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Ericsson (ERIC) Q4 Earnings Miss Estimates, Revenues Improve

Zacks Equity Research

Ericsson ERIC reported mixed fourth-quarter 2018 results, wherein the bottom line missed the Zacks Consensus Estimate but the top line beat the same.

Net Loss

On a GAAP basis, net loss was SEK 6,497 million ($722.2 million) or loss of SEK 1.99 (22 cents) per share compared with loss of SEK 18,493 million or loss of SEK 5.63 per share in the prior-year quarter, driven by higher sales and lower operating expenses. For full-year 2018, net loss was SEK 6,276 million or loss of SEK 1.98 per share compared with loss of SEK 32,433 million or loss of SEK 9.94 per share for 2017.

Non-IFRS loss came in at SEK 0.77 (9 cents) per share compared with loss of SEK 1.09 per share in the year-ago quarter. The bottom line missed the Zacks Consensus Estimate of earnings of 13 cents.

Ericsson Price, Consensus and EPS Surprise

Ericsson Price, Consensus and EPS Surprise | Ericsson Quote

Revenues

Quarterly net sales increased 10% year over year to SEK 63.8 billion ($7.1 billion), primarily driven by sales growth in Networks and Digital Services. The top line beat the Zacks Consensus Estimate of $6,884 million. For full-year 2018, net sales increased 3% year over year to SEK 210.8 billion.

Segmental Performance

Net sales in Networks increased 12% year over year to SEK 41.6 billion ($4.6 billion). The rise was primarily due to strong growth in North America, Europe and Latin America as well as in North East Asia, led by investments in 5G readiness and LTE networks. The segment’s gross margin increased to 39.9% year over year from 32% due to improved margins in hardware and services. Operating margin improved to 16.5% from 5.2% on the back of improved gross margin and sales.

Digital Services net sales increased 10% year over year to SEK 13 billion ($1.4 billion), driven by strong sales of 5G-ready Cloud Core and OSS solutions in North East Asia and North America. The demand for 5G-ready and cloud-native products remained strong with several signed contracts in the quarter. The segment’s gross margin declined to negative 9.5% from positive 9.4%, owing to provisions of SEK 6.1 billion made in the quarter to reshape the Business Support Systems (BSS) strategy.

Net sales remained flat in Managed Services at SEK 6.9 billion ($0.8 billion). Gross margin increased to 11.4% from a negative 10%, driven by results of efficiency measures and customer contract reviews.

Net sales from Other (including Emerging Business, iconectiv, Red Bee Media and Media Solutions) increased 9% year over year to SEK 2.3 billion ($0.3 billion), driven by growth in iconectiv business. The segment’s gross margin declined to 9.3% from 11.7%, mainly due to reduced margins in the media business.

Other Quarter Details

Gross margin improved to 25.7% year over year from 21.6%, primarily driven by improvements in Networks and Managed Services. It was partly offset by costs related to revised BSS strategy.

Operating loss came in at SEK 1.9 billion, reflecting negative effects from costs related to revised BSS strategy and seasonally higher operating expenses. However, it was partly offset by higher sales and reversal of provisions for impairment losses on trade receivables.

Financial net declined to negative SEK 0.7 billion from negative SEK 0.5 billion, primarily due to adverse effects of interest rate revaluation.

Cash Flow

For full-year 2018, Ericsson’s cash flow from operating activities was SEK 9.3 billion compared with SEK 9.6 billion for 2017. The company’s free cash flow excluding M&A for 2018 was SEK 4.3 billion compared with SEK 4.8 billion for 2017. Net cash at the end of 2018 improved 4% year over year to SEK 35.9 billion.

Liquidity

The Swedish firm’s cash and cash equivalents as of Dec 31, 2018 was SEK 38.4 billion ($4.3 billion) while its non-current borrowings were SEK 30.9 billion ($3.5 billion).

Looking Forward

Ericsson continues to execute its focused strategy and is well on track to achieve its 2020 financial targets. The company is investing in its competitive 5G-ready portfolio to enable seamlessly migration to 5G. It also maintains strong control of 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 and Other Stocks to Consider

Ericsson currently carries a Zacks Rank #2 (Buy). Other top-ranked stocks in the industry include Comtech Telecommunications Corp. CMTL, Juniper Networks, Inc. JNPR and Ubiquiti Networks, Inc. UBNT, each carrying a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.           

Comtech has a long-term earnings growth expectation of 5%.

Juniper has a long-term earnings growth expectation of 5.5%.

Ubiquiti has a long-term earnings growth expectation of 14%.

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SEK 1 = $0.110477 (Period average from Oct 1, 2018 to Dec 31, 2018)

SEK 1 = $0.111937 (As of Dec 31, 2018)


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