Telefonaktiebolaget LM Ericsson (publ) Q2 FY2025 earnings call

Management Statement and Operational Highlights

• Delivered solid Q2 with organic growth of 2% and 3-year high in EBITA margin. Fifth quarter in a row of positive EBITA in Cloud Software and Services.
• Strength in Americas market with 10% y/y sales growth, while Europe, Middle East, Africa declined 1%, and other regions saw significant drops.
• Fixed wireless access has over 160 million subscribers. 5G stand-alone is crucial for differentiated connectivity, with customers offering service innovations like network slices.
• Increased investments in AI, with an AI factory consortium in Sweden. AI is a key driver for network traffic as applications move to the edge.
• Cost actions taken over the last year are flowing through the P&L, with OpEx down, and 6% reduction in employees while having organic growth.

Segment Performance

• Networks: Sales decreased by 5% year-on-year to SEK 35.7 billion, with a negative currency impact of SEK 3.1 billion. Organic sales increased by 3%. Adjusted gross margin was 49.5%, and adjusted EBITA increased to SEK 6.5 billion, with an EBITA margin of 18.2%.
• Cloud and Software and Services: Sales declined by 5% year-on-year to SEK 14.4 billion, with a negative currency impact of SEK 1 billion. Organic sales grew by 1%. Adjusted gross margin was 43.2%, and adjusted EBITA was SEK 1.4 billion, with a margin of 9.6%.
• Enterprise: Sales decreased by 14%, with organic sales down 6%. Adjusted gross margin increased to 54.9%, and adjusted EBITA was minus SEK 0.5 billion.

Guidance

• Networks gross margin expected to be in the range of 48% to 50% for Q3.
• Expect Networks Q3 sales to be below 3-year average seasonality, mainly due to higher IPR licensing revenue in Q2.
• Cloud Software and Services sales growth expected to be similar to average 3-year seasonality in Q3.
• OpEx expected to be similar in the first and second half of the year, with cost reductions gradually kicking in.

Risks

• Fluid geopolitical and trade environment impacting sales and market conditions.
• Intense competition in various market areas, including Latin America, South East Asia, etc.
• Uncertainty around tariff changes and their impact on margins and product mix.

Question and Answer

Q: About guidance on Networks gross margin, are you expecting to sign more deals helping the margin?

A: Lars Sandstrom said it's about product and market mix at hand, not related to IPR, more underlying margins.

Q: About India's weakness in Q3?

A: Lars Sandstrom said the pause in India is temporary, difficult to say when it will start coming back, so no high expectations for Q3.

Q: On OpEx trending, how is it looking?

A: Lars Sandstrom said OpEx level expected to be similar in first and second half, with cost reductions taking time to kick in.

Q: On tariff-related effects in Q3?

A: Lars Sandstrom said tariffs had a normal quarter, guided around 1 percentage point impact, expect similar levels going forward.

Q: Trends in North American market?

A: Lars Sandstrom said North America has good sales pace, with multiple customers showing good investment levels, and inventory levels fairly balanced.

Q: Impact of 5G stand-alone and AI on product mix?

A: E. Borje Ekholm said 5G SA is key for low latency, etc., and AI is fundamental for network operation and traffic growth.

Q: Opportunities in defense and mission-critical?

A: E. Borje Ekholm said defense and mission-critical are big growth opportunities with real-time application benefits.

Q: Measures for tariff mitigation?

A: Lars Sandstrom said preparing for supply chain changes but no big investment decisions yet, with a U.S. factory already built for flexibility.

Q: Confidence in gaining market share?

A: E. Borje Ekholm said focusing on key markets like U.S., India, Japan, with investments in R&D and manufacturing to strengthen position.

Q: Cloud Software and Services EBITA margin and IPR run rate?

A: Lars Sandstrom said Cloud Software and Services has strong underlying trend with double-digit EBITA margin midterm, and IPR run rate at SEK 13 billion, with arbitration impacting future run rate.