ to resolve and discuss these matters and so on.

And we are, of course, very limited in what we can say. So I can't really speculate about what measures the DOJ will decide on, but we want that now to say in the report that it is likely that the closure, the resolution of this will include both monetary or possibly other measures and exactly what those are. It's -- I cannot really speculate about that. So, we will we will follow this, of course, and inform as much as we can, when we can under this -- under this matter.

Peter Nyquist

Thanks, [Inaudible] Thank you. We'll move down to Daniel Djurberg at Handelsbanken. Good morning, Daniel.

Daniel Djurberg -- Handelsbanken Capital Markets -- Analyst

Good morning, and thank you for squeezing me in. And gentlemen, the question is, I could start with the digital service again. Because we saw double-digit growth in BSS and 5G core while revenue still down 2%. So there is -- is that -- would you call it legacy sales but this drop in so much or is it something else? And also, again, on the execution, is it mainly the cost control or the sales execution that this you're not really happy with? And also, if I may ask you -- on managed services is doing well with 23% gross margin in the quarter.

Should we see this as a new higher level? Or is it the temporary positive effects in the quarter for managed services? Thank you.

Borje Ekholm -- Chief Executive Officer

If you'll take, Carl?

Carl Mellander -- Chief Financial Officer

I can start maybe, start from the back managed services. It is a good level. And as I said, it's a it's the highest we have seen. In managed services, there is a certain dependency on timing of cost.

So -- we have seasonally low cost, but also this quarter rather low cost structure that came in to the books. And I think over time we will see that normalize again. What is good though, and I also pointed that out before, is the network optimization sales. And that's a that's a good margin driver for us and it certainly helps margin come up.

But I would -- I would encourage you, Daniel, and everyone to look at more the four-quarter-rolling margin profile of managed services. I would say, in all businesses, but especially in my managed services because of this cost fluctuations between the quarter. DGS, Borje?

Borje Ekholm -- Chief Executive Officer

You can start if you're good, Carl.

Carl Mellander -- Chief Financial Officer

Yeah. OK. So your question was and it's very correct, we see double-digit growth in 5G core. This is, of course, a strong point here.

And we've told -- we've talked about the number of contracts we win, and so on. Borje just said before that, out of the 20 largest operators, 16 of them are actually on our 5G core path, which is a great result, I think, and improves the the capabilities of our offering. So that's all good. But then of course we are in -- you could say, we are in a shift between older parts of the portfolio and the new.

And what is the fact with the 5G core contract is that we have some cost associated with those now initially, but revenues will come later. We've talked about that before, also. It's still true in this quarter. It's growing, but still at a rather low level.

And of course, the majority of revenue will come as more and more networks actually go live and then when subscribers are migrated onto those. So at the same time, then of course, the legacy sales are not keeping up. And this is why we want to focus even more on accelerating the top line.

Borje Ekholm -- Chief Executive Officer

And I think you can just add that there, and Daniel, the question is well-taken. The -- we shrank in the first quarter and you know that for us to really deliver on the potential of digital services, we need to get back to sales growth. And that's really the the reason why we need to put more focus on sales execution. We're not going to win on on the cost side here.

We need to be efficient. We, of course, need to keep costs under control. But in reality, where we will be successful is by driving revenues, by getting our products into the market. And we see good traction in several parts of the portfolio.

But I also see that we can do better and must do better.

Peter Nyquist

Thanks, Borje. Thanks, Daniel. We have another -- one minute's ahead of the last question actually coming from Alex Duval at Goldman Sachs. So, please, Alex.

Alex Duval -- Goldman Sachs -- Analyst

Yes. Thank you very much indeed for squeezing me in, and I'll keep it quick. You talked about your RAN product power consumption being 25% better than current products. I just wondered how that compares in your view to products from the competition and you've obviously referenced R&D investment.

So, I just wondered if there are further improvements we should be thinking about that can help sustain your competitive position there? Thanks.

Borje Ekholm -- Chief Executive Officer

This is really the key of our long-term success is that, yes, today it's 25% lower, but tomorrow it's going to be even lower. And that's what we invest for. And that's why the key here is for us to stay ahead of the technology curve. To always make sure that we lead on power consumption, lead on spectrum efficiency, performance in the networks, that that's really why we can sustain a better gross margin as well as operating profit.

And really, our -- what has driven the turnaround of the company is actually the commitment to invest in leading technologies. By doing that, we can get a better gross margin and better operating profit. So that has not changed, and we continue to see very good customer interaction when we launch new products, because it really addresses needs for the customers and that's what we will continue to be dedicated to.

Peter Nyquist

Thanks, Borje, and thanks, Alex, for that question. I guess before we end the call, you want to make a final remark here, Borje?

Borje Ekholm -- Chief Executive Officer

Thanks, Peter. Thanks, everyone, for joining us for this call. We -- as we said, put another solid performance or solid quarter to the record. We feel the underlying performance in the business is strong.

There are some onetime effects this quarter. It's unfortunate. They happen in the business. But when you look at the real performance, it's good on our execution on increasing our market share and footprint, and we can grow top line.

But we also have a good operating performance when you adjust for the onetime effects. So we are confident about our strategy, continue to extend the leadership in the core mobile infrastructure business, and gradually build a presence in the enterprise space. And with those investments, we're going to go to a higher margin profile as well as better growth profile in 2 to 3 years. So we're very excited about that journey and look forward to executing on that.

So thank you very much for joining the call.

Operator

[Operator signoff]

Duration: 63 minutes

Call participants:

Peter Nyquist

Borje Ekholm -- Chief Executive Officer

Carl Mellander -- Chief Financial Officer

Aleksander Peterc -- Societe Generale -- Analyst

Unknown speaker

Peter Kurt Nielsen -- ABG Sundal Collier -- Analyst

Sebastien Sztabowicz -- Kepler Cheuvreux --Analyst

Francois Bouvignies -- UBS -- Analyst

Daniel Djurberg -- Handelsbanken Capital Markets -- Analyst

Alex Duval -- Goldman Sachs -- Analyst

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