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

Hello, everyone, and welcome to the presentation of Ericsson's Third Quarter 2026 results. Joining us today, we have Per Narvinger, our President and CEO; and also Lars Sandstrom, our Chief Financial Officer. As usual, we'll have a short presentation followed by Q&A. And in order to ask a question, you'll need to join the conference by phone. Details are available in the earnings release and also on the Investor Relations website. Today's presentation contains forward-looking statements and is being recorded. Actual results may differ materially due to various risks and uncertainties. Please refer to today's earnings report and the annual report for additional information. I'll now hand the call over to Per for his introductory comments.

Thanks, Daniel, and good morning, everyone. So today marks my first earnings call as CEO of Ericsson. I'm pleased to begin by reporting a strong third quarter where we are executing well in a challenging environment. So looking at top line, organic sales grew 7%, with organic growth in all segments. Growth was driven by solid customer demand in strategic markets and effective commercial execution. Our gross margin was 47.7%, and EBITDA margin came in at 17%. The quarter demonstrates the earnings leverage we create with sales growth and discipline on costs. So Lars will soon go through it in more detail. Let me give a few more general reflections first. So since the announcement of my appointment, I have spent a lot of time meeting with customers, and a consistent theme is the need for increasingly intelligent and autonomous networks to improve performance, efficiency and customer experience. So with the rapid development of AI, it's obvious that many new applications are going to be dependent on mobile connectivity. This means that networks will need to be even more reliable and resilient in the future. We are well positioned to help our customers on this journey. So with AI models optimized for their use cases and leveraging Ericsson's purpose-built silicon, we enable our customers to get more out of their spectrum assets without increasing power consumption. So we will continue to invest and make sure we stay on the forefront of this development. At the same time, we remain realistic about the market. The RAN market is broadly flat, and component costs are increasing in the wake of course, the AI boom. So far, we've been able to mitigate with tactical actions such as product substitution and up-selling. These tactical efforts, however, they will not be enough long term. We are also taking structural action, including portfolio optimization, raising prices, supply chain measures and efficiency improvements. Many customer contracts are multiyear, so structural mitigations will take time to flow through. We will not be immune to higher component costs but protecting the value of technology and our technology and the profitability of our mobile networks business remains our top priority. We are also maintaining cost discipline, while at the same time, prioritizing the investments needed for technology leadership and supporting our customers. The organizational changes that we announced today are part of that work. So from January, we are creating market area, Asia Pacific by combining Northeast Asia with Southeast Asia, Oceania and India. This will help us operate more effectively across the region while maintaining strong customer focus at country level. We are strengthening our focus on seamless connectivity and want to make sure that we can offer a rich indoor portfolio that leverages the full R&D competence in the company. We are, therefore, making changes to enterprise wireless solutions to capture these R&D synergies, drive product innovation and accelerate the growth with both CSPs and enterprise customers. These changes will also create a leaner executive team with clear accountability and ability to move fast in a dynamic market. So with that, I will hand over to Lars to go through the financial results in more detail.

All right. Thank you, Per. I will begin with some additional comments on the group before moving on to the segments. Net sales in Q3 totaled SEK 59.5 billion with organic sales increasing 7% year-over-year. Sales in all market areas grew with the exception of Americas, which reported a slight decline of 1%. In Americas, sales grew slightly in North America, but were lower in Latin America. In the other market areas, sales were driven by Japan, India, Vietnam and the Middle East. Sales in Market Area Other grew with enterprise sales broadly stable and growth in IPR. IPR revenues were SEK 3.9 billion with an increase of SEK 0.8 billion year-over-year. Part of the increase is due to retroactive revenue related to previously unlicensed periods. The current IPR run rate is approximately SEK 13.5 billion. Turning to the rest of the P&L. Adjusted gross income was SEK 28.4 billion with a gross margin close to 48%. Gross income increased year-over-year by SEK 1.4 billion due to higher sales in mobile networks. Gross margin was broadly stable. On the cost side, we were affected by component cost increases mostly in networks. I will cover this in more detail later. Operating expenses, excluding restructuring charges, improved to SEK 18.4 billion, around SEK 0.7 billion lower year-over-year. Cost reduction actions are mitigating wage pressures. Adjusted EBITA was SEK 10.1 billion. Excluding the divestment of iconectiv, EBITDA increased year-on-year. The EBITDA margin was 17%. And and showing the benefits of operating leverage with higher sales. Cash flow before M&A was SEK 4.9 billion, driven by earnings and impacted by higher inventories. I will come back to this later. Let's move to the segments. In Networks, sales increased by 9% year-over-year to SEK 38.7 billion, Year-to-date, organic sales grew by 4%. Organic sales grew in all market areas with the exception of Americas. North America grew slightly, while Latin America declined. Sales were driven by 3 main building blocks. First, our strong commercial momentum in the past 12 to 18 months is translating into share gains and financial performance in strategic markets, for example, Japan. Second, we are seeing a near-term shift in customer behavior with some customers accelerating spend before price increase. And third, good commercial execution on the near-term sales mitigation activities. As you know, we put this in place to support sales and margins as component costs increase. Networks adjusted gross margin was stable at 50.3%, benefiting from product mix and retroactive IPR licensing revenues, offsetting some of the component cost increases. Adjusted gross income increased to SEK 19.4 billion. And adjusted EBITDA was SEK 9 billion, up from SEK 7.2 billion last year, mostly due to higher sales. Adjusted EBITDA margin was 23.1%. And looking at the right-hand graph, the rolling 4 quarter adjusted gross margin was around 50% and adjusted EBITDA margin around 21%. Moving over to cloud software and services. Sales increased by 3% to SEK 15.8 billion Growth was broad-based across the commodities and benefited from growth in adjacencies, leveraging our capabilities into non-CSP verticals. Adjusted gross margin came in at 43.5%, and broadly stable compared to last year. Adjusted gross income increased to SEK 6.9 billion. And adjusted EBITDA increased slightly to SEK 2.0 billion with a margin close to 13%. And looking at the right-hand graph here, the rolling 4 quarter adjusted gross margin was around 44% and adjusted EBITDA margin around 13%. Then on Enterprise. Reported sales decreased by 10% due to the sale of iconectiv in the prior year. On an organic basis, Enterprise sales grew by 1%. And within enterprise, we are seeing good customer momentum in the Enterprise 5-gig private networks. And as Per mentioned, the changes announced today will capture R&D synergies, drive product innovation, accelerate growth. Adjusted gross margin declined to 50%, reflecting the impact of the divestment of iconectiv. Adjusted EBITDA landed at minus SEK 0.5 billion and improved sequentially. Efficiency actions are underway to improve profitability further. Then turning to free cash flow, which was SEK 4.9 billion before M&A in the quarter. Cash flow generation was supported by earnings, but impacted by increased operating net assets, mainly inventories. The buildup in inventory was due to higher component prices as well as the usual buildup of finished goods ahead of Q4. We delivered a cash flow to net sales of 11% for the rolling 4 quarters within our 9% to 12% target. And net cash increased sequentially to SEK 60.7 billion, gross cash increased to SEK 98 million, and we raised EUR 500 million bond in Q3, preparing for upcoming maturities. The share buyback continued in Q3 with SEK 4.5 billion of cash flow used for buybacks and impacting net cash. Year-to-date, this has delivered SEK 8 billion back to shareholders with 79 million shares repurchased alongside SEK 5 billion of dividends. Next, I will cover the outlook. Global uncertainty remains elevated, given the broad geopolitical and macroeconomic environment, including the global semiconductor situation. We are not immune. The industry is entering a period of higher input costs and the financial impact will continue to build up in the coming quarters. Our near-term mitigation actions across the business, mainly commercial measures are working well so far. As Per mentioned, we are continuing with our plans to gradually implement longer-term structural actions. These will be needed to more sustainably offset these impacts and protect our position in the value chain. We are adjusting pricing in current tenders and discussing to broaden price increases and commercial mitigations with current customers. We are also continuing efficiency and supply chain actions. Turning to the Q4 outlook. The outlook assumes the exchange rates specified in the report. And for networks and cloud software 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 49% to 51%, benefiting from product mix. Restructuring charges for 2026 will be elevated as you have already seen in the first 9 months. With that, I hand back to you, Per.

Thank you, Lars. So let me close with 3 messages. First, we are executing from a position of strength. The quarter demonstrates the earnings potential of Ericsson when customer demand, commercial execution and cost discipline come together. Second, we are acting decisively on challenges ahead. We are addressing higher component costs and a broadly flat and market while protecting the investments that underpin our technology leadership. Third, the opportunity ahead is significant. AI will increase the demand place on mobile networks and create new opportunities for our customers. With our technology, customer relationships and the actions we are taking Ericsson is well positioned to deliver sustainable, profitable, long-term growth across the group. Finally, I'd like to give a big thank you to all of my Ericsson colleagues for their contribution to the quarter and their commitment to our customers. And with that, Daniel, let us open up the line for questions.

Thanks, Per. We'll now move to the Q&A portion of the presentation. [Operator Instructions] Operator, we're now ready to go to the first question. The first question today is going to come from the line of Simon Granath of ABG.

And especially, congrats on the new position, Per. I have a question around investment trends in light of recent news about satellite operators potentially looking into buying and building their own terrestrial network. Could you talk about whether you see this as an emerging opportunity for Ericsson? And what is your assessment as to how operators are responding to this? Are they revising any CapEx around priorities due to these industry dynamics?

Thank you, Simon. It's a very good question. We discuss satellite with most of our customers at the moment, to be honest. First of all, for the end user, satellite communication will be a fantastic addition to [ Theresia ] networks. What we see will be very important is to have connectivity between outdoor and indoor. Obviously, that's going to be 1 of the challenges for satellite, how to take the outer coverage indoor. So we believe that for our customers, that seamless high-performing experience is going to be very, very important. That's also one of the reasons now that we are consolidating our R&D efforts in the indoor segment. meaning that we then also move or activities from our enterprise wireless solution business area into networks. So overall, we would want to see this as it actually shows the importance of connectivity. There will be more players for connectivity and but you cannot rely on satellite alone, you're going to need the terrestrial coverage as well. So we basically see it as positive.

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

A question on sales and the demand and how we should look at that going forward. It's very strong in the quarter, obviously, and the outlook for Q4 states that it will be normal seasonal patterns, so also a quite strong end to the year. And then you say that the market is broadly flat. So how should we look at this into 2027? Is there a flat market also the most likely going forward? And also, how that impacts your long-term mitigating actions to the higher component costs? Can you be a little bit more sort of clear in what you do to further mitigate because you've obviously been quite successful so far?

Thank you, Andreas. Maybe I'll start. So what we are seeing is a strong quarter in sales. As you are alluding to, there is a lot of headwind on the cost side. And we, of course, sit on fairly long contracts with our suppliers. We also sit with long contracts with our customers. And that means in the short term, what we can work with is tactical actions, and that would be things like upselling, making sure we do product substitution. So we have products with a better cost profile in what we are selling. Those are the kind of tactical actions we are taking. You could also probably see some kind of signal that looking at the product mix because there are less services. So maybe some of our customers are now trying to buy before price increases because we are signaling that we do see that this AI demand will continue, meaning, of course, cost on components will be high also next year. And you can only do tactical actions for so long. So that means we need to get some of these more long-term actions in place for next year, meaning we need to get prices up with customers as, of course, the contracts get renewed. Over time, this will, of course, ripple through the P&L. Our view is that this is, of course, structural. Everyone is on the same challenge, meaning in the end, we, as a supplier, cannot absorb these costs, they have to be passed on. But of course, there can be a transition period, and that's what we are saying that '27 could be such a transition period. But obviously, this quarter, we have managed well with tactical actions. I don't know if there's anything you want to add to that, Lars?

No, I think you asked on the demand and our ability to grow. And I think we live. We have not changed our view on the RAN market per se. Then of course, we try -- we work closely with our customers, how can we grow, how can we wind our technology gain market share, et cetera. What can we do in cases, et cetera. So our clear ambition is, of course, to capture some of that opportunity also in 2027, as we have done in 2026.

Thanks, Andreas. Moving on to the next question, please, operator. The next question is going to come from Sandeep Deshpande at JPMorgan.

My question is regarding -- you've had a third quarter which was much better than seasonal. And now you're guiding the fourth quarter to be seasonal levels of growth. I mean, is this showing some kind of share gains by Ericsson or something else happening in the market given that you continue to say that the market is flat? So this doesn't seem like a normal sort of behavior or it was that because Q2 was below seasonal that you had Q3, which was well above seasonal. So I'm just trying to understand the dynamics of the guidance at this point.

Sure. Yes. So I think you're right in that, Sandeep, that as you said, we were a bit weak in Q2, as we said, and we were coming out stronger in Q3 as we also said. And then looking at where we are year-to-date in networks, we are around 4% up year-to-date. So I think that is stabilizing again. And to measure share gains in just one single quarter. I think that is too short term to think like that. We have some improvements in some markets where we are prioritizing. So we see that happening, for example, in Japan, which is good. but it's not the big driver in that sense and especially not in a single quarter.

Thanks, Sandeep. Moving to the next question, please, operator. The next question is going to come from the line of Daniel Djurberg at Handelsbanken.

Lars, yes, my question would be on if you can comment a little bit more on the actions you do in the enterprise business area. And how soon we should expect the remaining part, parts, i.e., the global communication platform to show profitability?

Thanks, Daniel. Let me start. So what you're announcing today is then the enterprise wireless solutions, which we have had as a business area and we will dissolve the business area as such. But of course, continue with the portfolio and the solutions. We are taking what we call neutral host and EP5G, and we are actually then moving them to networks where we believe we can get a better R&D muscle, and we can then also accelerate the journey towards profitability. There will still be parts left. So what actually used to be Cradlepoint, we will keep as a stand-alone unit. And that unit will be headed up by [ Jose Cohen ], who is also our Head of Americas. That business is actually showing strong improvements, and we are getting to Black & berth. So that will then stay in what today is the enterprise segment. What is then the other big part is, of course, what used to be Vonage. When it comes to Vonage, we made one change in the quarter in leadership. And Christophe just coming on board, have, of course, the target not just to grow the business, but we have also been very clear that we need to look at the cost -- on the cost side of Vonage business. It is absolutely my experience in this company that we really succeed by just having growth. We also need to look at the cost side. So that is the target at hand for Christoph. And of course, we will come back and report progress as we go along. But it's absolutely a priority to get to black numbers quicker on the enterprise segment.

Thanks, Daniel. Moving to the next question, please, operator. Next question comes from the line of Jakob Bluestone at BNP. .

And I could ask you about the magnitude of the pull-ins that you're seeing. So you mentioned that you're seeing customers kind of responding behavioral changes ahead of potential price hikes. And just sort of if you can help us understand how big a contributor was that actually to your growth just so we can kind of break down what are more underlying sort of structural growth drivers and what's maybe perhaps a little bit more phasing related?

Yes, thanks. No, I mean as I mentioned in the beginning, we talked about 3 areas of growth drivers in this quarter, and this is 1 of the 3. We don't quantify each of them, but as we bring up those 3, you can drive a bit of conclusions from that, I think. And so it's not -- it's there. It's not super big. That's why I also tried to talk a little bit on the year-to-date growth in networks of around 4% to give more flavor of how it's performing. So there is some pull-ins coming and -- but it's not that it's a big material impact going for 2027 from 1 quarter of this.

Thanks, Jakob. The next question will come from the line of Felix Henriksson from Nordea.

I'd like to double quick on the near-term tactical commercial measures that you've used in offsetting the component cost inflation, especially when it comes to upselling. What kind of products have you been successful in upselling and how sustainable you see this sort of as a lever for offsetting the component cost inflation that you're witnessing?

Thanks, Felix. And so maybe I'll elaborate a bit on what kind of contracts we typically have. So we write frame agreements, maybe 3 or 5 years out. And of course, in those contracts, we can only include what we know at the time. Of course, as we develop new products, we can set the right price on those products as they become available. And with tactical, you could see it as you try to sell, of course, the newer products. You try to -- because obviously, they have the under right price structure and cost structure. You could also look at it, there's always differences across the portfolio. If the cost of certain memory is going up, you might have more or less memory in different type of products in your portfolio, you might try to steer sales towards those that are better. And of course, we can always try to have find upsell or do upselling, trying to find, I don't know, opportunities on software side or in other areas that will actually help the margin. So those are what we would call tactical activities. And of course, you cannot continue to do that forever. In the end, you need to get the right prices in your price book.

Thanks for the question, Felix. The next question comes from the line of Francois Bouvignies from UBS. .

I have a quick question on OpEx. I mean you are doing a lot of work on the OpEx side. You talk about the inflation of components. And obviously, you are OpEx down this quarter. I mean this year, you could have a good cost control. How should we think about the OpEx next quarter and next year? More importantly, I mean, should -- do you expect some inflation there or the cost measure would lead to flattish or maybe down OpEx? Just directionally, how should we think about OpEx from here given all the work you are doing?

Yes. When it comes to OpEx, if we think next quarter, there is always a bit of seasonality in Q4. So I think that you can expect also this year. But when it comes to the more -- and there is a continuous that we have with salary increases that we need to work with. And I think that we have had the intention and the hard work that we should offset any of these inflationary impacts that we see coming into OpEx. And that journey continues going forward as well. And I think this quarter, we have been done pretty okay. And you have seen the restructuring measures that we have done impacting both OpEx and cost of sales, of course, but -- and that journey will need to continue because we live in this as we talk about the flat rent market. And as long as we don't see any change there, we need to continue that work.

Any direction for next year? Flat, up, down? Just direction. I don't...

No, I think the direction is that we need to continue to offset any salary increases. And then with the component cost impact, we need to rethink also, is there more that we need to do. But I think as for now on to offset and then continue work.

Thanks, Francois. Moving to the next question, please. The next question comes from Stephane Houri from ODDO.