Key Takeaways
- Ericsson shares tumbled more than 8% following Q2 revenue of SEK 52.69 billion, missing the SEK 53.71 billion analyst estimate.
- The company exceeded earnings expectations with adjusted EBITA of SEK 6.9 billion and an adjusted gross margin of 48.4% versus 47.9% consensus.
- Intellectual property revenue declined to SEK 3.4 billion from SEK 4.9 billion, reflecting the absence of a one-time settlement from the previous year.
- Management forecasts Networks gross margin of approximately 49% for Q3, representing a decline from Q2’s 50.4%.
- Börje Ekholm will step down as CEO on September 30, with Per Narvinger appointed as his successor.
Shares of Ericsson (ERIC) tumbled over 8% on Tuesday following the Swedish telecommunications equipment manufacturer’s second quarter report, which revealed revenue below Wall Street expectations alongside cautionary guidance for margin compression in the upcoming quarter.
Telefonaktiebolaget LM Ericsson (publ), ERIC
Quarterly revenue decreased 6% year-over-year to SEK 52.69 billion, falling short of the SEK 53.71 billion analyst projection and down from SEK 56.13 billion in the comparable 2024 period.
The significant stock decline occurred even as the company’s bottom-line performance exceeded Wall Street estimates. The adjusted gross margin registered 48.4%, surpassing both the 47.9% consensus estimate and the highest analyst projection of 48.2%.
Adjusted EBITA totaled SEK 6.9 billion, exceeding the SEK 6.71 billion consensus forecast, while the adjusted EBITA margin reached 13.1% compared to the 12.5% analyst expectation.
The revenue shortfall was primarily attributed to declining patent-licensing income, which contracted to SEK 3.4 billion from SEK 4.9 billion. The year-ago quarter had benefited from a non-recurring intellectual property rights settlement that was absent this period.
Organic revenue fell 1% year-over-year, although the company achieved positive organic growth across three of its four regional markets.
Jefferies, maintaining a “hold” rating with a 98 crown price target, observed that the revenue underperformance was predominantly in the Networks segment, primarily due to postponed shipments in India.
The firm noted that Ericsson anticipates a stronger-than-typical seasonal third quarter as those Indian deliveries materialize, though the Networks margin outlook is what rattled market participants.
Profitability Outlook Weighs on Sentiment
Ericsson projected its Networks gross margin at approximately 49% for the third quarter, down from the second quarter’s 50.4%. Management attributed this anticipated decline to increased volumes of network deployment projects.
Jefferies additionally highlighted that escalating component costs could apply additional margin pressure in the fourth quarter, contingent upon the effectiveness of the company’s countermeasures, which include implementing price increases.
Free cash flow before mergers and acquisitions plummeted 85% to SEK 0.4 billion from SEK 2.6 billion in the prior-year period, which Jefferies characterized as a notable weakness in an otherwise respectable quarter.
Net profit declined 12% to SEK 4.1 billion from SEK 4.6 billion, with diluted earnings per share falling to SEK 1.22 from SEK 1.37.
Leadership Transition Announced
Börje Ekholm will retire as CEO effective September 30. Per Narvinger has been named as his successor for the President and CEO role, while Ekholm will continue in an advisory capacity through June 15, 2027.
Ekholm characterized the Q2 performance as demonstrating “the strength of our portfolio and disciplined execution,” noting that management has implemented measures to offset component cost inflation.
The company distributed SEK 8.2 billion to shareholders during the second quarter, which included SEK 3.2 billion through share repurchases.
Ericsson also showcased AI-powered drone detection and tracking capabilities utilizing existing cellular infrastructure at a Texas stadium during a prominent international sporting event.
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