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Ericsson's (ERIC) Q3 Earnings Beat Estimates, Revenues Miss

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Ericsson (ERIC - Free Report) reported mixed third-quarter 2021 results, wherein the bottom line beat the Zacks Consensus Estimate but the top line missed the same.

The Sweden-based telecom gear maker continues to expand its footprint, despite challenges in China, by leveraging its competitive 5G portfolio.

Net Income

Net income in the quarter was SEK 5,752 million ($664.9 million) or SEK 1.73 (21 cents) per share compared with SEK 5,353 million or SEK 1.61 per share in the prior-year quarter. The improvement was primarily driven by higher EBIT. The bottom line beat the Zacks Consensus Estimate by 2 cents.

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 declined 2.1% year over year to SEK 56,263 million ($6,507 million). Organic sales (adjusted for comparable units and currency) slipped 1% with growth in two of the five market areas. Sales in China in the Networks and Digital Services segments declined by SEK 3.6 billion. The top line missed the consensus estimate of $6,891 million.

Segment Results

Sales in Networks (which accounts for the lion’s share of total sales) declined 2.6% year over year to SEK 40.6 billion. Organic sales were stable despite considerably lower volumes from China, reflecting gains in other markets. Organic sales reflect double-digit growth in North America, Europe and Latin America, and a sales decline in the other market areas mainly due to timing of orders and project milestones. The segment’s gross margin improved to 47.8% year over year from 46.5% supported by operational leverage and higher IPR revenues.

Digital Services’ sales fell 1.2% year over year to SEK 8.6 billion, reflecting a decline in sales in South East Asia, Oceania, and India due to timing of orders and a decrease of SEK 0.4 billion in China. The segment’s gross margin declined to 42.2% from 43.4% due to initial deployment costs for the cloud native 5G Core portfolio.

Managed Services’ sales fell 9.1% year over year to SEK 5 billion mainly due to lower variable sales. The segment’s gross margin decreased to 18.7% from 19.9%. 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 25% year over year to SEK 2 billion, primarily driven by the acquired Cradlepoint business. The segment’s gross margin improved to 39.4% from 32%.

Other Details

Overall, gross margin increased to 44% year over year from 43.1% driven mainly by IPR revenues and the Cradlepoint business. Total operating expenses were SEK 16.4 billion compared with SEK 16.1 billion in the prior-year quarter. EBIT was SEK 8.8 billion compared with SEK 8.6 billion in the year-ago quarter, driven mainly by Networks.

Cash Flow & Liquidity

During the first nine months of 2021, Ericsson generated SEK 23,869 million of cash from operating activities compared with SEK 15,030 million in the prior-year period.

As of Sep 30, 2021, the company had SEK 46,476 million ($5,292.8 million) in cash and cash equivalents with SEK 22,282 million ($2,537.5 million) of non-current borrowings.

Looking Ahead

Ericsson has secured 5G contracts from all three tier-1 U.S. carriers, namely Verizon (VZ - Free Report) , AT&T (T - Free Report) , and T-Mobile (TMUS - Free Report) . It expects some impact on sales from disturbances in the supply chain. The company continues to invest in the Enterprise business to make it a sizeable part of its business in a few years.

Zacks Rank & Stocks to Consider

Ericsson currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Conversion rate used:

SEK 1 = $0.115595 (period average from Jul 1, 2021 to Sep 30, 2021)

SEK 1 = $0.113882 (as of Sep 30, 2021)


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