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Ericsson (ERIC) Misses Earnings & Revenue Estimates in Q1

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Ericsson (ERIC - Free Report) reported unimpressive first-quarter 2021 results, wherein both the top line and the bottom line missed the respective Zacks Consensus Estimate.

Net Income

Net income in the March quarter was SEK 3,187 million ($379.5 million) or SEK 0.96 (12 cents) per share compared with SEK 2,156 million or SEK 0.65 per share in the prior-year quarter. The improvement was primarily driven by stronger EBIT. The bottom line, however, missed the Zacks Consensus Estimate by 1 cent.

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

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


Quarterly net sales remained almost stable year over year at SEK 49,778 million ($5,928.2 million). This reflects market share gains in Networks, with four of the five market areas showing double-digit growth (based on sales adjusted for comparable units and currency). Sales in the Middle East and Africa declined due to uncertain macroeconomic conditions.

The company saw a decline in IPR licensing revenues, which was mainly related to expired contracts pending renewal and lower volumes with one licensee.

The top line missed the consensus estimate of $6,349 million.

Segment Results

Sales in Networks (which accounts for the lion’s share of total sales) grew 3.4% year over year to SEK 36.3 billion. The growth reflects high activity levels in all market areas except in the Middle East and Africa, where the pandemic hurt operators’ Capex levels. The segment’s gross margin improved to 46.1% year over year from 44.4%, as operational leverage more than offset a lower contribution from IPR.  

Ericsson expects the overall market to develop favorably during 2021. It intends to continue to invest for market share gains and supply chain resilience during the rest of the year.

Digital Services’ sales declined 5.5% year over year to SEK 6.9 billion. The decline was due to lower IPR licensing revenues and a negative currency impact. The segment’s gross margin improved to 43.5% from 39.9% supported by operational leverage.

Ericsson will continue to invest in R&D for the new cloud-native 5G Core portfolio. It will see initial deployment costs impacting 2021. However, it expects revenues from 5G Core contracts to start in late 2021 or early 2022.

Managed Services’ sales fell 14% year over year to SEK 4.9 billion. This was mainly due to lower variable sales in a large contract in North America. The segment’s gross margin increased to 19.4% from 16.3%, driven by efficiency gains.

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 grew 6.3% year over year to SEK 1.7 billion, mainly driven by the acquired Cradlepoint business, which is developing according to plan. The segment’s gross margin improved to 36.6% from 21.7%.

Other Details

Overall gross margin increased to 42.8% year over year from 39.8%. The increase reflects the positive impact of operating leverage and a favorable business mix in Networks and Digital Services. Total operating expenses were SEK 16 billion compared with SEK 15.5 billion in the prior-year quarter.

EBIT was SEK 5.3 billion compared with SEK 4.3 billion in the year-ago quarter. The growth was mainly driven by improved gross margin.

Cash Flow & Liquidity

During the first quarter of 2021, Ericsson generated SEK 3,205 million of cash from operations compared with SEK 4,302 million in the prior-year quarter.

As of Mar 31, 2021, Ericsson had SEK 40,543 million ($4,643.7 million) in cash and cash equivalents with SEK 23,299 million ($2,668.6 million) of non-current borrowings. This compares with the respective tallies of SEK 43,612 million and SEK 22,218 million at the end of the previous quarter.

Looking Ahead

Ericsson is expected to benefit from its strategy that hinges on increased investments in R&D for technology and cost leadership. It is well positioned to take advantage of the market momentum with a competitive 5G product portfolio and cost structure.

The company continues to invest in strengthening its portfolio and growing its global footprint. It aims to create a strong platform for the long term with competitiveness in core business and enterprise applications.

Zacks Rank & Stocks to Consider

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

Some better-ranked stocks in the broader industry are Micron Technology (MU - Free Report) , Etsy (ETSY - Free Report) and Vicor Corporation (VICR - Free Report) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Micron delivered a trailing four-quarter earnings surprise of 6.5%, on average.

Etsy delivered a trailing four-quarter earnings surprise of 31.8%, on average.

Vicor delivered a trailing four-quarter earnings surprise of 22.9%, on average.

Conversion rate used:

SEK 1 = $0.119092 (period average from Jan 1, 2021 to Mar 31, 2021)

SEK 1 = $0.114537 (as of Mar 31, 2021)

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