Strong demand for mobile network equipment Ericsson (ERIC.US) Q3 earnings exceeded expectations, but component costs may weigh down next year's gross profit margin

The Zhitong Finance App learned that Ericsson (ERIC.US)'s third-quarter profit exceeded analysts' expectations, mainly benefiting from strong demand for mobile network devices in the core market. However, the company also indicated that parts costs will put pressure on gross margins next year.

According to financial data, 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, up 6% year over year, and SEK 4.17 billion higher than analysts' expectations. The adjusted gross margin was 47.7%, compared to 48.1% for the same period last year.

The adjusted profit before interest, tax and amortization (EBITA) was SEK 10.1 billion (approximately USD 1 billion), higher than analysts' average estimate of SEK 7.93 billion. However, this indicator is lower than SEK 15.8 billion in the same period last year; the adjusted EBITA margin was 17.0% compared to 28.1% in the same period last year. The company explained that capital gains of SEK 7.6 billion were included in the same period last year. After excluding this factor, adjusted EBITA grew.

In terms of cash flow, free cash flow before mergers and acquisitions was SEK 4.9 billion, compared to SEK 6.6 billion for the same period last year. In terms of shareholder returns, the company carried out a share repurchase of SEK 4.8 billion.

Streamline operating structures

New CEO Per Narvinger (Per Narvinger) said in a statement: “We delivered strong third-quarter results, thanks to our focus on execution, the strength of our product portfolio, and customer trust in Ericsson.” He also said, “Today, we are also announcing a simplified operating structure, which will enhance customer focus and drive efficiency improvements over time. This will enable us to act faster, have greater accountability, and better support our customers in a changing market.”

Ericsson also said in another statement on Thursday that it plans to merge the two Asian business units into one Asia Pacific market region to streamline operations.

Nalwenger took over as Ericsson CEO this month. Ericsson has been plagued by the downturn in the 5G network equipment market for many years. As a company veteran, he will seek to revive the business. Its predecessor, Börje Ekholm (Börje Ekholm), cut expenses and staff numbers.

Finnish competitor Nokia has restructured its business, prioritized the development of network equipment for artificial intelligence data centers, and is integrating Nvidia chips into wireless access networks. Ericsson, on the other hand, remains a pure telecom equipment supplier, making special equipment for telecom operators to help them prepare the next generation of mobile technology.

In 2023, Ericsson won a five-year, $14 billion contract to help AT&T Inc. upgrade its network. This helped offset the decline in sales in other regions. AT&T said in August that Ericsson has also received another agreement to supply radio equipment to AT&T to support AT&T's deployment of the spectrum it purchased from EchoStar Corp.

Performance outlook

Looking ahead, Nalwinger said, “The radio access network (RAN) market will remain stable, geopolitical uncertainty is still high, and component costs will be a headwind for next year's gross margin.”

By business, Ericsson expects sales growth in the fourth quarter of the Internet business to be roughly comparable to the average seasonal level of the past three years, and the adjusted gross margin is expected to be between 49% and 51%. The fourth quarter sales growth for the cloud software and services business is expected to be roughly equivalent to the average seasonal level of the past three years. The amortization of intangible assets by the corporate business unit is expected to be around SEK 400 million per quarter. Reorganization fees are expected to be at a high level in 2026.

In terms of stock prices, Ericsson rose 2.2% to 97.10 SEK on Wednesday, with a cumulative increase of 7.2% since this year.