Ericsson: Sales declined. But the margins tell a different story.

The most important thing this report says is that Ericsson is performing well operationally, maintaining stable margins even as reported revenues decline. Group adjusted gross margin, which excludes restructuring charges to show the underlying profitability of each product sold, came in at 48.4%, increased to 48.0% a year ago. In a quarter where the top line declined, this  number shows that the business itself did not decline. (Source: Ericsson Q2 2026 Interim Report, published July 14, 2026.)

Reported net sales declined six percent, falling to SEK 52.7 billion from SEK 56.1 billion a year earlier. However, currency alone accounted for SEK 1.8 billion of that drop, and the remainder is almost entirely explained by a one-time patent licensing settlement that inflated last year's comparison. Strip those out and organic sales declined by only one percent. Three of the four geographic regions grew organically.

Cloud Software and Services, Ericsson's fastest-growing division covering core network software and managed services, deserves particular attention. Its adjusted EBITA margin, meaning earnings before interest, taxes, and amortisation as a percentage of sales — reached 12.4% up from 9.6% in the same quarter last year. This represents a significant improvement in a business that was essentially breaking even two years ago.

Net cash, the amount left over when you subtract all borrowings from cash and liquid securities on the balance sheet, stands at SEK 59.8 billion, up 66% year on year. That fortress position enabled SEK 8.2 billion in shareholder returns during the quarter alone, combining dividends and buybacks.

Free cash flow before M&A collapsed to SEK 0.4 billion in the quarter, down from SEK 2.6 billion a year ago. That is an 85% drop and, taken at face value, would suggest the business is burning through cash. It isn't. The entire shortfall traces to a deliberate inventory build of SEK 4.6 billion, with Ericsson stocking up components ahead of planned third-quarter deliveries. The company had already indicated higher Q3 Networks sales would exceed the three-year average seasonality. Inventories are a current asset, not cash lost. The year-to-date picture, SEK 6.3 billion in free cash flow against SEK 5.3 billion in the first half of 2025, confirms the underlying cash generation remains intact. (Source: Ericsson Q2 2026 Interim Report, published July 14, 2026.)

Dell'Oro, a research firm that tracks radio access network (RAN) equipment shipments, expects the global market to remain flat in 2026. This indicates a lack of growth , but also a lack of contraction. In a duopoly, this means that market share battles matter more than macro tailwinds. Ericsson leads Nokia in both adjusted margins and net cash generation, however Nokia has been more aggressive in positioning its cloud and AI software revenues as a growth catalyst. Ericsson's Cloud Software and Services margin trajectory is the clearest response to this competitive pressure. At 12.4% adjusted EBITA this quarter, this response is improving.

Two key factors will determine whether this quarter's operational resilience translates into a higher share price. First is component cost inflation. Management has addressed this issue explicitly and expects the Networks division's adjusted gross margin to land in the range of 48% to 50% in Q3. This is a step down from the 50.4% that the division delivered this quarter. How quickly Ericsson can offset that through pricing and procurement will matter. Second, the CEO transition. Per Narvinger will take over on September 30 from Börje Ekholm, who spend  nearly a decade rebuilding the company's credibility. While transitions at this level rarely go wrong immediately, they introduce strategic uncertainty that the market tends to price in with a discount until the new leader establishes a track record. ERIC B shares closed at SEK 112.75 on July 13, 2026. At that price, the question is whether investors are already paying for the upside in Cloud Software and Services, or if the margin momentum can continue to grow.