Telefonaktiebolaget LM Ericsson (publ) (ERICB) Earnings Call Transcript & Summary

Hello, everyone, and welcome to the presentation of Ericsson's Second Quarter 2026 Results. Joining us today, we have Borje Ekholm, our President and CEO; and Per Narvinger, Head of Networks, who will be assuming the CEO role in October; and a little later, Lars Sandstrom Chief Financial Officer, will also join us. As usual, we'll have a short presentation followed by Q&A. [Operator Instructions] Details can be found in today's earnings release and on the Investor Relations website. Please be advised that today's call is being recorded. This presentation may include forward-looking statements. These statements are based on our current expectations and certain planning assumptions, which are subject to risks and uncertainties. Actual results may materially due to factors mentioned in today's press release and discussed in the conference call. We encourage you to read about these risks and uncertainties in our earnings report as well as in our annual report. I'll now hand the call over to Borje Ekholm for some introductory comments.

Thanks, Daniel, and good morning, everyone, and thanks for joining us today. But before we get into the quarter, I wanted to take a moment to talk about the leadership transition we announced in June. So after almost 10 years as CEO of Ericsson and actually 20 years as a member of the Board. This will be my last quarterly results call. Since I stepped into the role in 2017, we've transformed Ericsson into a leader in our industry. I will always be proud of the progress team Ericsson has made in strengthening our technology leadership, improving our operational fusion and positioning us for long-term success now that AI actually moves into the physical world, which I think will provide us with a lot of growth opportunities forward. I also want to express my gratitude to the Board, the leadership team and all the colleagues in Team Ericsson is really the quality of our people that it is our success. It's been a privilege and honor to be a team member of Team Ericsson for the last almost 10 years. I'm also pleased to report a solid Q2, where we continue to execute against our operational and strategic priorities. We remain focused on serving our customers strengthening our technology leadership and driving disciplined execution across our business. But before going into some key takeaways from the quarter, I'd like to introduce Per Narvinger, who will be succeeding me as CEO, as Daniel said, and you all know, and he can join me today. Per has spent almost 30 years at Ericsson and brings a broad experience across the telco industry, but it's been in research, standardization, development, product management and sales. He's led some of Ericsson's most important businesses, most recently, of course, networks, but before that, leading the turnaround of cloud software and service. So I've had the privilege to work very closely with Per for many years now. And I've seen firsthand his deep understanding of our technology, our customers and our industry. But what has actually impressed me is really his ability to execute. And yes, you can rest assured, he consistently delivers on what he says he will do. So simply put, is an excellent choice to lead Ericsson into the next chapter. So over the next 2, 3 months, Per and I will spend a lot of time together, working closely to ensure a smooth transition. But please, Per, I'll leave the word over to you.

Thank you, Borje. And it's always a great honor to take over as the CEO of the company from October 1 as I have been in the company in the industry for quite a few years. I truly enjoy being back in the Networks business, where I spent a lot of my career, so as heading up the largest segment now for 1.5 years. I have to say, Borje, you hand me quite a challenge when we form cloud software and services. It's great to see that business is now progressing. I think we are at a very interesting point in time now with AI really coming in, in a big way. Of course, how we build our products, how we deliver to our customers and of course, all the traffic we're going to see on AI in our networks. And I also have to say a big, big thank you to you, Borje. You're handing over a company in a very strong position. strong on the market position, strong in the portfolio. And it's truly been a privilege working with you Borje, and great fun as well. And of course, you and I will now meet a lot of customer partners to make sure we have a smooth transition here. And of course, I'm looking forward also to engaging with everyone in this forum going forward. So yes, thank you.

You'll have a lot of exciting quarterly calls ahead of you. But thank you, Per. So Per, of course, has been part of my leadership team for many years. But I think it's fair to give him some time to chart out the strategy for the future. So he will not take part of the Q&A today and therefore, save your questions for the future quarterly reports when he can talk much more about the future. But now let's look at today's results. I would say, overall, we executed well in the second quarter, and we saw continued strong margin delivery. Looking at the top line, we saw a 1% organic decline. But underlying, it's actually a slight growth if we adjust for the back royalty portion of the IPR settlement last year. Gross margin came in at 48%, which is actually up 2 percentage points if we exclude the benefit from the one-off IPR settlement last year. EBITDA margin came in at 13.1%, which is in line with last year's results. All in all, these results emulate the strength of our portfolio, our disciplined execution and how we strengthen the company operationally. The actions we've taken over the recent years have made Ericsson much more resilient and is actually enabling us to sustain healthy margins in varying market conditions. The external environment continues to be rather challenging as the AI boom is driving up component costs. So we are taking, I would say, 2 sorts of actions to mitigate this. First, we do some near-term adjustments, accelerating costs out, but we're also increasing sales with product substitutions or sales of additional products. But we've also started to take longer-term structural actions, which, of course, include raising prices where appropriate. Of course, first step is to adjust on new tenders, but we're also implementing price increasing -- increases with current customers. So discussions to broaden price increases are going and we're also redesigning products, but all of these actions will help us mitigate longer-term effects from component inflation. While we're not immune to these external factors, we're in a strong position strategically and operationally and to make sure that we keep this position, we're continuing to strengthen our technology leadership in our core mobile networks business. This includes continued R&D investments in our leading high-performing programmable networks. But building on our strong position in mobile networks, we're also pursuing a number of growth initiatives. Of course, this includes what we do in enterprise with enterprise connectivity. Our API business, network-powered solutions but also the growth opportunities in mission-critical networks and different defense applications. And here, we continue to see good progress. Our strategy over the last few years has focused on positioning for the next phase of AI adoption or the AI race. And that is when AI moves into the industrial and physical world. In this world, connectivity will be more important and uplink will dimension mobile networks, but we will also see increasing demand of low latency. And actually, this is what 5G was designed for. So I would say Ericsson today is well positioned to capture this next wave of AI-driven connectivity. With this, I'd like to leave the word over to Lars to go through some of the numbers more in detail.

All right. Thank you, Borje. I will begin with some additional comments on the group before moving on to the segments. If you look at net sales in Q2, they totaled SEK 52.7 billion with organic sales declining 1% year-on-year. Excluding the one-off IPR settlement in Q2 2025, organic sales grew by 1%. Sales in all market areas grew with the exception of Americas, which reported a slight decline of 1%. In Americas, sales grew in Latin America but were lower in North America, reflecting strong deliveries in the prior year period. In the other market areas, sales were driven by Japan, India, the Middle East and Africa. Network sales declined in 2 of the 4 market areas. Network sales grew in Northeast Asia, driven by Japan and Southeast Asia, Oceania and India, driven by timing of deliveries in Southeast Asia. Europe declined due to the completion of modernization projects in some markets, while Middle East and Africa grew North America declined, partly offset by higher sales in Latin America. For cloud software and services, they grew in all market areas. Enterprise delivered its third quarter of organic growth. Reported sales decreased by 6%, impacted by a negative currency effect of SEK 1.8 billion. IPR revenues were SEK 3.4 billion down by SEK 1.5 billion year-over-year. This was mainly due to the one-off settlement in Q2 2025. The current IPR run rate is approximately SEK 13.5 billion, including the agreements signed in July 2026, which will benefit from Q3. Adjusted gross income was SEK 25.5 billion with a negative currency impact of SEK 0.8 billion. Adjusted gross margin was 48.4%, a slight increase from last year with improvements in networks and cloud software and services. On the cost side, operating expenses, excluding restructuring charges, dropped to SEK 19 billion, around SEK 1 billion lower year-over-year, driven by cost reductions, currency as well as the divestment of iconectiv. Wage pressures continued to be offset by reductions driven by head count as well as efficiency measures. And there was a limited financial impact in Q2 from the component prices helped by our resilient supply chain. The EBITDA margin was 13.1%, in line with last year, and adjusted EBITDA was NOK 6.9 billion, down by NOK 0.5 billion. EBITDA was impacted by a negative currency effect of SEK 0.6 billion in Q2. 2025 also benefited from the IPR settlement and included iconectiv. Excluding these, adjusted EBITDA would have improved by SEK 1.8 billion. Cash flow before M&A was SEK 0.4 billion, driven by earnings and impacted by higher inventories. I will come back to this later. So let's move to the segments. In Networks, reported sales decreased by 8% year-on-year to SEK 33 billion with a negative currency impact of SEK 1.2 billion. Organic sales decreased by 4%, and mainly reflecting IPR one-offs last year. Organic sales grew in Northeast Asia and Southeast Asia, Oceania and India while sales declined in Europe, Middle East and Africa and Americas. Networks adjusted gross margin was 50.4% be compared to last quarter, and adjusted gross income decreased to SEK 16.6 billion due to the lower sales and the negative currency impact. Adjusted EBITA was SEK 5.8 billion, down from SEK 6.5 billion last year, mainly impacted by a negative currency effect of SEK 0.5 billion. Adjusted EBITA margin was 17.7%, down slightly year-on-year, and this was partly due to the IPR one-off in Q2 last year and partly due to lower sales, including the negative FX impact. Moving to segment Cloud Software & Services. Reported sales increased by 3% to SEK 14.7 billion, including a negative currency impact of SEK 0.4 billion. Organically, sales grew by 5% with growth in all market areas and growth was broad-based across the commodities. Adjusted gross margin came in at 44.1%, an improvement from 43.2% last year, supported by improved delivery efficiency. Adjusted gross income increased to SEK 6.5 billion. Adjusted EBITA increased to SEK 1.8 billion with a margin of 14.2% and lower operating expenses benefited from efficiencies and currency. And looking at the right-hand graph, the rolling 4 quarter adjusted gross margin was around 44% and adjusted EBITA margin around 30%, a new high level. Then going to Enterprise. Reported sales decreased by 19%, impacted by the sale of iconectiv and currency. On an organic basis, Enterprise grew by 3%, with growth in global communications platform and enterprise wireless solutions. Adjusted gross margin declined to 50.9%, reflecting the impact of the divestment of iconectiv and the change in product mix. Adjusted EBITA landed at minus SEK 0.8 billion where the impact of the divestment of a connected was partly offset by cost reductions. EBITA improved compared to Q1, benefiting from lower operating expenses. Q1 was also impacted by some small negative one-offs. Turning to free cash flow, which was SEK 0.4 billion before M&A in the quarter. Cash flow generation was supported by earnings, but impacted by increased operating net assets, mainly inventories. As you might remember, we had a very strong Q1 due to a stronger than normal seasonal reduction in operating net assets. And in Q2, we had a buildup in inventories, in part preparing for planned Q3 delivery, sorry. We delivered a cash flow to net sales of 12% for the rolling 4 quarters at the upper end of our 9% to 12% target. Net cash decreased sequentially by SEK 8.3 billion to SEK 59.8 billion, reflecting dividend payments and share repurchase. Next, I will cover the outlook. Global uncertainty remains elevated, given the broad geopolitical and macroeconomic environment, including the global semiconductor situation. As mentioned last quarter, we are not immune to these disturbances. As a matter of fact, input costs increased further in Q2. The financial impact from this will start to build up gradually in the coming quarters. We are taking near-term actions across the businesses, including commercial measures, for example, product substitution as well as supply chain actions and targeted cost initiatives. At the same time, we are starting to implement longer-term structural actions that will be needed to more sustainably offset these impacts. We are adjusting pricing in current tenders, and discussions to broaden price increases with current customers are continuing, as Bar already mentioned. Turning to the Q3 outlook then. The outlook assumes the exchange rates specified in the report. And for Networks, we expect sales growth to be above the 3-year average quarter-on-quarter seasonality. For Cloud Software and Services, we expect sales growth to be broadly similar to the 3-year average quarter-on-quarter seasonality. We expect Networks adjusted gross margin to be in the range of 48% to 50%, down slightly compared to Q2 due to a change in mix. we expect also a higher share of network rollout projects in Q3. Restructuring charges for are expected to be at an elevated level with a fairly large part already seen in the first half. With that, I hand back to you, Borje.

Thanks, Lars. So Ericsson enters the future from a position of strength. With the external environment continuing to be challenging, I'm very happy that Ericsson today is in a great [indiscernible] and leading the industry in the AI era. The next phase of AI will require high-performing mobile connectivity to scale. We expect this to be a key driver for our industry over time. With our leading portfolio, Ericsson is well positioned to capitalize on this future and this future development. I believe this is an exciting time for bring Ericsson back to growth. As this is my last earnings call as CEO of Ericsson and possibly the last as the CEO. I'd like to thank all our customers. Ericsson has long believed that connectivity is a basic human need. And together with you, our customers and partners, we've continued to expand mobile connectivity and continue to create opportunities for people throughout the world. This is an amazing achievement and something we should all be really proud of. Finally, I'd like to give a big thank you to all my Ericson colleagues. You are all the reason why Ericsson today is leading the industry. You're truly amazing and have made these years so rewarding. Thank you, team. With this, I believe it's time to move on to some final, for me at least, Q&A.

Thanks, Borje. We'll move on to Q&A now with Borje and Lars. [Operator Instructions] Operator, we're ready for the first question. Thank you. The first question today is going to come from the line of Simon Granath at ABG.

Initially, just congrats on a very successful career at Ericsson, Borje, best of luck in the future. On to my question, which is a bit broader, I have been in detail tracking your mobility report and note that you have finally made some positive revisions on data traffic estimates after several years of downgrades. Could you give us your perspective of demand for RAN in light of this balancing it with the introduction of UpLink related applications and also the fact that Dell’Oro still only expect the market to grow 1% per year over the -- for the foreseeable future. Is the latter conservative in your view?

Yes. It's -- thanks, Simon, first of all. No, it's a good question. We're doing the revisions because what we are starting to see is an emerging demand for uplink. That is -- we don't really -- I can't really point to exactly what type of applications it's a broad-based is really starting to see that the demand for starting to shape traffic. That's why I think there is an upside case here, which will be much more positive for our industry when uplink becomes what I mentioned the networks going forward. But -- so I think there is a real case to start to be a bit more optimistic about our industry and the brand market. At the same time, I want to also say we -- when we plan and for our own planning perspective, we like to think it is rather flattish because when the demand happens, we need to make sure that we have the right products, the right cost structure and not kind of build on speculation in advance of that happening. So when you ask the question, yes, I'm personally very excited about that future, but I want us also to be disciplined in the way we execute and the way we plan our cost structure. And therefore, we're cautious -- so I think when you look out in a few years' time, it's going to be better to take this discussion. The purchase decisions ultimately will be in the hands of our customers. But when they see the demand happening, I also think they will start to buy. But until then, let's continue to plan for a flattish market.

Thanks for the question, Simon. Moving to the next question, please, operator. The next question is going to come from the line of Erik Lindholm-Rojestal from SEB.

So I start with perhaps a question on GPU the radio units. It's been a hot topic recently. NVIDIA revealed its BD entry into this area. You obviously operate mainly on Ericsson silicon, which is purpose built. Can you elaborate perhaps on the benefits and the possible risks of going with purpose-built and how capable do you think GPUs are as an option in radio units?

Yes. I think first of all, it's actually, in a way, confirmation of the importance of AI in the RAN, right, that we start to see other players wanting to enter here with GPUs. So I think it kind of confirms what we have been talking about for quite some time that AI will be what drives the networks going forward. So we have picked a strategy of being in that sense, agnostic from a hardware point of view. So we can run our rand stack on -- so being an x86 or a GPU or our purpose-built silicon. And when we look at what you need in the radio, it's, of course, in reality, very high performance, very energy efficient. And it's a lot of calculations and a very demanding compute environment. At the same time, it's actually not a need for very large models. So where this market is going to end up is always a bit uncertain, but we see a demand for that compute in the radio going forward that we can offer with the purpose built. But then as I said, our rand stack is agnostic. So we can be on what type of infrastructure ultimately wins. So it's actually not an either/or question. We are simply saying let's see where the market shapes up. Today, there are clear performance benefits in the purpose built. You see that on costs, you see it on energy efficiency. You see it on performance in field. So there is no doubt there is room for the purpose built and then how it's going to look like over time, we are not going to place the bets yet. We're simply keeping that an open topic. What I think is an important element in your comment is actually the deployment of AI in the RAN. That is, of course, going to be really important, and we are determined to lead -- you saw us announce at Mobile World Congress, a couple of applications where we use AI in the radio as well. So I'm convinced we are at the beginning of that journey, and we are determined to lead like we are today.

All right. And good luck on your future endeavors, Borje.

Thanks for the question, Erik. Moving to the next question, please. The next question is going to come from the line of Sebastian Sztabowicz at Kepler. .

Could you please quantify the component cost inflation impact on your network gross margin for this year. What do you expect in terms of impact? And regarding the price increase, what has been done already? Have you been already able to renegotiate some existing on track with higher prices?

Maybe Borje starting with you with the discussions and then Lars the final...

Yes, I can take the latter part. Yes, we have done that. It's not impacting but it will gradually be visible those type of renegotiations. Of course, I think it's also important to remember, we have rather long-term contracts in the industry. So it -- when you enter into these type of discussions, you need to be thoughtful as well. So it takes a bit of time. But where we have done it, we're actually seeing that customers also understand that we need to find ways to share the burden of the industry if this industry will be competitive going forward. So I actually think we have the opportunity ahead of us here to do more. And we, of course, take all the other actions, product substitutions, make sure that we design products in a call it, way that minimizes the cost inflation. So we're trying to do all these. I think we're not going to be immune we weren't immune from tariffs either about a little more than a year ago, but you also know that it didn't, at the end of the day, impact, can't guarantee that now. But I think we see a lot of mitigating actions that will help us position us well for the future. But maybe you want to take the details, Lars.

So I think when it comes to the cost impact, we don't share that kind of details. But as we said, already coming out of Q1, we will see a gradual impact during the second half into next year. And we are doing mitigation activities already now, so how big the impact will be, depends on a little bit the phasing of the cost increases that are coming and the phasing on the mitigating activities. We can do quite a bit in short term. But then in the longer term, it's really about how it's -- we cannot take this all along. It's really on what we can do together with customers here and to really ensure we get the best performing solution to the customers, but also at the right price point.

Okay. And congrats Borje for all your career at the reset.

Thanks for the question, Sebastian. Moving to the next question please. The next question is going to come from the line of Andreas Joelsson at DNB.

First of all, congratulations. And also, I know you will miss these calls tremendously, but we're only a phone call away. If you want further questions. And secondly, further on the gross margin and the other side of the equation, the volumes that you see will increase going forward. How should we see those rollout projects? Will they be for longer and therefore, have an impact on the gross margin for longer? What's the pattern usually look like in situations like this?

Thanks, Andreas. Yes. I will truly miss the questions, and -- but I try to fill my time with something else instead. So I'll figure out if it's equally rewarding, let's put it that way. That will be hard to beat -- but anyhow, it's a good question. The recent really a typical project to be honest. But if you want to kind of generalize a bit, -- what we see in rollout projects is the first few quarters tend to be the most challenging. And after that, it gradually recovers to be quite good after a period of time. That's what we have seen every time we have those type of contracts. Then exactly how the impact is varies. Sometimes the initial is actually negative. Sometimes it's just less positive below average margin, so to say. But it's not that we take contracts, which are -- we're very disciplined in taking contracts that are I call them accretive over time. That means it's challenging in the beginning but better over time. So we don't guide per se on margins year out, right? So that's on that purpose. So that's why we guide for a quarter, and we see this impact in the third quarter. Of course, you also should expect bigger volumes. So when you look at the numbers, you have to play a little bit yourself there. But it's -- I feel quite good about the volume and then it will be a bit more challenging short term on margins.

Next question will come from the line of Richard Kramer at Arete.

And Borje, I'm not sure you're going to miss this question. But if we just focus on measures of shareholder value creation, I'm sure you benchmark yourself against really the leading global tech companies. And since 2017, Ericsson's underperformed the NASDAQ 100 by 67% and also underperformed common equipment indices. And you've taken SEK 30 billion of restructuring charges and about SEK 6 billion of write-offs. Given Ericsson's continued reliance now on telcos for the vast majority of sales, do you think you could have been bolder and efforts to shift focus, for example, towards the massive investment boom we see happening now when data center builds. And is there anything you think in terms of the strategy you might adjust so that you could tap into this huge wave of spending?

No, I think it's a great question, Richard. And for sure, it's a relevant question, fair to ask. I think we have elected to be in a different part of the value chain for AI. And really where you see the big performance elsewhere is actually AI driven. I think the next phase of AI is actually going to benefit our industry quite substantially. So I think it's a bit Too early to decide where we are on that journey when you're kind of before really rolling out AI into the mass applications. So do I think we could have done differently? Yes, for sure, we could have. So that is any other answer would be, I think, inaccurate. So that we could, for sure, have done. But I think we've also done what we can to position the strength of Ericsson in the best possible way, where the market will be in the future. And we are convinced that we will see AI move into distributed applications, call it, it's going to be anything from, of course, glasses. It's going to be humanoid, it's going to be robots. And when you start to see that, you will demand mobile connectivity, and you will start to demand high-performance mobile connectivity with solid indoor coverage and with high uplinks. That's where we exactly have invested. So let's see where the physical AI develops in the future, that's when I think you'll see where we have a chance to outperform, and that's where we try to position ourselves for.

The next question is going to come from the line of Francois Bouvignies from UBS.

Good luck for Borje as well. Just a quick question on gross margin. And I think you mentioned in Q3 that you will have a mix rollout impact on the gross margin. And I thought in the past that you did actually a very good work on the mix side rollout versus non rollout that the gross margin actually not that impactful. We have seen that during AT&T rollout phase. We didn't see much impact there. So why is it different this time that the rollout is dilutive again at least on the gross margin side? And as we look into your price actions or maybe your component costs, can you give more details on how much is the pressure on your cost that we see happening? And is it fair to say that this pressure is more from Q4 onwards because Q3, you don't talk about inflation impact, it's more the rollout mix?