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Ericsson (ERIC) to Report Q2 Earnings: What's in Store?

Zacks Equity Research

Ericsson ERIC is scheduled to report second-quarter 2019 results before the opening bell on Jul 17. In the last reported quarter, the company beat estimates by 4 cents. The Swedish telecom firm delivered a trailing four-quarter average negative earnings surprise of 9.8%, despite beating estimates twice.

The company is likely to report relatively flat revenues in the second quarter owing to fall in demand due to reduced consumer telecom spending. Let’s see how things are shaping up for the upcoming announcement.

Factors at Play

Ericsson has been continually investing in its competitive 5G-ready portfolio to enable communications service providers to seamlessly migrate to 5G. During the second quarter, Ericsson was chosen by Batelco, a leading telecommunications company in Bahrain, to commercially deploy 5G technology in the Middle Eastern country. Notably, the company’s high-speed and low-latency 5G technology will likely help Batelco to address the increasing demand for data traffic, while providing better mobile broadband and fixed wireless experience.

Ericsson has upgraded its comprehensive 5G platform with portfolio additions across core, radio access, transport areas and service orchestration. Remarkably, the add-ons make the platform more dynamic and flexible, enabling service providers to easily transform their networks and deploy 5G at scale. During the quarter, the company inked a contract with Swisscom – the largest telecommunications service provider in Switzerland – to deploy large-scale commercial 5G network in Europe. This would allow the subscribers to enjoy the high speed and enhanced mobile broadband features of 5G services across infotainment, gaming, virtual reality and immersive media experiences.

Ericsson is actively pursuing three key areas — core business expansion, targeted growth, and cost and efficiency. AI and automation remain key enablers for the company’s future business development, creating customer and shareholder value. During second-quarter 2019, Ericsson strengthened its joint venture collaboration with ABB to accelerate the industrial ecosystem for flexible wireless automation. The partnership will enable enhanced connected services, Industrial IoT and AI technologies in the future.

However, gross margin at Digital Services is likely to take a grave beating from adverse industry trends. Persistent low investments in mobile broadband in certain markets and lower managed services are expected to affect sales of Networks segment, while lower legacy product sales might hurt IT & Cloud revenues. Lower IPR licensing revenues and an unfavorable mix between coverage & capacity and services are further expected to compound the miseries. Moreover, the company has been facing investment headwinds in network developments in Mediterranean, Northern Europe and Central Asia (especially Russia) regions as well as in Latin America and the Middle East.

The combination of all these factors is likely to translate into a slight dent in revenues in the quarter. The Zacks Consensus Estimate for total revenues is currently pegged at $5,721 million, almost flat with $5,750 million reported in the year-earlier quarter.

Earnings Whispers

Our proven model does not show that Ericsson is likely to beat earnings this quarter as it does not possess the key components. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. This is not the case here as you will see below:

Earnings ESP: Earnings ESP, which represents the difference between the Most Accurate Estimate and Zacks Consensus Estimate, is -18.18% with the former pegged at 6 cents and the latter at 7 cents. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Ericsson Price and EPS Surprise

Ericsson Price and EPS Surprise

Ericsson price-eps-surprise | Ericsson Quote

Zacks Rank: Ericsson has a Zacks Rank #2. Although this increases the predictive power of ESP, we need a positive ESP to make us reasonably confident of an earnings beat.

Note that we caution against stocks with a Zacks Rank #4 (Sell) or 5 (Strong Sell) going into the earnings announcement, especially when the company is seeing a negative estimate revisions momentum.

Stocks to Consider

Here are some companies that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter:

AT&T, Inc. T is slated to release quarterly numbers on Jul 24. It has an Earnings ESP of +0.46% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Verizon Communications, Inc. JNPR is scheduled to release results on Aug 1. The company has an Earnings ESP of +0.55% and has a Zacks Rank #3.

The Earnings ESP for United States Cellular Corporation USM is +15.66% and it sports a Zacks Rank of 1. The company is likely to report quarterly numbers on Aug 2.

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