Prepared remarks
Hello, everyone, and welcome to the presentation of Ericsson's Third Quarter 2025 Results. Joining us by video today is Börje 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. And in order to ask a question, you'll need to join the conference by phone. Details can be found in today's earnings release and on the Investor Relations website. Please be advised that today's call is being recorded and that 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 the annual report. I'll now hand the call over to Börje and Lars for their introductory comments.
Thanks, Daniel, and good morning, everyone. A big thank you for joining us today. So we delivered a strong Q3 with continued expansion in our EBITA margin despite the FX headwinds. I would say that reflects our execution against both operational and strategic priorities over the last couple of years. We're optimistic about the growing demand for advanced mobile connectivity as AI is starting to be rolled out. By structurally improving our cost base, we have positioned Ericsson to deliver resilient margins in the current market backdrop, which will give further benefits from improving operating leverage when growth comes back and actually comes into reality. Beyond operational improvements, of course, we focus on technology innovation, which positions us well for the next key driver of our industry, the broader adoption of AI. As AI workloads move to the edge, demand on the network will increase significantly.
These AI applications and devices will require wireless technology, placing new demands on connectivity, such as ultra-low latency, high dependability, guaranteed uplink, and very high security. So best effort connectivity—think of that as Wi-Fi, 4G, and 5G non-standalone—will simply not be enough. To cater to these new types of demands, operators will need to invest in and migrate to 5G standalone networks and later, of course, migrate into 6G. Their success here will depend on high-performing programmable networks, and here, Ericsson is a leader. We're also seeing some front-runner operators now starting to realize new monetization opportunities of network slices as well as efforts to provide differentiated connectivity to different segments and types of applications. Let me move on to some key financial and strategic takeaways before Lars dives into the numbers. Organic sales declined by 2%, but we saw growth in 3 out of 4 market areas with only the Americas reporting reduced sales following a particularly strong delivery in Q3 last year.
FX continues to be a headwind, and we had a negative year-over-year impact of SEK 4.2 billion this quarter. As mentioned, we saw positive development in our margins. Gross margin came in at 48.1%, and we delivered another 3-year high EBITA margin of 14.7%, excluding the capital gain from the iconectiv side, and this is now starting to approach our long-term target. The margin expansion reflects actions we've taken over the last years to increase operational excellence and efficiency, including the work we've done on our cost base. Over the last year, we've reduced our headcount by some 6,000, leveraging new ways of working, and that, of course, includes AI. As we plan for a flattish market also going forward, we will continue our cost measures at levels similar to what we've done in previous years. The effect of actions we've taken over the past years is now flowing through the P&L and establishing profitability at the new level.
Our continued focus on cost management will provide incremental benefits going forward, but it will also give operating leverage should the market improve. We ended the quarter with an elevated cash position driven by strong recurring cash flow, but also, of course, the iconectiv sale. As a result, we see scope for increased shareholder returns through extra dividends and/or share buyback programs. The Board will revert with a proposal in time for the AGM, which you know is the practice in the Swedish governance model. In parallel with strengthening the company's operational capacity, we're continuing to execute our strategy to capture a bigger share of the value created by connectivity. Let me expand on that a bit further. In our core mobile infrastructure business, we signed new customer agreements in the strategically important Japanese market following our recent R&D investments. Japan is one of the countries with a strong industrial base in areas like automation and has one of the densest networks that have yet to build out 5G coverage.
We see this as a key market going forward. We also increased our share in the U.K. with an 8-year partnership with Vodafone-3 to supply a significant majority of mobile networks and the entire core network. This morning, we announced a 5-year strategic agreement with Vodafone in Europe for programmable networks, where we remain their primary vendor with stable market share. New monetization opportunities are needed to drive more network investments by our customers within the telco market. We're seeing good development in fixed wireless access, where customer satisfaction is typically higher than for fiber due to the ease of use of cellular or wireless technology. In the quarter, we announced a contract with Bharti Airtel to support their fixed wireless access rollout with Ericsson's core network portfolio. We're also seeing good traction in mission-critical areas, including defense. We're taking important steps in our strategy to expose the capabilities of the networks through APIs, which is a key opportunity for us to capture more of the value created on top of the networks.
As you know, our joint venture with major operators for network APIs closed this past quarter. Revenues remain small, but we're seeing uptake in Vonage's API business, particularly in areas like fraud protection, as well as in industrial applications. Today, we already have applications live in the market. In Vonage, we're expanding our ecosystem partnerships with AWS and adding marketplace presence and product integration. Now, let me comment further on market development we saw in Q3. In market area Americas, sales declined by 8% year-over-year with declines in both North and Latin America. This follows a very strong Q3 delivery period in 2024, where we had high deliveries to several large customers. Latin America remains a competitive market with overall low investment levels. Sales in Europe, the Middle East, and Africa grew by 3% year-over-year, but within the region, we saw very strong development in Africa, partly driven by new 5G launches in Egypt and Morocco.
In both the Middle East and Europe, sales have declined as European customers continue to be cautious with investments. In Southeast Asia, Oceania, and India, sales increased by 1% year-over-year, with India maintaining low investment levels but growing quarter-over-quarter. We saw a decline in networks due to low network investment levels and stiff competition in Southeast Asia. Cloud software and services, however, saw an increase in sales. Lastly, sales in Northeast Asia increased by 10%, driven by higher network investments and deliveries in Japan. We were awarded new agreements with customers in the Japanese market, including enhancements to SoftBank's 5G SA network. We've clearly increased our market share. Overall, we continue to have good discussions with all our customers in Japan. With that, I hand over to Lars to go through the financials in more detail.
All right. Thank you. Net sales in Q3 totaled SEK 56.2 billion, with organic sales declining 2% year-on-year. Most regions grew, but North America declined, mainly reflecting tougher comparisons with a high period of customer investments last year. At the same time, reported sales decreased by 9%, impacted by a negative currency effect of SEK 4.2 billion. Taking a look at IPR performance, revenue declined by SEK 0.4 billion year-over-year, now standing at SEK 3.1 billion for Q3. It's worth noting that the last year's quarter included retroactive revenue, skewing comparisons slightly. The run rate coming out of Q3 is still around SEK 13 billion. In Q3, adjusted gross income was SEK 27 billion, including a currency headwind of around SEK 2 billion. We saw an improvement in our adjusted gross margin, reaching 48.1%. This positive development resulted from our cost reduction measures and operational excellence in both Networks and Cloud Software and Services.
Looking at gross margin sequentially, we held stable even though we lost a temporary boost from the Q2 IPR settlement. Excluding IPR, the improvement was around 2 percentage points. In Networks, this benefited from organizational effectiveness in the market areas with well-planned and executed service delivery. This also helped manage supply effectively and optimize inventory. In Cloud Software and Services, the improvement mainly came from services, where we are continuously improving our delivery performance. On the cost side, we made steady progress. Operating expenses, excluding restructuring charges, dropped to SEK 19.3 billion, around SEK 2 billion lower year-over-year. Of this, about half came from our cost initiatives, with the rest mainly from currency. Excluding the iconectiv gain, adjusted EBITA came in at SEK 8.2 billion, up by SEK 0.4 billion, including a negative currency impact of SEK 1.2 billion.
The EBITA margin was up around 2 percentage points to 14.7%. This improvement is due to the good progress we’ve made in optimizing operations and lowering operating expenses. Cash flow before M&A was SEK 6.6 billion, driven by earnings with net operating assets broadly stable. Let’s move to the segments. In Networks, sales decreased by 11% year-over-year to SEK 35.4 billion with a negative currency impact of SEK 2.8 billion. Organic sales decreased by 5%. We saw organic growth in market area Northeast Asia, driven largely by Japan, as Börje already mentioned. Europe, the Middle East, and Africa also grew, driven by Africa. However, sales declined in market area Americas and in Southeast Asia and India. Networks adjusted gross margin increased to 50.1%, benefiting from cost reduction actions and operational efficiencies despite changes in market and product mix. Looking at the rolling 4 quarters, adjusted gross margin reached 49.9% and stabilized at this new level.
Adjusted EBITA in Networks decreased by SEK 0.9 billion to SEK 7.2 billion, including a negative currency impact of SEK 1.1 billion. The EBITA margin of 20.3% remained stable compared to last year. Turning to Cloud Software and Services, sales increased by 3% year-over-year to SEK 15.3 billion, including a negative currency impact of SEK 0.9 billion. Organically, sales grew by 9%, primarily driven by higher core sales across all market areas. Sales growth was helped sequentially by a softer Q2 as well. Adjusted gross margin came in very strong in the quarter at 43.6%, an improvement of 5 percentage points compared to last year. This was due to continued focus on automation, efficiency, commercial discipline, and delivery performance. The rolling 4 quarters adjusted gross margin reached 41.3%, a new high level. Adjusted EBITA increased to SEK 1.9 billion with a margin of 12.5%, supported by higher gross income, lower operating expenses, and effective implementation of our strategic initiatives, including AI, automation investments, and our commercial discipline.
In Enterprise, sales decreased by 20% impacted by divestments and currency. Organic sales were down by 7%. The Global Communications platform declined by 9% due to the decision to scale back activities in some countries last year. The financial impact of this is now largely behind us, so we expect Enterprise sales to stabilize on an organic basis in Q4. Adjusted gross margin declined to 51.6% due to the iconectiv divestment. Margins improved in both the global communication platform and enterprise wireless solutions. Taking out the contribution from Aduna and iconectiv, which were divested in the quarter, adjusted EBITA landed at minus SEK 1.1 billion. Turning to free cash flow, which was SEK 6.6 billion before M&A, a decline from SEK 12.9 billion in Q3 2024 due to cash flow boosts from a reduction of operating working capital driven by large-scale rollout projects and lower inventories.
Operating cash flow was SEK 7.9 billion in the third quarter this year, driven by earnings with net operating assets relatively stable. Net cash increased by SEK 15.8 billion compared to last year, of which around SEK 10 billion was from M&A. Net cash has now reached SEK 51.9 billion. Next, I will cover the outlook. The outlook assumes stable exchange rates and no changes in tariffs. For Networks and Cloud Software and Services, we expect Q4 sales growth to be broadly similar to the 3-year average quarter-on-quarter seasonality. As mentioned before, we expect Enterprise sales to stabilize year-over-year on an organic basis. As for Networks' gross margin, we expect the adjusted gross margin to be in the range of 49% to 51% for Q4. Restructuring charges for 2025 are expected to remain at an elevated level, and with a flat RAN market, cost management remains an important lever for next year.
Okay. Thank you, Lars. Our Q3 report highlights our laser focus on both strategic and operating priorities. Our strong results reflect the actions we've taken to structurally improve our business in the past few years. This includes both the work we've done to improve our cost base and the way we run the business with greater operational efficiency and commercial discipline. The results of these efforts are now clearly visible in our P&L, and we expect them to continue supporting performance going forward. On the commercial side, we continue to strengthen our competitive position in mobile networks, and we're seeing good traction in key markets. This reflects our technology leadership and the strength of our portfolio, most recently reconfirmed by both Gartner and Omdia. With programmable high-performance networks, our customers are well prepared for growth in AI applications, having the best network for AI traffic.
Our Open RAN-ready portfolio includes over 130 radio models, and our future-proof, hardware-agnostic software architecture that is AI native supports both our own silicon and third-party CPUs and GPUs and is already integrated with more than 10 third-party radios. To put Ericsson on a growth trajectory, we're executing on our strategy to expand the monetization opportunities of the network. Here, we are taking important steps, including our work in fixed wireless access and mission-critical segments. We're also exposing network features to developers through network APIs to drive innovation, making it possible for Ericsson and our CSP customers to capture an increasing share of the value created from connectivity, which has, so far, been predominantly going to hyperscalers and over-the-top players. Creating new use cases and markets takes time, but we're moving from proof of concept into commercial deployment.
This is reflected in our Enterprise segment, which we expect to stabilize in Q4. We will continue to invest in technology leadership to ensure that Ericsson is leading in both its core mobile infrastructure business, having the best network for AI and 6G, and development of new use cases and applications of wireless networks. Looking ahead, we expect AI applications and devices to increasingly be the key driver of further investments in the networks. At the same time, we're facing a dynamic external environment with geopolitical uncertainty and a RAN market that has been flat for the last couple of decades. Thus, we continue to take actions to structurally improve our business through rigorous cost management, leveraging AI to change internal operations. This way, we ensure that Ericsson will continue to succeed across varying market conditions. Before we turn to Q&A, I'd like to thank all my colleagues for their hard work in making these results possible. With that, let's open up for Q&A, and back to you, Daniel.
Questions and answers
Thanks, Börje. We'll now move to the Q&A section of the presentation. Operator, we're ready to open the line for the first question. The first question this morning will come from Andrew Gardiner at Citi.
I wanted to follow up, Börje, on the point you were making about the level of sustainable margins that you're achieving at the moment. Another quarter where you're at the top end of the guidance range that you provided back at Q2. Historically, whenever Ericsson would talk about gross margins, particularly in discussions around the financial market, it was all about mix, specifically regional mix. Over the last year or so, that regional mix has been dynamic, but you're still delivering consistent gross margins quarter after quarter. Should we be focusing less on the regional dynamics as we look into 2026 and beyond? If so, can you help us understand what within the business, particularly around the cost-cutting and product costs, has allowed you to reach this sustainable level of gross margins regardless of whether the U.S. is up or down or India is up or down? More detail there would be appreciated in thinking towards next year.
Thanks, Andrew. Great question. If I start, maybe Lars can fill in, but the reality is we've been working over a number of years to structurally improve a couple of things in the business. One is the way we operate our supply chain. COVID disturbed it a bit, but those improvements have been in place for a couple of years. In the last year, we've had a more COVID-free supply chain, which has helped. This is what you're now seeing come through. One of the key parts is also on service delivery, as we have improved how we operate internally by structurally reducing costs. All of these improvements take some of the mix dependency out. We still have a mix dependency on software, services, and hardware, but it’s less so geographic exposure. This is why, when you look forward, there is still some geographic mix dependency, but the underlying improvements are coming through in other areas. We still have more work to do on service delivery to leverage automation better, and we can absolutely reduce OpEx even further. You should see that already materializing, but there are still areas we can improve on. Lars, do you want to add anything?
I think you covered the full P&L pretty well. As highlighted, it is really the product mix in the market that can vary between quarters, depending on the share of software, hardware, etc., driving customers to more advanced products with margins. That is also making it more even between different regions.
Thanks for the question, Andrew. Moving to the next question, please.
Börje, you mentioned Edge AI is a key driver for future network investments. Are you already seeing operators act on this, or is this more of a future consideration?
Yes. If you look at it so far, most AI investments have been in the data center for developing and training models. We see the market moving towards inference, which is going to be latency-sensitive and will start to move to the edge. I wouldn’t point to specific operators having made those investments yet, but we’re starting to see certain applications demanding edge compute and edge AI. I’m hopeful that this will come through. It won't be next quarter or in Q1 or Q2. Capital going into big data centers will continue, but as applications start to pick up, the need for edge compute will become clear. Consider that the next step has been smartphone-centric, but we may well move into other types of form factors, like AI glasses, requiring low latency performance to be useful. As we see this coming through, and some device launches require a new form factor and capabilities in the network, I believe it’s beginning, but we remain prudent in our market outlook, adjusting our cost structure accordingly. When demand arrives, we’ll be well-positioned to capture it through our technology leadership.
Thanks for the question, Erik. Moving to the next question, please.
On Cloud Software and Services, your business has accelerated quite substantially in the third quarter with the ramp of 5G Core deployments. Do you see 5G Core continuing to pick up in Q4 and into 2026, potentially triggering upgrades to 5G advanced in the coming quarters? Could this positively impact your mix and gross margin?
Do you want to take this one, Lars?
In terms of financials, I think we see good development in Cloud Software and Services, including core, driving market demand. As mentioned, Q2 was a bit slow; thus, we had a boost in the growth rate for Q3. We anticipate continued good development in managed services and Cloud Software and Services, including core where we’re well-positioned. It’s crucial for our customers to focus on maintaining stable, resilient networks. I think we see a good position going forward.
It's important that operators migrate to 5G stand-alone, as this is required to deliver 5G capabilities. Currently, only about 1 in 5 operators have upgraded. A few big operators have solid 5G SA networks and are realizing additional revenues from network slices and differentiated offerings. They must complete this migration for us to benefit from it both in mid-band coverage and 5G Core. Our position in 5G Core is strong, and we should be optimistic about the prospects as this migrates over the next few years.
Thanks for the question, Sébastien. Moving to the next question, please.
I have a question on cash flow. Börje mentioned a recurring cash flow, a phrase I haven’t seen before for Ericsson. Can you explain what you mean by recurring cash flow? Is it due to a better cost base making cash flow less volatile?
I can start. The key aspect is that we are a project business. We've put efforts into improving cost base, so we have less exposure. We're also gradually changing our sales model to increase the share of software revenues and advance services. This combination allows us to feel more comfortable about the stability of our cash flow generation going forward, hence, talking about recurring underlying ability to generate cash flow.
Thanks for the question, Andreas. Lars, anything to add?
No, I think that comment is important. While we can have swings within 1 or 2 quarters in our project business, we have been working actively on more solid cash flow and reducing volatility. That work has continued for some time, and we are seeing results.
Thank you. Moving on to the next question, please.
Can you hear me? I wanted to address your seasonal growth guidance for networks and CNS business into the next quarter while flagging increased uncertainty. Does this mean that increased uncertainty could affect this growth in Q4? If so, what are the areas where this uncertainty stems from?
Regarding guidance for the fourth quarter, this is what we see now. Our business is back-end heavy in the quarter, but this is still what we see. Increased uncertainty doesn’t necessarily refer to the quarter itself but pertains more to long-term aspects. Discussions around tariffs could potentially impact us and our customers.
So if uncertainty diminishes, would that mean you could do better than normal seasonality in Q4?
No, that is not what we are saying. We are not looking to adjust our growth projections in that way.
Thanks, Sandeep. Moving to the next question, please.
Congratulations on a stable report. Regarding your recurring changed business model in Cloud Software and Services, could you share the percentage of revenue that you consider being recurring, particularly part of the 5G Core revenues?
We don’t discuss specific percentages, but we continuously move into more recurring revenue and a model connected to utilization, which increases as network utilization grows. That represents a shift from fixed-price models we used historically.
Thanks, Daniel. Moving to the next question, please.
I have a question on OpEx. Could you provide an update on your current thinking about OpEx evolution? I believe you expected better than normal H on H for the second half, but Q3 looks quite strong. Any thoughts on OpEx for the next quarter and its evolution longer term?
Regarding Q4, we had quite a significant impact last year linked to incentive provisioning. This affected the numbers. However, it’s generally normal seasonal behavior with a bit of an uptick expected from Q3 to Q4. For the future, as mentioned, we are operating in a flat RAN market, which informs our planning assumptions and requires continuous cost management to combat inflation, including salary increases.
Thanks for the question, Jakob. Moving to the next question, please.
It’s about the North American market. There’s increased appetite for mobile spectrum as seen with AT&T's acquisition from EchoStar. When discussing with clients in North America, how do you expect this to translate into RAN equipment demand in the coming years?
Thanks for the question. Spectrum is the lifeline of our industry and is crucial for it to function. The strategies of our customers and how they deploy that spectrum are best answered by them. Nevertheless, I can say that spectrum increase typically drives market CapEx because it allows for greater capacity and improved network performance. When one operator expands their spectrum, typically, others need to invest more to keep pace.
Thanks for the question, Felix. Moving to the next question, please.
I wanted to latch on to an earlier question regarding OpEx development. R&D spending is down 12% year-on-year, highlighting a 3-percentage point effect. Could you comment on measures to ensure you’re not underinvesting? Underinvestment in this industry can lead to competitive issues.
I can comment on the financials first. Remember the currency impact on OpEx. In the Networks area, R&D spending, taking out FX, is quite stable. In Cloud Software and Services, we've worked to prioritize parts of the product portfolio, having had extra costs in the transition within R&D last year. These cuts shouldn't be viewed as major reductions.
To clarify, we needed to focus the portfolio to turn around Cloud Software and Services, resulting in exiting specific areas. This has helped R&D spend without impacting our output. The geopolitical situation has required redistributing resources, which previously resulted in duplicated R&D spending, and this is now eliminated. We will not jeopardize technology leadership; we gauge ourselves against the Chinese competition.
Thanks, Ulrich. Moving to the next question, please.
You've had another quarter with year-on-year growth and improving margins in Cloud Software and Services. The rolling 12-month margin is around 8%. What levels should we expect in the medium term? Also, can you comment on your expectations for 5G stand-alone matching with 6G deployment?
We aim for a solid double-digit margin in Cloud Software and Services as a first step. In this quarter, growth has contributed to margin leverage along with continued cost management, resulting in a good foundation for the future.
The discrepancy between 5G stand-alone and 5G non-stand-alone has stemmed from market conditions allowing operators to sell 4G as an established business model to their advantage. This led to less urgency around upgrading to 5G SA. However, the critical new capabilities, like network slicing and low latency, will compel operators to upgrade to 5G SA over the next few years. The transition paves the way to 6G and helps establish necessary monetization models.
Thanks for the question, Simon. Moving to the next question, please.
Could you clarify if there were any likely positive onetime factors affecting your strong performance in Cloud Software and Services? Should we assume that the 8% run rate from the previous four quarters can be sustained over the long term?
In Q3, the performance in Cloud Software and Services was fairly normal without significant onetime factors affecting results. Regarding the future run rate, while we cannot provide specific segment margins, the robust margins we saw this quarter offer a good basis moving forward.
One notable factor that influences margins is our IPR agreements, which did not affect this quarter.
Thanks, Sami. Moving to the final question, please.
Can you talk through what you mean by a solid net cash position? Is it in relation to a portion of your OpEx or working capital demands? Can investors assume Ericsson won’t deploy the SEK 52 billion towards M&A after your experience with Vonage?
Our net cash position serves as a foundation to maintain R&D and technology leadership. Financial strength is crucial for our long-term contracts with customers. As we manage our excess cash following the recent divestment of iconectiv, we're evaluating options for extra dividends or buybacks, with proposals coming at the Annual General Meeting.
We have the product portfolio we need without significant additions planned. There might be geographical bolt-on acquisitions, but no major ones required.
Thanks, Richard. We have time for one brief final question. So one more question, please.
I’m interested in an update on Germany. With movements to swap out Huawei and ZTE, there's a 2029 deadline, but resistance from German telcos. Can you comment on that?
You're correct. There is no requirement to replace Chinese vendors by 2029; thus, progress has been slow. There has been little movement on this issue.
Thanks, Rob. Thanks to everyone for joining us. That concludes the conference call today.