Strong Demand for Mobile Network Equipment: Ericsson (ERIC.US) Q3 Earnings Exceed Expectations, but Component Costs May Suppress Next Year's Gross Margin

According to Zhihui Finance APP, Ericsson (ERIC.US) exceeded analysts’ expectations for third-quarter earnings, mainly benefiting from strong demand for mobile network equipment in core markets. However, the company also warned that component costs will put pressure on gross margins next year.

Financial data show that Ericsson’s GAAP earnings per share for the third quarter were SEK 1.77, SEK 0.22 higher than analysts’ expectations; revenue was SEK 59.5 billion, a year-on-year increase of 6%, and SEK 4.17 billion higher than analysts’ expectations. Adjusted gross margin was 47.7%, compared with 48.1% in the same period last year.

Adjusted EBITA was SEK 10.1 billion (approximately $1 billion), higher than the analysts’ average expectation of SEK 7.93 billion. However, this figure was lower than SEK 15.8 billion in the same period last year; adjusted EBITA margin was 17.0%, compared with 28.1% in the same period last year. The company explained that the same period last year included capital gains of SEK 7.6 billion; excluding this factor, adjusted EBITA showed growth.

In terms of cash flow, pre-acquisition free cash flow was SEK 4.9 billion, compared with SEK 6.6 billion in the same period last year. For shareholder returns, the company conducted SEK 4.8 billion in share repurchases.

Simplifying the Operating Structure

New CEO Per Narvinger said in a statement: “We delivered strong third-quarter results thanks to focused execution, the strength of our product portfolio, and the trust our customers place in Ericsson.” He also said: “Today, we also announced a streamlined operating structure, which will reinforce our customer focus and drive greater efficiency over time. This will enable us to act faster, clarify accountability, and better support our customers in a changing market.”

On Thursday, Ericsson also stated in a separate announcement that it plans to merge two Asian business units into one Asia-Pacific market area to streamline operations.

Narvinger took over as Ericsson’s CEO this month. Ericsson has long been troubled by a sluggish 5G network equipment market. As a company veteran, he will seek to rejuvenate the business. His predecessor, Börje Ekholm, had cut costs and reduced headcount.

Finnish competitor Nokia has restructured its business to prioritize network equipment for artificial intelligence data centers and is integrating Nvidia chips into its radio access networks. Ericsson remains a pure telecom equipment supplier, manufacturing specialized equipment for telecom operators to help them prepare for next-generation mobile technology.

In 2023, Ericsson secured a five-year contract worth $14 billion to help AT&T Inc. upgrade its network. This helped offset sales declines in other regions. In August, AT&T said Ericsson had also obtained another agreement to supply AT&T with radio equipment, supporting AT&T’s deployment of spectrum acquired from Echostar Corp.

Performance Outlook

Looking ahead, Narvinger said: “The radio access network (RAN) market will remain stable, geopolitical uncertainty remains high, and component costs will be a headwind for gross margins next year.”

By business segment, Ericsson expects fourth-quarter sales growth in its network business to be roughly in line with the average seasonal level of the past three years, with adjusted gross margins expected between 49% and 51%. Fourth-quarter sales growth in the cloud software and services business is also expected to be roughly in line with the average seasonal level of the past three years. The amortization of intangible assets in the enterprise business segment is expected to be about SEK 400 million per quarter. Restructuring costs in 2026 are expected to remain at a high level.

In terms of share price, Ericsson rose 2.2% on Wednesday to SEK 97.10, up 7.2% so far this year.