Ericsson second-quarter profit tops expectations, warns on AI costs

By Supantha Mukherjee

STOCKHOLM, July 14 (Reuters) - Swedish telecom equipment maker Ericsson reported a second-quarter core profit above market expectations on Tuesday, aided by cloud services and orders but warned that it is under pressure from rising component costs linked to AI demand.

High margins from some businesses helped beat analysts' expectations, but the company has been seeing lower sales at its mainstay mobile equipment business in key markets such as North America.

Ericsson said it was under pressure as the global AI build-out hits suppliers, but there was limited financial impact in the second quarter due to its resilient components supply chain.

Ericsson reported a fall in adjusted operating profit to 6.52 billion Swedish crowns ($671.70 million) for the second quarter, but beat analysts' average expectation of 6.42 billion, according to an LSEG poll.

Quarterly net sales fell 6% from a year earlier to 52.7 billion crowns, lagging the LSEG poll estimate of 53.6 billion crowns.

Net sales at Ericsson's high-margin network business, the biggest by revenue, fell 8% in the quarter, but the company expects growth to exceed seasonality in the third quarter.

AI COSTS AND RESTRUCTURING

Ericsson expects the increase in component costs due to the AI build-out to put pressure on the company to raise prices.

"The whole AI build-out is putting quite the pressure on the whole industry, including us," CFO Lars Sandström told Reuters.

Apart from memory prices, it is also affecting custom chips the company uses in building telecom infrastructure, he said.

Memory makers have in recent months prioritised orders from AI chipmakers, leaving little supply for electronics makers that have been forced to increase prices.

Outgoing CEO Borje Ekholm said the company would continue to pursue internal measures and pricing actions to help offset the effect in the coming quarters.

"We are taking near-term actions across the businesses, including commercial measures, for example, product substitution, as well as supply chain actions and targeted cost initiatives," Ekholm said on a conference call.  

Last month, Ericsson announced Ekholm's departure, and many employees were told about their termination as part of a restructuring.

Sandström said there would be more restructuring, including layoffs, during the rest of the year.

($1 = 9.7067 Swedish crowns)

(Reporting by Supantha Mukherjee in Stockholm; Editing by Terje Solsvik and Jacqueline Wong)