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Ericsson (ERIC) Q3 Earnings Beat on 5G Momentum, Shares Up

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Ericsson (ERIC - Free Report) reported decent third-quarter 2020 results, wherein the bottom line beat the Zacks Consensus Estimate.

The Sweden-based telecom equipment provider stated that the COVID-19 pandemic has so far had a limited impact on its business. The 5G contracts in Mainland China have developed according to plan, contributing to profits in the quarter.

Bottom Line

Net income in the September-ended quarter was SEK 5,353 million ($603.3 million) or SEK 1.61 (20 cents) per share against a net loss of SEK 6,229 million or loss of SEK 1.89 per share in the prior-year quarter. The improvement was driven by strong operating income and higher financial net. The bottom line beat the Zacks Consensus Estimate by 4 cents, delivering a positive surprise of 25%.

Ericsson Price, Consensus and EPS Surprise Ericsson Price, Consensus and EPS Surprise

Ericsson price-consensus-eps-surprise-chart | Ericsson Quote

Top Line

Quarterly net sales inched up 0.6% year over year to SEK 57,472 million ($6,476.7 million), primarily driven by 5G deployments in North-East Asia and North America. However, sales in Latin America and Africa declined due to COVID-19 and macroeconomic instability. The top line lagged the consensus estimate of $6,520 million.

Segment Results

Net sales in Networks (which accounts for the lion’s share of total sales) increased 6.1% year over year to SEK 41.7 billion. Sales growth was driven by North-East Asia, North America and Europe. Sales declined in Latin America and Africa, where the pandemic negatively impacted CapEx levels for some customers. The segment’s gross margin improved to 46.5% year over year from 41.6%, as a result of a large share of software sales and operational leverage. Operating margin grew to 22% from 18.4%, supported by improved gross margin.

Digital Services’ net sales fell 12.1% year over year to SEK 8.7 billion, affected by a sales decline in the legacy portfolio and uncertainty related to COVID-19. Sales grew in South-East Asia, Oceania and India while the same in all other market areas declined. The segment’s gross margin improved to 43.4% from 37.9%, supported by a favorable business mix with a higher share of software sales.

Managed Services’ net sales fell 14.1% year over year to SEK 5.5 billion. This was due to reduced variable sales in a large contract in North America and the transfer of a contract from Ericsson to an associated company. The segment’s gross margin improved to 19.9% year over year from 17.9%, mainly as a result of efficiency gains. Operating margin grew to 8.9% from 8.8%. Ericsson’s investments in automation, analytics and AI-driven offerings are supporting 5G and efficiency in service delivery.

Net sales in Emerging Business and Other declined 3% year over year to SEK 1.6 billion, mainly due to lower sales in Red Bee Media. The segment’s gross margin improved to 32% from 20.2%. On Sep 18, Ericsson announced an agreement to acquire Cradlepoint — the market leader in Wireless Edge WAN solutions — for an enterprise value of $1.1 billion. The transaction is expected to close in the coming weeks.

Other Details

Overall, gross margin jumped to 43.1% year over year from 37.7%, driven by strong margin improvements in all segments. Total operating expenses were SEK 16.1 billion compared with SEK 14.2 billion in the prior-year quarter. Operating income was SEK 8.6 billion against an operating loss of SEK 4.2 billion in the year-ago quarter.

As of Oct 21, Ericsson has 65 live 5G networks and 112 commercial 5G agreements with operators.

Cash Flow & Liquidity

In the first nine months of 2020, Ericsson generated SEK 15,030 million of cash from operating activities compared with SEK 16,377 million in the prior-year period. The company’s free cash flow was SEK 9,147 million compared with SEK 9,356 million in the year-ago period.

As of Sep 30, Ericsson had SEK 48,774 million ($5,431.6 million) in cash and cash equivalents with SEK 22,132 million ($2,464.7 million) of non-current borrowings compared with the respective tallies of SEK 45,655 million and SEK 22,582 million at the end of the previous quarter.

Going Forward

Ericsson is confident in delivering on the 2020 Group target. The financial targets for 2022 remain unchanged. The company is positive on the long-term outlook.

The acquisition of Cradlepoint will strengthen its ability to grow in the 5G enterprise market. Cradlepoint will operate as a standalone subsidiary within Ericsson.

Zacks Rank & Stocks to Consider

Ericsson has a Zacks Rank #4 (Sell), at present.

Some better-ranked stocks in the broader industry are Corning (GLW - Free Report) , Viasat (VSAT - Free Report) and Harmonic (HLIT - Free Report) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Corning delivered a trailing four-quarter positive earnings surprise of 39.9%, on average.

Viasat delivered a trailing four-quarter positive earnings surprise of 361.3%, on average.

Harmonic delivered a trailing four-quarter positive earnings surprise of 4.4%, on average. The company’s earnings beat the Zacks Consensus Estimate in three of the last four quarters.

Conversion rate used:

SEK 1 = $0.112694 (period average from Jul 1, 2020 to Sep 30, 2020)

SEK 1 = $0.111362 (as of Sep 30, 2020)

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