Ericsson (NASDAQ:ERIC) stock tanked on Tuesday after the telecommunications equipment maker reported weaker-than-expected second-quarter revenue numbers, shrinking margins in its core Networks division, and a cautious outlook.
The company posted earnings per share of 13 cents, in line with analysts’ consensus estimate. Quarterly sales came in at 52.7 billion Swedish kronor ($5.42 billion), down 6% from a year earlier and below expectations of $5.84 billion.
Organic sales, which exclude the effects of acquisitions, divestments, and currency movements, fell 1% in the period.
Networks Business Drives Revenue Decline
Sales in the Networks division, Ericsson’s core business, declined 8%. The Enterprise segment dropped 19%, largely due to the divestment of iconectiv in 2025. Cloud Software and Services revenue rose 3%.
On an organic basis, Networks’ sales declined 4%, mainly due to lower IPR licensing revenues. Cloud Software and Services organic sales increased 5%, driven by growth across all market areas.
Enterprise organic sales rose 3%, with growth in Global Communications Platform and Enterprise Wireless Solutions.
Margins And Cash Flow Weaken
Profitability weakened during the quarter. Adjusted gross margin rose to 48.4% from 48.0% a year earlier. Adjusted EBIT margin fell to 12.4% from 12.6%, while adjusted EBITA margin declined to 13.1% from 13.2%.
Free cash flow before mergers and acquisitions fell to 0.4 billion kronor from 2.6 billion kronor a year earlier. Ericsson reported a net cash position of 59.8 billion kronor for the quarter.
AI-Driven Component Costs Pressure Profitability
Ericsson executives and analysts flagged rising component costs as a key pressure point, even as management said supply-chain actions helped limit the near-term impact.
The company warned that the AI infrastructure boom is pushing up component costs, creating a growing headwind for profitability. CEO Börje Ekholm said the company is “not immune” to the inflationary pressure and expects the financial impact to build gradually over the coming quarters and into 2027.
To offset the higher costs, Ericsson is raising prices, redesigning products, pursuing supply chain efficiencies and renegotiating customer contracts, though management acknowledged the pressure will take time to fully mitigate.
Analysts Warn Of Longer-Term Cost Risks
Citi analyst Andrew Gardiner told Bloomberg on Tuesday that the main challenge for Ericsson is not the immediate impact of higher component costs, but the pressure that could build into 2027.
CFO Lars Sandström said in an interview that Ericsson mitigated component cost pressure through measures across the supply chain.
The cost concerns come as AI data center demand tightens memory chip supply and pushes prices higher, forcing companies to raise prices for their own products and services.
Ericsson has also faced weak telecom-equipment demand for years as expected 5G network upgrade spending failed to materialize. The company has responded by cutting costs, including eliminating about 5,000 jobs worldwide in 2025, and it plans to reduce expenses at a similar pace this year.
Outlook Signals Seasonal Recovery With Margin Pressure
The company forecasts that third-quarter sales growth for Networks will be above the 3-year average seasonality.
Similarly, it expects quarterly Cloud Software and Services sales to be broadly in line with the 3-year average seasonality.
The company anticipates a quarterly adjusted gross margin of 48% to 50% for Networks.
However, the company expects 2026 restructuring charges to remain elevated.
Ekholm said Ericsson took steps in the quarter to mitigate the impact of component cost inflation and will continue using internal measures and pricing actions as those pressures build in the coming quarters.
He also said the Networks’ adjusted gross margin could face some pressure in the third quarter due to higher volumes of network rollout projects.
Management Sees AI Connectivity As Long-Term Growth Driver
Looking ahead, Ekholm said Ericsson enters its next phase from a position of strength. He said the company has strengthened its portfolio in recent years to capture the next wave of AI-driven connectivity and expand beyond mobile network leadership into growth areas tied to AI moving into the physical world.
Ericsson executives said the company is entering its next phase from a stronger position, with AI-driven connectivity, progress in Cloud Software and Services, and disciplined cost actions shaping its outlook as Ekholm prepares to step down as CEO after nearly 10 years in the role.
CEO Transition Underway
Per Narvinger, head of Networks and incoming CEO, said he will take over on Oct. 1, 2026. Narvinger said Ericsson holds a strong market position and portfolio, and he pointed to progress in Cloud Software and Services after earlier turnaround work.
Executives Outline Future Growth Opportunities
Ekholm said Ericsson is preparing for the next phase of AI adoption, when AI spreads into industrial and physical-world applications. He said that the shift should increase demand for high-performance mobile connectivity, stronger indoor coverage, low latency, and higher uplink capacity.
Ekholm said Ericsson sees growth opportunities in enterprise connectivity, network APIs, mission-critical networks, and defense applications. He also said the company remains focused on strengthening its core mobile Networks business through R&D investments in high-performing programmable networks.
ERIC Price Action: Ericsson shares were down 13.82% at $10.10 at last check on Tuesday, according to Benzinga Pro data.
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