Ericsson's 28% profit beat arrives with a gross margin warning for next year

Organic sales of 59.5 billion crowns finished 4.1 billion above the 55.4 billion forecast ^[7][13], and operating profit finished 2.23 billion above its own ^[2][9]. If the extra sales had earned only the 17.0% average margin ^[6], they would explain about 0.70 billion of the profit beat ^[15]. The other 1.53 billion ^[16] had to come from costs running below what analysts modelled, or from the extra sales carrying a richer margin than the average, and the sources cannot say which. The comparison also has a flaw: the profit forecast is the mean of a poll that Ericsson itself provided ^[2], and the report does not say the sales forecast came from the same analysts.

Against last year, the cost line moves more, or rather the implied cost line does, since the figures reported are profit and margin. Year-earlier profit of 15.8 billion at a 28.1% margin ^[2][6] implies sales of about 56.2 billion crowns ^[14] and costs of 40.4 billion ^[17]. This quarter's 59.5 billion of sales less 10.1 billion of profit leaves 49.4 billion ^[18], a cost base up roughly 22% ^[19] on organic sales growth of 7% ^[7]. That is an estimate, because it assumes both margins were struck on reported sales. The report does not size the efficiency measures that Ericsson says helped offset the higher component costs ^[1].

"Looking ahead, the RAN (Radio Access Network) market is flat, geopolitical uncertainty remains elevated and component costs are a headwind to gross margin," Per Narvinger, the new chief executive, said in a statement ^[4]. He said components, not memory. The AI link comes from July, when Ericsson warned that rising memory chip costs, driven by surging AI demand, were putting it under pressure ^[5]. Joining the two is our inference, and a reasonable one. He also named gross margin, while the 17.0% figure is an adjusted EBITA margin ^[6], a lower line that also carries operating expenses. A quarter can beat on EBITA while gross margin is already thinner.

Sales in North America rose slightly, supported by project phasing ^[8]. Phasing is timing, and timing can reverse, so some of the sales beat may be borrowed from later quarters. Our view is that gross margin falls next year, as Ericsson itself warned ^[1]. It falls by less if memory prices ease or if efficiency savings grow as fast as component costs, and either would make us wrong.