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Ericsson (ERIC) Q1 Earnings Meet Estimates, Warns on Slowdown
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Ericsson (ERIC - Free Report) reported unimpressive first-quarter 2020 results, with the top line missing the Zacks Consensus Estimate.
The company stated that the COVID-19 pandemic had a limited impact on its operating income and cash flow in the quarter. Actions taken by governments to contain the spread are making service delivery and supply tougher due to lockdowns and travel restrictions in many countries. While there has been no material effect on the demand side so far, it is reasonable that the economic slowdown might compel some operators to delay their investment programs.
Net Income
Net income in the March quarter was SEK 2,156 million ($223 million) or SEK 0.65 (8 cents) per share compared with SEK 2,317 million or SEK 0.70 per share in the prior-year quarter. The downtick was caused by items affecting comparability in first-quarter 2019, which had a positive impact. The bottom line was in line with the Zacks Consensus Estimate.
Quarterly net sales inched up 1.7% year over year to SEK 49,750 million ($5,145 million). Sales in North America, Saudi Arabia and Japan rose while sales in Latin America, China and India declined. The top line, however, lagged the consensus estimate of $5,545 million.
Segment Results
Net sales at Networks (which accounts for the lion’s share of total sales) increased 4.8% year over year to SEK 35.1 billion ($3.6 billion), reflecting continued strong momentum for 5G. Growth in North America, Saudi Arabia and Japan was offset by decline in Latin America, India and North-East Asia (excluding Japan). The segment’s gross margin increased to 44.4% year over year from 43.2%, supported by a favorable business mix including a higher share of software sales. The operating margin improved to 16.6% from 16.3%.
Digital Services’ net sales declined 6.4% year over year to SEK 7.3 billion ($0.8 billion) due to lower sales of services and legacy hardware. Services sales declined following fewer project completions and a negative impact on deliveries from the COVID-19 pandemic as access to customer networks has been limited in certain countries. Hardware sales declined due to the company’s strategy to focus on cloud-native software. That said, the business momentum is strong for the new portfolio of 5G and cloud-native products. Important 5G core contracts were signed with several tier 1 operators in 2020. The segment’s gross margin improved to 39.9% from 36.8%, supported by a higher share of software sales and improved hardware margins.
Managed Services’ net sales fell 3.4% year over year to SEK 5.7 billion ($0.6 billion) due to the exit of non-strategic contracts. However, sales in Optimization (project business) showed growth. The gross margin declined to 16.3% year over year from 17.7%. Operating margin fell to 7.1% from 21.4%. The company’s investments in automation, analytics and AI-driven offerings are supporting 5G and efficiency in service delivery.
Net sales from Emerging Business and Other declined 11.1% year over year to SEK 1.6 billion ($0.2 billion), reflecting the 51% divestment of MediaKind in first-quarter 2019 and lower sales related to the legacy media business. The segment’s gross margin declined to 21.7% from 23.4%. This was mainly due to the divestment of MediaKind and legacy project costs, partially offset by improvements in Red Bee Media.
Other Details
Overall gross margin improved to 39.8% year over year from 38.4%, driven by a favorable business mix, including an increased software share, in Networks. Total operating expenses were SEK 15.5 billion compared with SEK 14.6 billion in the prior-year quarter. Operating income was SEK 4.3 billion compared with SEK 4.9 billion in the year-ago quarter. As of Mar 31, Ericsson had 86 commercial 5G agreements with operators, including 29 live networks.
Cash Flow & Liquidity
In the first quarter, Ericsson generated SEK 4,302 million of cash from operations compared with SEK 5,765 million in the year-ago quarter. The company’s free cash flow (before M&A) was SEK 2.3 billion compared with SEK 3.5 billion in first-quarter 2019.
As of Mar 31, the Sweden-based telecom gear maker had SEK 48,347 million ($4,823.7 million) in cash and equivalents with SEK 23,381 million ($2,332.8 million) of non-current borrowings. Its net cash at the end of the quarter was SEK 38.4 billion compared with SEK 36.1 billion a year ago.
Going Forward
Ericsson remains positive on the longer-term outlook, but the second quarter is likely to be a tad softer than normal due to the timing of strategic contracts and uncertainty induced by COVID-19. Nevertheless, with current visibility, it maintains the financial targets for 2020 and 2022.
The approved operator merger in North America is expected to build an even stronger 5G momentum and investments are expected to intensify during the second half of the year. However, Ericsson’s managed services contract is expected to be negatively impacted over time, starting the second quarter.
The targets for 2020 take into account an increasing share of strategic contracts, including 5G in China. The acquired antenna and filter business is expected to hurt Networks’ margins in 2020, with a gradual improvement during the second half.
The improvements in Digital Services continue, but earnings will vary between quarters depending on the business mix, sales seasonality and impact of the remainder of the 45 critical contracts. In Managed Services, investments in automation and AI will continue to contribute to the gross margin. There will be quarterly variations depending on the timing of add-on sales and costs.
Cogent has a trailing four-quarter positive earnings surprise of 15.9%, on average. The company’s earnings beat the Zacks Consensus Estimate in three of the last four quarters.
Telenav has a trailing four-quarter positive earnings surprise of 77%, on average. The company’s earnings topped the consensus estimate in two of the last four quarters.
Plantronics has a trailing four-quarter positive earnings surprise of 27.7%, on average. The company’s earnings topped the consensus estimate in three of the last four quarters.
Conversion rate used:
SEK 1 = $0.103417 (period average from Jan 1, 2020 to Mar 31, 2020)
SEK 1 = $0.099772 (as of Mar 31, 2020)
5 Stocks Set to Double
Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.
Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.
Image: Bigstock
Ericsson (ERIC) Q1 Earnings Meet Estimates, Warns on Slowdown
Ericsson (ERIC - Free Report) reported unimpressive first-quarter 2020 results, with the top line missing the Zacks Consensus Estimate.
The company stated that the COVID-19 pandemic had a limited impact on its operating income and cash flow in the quarter. Actions taken by governments to contain the spread are making service delivery and supply tougher due to lockdowns and travel restrictions in many countries. While there has been no material effect on the demand side so far, it is reasonable that the economic slowdown might compel some operators to delay their investment programs.
Net Income
Net income in the March quarter was SEK 2,156 million ($223 million) or SEK 0.65 (8 cents) per share compared with SEK 2,317 million or SEK 0.70 per share in the prior-year quarter. The downtick was caused by items affecting comparability in first-quarter 2019, which had a positive impact. The bottom line was in line with the Zacks Consensus Estimate.
Ericsson Price, Consensus and EPS Surprise
Ericsson price-consensus-eps-surprise-chart | Ericsson Quote
Revenues
Quarterly net sales inched up 1.7% year over year to SEK 49,750 million ($5,145 million). Sales in North America, Saudi Arabia and Japan rose while sales in Latin America, China and India declined. The top line, however, lagged the consensus estimate of $5,545 million.
Segment Results
Net sales at Networks (which accounts for the lion’s share of total sales) increased 4.8% year over year to SEK 35.1 billion ($3.6 billion), reflecting continued strong momentum for 5G. Growth in North America, Saudi Arabia and Japan was offset by decline in Latin America, India and North-East Asia (excluding Japan). The segment’s gross margin increased to 44.4% year over year from 43.2%, supported by a favorable business mix including a higher share of software sales. The operating margin improved to 16.6% from 16.3%.
Digital Services’ net sales declined 6.4% year over year to SEK 7.3 billion ($0.8 billion) due to lower sales of services and legacy hardware. Services sales declined following fewer project completions and a negative impact on deliveries from the COVID-19 pandemic as access to customer networks has been limited in certain countries. Hardware sales declined due to the company’s strategy to focus on cloud-native software. That said, the business momentum is strong for the new portfolio of 5G and cloud-native products. Important 5G core contracts were signed with several tier 1 operators in 2020. The segment’s gross margin improved to 39.9% from 36.8%, supported by a higher share of software sales and improved hardware margins.
Managed Services’ net sales fell 3.4% year over year to SEK 5.7 billion ($0.6 billion) due to the exit of non-strategic contracts. However, sales in Optimization (project business) showed growth. The gross margin declined to 16.3% year over year from 17.7%. Operating margin fell to 7.1% from 21.4%. The company’s investments in automation, analytics and AI-driven offerings are supporting 5G and efficiency in service delivery.
Net sales from Emerging Business and Other declined 11.1% year over year to SEK 1.6 billion ($0.2 billion), reflecting the 51% divestment of MediaKind in first-quarter 2019 and lower sales related to the legacy media business. The segment’s gross margin declined to 21.7% from 23.4%. This was mainly due to the divestment of MediaKind and legacy project costs, partially offset by improvements in Red Bee Media.
Other Details
Overall gross margin improved to 39.8% year over year from 38.4%, driven by a favorable business mix, including an increased software share, in Networks. Total operating expenses were SEK 15.5 billion compared with SEK 14.6 billion in the prior-year quarter. Operating income was SEK 4.3 billion compared with SEK 4.9 billion in the year-ago quarter. As of Mar 31, Ericsson had 86 commercial 5G agreements with operators, including 29 live networks.
Cash Flow & Liquidity
In the first quarter, Ericsson generated SEK 4,302 million of cash from operations compared with SEK 5,765 million in the year-ago quarter. The company’s free cash flow (before M&A) was SEK 2.3 billion compared with SEK 3.5 billion in first-quarter 2019.
As of Mar 31, the Sweden-based telecom gear maker had SEK 48,347 million ($4,823.7 million) in cash and equivalents with SEK 23,381 million ($2,332.8 million) of non-current borrowings. Its net cash at the end of the quarter was SEK 38.4 billion compared with SEK 36.1 billion a year ago.
Going Forward
Ericsson remains positive on the longer-term outlook, but the second quarter is likely to be a tad softer than normal due to the timing of strategic contracts and uncertainty induced by COVID-19. Nevertheless, with current visibility, it maintains the financial targets for 2020 and 2022.
The approved operator merger in North America is expected to build an even stronger 5G momentum and investments are expected to intensify during the second half of the year. However, Ericsson’s managed services contract is expected to be negatively impacted over time, starting the second quarter.
The targets for 2020 take into account an increasing share of strategic contracts, including 5G in China. The acquired antenna and filter business is expected to hurt Networks’ margins in 2020, with a gradual improvement during the second half.
The improvements in Digital Services continue, but earnings will vary between quarters depending on the business mix, sales seasonality and impact of the remainder of the 45 critical contracts. In Managed Services, investments in automation and AI will continue to contribute to the gross margin. There will be quarterly variations depending on the timing of add-on sales and costs.
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 Cogent Communications Holdings, Inc. (CCOI - Free Report) , Telenav, Inc. and Plantronics, Inc. , each carrying a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Cogent has a trailing four-quarter positive earnings surprise of 15.9%, on average. The company’s earnings beat the Zacks Consensus Estimate in three of the last four quarters.
Telenav has a trailing four-quarter positive earnings surprise of 77%, on average. The company’s earnings topped the consensus estimate in two of the last four quarters.
Plantronics has a trailing four-quarter positive earnings surprise of 27.7%, on average. The company’s earnings topped the consensus estimate in three of the last four quarters.
Conversion rate used:
SEK 1 = $0.103417 (period average from Jan 1, 2020 to Mar 31, 2020)
SEK 1 = $0.099772 (as of Mar 31, 2020)
5 Stocks Set to Double
Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.
Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.
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