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Why Is Ericsson (ERIC) Up 6.3% Since the Last Earnings Report?
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It has been about a month since the last earnings report for Ericsson (ERIC - Free Report) . Shares have added about 6.3% in that time frame, outperforming the market.
Will the recent positive trend continue leading up to the stock’s next earnings release, or is it due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Ericsson Q4 Earnings Miss, Revenues Beat Estimates
Ericsson reported non-IFRS earnings per share (excluding amortizations, write-downs of acquired intangible assets and restructuring charges) of SEK 62 ($0.07) for the fourth quarter of 2016. Earnings lagged the Zacks Consensus Estimate of $0.11 by 36.4%, marking the fourth consecutive earnings miss for the Swedish communication technology and services giant.
The bottom-line performance was even worse on a year-over-year basis. The quarterly earnings plunged 75.2% from the prior-year tally of SEK 2.50.
For full-year 2016, the company’s non-IRFS earnings per share declined 56.1% year over year to SEK 2.66.
The decrease in the bottom line can be attributed to sluggish industry trends significantly reducing product demand. Moreover, a steep decline in revenues over the past few quarters is making things worse for Ericsson.
Inside the Headlines
Net Sales for the quarter fell 11% year over year to SEK 65.2 billion ($7.2 billion). Nonetheless, the top line beat the Zacks Consensus Estimate of $6.8 billion.
The decline in sales was all-pervasive, with all three operating segments of the company charting negative revenue growth. Lower IPR licensing revenues, in particular, were a major drag on fourth-quarter sales.
For full-year 2016, the company’s revenues decreased 9.8% to SEK 222.6 billion. The lackluster top-line performance for the full year is attributable to weakness in key end markets like Latin America, the Middle East and Africa, which continue to face waning mobile broadband investments.
Segmental Performance
On a segmental basis, Networks revenues declined 13% year over year to SEK 32.4 billion ($3.6 billion). Reduced investment by a major customer in the U.S. and completion of key mobile broadband projects in Europe resulted in the poor performance of this segment.
Global Services revenues fell 4% year over year to SEK 29.4 billion ($3.2 billion). Lower sales in Managed Services hampered the segmental performance, leading to the decline.
Support Solutions revenues were the worst hit. The revenues from this segment plunged 39% year over year to SEK 3.4 billion ($375 million), primarily due to lower IPR licensing revenues and lower TV & Media sales. Lower sales in OSS and BSS added to the woes.
Ericsson’s gross margin (excluding restructuring charges) in the quarter declined 720 basis points year over year to 29.4%. A bigger share of lower margin business, escalating restructuring charges and lower IPR licensing revenues, contributed to the margin compression.
The decline in Ericsson’s operating margin (excluding restructuring charges) was even more pronounced – down 930 basis points on a year-over-year basis to 6.7%. The effect of lower gross margin trickled down to operating margins, with lesser IPR licensing revenues further contracting it.
Updates on Cost and Efficiency Program
The formerly announced cost and efficiency program, through which Ericsson intends to achieve savings of SEK 9 billion in 2017, is moving ahead per the plan. For full-year 2016, operating expenses, excluding restructuring charges, amounted to SEK 56.4 b., which in turn led to a full-year reduction of SEK 5 billion. However, the pace of execution of the Cost and Efficiency Program, which was accelerated during the fourth quarter, resulted in full-year restructuring charges of SEK 7.6 billion compared with the estimated SEK 5.5–6.5 billion. In full-year 2017, the company expects restructuring charges of SEK 3 billion.
Ericsson plans to reduce the annual run rate of operating expenses (excluding restructuring charges) to SEK 53 billion in the second half of 2017, through these initiatives. This is comparable to SEK 63 billion in 2014, and equates to double the amount of savings in operating expenses than previously targeted.
Liquidity
During the quarter, cash flow from operating activities was SEK 19.4 billion ($2.1 billion) compared with SEK 21.9 billion at the end of fourth-quarter 2015.
Ericsson’s cash and cash equivalents as of Dec 31, 2016 totaled SEK 37.0 billion ($4.0 billion) compared with SEK 40.2 billion a year back.
Note: SEK 1 = $0.107902 (Period average from Oct 1, 2016 – Dec 31, 2016)
SEK 1 = $1.05155 (As on Dec 31, 2016)
How Have Estimates Been Moving Since Then?
Analysts were quiet during the last one month period as none of them issued any earnings estimate revisions.
At this time, Ericsson's stock has a nice score of 'B' on growth and momentum front. However, the stock was allocated a grade of 'A' on the value side, putting it in the top quintile for this investment strategy.
Overall, the stock has an aggregte VGM Score of 'A'. If you aren't focused on one strategy, this score is the one you should be interested in.
Our style scores indicate that the stock is suitable for value, growth and momentum investors.
Outlook
Interestingly, the stock has a Zacks Rank #3 (Hold). We are expecting an inline return from the stock in the next few months.
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Why Is Ericsson (ERIC) Up 6.3% Since the Last Earnings Report?
It has been about a month since the last earnings report for Ericsson (ERIC - Free Report) . Shares have added about 6.3% in that time frame, outperforming the market.
Will the recent positive trend continue leading up to the stock’s next earnings release, or is it due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Ericsson Q4 Earnings Miss, Revenues Beat Estimates
Ericsson reported non-IFRS earnings per share (excluding amortizations, write-downs of acquired intangible assets and restructuring charges) of SEK 62 ($0.07) for the fourth quarter of 2016. Earnings lagged the Zacks Consensus Estimate of $0.11 by 36.4%, marking the fourth consecutive earnings miss for the Swedish communication technology and services giant.
The bottom-line performance was even worse on a year-over-year basis. The quarterly earnings plunged 75.2% from the prior-year tally of SEK 2.50.
For full-year 2016, the company’s non-IRFS earnings per share declined 56.1% year over year to SEK 2.66.
The decrease in the bottom line can be attributed to sluggish industry trends significantly reducing product demand. Moreover, a steep decline in revenues over the past few quarters is making things worse for Ericsson.
Inside the Headlines
Net Sales for the quarter fell 11% year over year to SEK 65.2 billion ($7.2 billion). Nonetheless, the top line beat the Zacks Consensus Estimate of $6.8 billion.
The decline in sales was all-pervasive, with all three operating segments of the company charting negative revenue growth. Lower IPR licensing revenues, in particular, were a major drag on fourth-quarter sales.
For full-year 2016, the company’s revenues decreased 9.8% to SEK 222.6 billion. The lackluster top-line performance for the full year is attributable to weakness in key end markets like Latin America, the Middle East and Africa, which continue to face waning mobile broadband investments.
Segmental Performance
On a segmental basis, Networks revenues declined 13% year over year to SEK 32.4 billion ($3.6 billion). Reduced investment by a major customer in the U.S. and completion of key mobile broadband projects in Europe resulted in the poor performance of this segment.
Global Services revenues fell 4% year over year to SEK 29.4 billion ($3.2 billion). Lower sales in Managed Services hampered the segmental performance, leading to the decline.
Support Solutions revenues were the worst hit. The revenues from this segment plunged 39% year over year to SEK 3.4 billion ($375 million), primarily due to lower IPR licensing revenues and lower TV & Media sales. Lower sales in OSS and BSS added to the woes.
Ericsson’s gross margin (excluding restructuring charges) in the quarter declined 720 basis points year over year to 29.4%. A bigger share of lower margin business, escalating restructuring charges and lower IPR licensing revenues, contributed to the margin compression.
The decline in Ericsson’s operating margin (excluding restructuring charges) was even more pronounced – down 930 basis points on a year-over-year basis to 6.7%. The effect of lower gross margin trickled down to operating margins, with lesser IPR licensing revenues further contracting it.
Updates on Cost and Efficiency Program
The formerly announced cost and efficiency program, through which Ericsson intends to achieve savings of SEK 9 billion in 2017, is moving ahead per the plan. For full-year 2016, operating expenses, excluding restructuring charges, amounted to SEK 56.4 b., which in turn led to a full-year reduction of SEK 5 billion. However, the pace of execution of the Cost and Efficiency Program, which was accelerated during the fourth quarter, resulted in full-year restructuring charges of SEK 7.6 billion compared with the estimated SEK 5.5–6.5 billion. In full-year 2017, the company expects restructuring charges of SEK 3 billion.
Ericsson plans to reduce the annual run rate of operating expenses (excluding restructuring charges) to SEK 53 billion in the second half of 2017, through these initiatives. This is comparable to SEK 63 billion in 2014, and equates to double the amount of savings in operating expenses than previously targeted.
Liquidity
During the quarter, cash flow from operating activities was SEK 19.4 billion ($2.1 billion) compared with SEK 21.9 billion at the end of fourth-quarter 2015.
Ericsson’s cash and cash equivalents as of Dec 31, 2016 totaled SEK 37.0 billion ($4.0 billion) compared with SEK 40.2 billion a year back.
Note: SEK 1 = $0.107902 (Period average from Oct 1, 2016 – Dec 31, 2016)
SEK 1 = $1.05155 (As on Dec 31, 2016)
How Have Estimates Been Moving Since Then?
Analysts were quiet during the last one month period as none of them issued any earnings estimate revisions.
Ericsson Price and Consensus
Ericsson Price and Consensus | Ericsson Quote
VGM Scores
At this time, Ericsson's stock has a nice score of 'B' on growth and momentum front. However, the stock was allocated a grade of 'A' on the value side, putting it in the top quintile for this investment strategy.
Overall, the stock has an aggregte VGM Score of 'A'. If you aren't focused on one strategy, this score is the one you should be interested in.
Our style scores indicate that the stock is suitable for value, growth and momentum investors.
Outlook
Interestingly, the stock has a Zacks Rank #3 (Hold). We are expecting an inline return from the stock in the next few months.