Telefonaktiebolaget L M (NASDAQ:ERIC) reported second-quarter financial results on Tuesday. The transcript from the company's second-quarter earnings call has been provided below.
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The full earnings call is available at https://edge.media-server.com/mmc/p/rrqrodsy/
Summary
Telefonaktiebolaget L M Ericsson reported a solid Q2 2026 with continued strong margin delivery despite a 1% organic sales decline, which slightly grew excluding IPR settlement impacts.
The company is undergoing a leadership transition with Per Norwinger set to become CEO, emphasizing the strategic importance of AI integration and maintaining technology leadership.
Ericsson is proactively addressing component cost inflation through product redesigns, price adjustments, and cost mitigation strategies to sustain margins.
The company maintains a strong strategic position with growth initiatives in enterprise connectivity and mission-critical networks, contributing to future revenue streams.
Management expressed optimism about AI driving future network demand, emphasizing the importance of mobile connectivity in the AI era.
Full Transcript
OPERATOR (Operator)
Hello everyone and welcome to the presentation of Ericsson's second quarter 2026 results. Joining us today we have Börje Ekholm, our President and CEO, and Per Naviga, Head of Networks, who will be assuming the CEO role in October. And a little later Lars Sandström, our Chief Financial Officer, will also join us. As usual, we'll have a short presentation followed by Q and A. And in order to ask a question, you'll need to join the conference by phone.
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 and that today's 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 differ 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 Börje and to Per for some introductory comments.
Börje Ekholm, President and CEO
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 execution, 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 going forward. I also want to express my gratitude to the board, the leadership team, and all the colleagues in Team Ericsson. It's really the quality of our people that defines 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 Norwinger, 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 he'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 services. 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, he's an excellent choice to lead Ericsson into the next chapter. So over the next two, three months, Per and I will spend a lot of time together working closely to ensure a smooth transition. But please, Per, I leave the word over to you.
Per Norwinger (Head of Networks (Future CEO))
Thank you, Börje. And it's of course a great honor to take over as CEO of the company from October 1st. As Börje says, I have been in the company, in the industry for quite a few years. I truly enjoyed being back in the networks business where I spent a lot of my career. So I was heading up the largest segment now for a year and a half. I have to say, Börje, you handed me quite a challenge when we formed Cloud Software and Services. It's great to see that that business is now progressing.
I also 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, Börje. You're handing over a company in a very strong position. Strong on the market position, strong in a portfolio. And it's truly been a privilege working with you, Börje, 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 then, of course, I'm looking forward also to engaging with everyone in this forum going forward. So, yeah, thank you.
Börje Ekholm, President and CEO
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 and A 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 benefits 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 demonstrate 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 two 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're also starting 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 increases with current customers. So discussions to broaden price increases are ongoing. 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 and 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 on 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 us 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.
Lars Sandström, Group CFO
All right, thank you Baja. 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 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 the Americas, which reported a slight decline of 1%. In the 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 two of the four 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 the 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 1.8 billion. IPR revenues were 3.4 billion, down by 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 13.5 billion, including the agreements signed in July 2026, which will benefit from Q3. Adjusted gross income was 25.5 billion with a negative currency impact of 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 19 billion, around 1 billion lower year over year driven by cost reductions. Currency as well as the divestment of iconnective. Wage pressures continue to be offset by cost reductions driven by headcount as well as efficiency measures, and there was 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 6.9 billion, down by 0.5 billion. EBITDA was impacted by a negative currency effect of 0.6 billion in Q2 2025 also benefited from the IPR settlement and included iconnective. Excluding these, adjusted EBITDA would have improved by 1.8 billion. Cash flow before MA was 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 33 billion with a negative currency impact of 1.2 billion. Organic sales decreased by 4% 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. Network's adjusted gross margin was 50.4% stable compared to last quarter and adjusted gross income decreased to 16.6 billion due to the lower sales and the negative currency impact.
Adjusted EBITDA was 5.8 billion down from 6.5 billion last year, mainly impacted by a negative currency effect of 0.5 billion. Adjusted ETA 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 and services, reported sales increased by 3% to 14.7 billion including a negative currency impact of 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 6.5 billion, adjusted EBITDA increased to 1.8 billion with a margin of 14.2%. Lower operating expenses benefited from efficiencies and currency. Looking at the right-hand graph, the rolling four-quarter adjusted gross margin was around 44% and adjusted EBITDA margin around 13%, a new high level then going to Enterprise.
Reported sales decreased by 19% impacted by the sale of Iconnective 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 Iconnective and the change in product mix. Adjusted EBITDA landed at minus 0.8 billion where the impact of the divestment of iconnective was partly offset by cost reductions.
EBITDA 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 0.4 billion before MA 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 build-up in inventories in part preparing for planned Q3 delivery.
We delivered a cash flow to net sales of 12% for the rolling four quarters at the upper end of our 9 to 12% target. Net cash decreased sequentially by $8.3 billion to $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 situation 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 Baye already mentioned. Turning to the Q3 outlook then, the outlook assumes the exchange rate specified in the report. And for networks, we expect sales growth to be above the three-year average quarter on quarter seasonality. For cloud, software, and services, we expect sales growth to be broadly similar to the three-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's rollout projects in Q3. Restructuring charges for 2026 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 Abea.
Börje Ekholm, President and CEO
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 spot 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 that can bring Ericsson back to growth. As this is my last earnings call as CEO of Ericsson and possibly the last as a 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 Ericsson 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 and A.
OPERATOR (Operator)
Thanks, Beria. We'll move on to Q and A now with Beria and Lars. To ask a question, please could you press Star one and one on your phone and wait for your name to be announced? If you're streaming the webcast, could we ask that you mute the audio on the webcast while asking a question to avoid any feedback? And as usual, if I can request one question per participant, please, so we have time to hear from as many of you as possible. 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. Please go ahead. Simon.
Simon Granath, Analyst at ABG
Initially, just congrats on a very successful career at Ericsson, Börje. Best of luck in the future. Onto 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 DeLauro still only expects the market to grow 1% per year for the foreseeable future.
Is the latter conservative in your view? Thank you.
Börje Ekholm, President and CEO
Yeah, 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, you know, we don't really. I can't really point to exactly what type of applications. It's a broad-based. It's really starting to see that the demand for AI is 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 dimensions the networks going forward.
So I think there is a real case to start to be a bit more optimistic about our industry and the RAN market. At the same time, I want to also say 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. You know, 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 you know, until then let's continue to plan for a flattish market.
Simon Granath, Analyst at ABG
Thank you so much.
OPERATOR (Operator)
Thanks for the question, Simon. Moving to the next question please, Operator. The next question is going to come from the line of Eric Lindholm Rogerstal from SCB. Please go ahead Eric.
Eric Lindholm Rogerstal, Analyst at SCB
Yes, good morning Börje and Lars. Thanks for taking my question. So I'll start with perhaps a question on GPUs in the radio units. It's been a hot topic recently. Nvidia revealed its entry into this area. You obviously operate mainly on Ericsson silicon, which is purpose-built. Can you elaborate a bit 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? Thanks.
Börje Ekholm, President and CEO
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 RAN stack on. So being an X86 or a GPU or our purpose-built silicon.
And you know, 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 the 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 a purpose-built. But then as I said, our RAN 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 cost, 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.
Eric Lindholm Rogerstal, Analyst at SCB
All right, thank you and good luck on your future endeavors.
Börje Ekholm, President and CEO
Thank you.
OPERATOR (Operator)
Thanks for the question, Eric. Moving to the next question please. The next question is going to come from the line of Sebastian Stabovitz at Kepler Sharo. Please go ahead. Sebastian, your line's open.
Sebastian Stabovitz, Analyst at Kepler Sharo
Yeah. Hi everyone and thanks for taking my question. Could you please quantify the copper and 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 contract with higher prices? Thanks a lot.
Börje Ekholm, President and CEO
Maybe Barry, starting with you with the discussions and then Lars, the final.
Lars Sandström, Group CFO
I can take the latter part. Yes, we have done that. It's not impacting Q2, 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 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 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 as well for the future. But maybe you want to take the details.
Börje Ekholm, President and CEO
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 gradual impact during the second half and 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 we cannot take this all alone. 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.
Sebastian Stabovitz, Analyst at Kepler Sharo
Okay, thank you and congrats for all your career at Ericsson.
Börje Ekholm, President and CEO
Thank you.
OPERATOR (Operator)
Thanks for the question, Sebastian. Moving to the next question, please. The next question is going to come from the line of Andreas Jolsen at DNB. Please go ahead, Andreas.
Andreas Jolsen, Analyst at DNB
Thank you. Good morning, everyone. First of all, Berije, 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.
Börje Ekholm, President and CEO
Thanks, Andreas. Yeah, I will truly miss the questions and, you know, 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. You know, there isn't 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 you know, the initial is actually negative.
Sometimes it's just less positive below group average margin, so to say. But it's not that we take contracts which are, you know, 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, you know, 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, but it's, I feel quite good about the volume and then it will be a bit more challenging short term on margins.
Andreas Jolsen, Analyst at DNB
Perfect. Thanks a lot.
OPERATOR (Operator)
Thanks for the question. Andreas, moving to the next question, please. Next question will come from the line of Richard Kramer at Arete. Please go ahead, Richard.
Richard Kramer, Analyst at Arete
Thanks. And Bori, 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'd 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 30 billion kroner restructuring charges and about 60 billion kroner 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 in efforts to shift focus, for example, towards the massive investment boom which we see happening now in 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? Thanks.
Börje Ekholm, President and CEO
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 different? Yeah, 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're 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 humanoids, 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 what we try to position ourselves for.
Richard Kramer, Analyst at Arete
Okay, thanks and good luck.
Börje Ekholm, President and CEO
Thank you.
OPERATOR (Operator)
Thanks for the question, Richard. Moving to the next question, please. The next question is going to come from the line of Francois Bovignier from UBS. Please go ahead, Francois. Your line is open.
Francois Bovignier, Analyst at UBS
Thank you very much and good luck for Bogu as well. Just a quick question on gross margin. Again, I think you mentioned in Q3 that you will have a mixed 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 is 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 a 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. Thank you.
Börje Ekholm, President and CEO
I can just start on the rollout question. The reality is we're in the project business quarterly. It shifts a bit all the time. Right. It's a bit larger portion rollout projects during Q3 that impacts margins. So that's what we're guiding for. And that will periodically happen. I think when you look at our track record over time, as you note, it's, you know, we've been able to manage across geographic mix. That's actually been our focus to reduce the dependence on geographic mix.
But we have always said we have a mixed dependence on products. So of course it's very different if we sell software versus if we sell services for a rollout project. That's going to be different. And that's what you see impact in Q3. So it's actually less geographic dependence that we've taken away. But the product dependent and product mix dependence that we will not be able to take away because it's simply lower margin structurally on services than it is on software.
Lars Sandström, Group CFO
And on the. I think when it comes to impact from cost, we will see some already in Q2. But as we said there on the mitigate negativities we see that we will have those supporting offsetting that during the third quarter. Then it is an increase in cost pressure that we have. So that will of course have put a bit pressure more coming out of the year and into next year. And there the activities that we are doing will take a bit. The short term they will work with and the longer terms that we will see how that plays out. It's really on the discussions that we have in negotiations that we will have towards customers as well. So that's why it's a bit different in the facing.
Francois Bovignier, Analyst at UBS
Thank you very much.
OPERATOR (Operator)
Thanks Francois. Moving to the next question please. Next question is going to come from the line of Jacob Bluestone at BNP. Please go ahead, Jacob.
Jacob Bluestone (Analyst at BNP)
Thanks, Daniel, and congrats and best wishes to Barrio as well. Just to stay on the topic of the memory cost inflation, can you maybe just explain to us what is actually the mechanism in your current contracts passing on price inflation? So do you have automatic pass-through, or do you have to go back and renegotiate every contract individually just to help us understand what's actually in your current contract for protecting?
Börje Ekholm, President and CEO
We've been very clear on this over time, Jacob, that we don't have automatic pass-throughs. And the reason why our contracts are not designed that way is actually that they are rather long-term. And you know, just because the contract is long-term doesn't mean it's exactly the same products being shipped the whole time. So it would simply not be workable to have those types of adjustments in there. So that's why the contracts typically do not include that.
Some do, but that's typically very small and much shorter-term contracts. So there is nothing automatically in this. That's why we talk about the mitigating actions. And you see us take that on the cost side. We take it on product substitution, we take it on new product introduction, and we of course take it on price increases. Some part is renegotiation. We've done that successfully already. We know it can be done, so we're going to continue with that.
We also change the prices, of course, in tenders we enter into. So overall, you know, we're not immune even though we don't have it written into the contract. But we also know that we're able to mitigate a large part by taking those types of actions. Is it easy? No, it's not. But it shows also our performance that it actually can be done.
Jacob Bluestone (Analyst at BNP)
Understood. Thank you and best wishes.
OPERATOR (Operator)
Thank you. Thanks for the question, Jacob. Moving to the next question, please. The next question is going to come from the line of Daniel Joeburg at Handelsbanken. Please go ahead, Daniel.
Daniel Joeburg (Analyst at Handelsbanken)
Thank you, Daniel. And good morning, Bori and Lorsch. And Bori, thanks for a great contribution and all good meetings during the years. And if you really miss the Rowan discussions, you're always welcome back to Jetspriuk where I have a newly refurbished apartment available. Nevertheless, I'll go first to... Or I would like to ask on the net worth gross margin and the guidance here for the 850, which in my view wouldn't be a bad number given what you talked about here on rollouts and on the price inflation and so on.
But we also know that you have some kind of IPR catch-up from transient here in Q3. So I guess some of the uncertainties there are based on this. How is this impacting this guidance? So should we be even more conservative after this or given that there is some impact from transient in this?
Börje Ekholm, President and CEO
You know, not to comment explicitly on transient, Daniel, but I would say it's a marginal impact from that. So that has not been assumed to be a positive contributor during Q3. And it all, you know, these types of contracts on the IPR depend on exactly how they look like. I think the key here is the agreement we strike kind of increases the value. So we're at a 13.5 billion run rate now. So that's the most important part. It positions the value of our IPR portfolio for the future.
But the contribution from, you know, is actually marginal during Q3. Otherwise, I may take you up on a coffee in Ellsbruck.
Daniel Joeburg (Analyst at Handelsbanken)
Yeah, that's great. Always welcome.
OPERATOR (Operator)
Thank you. Thanks for the question, Daniel. Moving to the next question, please. The next question is going to come from the line of Sandeep Deshpandi at JP Morgan. Please go ahead, Sandeep.
Sandeep Deshpandi (Analyst at JP Morgan)
Yeah, hi. Thank you for letting me on and all the best for your future endeavors. Just a quick question on the enterprise business of Ericsson. I mean, over the last five years, this business has consistently been loss-making. Is there a time horizon over which the intention of the company is to make this business profitable? Because it has on average been a 10% impact on your EBITDA reported for the year. So it has been a consistent negative. So will this change in the next few years?
Börje Ekholm, President and CEO
It will. You know, the answer, Sandeep, is of course it cannot be consistently loss-making. Instead, it has to be value accretive to the group. And we clearly have a plan in place that we're executing upon. It comes from a couple of elements, and you already now start to see our wireless one business to actually contribute not to reported numbers, but the way we see sales growth, on bookings, etc. It's actually quite positive. The challenge in enterprise has been the enterprise, call it the private networks, where we've actually not had attractive neither growth nor profitability.
So that is something we're working to address and starting to see progress on that. You all know the business of Vonage has not been contributing. We put in place a plan to change the trajectory of that business that we're executing upon. It will take a little bit more time, but you will start to see improved performance in the reported numbers. You've seen it from Q1 to Q2, and you see it continuing throughout the year. So clearly the ambition is here to turn this around and make it value accreting in the view.
I'm not going to put a timeline on it as I'm not the one to deliver on it. So it feels a bit unfair to do. But I would say the plan is in place and we're executing on that, and over time it should be value creative.
Sandeep Deshpandi (Analyst at JP Morgan)
Thank you, Lori.
OPERATOR (Operator)
Thanks, Sandeep. Moving to the next question, please. The next question is going to come from the line of Sami Sarkomedes at Danske Bank. Please go ahead, Sami. Your line's open.
Sami Sarkomedes
Thanks. First of all, I want to thank Beria for good cooperation over the years. I think you can be proud of the achieved margin turnaround during the past 10 years. Just curious, what do you think will be the biggest challenges or questions your successor will need to address going forward?
Börje Ekholm, President and CEO
Thanks, Ami. I think it's a bit unfair to my successor to put something on his table, but what we have been focused on the last few years is that we have recognized that the core business, the core mobile networks business in reality is a flattish market. And to get into growth, which I actually think is critical for long-term value creation of a company, is actually to find new use cases of our technology. We've done that in trying to do that in enterprise.
We're not there yet. We tried in or actually doing it in mission-critical, including defense. And there we're starting to see that it contributes to overall growth. So when we look at this, I think the one thing which now I'm answering this much more from what we have actually been focusing on the past few years is to drive growth into the company without being in that sense pursuing a number of initiatives and from a blue sky thinking. So we've rather tried to be disciplined in the way we enter areas, trying to invest to capture that potential and trying to grow, trying to get into growth.
And I think that's where the next step of the journey is. I'm actually a big believer that AI will move into the physical world, and when that happens, we're going to be very well positioned with the initiatives we have taken. But I am sure that my successor will take new initiatives and ideas and change some to capture this potential. So I think there are a lot of opportunities. Not saying it's easy, but it's a lot of opportunities where we can capitalize on our position.
OPERATOR (Operator)
Thanks for the question, Sami, moving to the next question please, which will come from the line of Felix Hendrickson at Nordea. Please go ahead. Felix.
Felix Hendrickson
Thanks for taking my question again. Congrats and all the best for the future. My question is on the inventory. You tied up around 4.6 billion in inventory during the quarter. So I was just wondering if you could dissect this a little bit. How much of this is sort of attributed to the memory cost inflation and how much is attributed to, you know, a sort of strong sales quarter you see in Q3 relating to the timing of deliveries? I think in the IR chats in the morning there was some discussion about delayed deliveries from Q2 to Q3.
So if you could just unpack the inventory buildup a little bit and how we should read into it. Thanks.
Börje Ekholm, President and CEO
Yeah, no, but when you look at the inventory build-up here, it's around 5 billion in the quarter and the majority of that is finished goods that is then to be delivered in Q3 and going forward on this phasing, as you mentioned. But there is also a portion of that connected to the higher component cost that we see coming in. But it's not the majority. It is a smaller part of the 5 billion that is connected to the component cost increases, and this will continue a bit.
So that will be the challenge going forward here to really address the working capital and the capital turnover rate here in the coming quarters. But it's important also that we have the right levels here so we have the ability to deliver on time to our customers and the commitments we have with our customers.
Felix Hendrickson
Thank you.
OPERATOR (Operator)
Thanks for the question, Felix. Moving to the next question, please. Next question is going to come from the line of Janadin Menon Jefferies. Please go ahead. Jananin.
Janadin Menon (Analyst at Jefferies)
Hi, good morning. Thanks for taking the question. And congratulations, Bori, from my side as well. I think you've done a great job on the profitability side. The company inherited was struggling with profitability, and now the company is maintaining consistently high levels of gross margins. On the network side, my question is really on the competitive dynamics of your mitigation aspects. When you are redesigning products to account for higher component prices or your increasing prices, are you seeing a similar kind of an approach from your competitors?
And that's both your Chinese competitors who are able to possibly source components like DRAM at an easier level or lower prices from Chinese vendors than you can. And are you seeing any competitive effect from these actions which could have an impact on your market share?
Börje Ekholm, President and CEO
I think you actually make implicit in your question, Janadin, is actually an important part here. And there may be, as you say, a little bit lower cost inflation in the Chinese ecosystem. And as you know, we cannot rely on that ecosystem to export to a number of countries we're in. That forces us to look at the product design in a different way. We're seeing all vendors otherwise under some sort of similar cost inflation pressure. So we're not the only one going through this.
What we are doing is of course spending maybe a little bit more effort on product design to actually optimize our products for the performance needed in order to balance component cost. This takes six, nine months to do. So it doesn't really come through in the short term, but longer term it will help us and I expect everyone to do something similar. We're probably going to see that in other parts of the AI value chain as well, that companies do the same thing because it's simply a way to optimize performance and cost of your product.
I don't think the vendors, whether they come from China or from elsewhere, are under any other way of operating.
Janadin Menon (Analyst at Jefferies)
Understood, thank you very much.
OPERATOR (Operator)
Thanks for the question, Janadan. Moving to the next question, the next question will come from the line of Stefan Hirot at Odo. Please go ahead. Stefan?
Stefan Hirot (Analyst at Odo)
Yes, good morning. Actually, I wanted to speak about the cloud and software and services margin where your margins went really above the expectations, you know, 12.4%. I just want to know how much of this improvement is structural, like cost reduction, efficiency mix, and how much is a one-off and what is a reasonable run rate margin to expect going forward. Thank you.
Börje Ekholm, President and CEO
When it comes to cloud software services, we try to emphasize the beta margin since there can be a bit of volatility depending on the product mix. In cloud software services, we had a good quarter this quarter for sure. But you also see the impact when we get a bit higher revenues that there is a leverage also supporting the margin here. So it's a mix of the leverage and the product mix and it is, as I said, a good quarter here in Q2 and we have said that we are aiming for double-digit cloud software and services beta margin and we are there now and above and the task is for us to maintain and drive this going forward.
But there is also of course the connection with the Rand market demand that is not, it's not separate life of that business of course so the challenge we see in the Rand market is also there for the cloud software and services. But having said that, we see some good progress in capturing a bit of growth here and that we have seen over the, if you look more on the rolling base, it's actually been a bit better than the pure Rand market here and we intend to keep focus on that going forward as well.
Lars Sandström, Group CFO
But it's fair to say there's no one-time effects that actually come into the quarter. It's kind of business as usual to be honest and it's the turnaround plan that was put in place several years ago on commercial discipline work on the cost side, focus the product portfolio, etc. That's giving the benefits here and sometimes there is a bit of lag until you see it in the numbers. It's the same thing that we discussed on the enterprise side. A lot of the actions that have been taken the last, you know, one, two years will start to come through in the future and that's what you see on BCSS.
It's a lot of the actions taken a few years back that now is building a solid base. Then we've said we need to be double-digit margin that's been, I think, a minimum requirement according to decency level. If you look at what a business like this should be, I've often said it should at least be mid-teens and above because that's the reality of the value we provide should warrant that then it takes time. Not going to commit to a timing of reaching that but of course the ambition is to make this a more profitable business than it is today.
But I think it's the timing effect of action when you take them it takes a few quarters before you see it come through.
Stefan Hirot (Analyst at Odo)
Very clear. Thank you very much.
OPERATOR (Operator)
Great, thanks for the question Stefan and I see we are just coming up on time so we will need to conclude today's conference call there. Thanks for joining us. Thanks Burja. Thanks Lars and also to Per.
Börje Ekholm, President and CEO
Thanks everyone and good luck in your work.
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