Ericsson Lm Telephone Co Q1 FY2026 Earnings Call

Hello, everyone, and welcome to the presentation of Ericsson's First Quarter 2026 Results. Joining us by video today is Borje Ekholm, our President and CEO and in the studio, I'm joined by Lars Sandstrom, our Chief Financial Officer. As usual, we'll have a short presentation followed by Q&A. Details can be found in today's earnings release and on the Investor Relations website as well. Please be advised that today's call is being recorded, and 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 Borje and Lars for their introductory comments.

Thanks, Daniel, and good morning, everyone, and thanks for joining us today. Q1 was a solid start of the year and the results reflect our continued execution against our operational and strategic priorities. We saw a very large currency headwind during the quarter, probably one of the toughest quarters from a comp ratio as the Swedish krona strengthened against almost all currencies compared to last year. This, of course, materially impacted every line of our financial statements, with reported sales falling 10%. At the same time, we performed well operationally, realizing strong organic growth of 6%, with all segments contributing. Our results are a testament to our leading portfolio and the investments we've been making in furthering our technology leadership. Over the last few years, we've actively managed to reduce dependence on geographic mix. Of course, we realize that North America often receives disproportionate interest from, I guess, the analyst community, but also around the world. That's natural because it is a front-runner market. In this quarter, we saw sales reduced by mid-single digits in North America, but we could still deliver a gross margin of 48.1% for the group and 50.4% for the segment networks, indicating that our efforts to balance out the geographic mix are yielding results, giving us less sensitivity to geographic mix. Cloud Software and Services continue to execute well. We reached a gross margin of 43.2%, up more than 300 basis points year-over-year. Revenue seasonality was in line with our guidance for the quarter and we saw some deals being pushed into Q2, and we expect to see stronger seasonality than normal next quarter. EBITA came in at SEK 5.6 billion with a margin of 11.3%, and the strengthening of the Swedish krona affected EBITA by SEK 2.2 billion. We've also seen the revaluation of the long-term stock-based programs included in the results. Cash flow during the first quarter is typically lower. Despite this, cash flow came in at a healthy SEK 5.9 billion with a net cash position of SEK 68.1 billion. As you saw just a couple of weeks ago, the AGM approved the Board's proposal for an increased dividend and our first share buyback program. We will start executing on this buyback program next week with a target to repurchase SEK 15 billion. In the next phase of AI, we see that high-performance mobile connectivity will become increasingly important. Even so, our planning assumptions for the RAN market remain flat over the longer term. With disciplined execution, we create room to make selective investments in growth, broadening the mobile platform to new use cases and new sectors. We believe growth will come in areas outside of our traditional CSP markets, particularly in enterprise and mission-critical networks. In our Enterprise segment, including our wireless WWAN business, private networks, network APIs, and mobile money, organic growth was stronger, which is encouraging. There are new markets that we see as key opportunities going forward. Of course, new markets take time to develop, but we're now seeing these efforts starting to scale. I would also comment on the loss in Enterprise of SEK 1.4 billion. It's clearly unacceptable, but it includes a number of one-time costs. We have an improvement plan in place that we're executing on, and we expect to see thus shrink losses during the rest of the year coming from growth, operational discipline, and the one-time cost base. We're also driving several other growth initiatives, and we see good progress in mission-critical networks, which tend to be a bit lumpy and vary by quarter. Strong interest is present in several verticals, particularly within Defense Solutions. In modern defense applications, high performance—large capacity connectivity is required, and 5G stand-alone is a cost-effective alternative. We've seen a trial with the Italian Navy this quarter. Another exciting area is 5G-based sensing, which includes detecting unconnected drones. A few weeks ago, we showcased our solution, which is garnering significant customer interest, especially given the current geopolitical market environment. We see that our technology here has great market potential, and we are starting to invest to capture these opportunities. I would say this is just one example that you don't have to wait for 6G to get exciting use cases with the technology we have. We're seeing good momentum on our strategy execution, and this is showing in our Q1 results. With that, let me give the word over to you, Lars, to go through the numbers in some more detail.

All right. Thank you, Borje. I will begin with some additional comments on the group before moving over to the segments. Net sales in Q1 totaled SEK 49.3 billion, with organic sales growing 6% year-on-year. The growth was broad-based, and sales grew in all segments. Three market areas delivered double-digit organic growth, driven by continued 5G rollouts and increased uptake of 5G core. Americas declined 2%, with strong growth in Latin America more than offsetting a mid-single-digit decline in North America following a strong quarter last year. Reported sales decreased by 10%, impacted by a negative currency effect of SEK 7.8 billion. Organic growth again grew 6%. IPR revenues were SEK 3.1 billion, and this run rate coming out of the quarter is approximately SEK 13 billion. Adjusted gross income was SEK 23.7 billion with a negative currency impact of SEK 3.8 billion. Adjusted gross margin was 48.1%, in line with last year, excluding iconectiv. On the cost side, operating expenses, excluding restructuring charges, dropped to SEK 18.4 billion, around SEK 2 billion lower year-on-year, driven mainly by currency and the divestment of iconectiv. Underlying inflationary pressures were more than offset by cost reductions driven by headcount as well as efficiency measures. As Borje mentioned, adjusted EBITA, which excludes restructuring but includes other one-offs, was SEK 5.6 billion. This is down by SEK 1.4 billion, including a negative impact of SEK 2.2 billion from the divestment of iconectiv and SEK 0.5 billion of additional share-based compensation costs due to the increased share price during the quarter. The EBITA margin was 11.3%. Cash flow before M&A was SEK 5.9 billion, driven by earnings and reduced net operating assets. So let's move to the segments. In Networks, sales decreased by 8% year-on-year to SEK 32.9 billion, with a negative currency impact of SEK 5.2 billion. Organic sales increased by 7%. Organic revenues grew in three of our four market areas, with two strategic markets—India and Japan—growing strongly. North America declined, impacted by customer spend reallocation in Q1 this year following recent market consolidation. Customer investments were also elevated last year due to tariff uncertainty impacting the comparison. Networks' adjusted gross margin decreased slightly to 50.4%, reflecting actions to enhance resilience in the supply chain. Adjusted EBITA was SEK 6.4 billion, impacted by a negative currency effect of SEK 2 billion and benefiting from lower operating expenses, which were also supported by continued efficiency improvements. Adjusted EBITA margin was 13.3%. In the segment Cloud Software and Services, sales decreased 9% to SEK 11.8 billion, including a negative currency impact of SEK 1.6 billion. Organically, sales grew by 4%, with growth primarily in core. Adjusted gross margin came in at 43.2%, an improvement from 39.9% last year, supported by improved delivery efficiency and a favorable product mix. Adjusted EBITA increased to SEK 0.6 billion, with a margin of 5.3% despite a negative currency impact of SEK 0.3 billion. Looking at the right-hand graph, the rolling four quarters adjusted gross margin was around 44%, and adjusted EBITA margin around 12%. These are both new high levels. Reported sales on the Enterprise side decreased 30%, impacted by the sale of iconectiv and currency. On an organic basis, Enterprise grew by 4%, marking the second quarter of organic growth. Adjusted gross margin declined to 49.0%, reflecting the impact of the divestment of iconectiv and change in business mix in Global Communications platform. Adjusted EBITA landed at minus SEK 1.4 billion, reflecting the divestment of iconectiv and a nonrecurring cost of SEK 0.3 billion in the current quarter. Turning then to free cash flow, which was SEK 5.9 billion before M&A in the quarter. We delivered a cash-to-net sales ratio of 13% for the rolling four quarters, above our 9% to 12% target, and cash flow generation was strong, supported by earnings and a stronger-than-normal seasonal reduction in operating net assets. Net cash increased sequentially by SEK 6.9 billion to SEK 68.1 billion in the quarter. The buyback program of up to SEK 15 billion was approved by the AGM, and share repurchases will start soon. Global uncertainty remains elevated given the geopolitical and macroeconomic environment, including the global semiconductor situation, which Borje will come back to. The Q2 outlook assumes no tariff changes and the exchange rates specified in the report. For Networks, we expect sales growth to be broadly similar to the three-year average quarter-on-quarter seasonality. For Cloud Software and Services, we expect sales growth to be above the three-year average quarter-on-quarter seasonality. We expect Networks' adjusted gross margin to be in the range of 49% to 51%, and restructuring charges for 2026 are expected to be at an elevated level with a fairly large part already seen in Q1. So with that, I hand back to you, Borje.

Thanks a lot, Lars. Our Q1 results demonstrate the strong execution of our strategic priorities and the actions we've taken over the last several years to strengthen the company operationally. This includes how we've made Ericsson less reliant on any specific geographical mix, enabling us to sustain healthy margins in varying market conditions as seen in today's report. Our actions also include how we diversified our supply chain to mitigate geopolitical disturbances as much as possible. This continues to be a clear competitive advantage, enabling us to meet customer commitments amid the current backdrop. Of course, the global semiconductor situation remains challenging as the AI boom is increasing input costs. We continue to take actions, and Lars mentioned this as well, to mitigate this impact by working closely with both our customers and suppliers, including our pricing. While we believe we're in a good position, we are not immune to these disturbances. So they will have consequences on price and availability. As AI may be the key driver for our industry long-term, we view AI as a net positive for us. The next phase of AI will see it being industrialized, shifting focus from current data centers and large language models to applications, devices, and use cases. This will require advanced mobile connectivity with capabilities such as ultra-low latency and high uplink. This positions us in the middle of the next phase of the AI era. With our strategy, we are well-positioned to capitalize on this opportunity. We are doing this by providing the industry's best networks for AI and by expanding the mobile platform to new use cases and sectors. This includes exposing network capabilities through network-powered solutions, allowing developers to create new use cases. It also encompasses opening up new addressable markets such as enterprise solutions based on cellular technology and mission-critical networks. This will allow us to capture greater share of the value from connectivity and drive mid-single-digit growth for Ericsson, while achieving our long-term margin targets of 15% to 18%. With that, I think it's time for some Q&A.

Thanks, Borje. It's time for the first question. The first question this morning is from Simon Granath at ABG.

I have a question for Lars regarding the memory and cost inflation. The Q1 margin performance for Networks was, in my view, strong. But given the rising memory prices and as inventory runs down through the year, how confident are you that memory prices won't be a significant headwind for the rest of the year? And all else being equal, should we see Q1 marking the highest level for the year?

All right. Thanks, Simon. Regarding the outlook, we provide guidance for the next quarter. When it comes to memory costs and other semiconductor costs, there is a headwind coming. But we should also remember that it's a smaller part of our total cost base. We're working hard to mitigate this together with our suppliers and customers to share the burden. There might be some product substitutions as well. It's a bit early to say how the impact will be, but you'll start to see more of that in the second half of the year.

The next question will come from Andrew Gardiner at Citi.

On the North American revenue trends that you saw in the quarter, you've highlighted the pressure there, Borje, with mid-single-digit downturn year-on-year. I'm wondering what your view for 2026 as a whole is for that region. As you suggested, the comps were particularly tough in the first quarter because of the tariff impact last year. Does the decline you've seen in Q1 lessen as we progress through 2026, or are there other factors we should be aware of?

You see many forecasts in the market for North America. The development seen during Q1 is probably similar to what we should expect for the year. That's fair to say, given our customer's guidance. At the same time, we have a slightly different mix compared to the market where we may have been hit a bit harder than the general market in Q1 due to consolidation among U.S. operators. If you look at this net-net, I don't foresee a changing market condition, but I see a better mix for us compared to the market. While we had a tough comp in Q1, do not assume the U.S. market is suddenly going to change direction. I'm coming back to what I think is more important today: our reduced exposure to North America from a geographic mix perspective and the investments we've made to diversify. If we are slightly weaker in North America but stronger in another market for a quarter, we can compensate that and maintain a healthy gross margin. I think North America will always be important, but from a mix point of view, it will be less critical going forward.

Is that growth expected from strategic markets like India and Japan that you mentioned earlier? Should we anticipate steady growth from those key markets through the year?

We have strengthened our market position there, so we should see healthy growth as we continue to deliver on those opportunities. I'm quite comfortable about that.

The next question is from Erik Lindholm-Rojestal from SEB.

Can you discuss OpEx and the impact of cost savings? Underlying OpEx seems to be down about SEK 0.5 billion despite the one-off impact you've flagged. What inflationary pressures do you anticipate in OpEx for the rest of the year? When should we see the effects of the cost savings you've initiated in Sweden?

Regarding OpEx, we saw a reduction organically due to currency and the divestment plus some underlying cost reductions. We continuously work on this. The inflation we discuss revolves around people. Underlying salary increases will persist, and we need to find efficiencies. We operate under the assumption of a flat RAN market and continue improving where possible. We have ongoing restructuring primarily in the Swedish area, but also elsewhere. This work will continue in the coming quarters.

But these measures should show more effect in the second half of the year then?

Yes, the ones we announced today and in this quarter will show more in the second half of this year and into next year. Previous measures are already visible, and we will continue this path.

It typically takes longer to see these effects in the numbers than anticipated. Theoretically, we expect to see it in Q2 or Q3, but there will be some delay. Therefore, some costs might not exactly correlate with reducing employee numbers due to timing, but you'll see progress after the second half and into next year.

The next question comes from the line of Andreas Joelsson, DNB.

Following up on the COGS question, though you noted headwinds from component prices, you've managed to increase the gross margin in Networks recently. What other areas within costs could help offset increasing component prices?

Thanks for the question, Andreas. One of the most important levers is working on prices. We continuously focus on product substitution, delivering products that perform the same but at a lower cost. We've shown success with the next generation ASICs coming soon. Additionally, we've significantly reduced costs in service delivery, and I think more can be done. While it doesn't come easy or for free, we have several levers available to sustain healthy gross margins due to our experience managing past variations in component prices. Our ambition is to continue doing this.

The next question will come from Richard Kramer at Arete.

Borje, can you elaborate on the early stages of physical AI and how greater mobile connectivity could enhance group sales growth? Will data center AI spending significantly impact your revenue stream?

While we won't see direct sales from data center expansions now, our exposure to AI emerges from applications as inference plays an important role. We're not frontrunners in the AI surge, but connectivity will likely become a key traffic driver due to broader network use cases as AI evolves. Additionally, AI demand in enterprises is rising, especially among industrial firms seeking wireless and network API solutions. Thus, rather than direct data center exposure, we will benefit from the overall migration of applications towards AI.

Next question is from Felix Henriksson at Nordea.

It’s good to see Cloud Software and Services EBITA margin expand to around 12% on a 12-month rolling basis. Is there any reason why margin expansion in this segment shouldn't continue, given that growth is led by margin-accretive 5G core demand?

It's a valid question. Our aim is to stabilize a double-digit margin and continue from there. Just remember that cloud software is also connected to a flat RAN market. Nevertheless, underlying growth is manageable. We are positioned well and working towards that, guiding quarter by quarter, as you know. We are currently at a stable level in a good way for the company.

The next question comes from Ulrich Rathe at Bernstein.

Lars, you mentioned immunizing margin against foreign exchange moves. How does that play out specifically? Are you still benefiting from hedging that may roll off and create a headwind if forex rates remain unchanged?

We need to differentiate between gross margin and EBITA margin here. On gross margin, we're quite balanced in currency baskets, but we're more exposed on the OpEx side with the Swedish SEK ratio. If major changes occur, expect EBITA to be more influenced than gross margins. Regarding hedging, we have some but at low levels now, which won't significantly impact our future outlook.

The next question is from Sandeep Deshpande at JPMorgan.

With noticeable weakness in North America, do you see significant upgrades outside North America in 5G and 5G core? Could this growth compensate if North American growth doesn't strengthen in the next few years? Historically, markets outside North America have been slower to adopt next-gen technologies like 5G. What is your current assessment of this?

That's an excellent question. While North America has been the front-runner market, even there, not all have fully migrated to 5G SA yet. The only market fully 5G SA is China currently. Other operators are focusing on migrating towards 5G SA and 5G advanced, but it's still a work in progress. Statistically, maybe a quarter have some sort of 5G SA, with fewer at scale. This represents a major opportunity for our industry. It creates a potential upgrade cycle for us and operators can begin offering differentiated services like network slicing with 5G stand-alone. To prepare for 6G, they need to transition from 5G non-standalone to 5G advanced. While many haven't transitioned yet, they eventually will, providing insightful opportunities for us during these upgrades. We've invested in positioning ourselves well on 5G core, and now we're starting to see growth from that.

The next question is from Daniel Djurberg at Handelsbanken.

I was impressed by the network gross margin given the geographical mix with large deployments in India and growth in LatAm. If so, should we expect more coverage and hardware deployment in the second half in India and Japan, which would support gross margins, even considering rising costs?

While we previously focused on coverage and capacity, our aim is to reduce dependence on those aspects. What we've tried to do is minimize reliance on those factors as we believe that blending software sales with hardware is becoming less critical going forward. While there may be a bit of added capacity, it's not significantly impacting our overall profile.

The outlook for Q2 for Networks is 49% to 51% gross margin, and we have a more stable profile now based on product deliveries and market mix we foresee. This signals stability.

The next question is from Sebastien Sztabowicz at Kepler Cheuvreux.

Regarding the defense market opportunity, you've mentioned a $10 billion market potential. Can you clarify when you expect those opportunities to materialize?

I believe the opportunity emerges more in the near term. From my perspective, we manage to showcase strong customer interest and readiness for AI applications in modern warfare where communication networks are crucial. While it's difficult to pinpoint exact timing, I believe we could start seeing significant opportunities materializing within the next 9 to 18 months, with scaling observed over two to three years. The reception from customers thus far has been positive.

The next question is from Sami Sarkamies at Danske.

Could you elaborate on your current operator agreements and whether they allow for price increases amidst rising input costs? Are rising energy costs impacting your operators and their investment plans for the year?

As you know, it varies by contract renewal with customers, but there's an opportunity for negotiations given these exceptional times. Regarding rising energy costs, they influence the total cost of ownership where our products can drive down TCO. We haven't seen significant impacts yet, but if high energy prices persist, it could affect investments. Historically, our customers' revenue base remains stable and resilient.

You're correct and it reveals an ongoing focus on energy efficiency during our discussions. This leads to operators migrating to the latest technology for reducing costs, phasing out old tech, and considering moving to 5G and 6G. This energy focus results in a behavior shift toward next-gen solutions that help reduce processing costs.

Moving on to the next question, from Oliver Wong at Bank of America.

Can you discuss logistics and transportation costs in light of global geopolitical events? How do these expectations compare with rising memory costs' potential headwinds?

We've seen some impacts from logistics and transportation, but overall, they represent a limited portion of our costs. In Q1, additional costs arose from rerouting due to the Middle East conflict, but our flexible supply chain allowed us to deliver to our customers. Our well-distributed supply chain has been effective in managing disturbances, as proven during the pandemic and with tariff challenges.

While it's true we experienced disruptions, our distribution hub in the Middle East enabled us to mitigate fully by leveraging our flexible supply chain. We'll continue to focus on managing and monitoring everything effectively.

We have time for one final question this morning from Daniel Djurberg at Handelsbanken.

Latin America witnessed good growth in Networks this quarter, despite tough competition. Can you provide any examples of this and how we should consider tough markets like Latin America, Sub-Saharan Africa, and Eastern Europe with Chinese competition?

I'm hesitant to go into specifics due to competitive sensitivities, but the Chinese competitors are indeed strong. We feel our products perform well compared to them, as we frequently excel in performance tests. By focusing on real-world performance over lab trials, we know we can prevail in regions like Latin America, or Africa, and in Southeast Asia, we are capturing market share.

Thank you. This concludes the Q&A session. Thank you for joining us, Borje and Lars.

Thank you.