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Ericsson (ERIC) Q2 Earnings Miss, Stock Down on Challenges in China

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

The Sweden-based telecom equipment provider’s shares fell more than 9% in pre-market trading after it hinted at facing business challenges in China.

Net Income

Net income in the June quarter was SEK 3,679 million ($436.8 million) or SEK 1.10 (14 cents) per share compared with SEK 2,452 million or SEK 0.74 per share in the prior-year quarter. The improvement was primarily driven by higher EBIT (earnings before financial items and income tax). 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

Revenues

Quarterly reported net sales slipped 1.1% year over year to SEK 54,941 million ($6,522.9 million). Organic sales (adjusted for comparable units and currency) grew 8%, with double-digit currency-adjusted growth in three of the five market areas. Sales in North East Asia remained stable despite a sales decline in mainland China of SEK 2.5 billion in the Networks and Digital Services segments.

The top line lagged the consensus estimate of $6,651 million.

Segment Results

Sales in Networks (which accounts for the lion’s share of total sales) were stable year over year at SEK 39.9 billion. Organic sales jumped 11% with growth in four of the five market areas. Sales in China decreased SEK 2 billion. Sales were down in market area Middle East and Africa primarily due to lower 5G investments in the Middle East and uncertain macroeconomic conditions in Africa.

The segment’s gross margin improved to 47.9% year over year from 40.2%, driven by strong operational leverage, which more than offset the lower IPR revenues. Ericsson strengthened its Cloud RAN portfolio with 5G mid-band and massive MIMO support.

Digital Services’ sales fell 8.1% year over year to SEK 7.9 billion due to a decrease of SEK 0.5 billion in China. The segment’s gross margin declined to 37.9% from 43.6%. The company sees high risk regarding future market share in China and it has made a write-down of SEK 0.3 billion for pre-commercial product investments for China’s market.

Managed Services’ sales fell 8.9% year over year to SEK 5.1 billion due to lower variable sales in North America. The segment’s gross margin increased to 19% from 17.1% driven by efficiency gains. Ericsson’s investments in automation, analytics and AI-driven offerings are supporting 5G and efficiency in service delivery.

Sales in Emerging Business and Other jumped 29% year over year to SEK 2.1 billion, primarily driven by the acquired Cradlepoint business. The segment’s gross margin improved to 37.9% from 12.6%.

Other Details

Total gross margin increased to 43.4% year over year from 37.6% driven by improvements in Networks. Total operating expenses were SEK 17.4 billion compared with SEK 17 billion in the prior-year quarter. EBIT was SEK 5.8 billion compared with SEK 3.9 billion in the year-ago quarter, driven by an improved gross margin in Networks.

Cash Flow & Liquidity

During the first half of 2021, Ericsson generated SEK 9,145 million of cash from operating activities compared with SEK 9,751 million in the prior-year period.

As of Jun 30, 2021, the company had SEK 43,273 million ($5,070 million) in cash and cash equivalents with SEK 21,673 million ($2,539 million) of non-current borrowings.

Looking Ahead

Ericsson is well positioned to cash in on the market momentum with its competitive 5G product portfolio. However, the company projects a substantially lower market share in China. It had already warned that Sweden’s decision to exclude Chinese vendors from Swedish 5G networks might adversely impact its business in the East Asian country.

Ericsson expanded its long-standing partnership with Verizon (VZ - Free Report) with an $8.3 billion, multi-year deal. The company will provide its industry-leading 5G solutions to accelerate the deployment of the service provider’s 5G network in the United States.

Zacks Rank & Stocks to Consider

Ericsson currently carries a Zacks Rank #3 (Hold).

A couple of better-ranked stocks in the broader industry are Motorola Solutions, Inc. (MSI - Free Report) and Ooma, Inc. (OOMA - Free Report) , both carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Motorola delivered a trailing four-quarter earnings surprise of 11.6%, on average.

Ooma pulled off a trailing four-quarter earnings surprise of 65.5%, on average.

Conversion rate used:

SEK 1 = $0.118725 (period average from Apr 1, 2021 to Jun 30, 2021)

SEK 1 = $0.117152 (as of Jun 30, 2021)


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