Ericsson ERIC reported solid first-quarter 2019 financial results, wherein both the top line and the bottom line increased year over year.
On a GAAP basis, net income for the quarter was SEK 2,317 million ($252.7 million) or SEK 0.70 (8 cents) per share against loss of SEK 837 million or loss of SEK 0.25 per share in the prior-year quarter. The improvement was primarily driven by top-line growth and lower operating expenses.
Non-IFRS earnings came in at SEK 0.80 (9 cents) per share compared with SEK 0.11 in the year-ago quarter. The bottom line beat the Zacks Consensus Estimate by 5 cents.
Ericsson Price, Consensus and EPS Surprise
Ericsson Price, Consensus and EPS Surprise | Ericsson Quote
Quarterly net sales increased 12.7% year over year to SEK 48,906 million ($5,329.9 million), primarily driven by sales growth in Networks business.
Net sales in Networks increased 17.1% year over year to SEK 33.5 billion ($3.7 billion). The rise was primarily due to strong growth in North America and North East Asia, driven by 4G and 5G investments. The segment’s gross margin increased to 43.2% year over year from 38.9% led by higher IPR licensing revenues, lower restructuring charges and lower negative impact from strategic contracts. Operating margin improved to 16.3% from 11.8% on the back of higher sales and gross margin.
Digital Services net sales increased 6.8% year over year to SEK 7.8 billion ($0.9 billion), driven by growth in North America, partly offset by lower sales in India. Notably, sales in Operations Support Systems and Cloud Core increased, but were partly offset by lower sales in Business Support Systems. The segment’s gross margin declined to 36.8% from 39.8% due to unfavorable business mix.
Net sales in Managed Services remained almost flat at SEK 5.9 billion ($0.6 billion), owing to customer contract exits. Gross margin increased to 17.7% year over year from 8.3%, driven by customer contract exits and efficiencies as well as lower restructuring charges. Operating margin improved to 21.4% from 1.7% on the back of a reversal of provision for impairment of trade receivables of SEK 0.7 billion and higher gross margin.
Net sales from Other (including Emerging Business, iconectiv, Red Bee Media and Media Solutions) increased 5.9% year over year to SEK 1.8 billion ($0.2 billion), driven by growth in iconectiv business, owing to a number portability contract in the United States. The segment’s gross margin improved to 23.4% from 21.1%, reflecting the divestment of 51% of MediaKind.
Overall gross margin improved to 38.4% year over year from 34.2%, primarily driven by improvements in Networks and Managed Services. Higher IPR licensing revenues and progress in customer contract reviews in Managed Services had a positive impact on gross margin. Total operating expenses were SEK 14.6 billion compared with SEK 15.3 billion in the prior-year quarter.
Operating income came in at SEK 4.9 billion against operating loss of SEK 0.3 billion in the year-ago quarter. This was driven by capital gain related to the divestment of 51% of MediaKind and certain assets in Red Bee Media, and reversal of a provision for impairment of trade receivables following customer payment.
The company divested 51% of MediaKind on Feb 1, 2019. It expects to close the acquisition of antenna and filter assets from Kathrein in the third quarter of 2019.
Cash Flow & Liquidity
During first-quarter 2019, Ericsson generated SEK 5.8 billion ($0.6 billion) of cash from operations compared with SEK 1.6 billion in the prior-year period. The company’s free cash flow for the quarter was SEK 4.4 billion ($0.5 billion) compared with SEK 0.3 billion in the year-ago period.
As of Mar 31, 2019, the Swedish telecom equipment provider had SEK 45.5 billion ($4.9 billion) in cash and equivalents with SEK 32.5 billion ($3.5 billion) of non-current borrowings. Net cash as of the same date was SEK 36.1 billion ($3.9 billion) compared with SEK 35.6 billion a year ago.
Ericsson continues to execute its strategy and is well on track to achieve its 2020 financial targets. It is investing in its competitive 5G-ready portfolio to enable seamless migration to 5G. The company also controls its cost position to stay competitive and profitable.
Furthermore, Ericsson’s R&D investments over the past two years have secured a competitive and industry-leading offering. Artificial intelligence and automation remain key enablers for the company’s future business development, creating customer and shareholder value. Ericsson remains confident in reaching long-term target for 2020 and 2022.
Zacks Rank & Other Stocks to Consider
Ericsson currently carries a Zacks Rank #2 (Buy). A few other top-ranked stocks in the broader industry are CommScope Holding Company, Inc. COMM, Bandwidth Inc. BAND and Juniper Networks, Inc. JNPR. While CommScope sports a Zacks Rank #1 (Strong Buy), Bandwidth and Juniper carry a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
CommScope has long-term earnings growth expectation of 4%.
Bandwidth has long-term earnings growth expectation of 10%.
Juniper has long-term earnings growth expectation of 7.1%.
Conversion rate used:
SEK 1 = $0.108982 (period average from Jan 1, 2019 to Mar 31, 2019)
SEK 1 = $0.107516 (as of Mar 31, 2019)
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