Ericsson's AI Story Meets a Component Cost Reality Check

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Ericsson delivered a solid second quarter, with adjusted gross margin rising to 48.4% and core profit beating expectations. But the good news came with a warning label. Sales fell, its key networks business weakened in North America and Europe, and AI-driven demand for chips is pushing up component costs. CEO Börje Ekholm is leaving on a respectable note. His successor inherits a tougher question. Can Ericsson turn AI from a cost problem into a growth engine?

Ericsson reported second-quarter sales of SEK 52.7 billion (about $5.5 billion), down 6% from a year earlier and below market expectations.

Organic sales fell 1%, mainly because last year's results included a one-off boost from an intellectual property settlement. Three of Ericsson's four market areas still grew organically, but the headline sales trend remained soft.

Adjusted gross margin was 48.4%, slightly above last year's 48.0%, helped by disciplined execution and improved margins in Mobile Networks. Adjusted EBITA was SEK 6.9 billion, with a margin of 13.1%, almost flat from a year earlier.

Net income fell to SEK 4.1 billion from SEK 4.6 billion, while diluted earnings per share dropped to SEK 1.22. Free cash flow before mergers and acquisitions fell to SEK 0.4 billion from SEK 2.6 billion.

The networks business stayed under pressure. Organic sales declined as North American operators continued digesting earlier 5G investments and European modernization projects wound down. Ericsson also warned that network margins could fall in the third quarter because of higher rollout volumes and component cost inflation.

The company returned SEK 8.2 billion to shareholders during the quarter, including SEK 3.2 billion in share buybacks, supported by a net cash position of SEK 59.8 billion.

Ekholm will step down at the end of September after more than nine years as CEO. Per Narvinger, currently head of networks, takes over on October 1.

Ericsson is trying to tell investors a story about the next network boom. The spreadsheet is still talking about the last one.

The company has spent years cleaning itself up after margin pressure, restructuring and patchy telecom spending. It has become more disciplined, more cash-conscious and more focused. That showed in the quarter. Margins held up. Cloud Software and Services improved. The balance sheet stayed strong enough to fund buybacks.

But telecom equipment is still a cyclical business hiding inside a strategic technology story.

The problem is that 5G investment has cooled in the markets Ericsson cares about most. North America was an early 5G adopter, which helped Ericsson when operators were upgrading aggressively. Now those same customers are spending less. Europe is not filling the gap fast enough because some modernization projects are finishing and telecom operators remain cautious with capital spending.

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That leaves Ericsson in an awkward middle phase. It has better margins than before, but not enough top-line momentum. Investors can respect cost discipline. They usually pay more for growth.

AI complicates the picture. Ericsson wants to position itself as a winner from AI-driven connectivity, physical AI, defense communications and smarter mobile networks. If AI moves from data centers into factories, cities, drones, vehicles and industrial systems, mobile networks will need to be faster, more reliable and more intelligent.

Ericsson even showed off AI-enabled drone sensing and tracking using existing cell towers at a Texas stadium during a major global sporting event. That is exactly the kind of example management wants investors to remember. Networks are not just pipes. They can become sensing platforms, automation layers and physical-world AI infrastructure.