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Ericsson's (ERIC) Q4 Earnings Beat on Strong 5G Momentum

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Ericsson (ERIC - Free Report) reported solid fourth-quarter 2020 results, wherein the top and the bottom lines beat the respective Zacks Consensus Estimate.

Net Income

Net income in the December quarter was SEK 7,522 million ($873.4 million) or SEK 2.26 (27 cents) per share compared with SEK 4,430 million or SEK 1.33 per share in the prior-year quarter. The improvement was driven by higher operating income. The bottom line beat the Zacks Consensus Estimate by 6 cents.

Ericsson Price, Consensus and EPS Surprise

Ericsson Price, Consensus and EPS Surprise

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

In 2020, net income was SEK 17,483 million or SEK 5.26 per share compared with SEK 2,223 million or SEK 0.67 per share in 2019.

Revenues

Quarterly net sales increased 4.8% year over year to SEK 69,590 million ($8,080 million), primarily driven by 5G deployments in North-East Asia, North America and Europe. However, sales in Middle East & Africa and Latin America declined due to macroeconomic conditions, along with weak currencies, resulting from the pandemic. The top line surpassed the consensus estimate of $7,418 million.

In 2020, net sales grew 2.3% year over year to SEK 232,390 million.

Quarterly Segment Results

Sales in Networks (which accounts for the lion’s share of total sales) increased 11.3% year over year to SEK 49.4 billion. This was driven by higher hardware sales as a result of increased market footprint. All market areas reported growth except Middle East & Africa where the pandemic hurt operators’ CapEx levels. The segment’s gross margin improved to 43.4% year over year from 41.1%, mainly as a result of operational leverage. Operating margin grew to 21.5% from 14.4%, supported by improved gross margin.

Digital Services’ sales declined 3.8% year over year to SEK 12.7 billion. This was due to a sales decline in the legacy portfolio, partly offset by sales growth in cloud infrastructure. Sales grew in four of the five market areas. The segment’s gross margin jumped to 40.9% from 37.2%, supported by a higher share of software sales. Operating margin improved to 3.9% from -1.2%.

Managed Services’ sales fell 17.1% year over year to SEK 5.8 billion. This was mainly due to reduced variable sales in a large contract in North America and the transfer of a contract to an associated company. The segment’s gross margin improved to 17.7% year over year from 14.8%, as a result of efficiency gains and higher variable sales. Operating margin grew to 6.9% from 4.2%. Ericsson’s investments in automation, analytics and AI-driven offerings continue to support 5G and efficiency in service delivery.

Sales in Emerging Business and Other remained flat year over year at SEK 1.7 billion, mainly driven by the acquired Cradlepoint business. The segment’s gross margin improved to 35.3% from 13.4%.

Other Quarterly Details

Overall, gross margin jumped to 40.6% year over year from 36.8%, driven by margin improvements in all segments. Total operating expenses were SEK 17.6 billion compared with SEK 19 billion in the prior-year quarter. Operating income was SEK 11 billion compared with SEK 6.1 billion in the year-ago quarter.

Ericsson has powered 79 live 5G networks and has inked 127 commercial 5G agreements with operators.

Cash Flow & Liquidity

In 2020, Ericsson generated SEK 28,933 million of cash from operating activities compared with SEK 16,873 million in 2019.

As of Dec 31, 2020, Ericsson had SEK 43,612 million ($5,316.8 million) in cash and cash equivalents with SEK 22,218 million ($2,708.6 million) of non-current borrowings compared with the respective tallies of SEK 48,774 million and SEK 22,132 million at the end of the previous quarter.

Looking Ahead

Ericsson intends to invest in strengthening its portfolio and growing its global footprint. It is committed to the 2022 target as a milestone toward a long-term EBITA target of 15-18%.

While the company’s long-term business fundamentals remain strong, it expects a temporary negative impact during 2021 from IPR renewals, Cradlepoint and investments to strengthen its long-term business.

Zacks Rank & Stocks to Consider

Ericsson currently has a Zacks Rank #4 (Sell).

Some better-ranked stocks in the broader industry are Airgain (AIRG - Free Report) , Knowles (KN - Free Report) and U.S. Cellular (USM - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Airgain delivered a trailing four-quarter positive earnings surprise of 62.5%, on average. The company’s earnings beat the Zacks Consensus Estimate in three of the last four quarters.

Knowles delivered a trailing four-quarter positive earnings surprise of 12.5%, on average.

U.S. Cellular delivered a trailing four-quarter positive earnings surprise of 231.1%, on average.

Conversion rate used:

SEK 1 = $0.116108 (period average from Oct 1, 2020 to Dec 31, 2020)

SEK 1 = $0.121912 (as of Dec 31, 2020)

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