Ericsson (ERIC) Q3 2026 earnings review
Ericsson grows again, but chip costs will rise next year
Ericsson's network sales grew again and profit rose faster, but its chief executive expects higher chip costs next year. Sales from businesses it owned a year ago rose 7%, after a 1% fall in the spring, as operators in Japan and India took deliveries. New chief executive Per Narvinger said some customers bought early to beat price rises and that 2027 "could be such a transition period".
| Sales from businesses owned a year ago | +7% −1% last quarter |
|---|---|
| Operating profit excluding restructuring (adjusted EBITA) | SEK 10.1 billion +23% from a year ago, excluding last year's SEK 7.6 billion sale gain, by our math |
| Networks gross margin, excluding restructuring | 50.3% plan was 48–50% |
| Fourth-quarter outlook | New Networks gross margin 49–51%; sales about +2% from a year ago, by our math |
⚖️ Verdict: 🟢 Bullish
The story got better because growth came back while the margin held and costs fell. The bad news: early orders and a one-off royalty payment helped, and Narvinger says component costs will weigh on margins next year.
The question now is how much of the rising component bill Ericsson can pass on to operators. If customers accept higher prices as contracts renew, the margin holds; if they resist, the "transition period" means a lower margin for much of 2027. January's fourth-quarter margin and first 2027 outlook will tell.
🐂 Bull Case
Networks Sales Grew 9% and Profit Climbed Faster
Networks, Ericsson's largest business, sells the radios and software that carry mobile traffic and brings in two thirds of group sales. For most of the past two years its sales fell as operators spent less.
This quarter the segment grew 9% from a year ago, its first rise in six quarters, as operators in Japan and India took deliveries. Finance chief Lars Sandström said momentum "is translating into share gains and financial performance in strategic markets, for example, Japan".
- Networks sales: SEK 38.7 billion, up 17% from the second quarter
- Products (hardware and software): up 17% from a year ago; services: down 13%
- Operating profit excluding restructuring: SEK 9.0 billion, up 25%
- Margin on that profit: 23.1%, from 20.3% a year ago
Profit rose faster than sales because the mix moved toward products, which earn more than rollout services. But Sandström called one quarter "too short-term" to prove share gains, and some customers bought early to avoid price rises.
What to watch: Networks sales in the first quarter of 2027, after the seasonal year-end peak. Growth there would show the Japanese and Indian demand lasts beyond one delivery cycle.
Cost Cuts and Buybacks Lift Profit per Share
Ericsson employs about 4,500 fewer people than a year ago, and finance chief Lars Sandström said cost cuts are "mitigating wage pressures". Lower costs and fewer shares turned modest sales growth into a double-digit rise in profit per share, excluding last year's gain on selling iconectiv. The buyback programme is half used, so the share count keeps falling.
- Operating costs excluding restructuring: 31.4% of sales, from 34.4% a year ago
- Selling and administrative costs: down 1.9 points of sales
- Shares bought back this quarter: 49 million for SEK 4.8 billion
- Profit per share: SEK 1.77, up 10% excluding the gain, by our math
What to watch: operating costs in the fourth quarter, when seasonal spending usually rises. Costs near 31% of sales would show the cuts are lasting.
Positives This Quarter Didn't Test
Three standing positives got no new numbers this quarter, so they stay in the case as they were. Chief executive Per Narvinger discussed each one.
- AI traffic: Narvinger says AI agents will need slicing, but Ericsson does "not see it happening in volume yet"; a paid deal would move it.
- India: sales rose on project timing and India was 5% of sales, but Ericsson gives no growth rate; a rising share would move it.
- Mission-critical networks: Queensland picked Ericsson for its rail network, and Narvinger calls it "a very good business already today"; a revenue figure would move it.
🐻 Bear Case
Component Costs Will Lower Margins in 2027
Ericsson buys memory chips and other components whose prices are rising because AI data centres compete for the same supply. Its contracts with operators run three to five years, so it cannot raise prices quickly.
Chief executive Per Narvinger said the cost rise reaches the accounts next year, and that 2027 "could be such a transition period". "It will have dilution effect significant if we're not taking action," he told an analyst who asked for a number. The written outlook agrees: "component costs are a headwind to gross margin next year".
So far the margin has held. Networks gross margin excluding restructuring was 50.3%, above the planned 48–50%, because the mix tilted to products and royalty back payments helped. Those are one-quarter supports, and the fourth-quarter range of 49–51% also rests on mix. Narvinger says Ericsson "cannot absorb these costs", but finance chief Lars Sandström noted operators "are struggling with return on capital employed".
What to watch: the Networks gross margin range for the first quarter of 2027, due in January. A range starting below 49% would mean costs reach the accounts before the price rises do.
Early Orders and Stock Building Flattered the Quarter
Three things made the quarter look better than underlying demand. Finance chief Lars Sandström said some customers were "accelerating spend before price increase", though he called the effect "not super big". Royalty income included back payments for "previously unlicensed periods", with the cash "coming in incoming quarters primarily". And deliveries drew down orders customers had already paid for.
- Deferred revenue (cash received for work not yet delivered): SEK 40.5 billion, down 10% from June
- Inventories: SEK 35.4 billion, up 29% from a year ago
- Inventory days: 87, from 80 a year ago
- Free cash flow before acquisitions: SEK 4.9 billion, down 26%
The forward book did not grow with sales, so part of the growth came out of existing orders. Inventory grew because Ericsson staged goods for year-end deliveries and because higher component prices "are impacting inventories as well", Sandström said. Cash conversion still met the target, at 11% of sales over four quarters.
What to watch: inventories at year-end, after the fourth-quarter deliveries. A balance still near SEK 35 billion would mean the build comes from component inflation rather than timing.
Risks This Quarter Didn't Answer
Five standing concerns got no decisive reading this quarter. Each stays in the case as it was, with the reading that would move it.
- Enterprise losses: lost money again; Narvinger called profit there "absolutely a priority" but gave no date; a breakeven quarter would move it.
- GPU radios: Narvinger called Ericsson's own chips "an extraordinary asset" but is "not ruling out any other platform"; an operator choosing GPUs would move it.
- Latin America: sales fell again on rollout timing; Americas growth would move it.
- Legal: a fifth US Anti-Terrorism Act suit came in September; China's patent probe continues; a ruling on the first motion would move it.
- New chief executive: the structure changed, the targets did not, and buybacks after March 2027 went unmentioned; January's report would move it.
👓 Other Themes
Narvinger Reshapes Enterprise and Merges Asian Regions
Chief executive Per Narvinger's first structural move: Ericsson "will dissolve the business area" Enterprise Wireless Solutions. Private 5G and indoor products move into Networks, and the former Cradlepoint business stays separate under Yossi Cohen, who also runs the Americas. Vonage gets a new head with a cost brief. From January one Asia-Pacific market area replaces two, and the executive team shrinks. Ericsson gave no savings figure.
AI Software Adds 10% Capacity on Existing Radios
Narvinger's example of AI in the network is link adaptation, which sets how fast data moves between a radio and each phone. An AI model in its place gives "10% gain in spectrum efficiency", and three operators run it on "more than 60,000 base station". It runs on Ericsson's own chips in radios already deployed, so customers need no new hardware, and Narvinger wants to charge for it.
💲 Other KPIs
Royalty income rose 24% from a year ago, partly on back payments for periods when customers used Ericsson's patents without a licence. The recurring run-rate is about SEK 13.5 billion a year after July's smartphone-maker agreement. By our math the underlying quarter is near SEK 3.4 billion and the back payment about SEK 0.5 billion.
The software and services arm earned 12.8% on sales before restructuring, from 12.5% a year ago. Sales grew 3%, with faster project deliveries in Europe and the Americas. The margin has stayed in double digits in every quarter except the seasonally weak first one, and delivery performance improved.
The Enterprise segment, mostly Vonage's cloud communications business, lost SEK 0.5 billion, narrower than the SEK 0.8 billion loss last quarter. A year ago it lost about SEK 0.6 billion once we remove the iconectiv sale gain, by our math, so the yearly improvement is small. Narvinger wants efficiency measures and the new structure to speed the turn.
Cash minus debt rose 17% from a year ago and SEK 0.8 billion from June. Buybacks took cash out, but Ericsson raised a EUR 500 million bond in September ahead of maturities. Gross cash reached SEK 98 billion.
🔮 Guidance
New. The plan calls for the usual seasonal jump of about 17% from the third quarter. By our math that is SEK 45.3 billion, about 2% above last year's fourth quarter at the plan's exchange rates, which assume a weaker krona. Growth therefore slows sharply after this quarter. Networks beat its seasonal plan this quarter, +17% against the +1% it pointed to, but that followed a second quarter that missed.
New. The plan has the software and services arm following its usual year-end pattern, up about 29% from the third quarter. By our math that is SEK 20.4 billion, about 2% above a year ago. Faster project deliveries in Europe and the Americas lifted this quarter. The segment beat its seasonal plan, +7% against the +3% it pointed to.
New. The plan puts the margin at 49–51%, "benefiting from product mix", finance chief Lars Sandström said. The range sits one point above the one set for this quarter, which Networks beat. The margin has landed inside or above its range in six straight quarters, by about one point on average. If the pattern holds, the top of the range is the usual outcome.
Lowered. Ericsson now expects a 28% tax rate for the year, from 29% in July. Restructuring costs and provisions for settling tax matters keep it above last year's 25%. Those provisions also pushed the financial net to SEK -0.9 billion this quarter.
Unchanged. Charges stay high for the year. They were SEK 0.9 billion this quarter, after SEK 3.8 billion in the first quarter for the Swedish job cuts. The second half is running well below the first, as the plan implied.
Unchanged. The run-rate stays at about SEK 13.5 billion a year after July's smartphone and payment-terminal agreements. Ericsson signed further licences in automotive and point-of-sale this quarter but did not raise the figure.
Unchanged. Amortisation of acquired intangibles in Enterprise, mostly from the Vonage purchase, stays around SEK 0.4 billion a quarter. It was SEK 0.33 billion this quarter.
❓ Key Questions
How much of this quarter's growth was customers buying early?
Sandström said the pull-forward was "not super big" but gave no figure. Without it, readers cannot tell how much fourth-quarter and 2027 demand Ericsson has already booked.
How large is the 2027 margin headwind from components?
Narvinger pointed to server makers' memory costs as a reference but declined a number for a fourth straight quarter. The Networks margin range stays precise, so the size and the share of contracts repriced matter.
When does Enterprise stop losing money?
Narvinger made profit in Enterprise "absolutely a priority" and gave Vonage a new leader with a cost brief, but set no breakeven quarter.
Will the new chief executive keep the old financial targets?
Narvinger changed the structure on his first results day but said nothing about the group margin ambition. Nor did he say whether buybacks continue after the current programme ends in March 2027.
How much revenue do defense and mission-critical networks bring?
Narvinger named mission-critical networks "a very good business already today" and a growth area, but Ericsson still reports no revenue figure for it.