Ericsson (ERIC) Q2 Earnings Miss Estimates, Revenues Beat

In second-quarter 2018 results, Ericsson ERIC reported a non-IFRS loss of SEK 0.09 (1 cent) per share (excluding amortizations, write-downs of acquired intangible assets and restructuring charges) against income of SEK 0.33 per share in the year-ago quarter. The figure missed the Zacks Consensus Estimate of earnings of 2 cents.

The company reported a GAAP loss of SEK 0.58 (7 cents) per share compared with loss of SEK 0.14 per share in the year-ago quarter due to increased taxes and negative financial net.

The Sweden-based firm incurred a net loss of SEK 1.8 billion ($0.2 billion) compared with net loss of SEK 0.5 billion in the previous-year quarter.    

Ericsson Price, Consensus and EPS Surprise
 

Ericsson Price, Consensus and EPS Surprise | Ericsson Quote

Inside the Headlines

Ericsson’s net sales for the quarter fell 1% year over year to SEK 49.8 billion ($5.7 billion). This was primarily due to decline in legacy product sales and lower telecom core sales in North East Asia. The top line, however, beat the Zacks Consensus Estimate of $5,432 million.

Segmental Performance

By segments, Networks revenues increased 2% year over year to SEK 32.4 billion ($3.7 billion). The rise was mainly due to strong growth in North America, driven by investments in 5G readiness. This was partly offset by lower sales in South East Asia, Oceania, India, the Middle East and North East Asia.

Operating margin improved to 11.8% year over year from 8.6% due to improved gross margin and lower restructuring charges. However, the improvement was partly offset by lower sales and increased R&D expenses.

Digital Services revenues decreased 11% year over year to SEK 8.8 billion ($1 billion), mainly due to decline in sales of legacy product. New product sales declined due to lower telecom core sales in North East Asia as consequence of a contract delay. The demand for 5G-ready and cloud-native products remained strong with several signed contracts in the quarter.

Gross margin for the segment improved to 39.1% year over year from 33.2%, owing to improved software margins and cost reductions in services.

Managed Services revenues decreased 2% year over year to SEK 6.5 billion ($0.7 billion), mainly due to contract reviews. Gross margin increased to 12.4% from 0.3%, driven by results of efficiency measures and reviewed and addressed contracts.

Revenues from Other (including Emerging Business, Media Solutions, Red Bee Media and iconectiv) increased 2% year over year to SEK 2.1 billion ($0.2 billion), driven by growth in iconectiv business. Sales and deliveries started in the quarter on a multi-year number portability contract in the United States. This contract was awarded to iconectiv in 2015. Sales in Emerging Business continued to grow, backed by IoT.

Sales in the media business (Media Solutions and Red Bee Media) were SEK 1.3 billion ($0.1 billion), resulting from lower sales in the discontinued portfolio. Red Bee Media sales declined slightly due to scope changes in contracts.    

Gross margin improved to 24.4% year over year from 21.3%, supported by improvements in IoT, Media Solutions and Red Bee Media.

Operating Metrics

Gross margin improved to 34.8% from 29.1%, primarily driven by cost reductions, ramp-up of Ericsson Radio System product platform, market mix and good progress in addressing non-strategic contracts in Managed Services.

Operating expenses increased to SEK 17.2 billion ($2 billion) from SEK 15.4 billion primarily due to higher R&D expenses.

Financial net declined to a negative SEK 0.8 billion ($0.1 billion) from SEK 0.1 billion, primarily due to negative revaluation and realization effects of foreign exchange forecast hedging and negative return on assets.

Cash Flow

During the first six months of 2018, cash flow from operating activities improved to SEK 3 billion from cash utilization of SEK 1.5 billion in the year-ago period.

Free cash flow for the first six months of the year was negative SEK 0.3 billion compared with negative SEK 4.6 billion in the year-ago period. Net cash at the end of period improved 38% to SEK 33.1 billion.

Liquidity

Ericsson’s cash and cash equivalents as on Jun 30, 2018 came in at SEK 37 billion ($4.1 billion), while non-current borrowings were SEK 31.1 billion ($3.5 billion).

The company’s SEK 10 billion cost reduction program, launched in second-quarter 2017, was successfully completed. It has reduced the total workforce by more than 2,000 in the quarter and by 20,500 in total as part of the program to ensure competitiveness and lower operating costs.

The company strengthened momentum in 5G domain in the quarter. It has gradually improved the cost position and will continue to have a strict cost focus in order to further increase competitiveness and efficiency. Ericsson remains confident in reaching long-term target of at least 12% operating margin by 2020.

Zacks Rank & Stocks to Consider

Ericsson currently has a Zacks Rank #3 (Hold). Better-ranked stocks in the industry include Comtech Telecommunications Corp. CMTL, Micron Technology, Inc. MU and AT&T Inc. T. While Comtech and Micron sport a Zacks Rank #1 (Strong Buy), AT&T carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.               

Comtech has a long-term earnings growth expectation of 5%. It beat earnings estimates in each of the trailing four quarters, the average being 123.7%.          

Micron has a long-term earnings growth expectation of 8.2%. It beat earnings estimates in each of the trailing four quarters, the average being 5.9%.   

AT&T has a long-term earnings growth expectation of 3.4%. It exceeded earnings estimates twice in the trailing four quarters with an average positive surprise of 5.8%.

Looking for Stocks with Skyrocketing Upside?

Zacks has just released a Special Report on the booming investment opportunities of legal marijuana.

Ignited by new referendums and legislation, this industry is expected to blast from an already robust $6.7 billion to $20.2 billion in 2021. Early investors stand to make a killing, but you have to be ready to act and know just where to look.

See the pot trades we're targeting>>

SEK 1 = $0.115260 (Period average from Apr 1, 2018 to Jun 30, 2018)

SEK 1 = $0.111404 (As on Jun 30, 2018)

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
Ericsson (ERIC) : Free Stock Analysis Report
 
Comtech Telecommunications Corp. (CMTL) : Free Stock Analysis Report
 
AT&T Inc. (T) : Free Stock Analysis Report
 
Micron Technology, Inc. (MU) : Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research