Swedish telecom equipment maker Ericsson beat profit expectations in its second-quarter results, but the company warned that the global build-out of artificial intelligence is raising costs for key components, even as demand for mobile network gear cools in North America.
Quarterly Results
Ericsson reported adjusted operating profit of 6.52 billion Swedish crowns on sales of 52.7 billion crowns. While revenue fell 6% from a year earlier and missed analyst forecasts, the profit figure came in ahead of expectations. The better-than-expected bottom line was driven by higher-margin cloud services and other non-network work, which helped offset weakness in the company's core business.
The weak spot was Ericsson's largest division: network sales dropped 8% as telecom carriers cut back on upgrades, particularly in North America. With revenue under pressure, the company is leaning more on cost cuts and a better mix of business to protect profits.
AI-Driven Cost Pressure
Chief Financial Officer Lars Sandström told Reuters that AI-related demand is tightening supply for components such as memory and custom chips used in telecom equipment. This creates a familiar problem for Ericsson: telecom contracts are often priced in advance, so higher input costs hit margins first. Price hikes, component redesigns that swap parts, and supply-chain adjustments tend to arrive later and only partly offset the squeeze.
Management said the financial impact was limited in the second quarter, but flagged more "pricing actions" and additional restructuring, including further layoffs, over the rest of the year. The company is also contending with broader industry trends, as carriers globally have been slowing their spending on 5G network upgrades after a multiyear investment cycle.
The AI-driven cost inflation is a growing theme across the tech hardware sector. As companies like TYLSemi raise funds to build open-standard AI chiplets, the competition for specialized chips and memory is intensifying, pushing up prices for all buyers.
What It Means for Investors
Ericsson's 6.52 billion-crown profit beat may not say much about next quarter's margins. AI-driven cost inflation can make earnings less predictable for hardware makers. If memory and custom chips get pricier, Ericsson's bill of materials rises immediately, but customers often only accept higher prices when new quotes or renewals roll around.
With network sales already down 8%, investors may pay less attention to one-off profit beats helped by cloud services and cost actions, and more to whether margins in the core network business can hold up without sacrificing pricing in a soft market. The company's restructuring plans, including further layoffs, signal that management expects the pressure to persist.
For everyday investors, the key takeaway is that Ericsson is navigating a tricky period. The company's ability to pass on higher costs to customers will be critical, especially as telecom carriers remain cautious on spending. The broader lesson is that AI's impact on supply chains can create unexpected cost pressures even for companies not directly involved in AI development.
Ericsson's situation echoes challenges seen elsewhere in the tech sector. For example, German retailers are also being squeezed by rising costs and falling sales, highlighting a broader trend of margin pressure across industries.
Looking Ahead
Investors will be watching Ericsson's next quarterly report for signs that pricing actions are taking effect and whether the restructuring is delivering the promised cost savings. The company's ability to manage its supply chain and component costs will be a key factor in determining its profitability in the second half of the year.
Ericsson's experience also underscores how AI is reshaping the competitive landscape for hardware makers. As demand for AI-related components grows, companies that can secure supply and manage costs effectively may have an advantage. For now, Ericsson is focused on navigating the near-term headwinds while positioning itself for when carrier spending eventually picks up again.
