Ericsson's revenue declines by 6% due to rising component costs and a decrease in licensing income.

      Ericsson reported SEK 52.7 billion in revenue for the second quarter, a decrease of 6% compared to SEK 56.1 billion a year prior. This decline was primarily due to reduced patent licensing income and currency fluctuations, which outweighed growth in some regional markets. The Swedish equipment manufacturer released these figures on Tuesday morning.

      Conversely, profit showed an upward trend. The adjusted operating profit reached SEK 6.52 billion, approximately $672 million, excluding restructuring costs, surpassing the SEK 6.42 billion that analysts surveyed by LSEG had anticipated. The adjusted gross margin improved to 48%, a two percentage point rise when last year's one-off IPR settlement is excluded.

      The Networks segment, still the largest, faced the most significant setback, with revenue dropping 8% to SEK 33.0 billion, primarily due to the patent licensing shortfall rather than hardware demand, which the company indicated remained generally stable year over year once IPR impacts were removed.

      Cloud Software and Services increased by 3% to SEK 14.7 billion, benefiting from core network upgrades in Europe, project deliveries in the Middle East and Africa, and increased software sales in Northeast Asia. The Enterprise segment saw a 19% decrease to SEK 4.5 billion, which included SEK 1.0 billion related to the absence of iconectiv, divested in the previous year, creating a gap in year-over-year comparisons.

      The chief executive remarked, “We took action to mitigate component cost inflation. As the impact builds in the coming quarters, we will continue to implement internal measures and pricing actions to help offset the effects.” He also cautioned about potential pressure on the adjusted gross margin in the Networks segment for the third quarter, as higher volumes of network rollout projects are expected. Essentially, this implies that the vendor is informing its customers politely and in advance about forthcoming price increases.

      Ekholm has been addressing this issue for two quarters. In April, when Ericsson narrowly missed first-quarter projections and adjusted EBITA dropped 20% year-over-year to SEK 5.6 billion, he highlighted rising input costs, specifically mentioning semiconductors driven in part by AI demand. There was no indication in the second quarter that this situation had improved.

      The memory shortage impacting the economics of budget smartphones also affects radio equipment, as Ericsson purchases a substantial amount of silicon. Competing with hyperscalers for the same wafers is a battle it cannot win on volume, leading it to focus on price instead—hence the use of the term “pricing actions” in communications.

      Geographically, the quarter showed limited growth. South East Asia, Oceania, and India was one of only three regions to report positive organic sales growth at 4%, yet reported revenue in that area fell 2% to SEK 5.4 billion due to currency effects. India accounted for 4% of global revenue, down from 8% in the first quarter, a variation that reflects the timing of projects rather than a significant downturn in demand.

      For the first half of the year, the region generated SEK 12.4 billion compared to SEK 12.7 billion a year earlier: reported revenue declined 3%, while organic sales increased 8%. The difference between these two figures highlights the influence of currency fluctuations.

      Ericsson did not specify how much of the overall decline was solely attributable to currency or how much of the licensing shortfall was related to the timing of patent deals as opposed to a fundamental decrease in the value of its portfolio. These inquiries typically receive clarification in the next call or may not be addressed at all.

      Overall, this does not alter Ericsson's trajectory for the year. The company continues to navigate the decline from its North American build cycle, maintains its investments in 6G research, and is preparing to relocate from Kista to a new campus in Stockholm set for 2028. It is a business currently in a slow phase of a long cycle, undertaking necessary cost-cutting measures, maintaining margins where possible, and passing the remainder along.

      The third-quarter results are expected in October, with particular attention on the guidance regarding Networks margin, which Ericsson has already indicated will worsen before it improves.