Ericsson (ERIC) Q1 Loss Narrower Than Expected, Revenues Lag

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In first-quarter 2018 results, Ericsson ERIC reported a non-IFRS income of SEK 0.11 (1 cent) per share (excluding amortizations, write-downs of acquired intangible assets and restructuring charges) against loss of SEK 2.19 in the year-ago quarter.

The figure also surpassed the Zacks Consensus Estimate of loss of 3 cents.

The company reported GAAP loss of SEK 0.25 (3 cents) per share compared with a loss of SEK 3.08 in the year-ago quarter.  

The Swedish firm reported a net loss of SEK 0.7 billion ($0.1 billion) compared with net loss of SEK 10 billion in the previous-year quarter.    

Inside the Headlines

Net sales for the quarter fell 9% year over year to SEK 43.4 billion ($5.3 billion). The top line, however, missed the Zacks Consensus Estimate of $5,547 million. This was mainly due to lower revenues in market areas North East Asia as well as in South East Asia, Oceania and India.

The decline in sales was all-pervasive, with all four operating segments of the company charting a fall in revenues. Lower IPR licensing revenues, in particular, were a major drag on first-quarter sales.
 

Ericsson Price, Consensus and EPS Surprise

Ericsson Price, Consensus and EPS Surprise | Ericsson Quote

Segmental Performance

Ericsson reorganized its operations to focus on four core areas — Networks, Digital Services, Managed Services, and Emerging Business and Other (including Emerging Business, Media Solutions, Red Bee Media and iconectiv).

Networks revenues were down 10% year over year to SEK 28.6 billion ($3.5 billion). The decline was mainly due to lower LTE investments in Mainland China and completion of larger projects in market area South East Asia, Oceania and India. The fall was partly offset by solid growth in Europe and Latin America as well as in the Middle East and Africa. Investments in network expansions and 5G readiness in North America continued and sales grew in constant currencies.

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 9% year over year to SEK 7.7 billion ($0.9 billion), primarily due to lower IPR licensing revenues, lower sales of products and services.      

Gross margin for the segment significantly improved to 38.5% year over year from a negative 27.8%, due to a rise in services margin. The improvement was driven by cost reductions in service delivery. Lower sales in large low-margin transformation projects had a positive impact. Completion of amortization of software release development expenses benefitted the gross margin.

Managed Services revenues decreased 8% year over year to SEK 5.5 billion ($0.7 billion), due to contract reviews and reduced variable sales in certain large Managed Services Networks contracts.

Revenues from Emerging Business and Other decreased 7% year over year to SEK 1.6 billion ($0.2 billion). Sales adjusted for comparable units and currency decreased 2%. Red Bee Media sales declined due to earlier renegotiations and scope changes of contracts. Media Solutions sales declined mainly due to lower sales in the discontinued portfolio including related services sales. Sales in Emerging Business and iconectiv grew year over year. Emerging Business also saw continued year-over-year growth in IoT. Unified Delivery Network’s sales grew on a year-over-year basis.

Ericsson’s gross margin (excluding restructuring charges) for the quarter improved to 35.9% from 18.7%, supported by cost reductions and continued ramp-up of Ericsson Radio System.

Liquidity

During the quarter, cash flow from operating activities was SEK 1.6 billion ($0.2 billion).

Ericsson’s cash and cash equivalents as of Mar 31, 2018 came in at SEK 36.7 billion ($4.5 billion).

Free cash flow for the quarter was SEK 0.3 billion ($37 million) while net cash improved 26% year over year to SEK 35.6 billion ($4.4 billion).   

Zacks Rank & Stocks to Consider

The stock has a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader industry are Comtech Telecommunications Corp. CMTL, BlackBerry Limited BB and China Mobile Limited CHL. While Comtech Telecommunications and BlackBerry sport a Zacks Rank #1 (Strong Buy), China Mobile carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.               

Comtech Telecommunications has an expected long-term earnings growth rate of 5%. It exceeded earnings estimates in each of the trailing four quarters, with an average of 111.4%.         

BlackBerry has an expected long-term earnings growth rate of 18.6%. It exceeded earnings estimates twice in the trailing four quarters, with an average of 500%.       

China Mobile has an expected long-term earnings growth rate of 5%.  

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SEK1 = $0.123195 (Period average from Jan 1, 2018 to Mar 31, 2018)


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