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Ericsson's (ERIC) Q2 Earnings Beat Estimates, Top Line Improves
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Ericsson (ERIC - Free Report) reported mixed second-quarter 2023 results, wherein the bottom line beat the Zacks Consensus Estimate but the top line missed the same.
The company's revenues showed modest growth year over year, driven by rapid 5G expansion in India and market gains in South East Asia and Oceania. However, demand softness in North America caused by low capital expenditure and inventory adjustments impacted the top line during the quarter.
Net Income
Ericsson registered a net loss of SEK 0.6 billion ($57 million) or a loss of SEK 0.21 (a penny) per share in the second quarter of 2023 against an income of SEK 4.7 billion or SEK 1.35 per share in the year-ago quarter. Despite top-line growth, higher restructuring charges led to a net loss during the quarter. Adjusted earnings for the quarter came in at 7 cents per share, which beat the Zacks Consensus Estimate by 2 cents.
Revenues increased to SEK 64.4 billion ($6,118 million), up 3% year over year compared with SEK 62.5 billion reported in the prior-year quarter. However, net sales declined 9% year over year when adjusted for foreign exchange. Healthy traction in Enterprise, Cloud Software and Services vertical cushioned the top line. Declining trends in the Networks segment hurt quarterly net sales. The top line missed the Zacks Consensus Estimate of $6,125 million.
Segment Results
Networks sales were SEK 42.4 billion ($4 billion), down 8% from the year-ago quarter’s figure of SEK 46 billion. The segment’s gross margin declined to 38.4% from 45.1% in the prior-year quarter. A 50% sales decline in North America, induced by inventory adjustments and lower capex spending from operators, led to lower revenues from this segment. However, significant sales growth in South East Asia, Oceania and India partially cushioned the top line.
Net sales from Cloud Software and Services aggregated SEK 15.1 billion ($1.4 billion), up 8% year over year. Revenue growth was primarily driven by 5G sales in North America. Gross margin, excluding restructuring charges, rose marginally to 33.9% from 33.5% in the prior-year quarter. The improvement was primarily due to rising IPR licensing revenues and better delivery performance.
Enterprise sales contributed SEK 6.4 billion ($608 million), up 275% from the year-ago quarter’s level of SEK 1.7 billion. Strong growth in Enterprise Wireless Solutions and the consolidation of Vonage boosted the top line from this vertical. Gross margin, excluding restructuring charges, fell to 46.3% from 52.8% in the prior-year quarter. The decline was a result of Vonage's consolidation, which had a lower gross margin when compared to the rest of the Enterprise segment.
Other revenues were SEK 0.5 billion ($47 million), down 32% year over year due to disinvestment in loT business.
Revenues from South East Asia, Oceania and India generated SEK 13.8 billion ($1.31 billion), up 74% year over year. The upside was driven by 5G expansions in India and several project wins in Oceania and other parts of South East Asia. Revenues from Europe and Latin America increased 4% year over year. Net sales from North America decreased 37% as a result of inventory adjustments and reduced capital expenditure spending.
North East Asian markets witnessed a 31% year-over-year decline after a period of high 5G investment in 2022. Revenues from other regions rose to SEK 9.8 billion ($931 million) from SEK 3.8 billion in the prior-year quarter, owing to growth in IPR licensing revenues and Enterprise Wireless solutions.
Other Details
Gross income decreased to SEK 24.7 billion ($2.34 billion) from the year-ago figure of SEK 26.3 billion due to lower sales in the Networks segment. However, higher IPR revenues partially reversed this trend. Gross margin, excluding restructuring charges, declined to 38.3% from 42.2% in the prior-year quarter, owing to the changed business mix in Networks.
Cash Flow and Liquidity
Ericsson utilized SEK 2.9 billion ($275 million) cash in operating activities during the quarter. As of Jun 30, 2023, the company has net cash of SEK 1.9 billion ($175.3 million) compared with the previous year’s figure of SEK 70.3 billion.
Outlook
Management foresees that the market mix and trends experienced in the second quarter will persist in the third quarter as well. The company anticipates that migration to 5G standalone will continue and average smartphone usage is likely to surpass 20 GB/month in 2023. Furthermore, the fixed wireless access market is likely to grow quickly.
Based on these factors, Ericsson remains confident about favorable demand trends and gradual market recovery. However, management remains cautious about the current environment and focuses on enhanced research and development productivity, portfolio adjustments, IPR growth and cost optimization.
For the third quarter, Ericsson expects gross margin to be in the range of 38-40% for the Networks segment. It expects operating expenses to follow the average seasonality of the past three years. The EBITA margin is expected to be in line with or marginally better than the Q2 levels.
EBITA for Cloud Software and Services is anticipated to remain consistent with the second quarter and likely to reach breakeven in fiscal 2023. For the full year, the company estimates restructuring costs of around SEK 7 billion. These restructuring charges are likely to normalize at about 0.5% of sales in 2024.
Zacks Rank & Stocks to Consider
Ericsson currently carries a Zacks Rank #2 (Buy).
InterDigital, Inc. (IDCC - Free Report) , sporting a Zacks Rank #1 (Strong Buy), delivered an earnings surprise of 170.89%, on average, in the trailing four quarters. In the last reported quarter, it pulled off an earnings surprise of 579.03%. You can see the complete list of today’s Zacks #1 Rank stocks here.
It is a pioneer in advanced mobile technologies that enable wireless communications and capabilities. The company designs and develops a wide range of advanced technology solutions, which are used in digital cellular and wireless 3G, 4G and IEEE 802-related products and networks.
Akamai Technologies, Inc. (AKAM - Free Report) , carrying a Zacks Rank #2 at present, delivered an earnings surprise of 4.86%, on average, in the trailing four quarters. In the last reported quarter, it pulled off an earnings surprise of 6.06%.
It is a global provider of content delivery networks and cloud infrastructure services. The company’s solutions accelerate and improve the delivery of content over the Internet, enabling faster response to requests for web pages, streaming of video & audio, business applications, etc. Its offerings are intended to reduce the impact of traffic congestion, bandwidth constraints and capacity limitations on customers.
Viasat, Inc. (VSAT - Free Report) , currently sporting a Zacks Rank #1, delivered an earnings surprise of 7.98%, in the last reported quarter. Viasat designs, develops and markets advanced digital satellite telecommunications and other wireless networking and signal processing equipment. The company serves its high-bandwidth, high-performance communications solutions to the public, as well as military, enterprises and government enterprises.
Viasat provides broadband services named ‘Exede’ in North America. This features the world's highest capacity satellite, ViaSat-1; satellite broadband networking systems, global mobile satellite services comprising high-speed in-flight Internet, as well as global tracking and messaging; and Wi-Fi and other hotspot support, operations and management systems.
Note: SEK 1 = $0.0950076 (period average from Apr 1, 2023 to Jun 30, 2023) SEK 1 = $0.0923088 (as of Jun 30, 2023)
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Ericsson's (ERIC) Q2 Earnings Beat Estimates, Top Line Improves
Ericsson (ERIC - Free Report) reported mixed second-quarter 2023 results, wherein the bottom line beat the Zacks Consensus Estimate but the top line missed the same.
The company's revenues showed modest growth year over year, driven by rapid 5G expansion in India and market gains in South East Asia and Oceania. However, demand softness in North America caused by low capital expenditure and inventory adjustments impacted the top line during the quarter.
Net Income
Ericsson registered a net loss of SEK 0.6 billion ($57 million) or a loss of SEK 0.21 (a penny) per share in the second quarter of 2023 against an income of SEK 4.7 billion or SEK 1.35 per share in the year-ago quarter. Despite top-line growth, higher restructuring charges led to a net loss during the quarter. Adjusted earnings for the quarter came in at 7 cents per share, which beat the Zacks Consensus Estimate by 2 cents.
Ericsson Price, Consensus and EPS Surprise
Ericsson price-consensus-eps-surprise-chart | Ericsson Quote
Revenues
Revenues increased to SEK 64.4 billion ($6,118 million), up 3% year over year compared with SEK 62.5 billion reported in the prior-year quarter. However, net sales declined 9% year over year when adjusted for foreign exchange. Healthy traction in Enterprise, Cloud Software and Services vertical cushioned the top line. Declining trends in the Networks segment hurt quarterly net sales. The top line missed the Zacks Consensus Estimate of $6,125 million.
Segment Results
Networks sales were SEK 42.4 billion ($4 billion), down 8% from the year-ago quarter’s figure of SEK 46 billion. The segment’s gross margin declined to 38.4% from 45.1% in the prior-year quarter. A 50% sales decline in North America, induced by inventory adjustments and lower capex spending from operators, led to lower revenues from this segment. However, significant sales growth in South East Asia, Oceania and India partially cushioned the top line.
Net sales from Cloud Software and Services aggregated SEK 15.1 billion ($1.4 billion), up 8% year over year. Revenue growth was primarily driven by 5G sales in North America. Gross margin, excluding restructuring charges, rose marginally to 33.9% from 33.5% in the prior-year quarter. The improvement was primarily due to rising IPR licensing revenues and better delivery performance.
Enterprise sales contributed SEK 6.4 billion ($608 million), up 275% from the year-ago quarter’s level of SEK 1.7 billion. Strong growth in Enterprise Wireless Solutions and the consolidation of Vonage boosted the top line from this vertical. Gross margin, excluding restructuring charges, fell to 46.3% from 52.8% in the prior-year quarter. The decline was a result of Vonage's consolidation, which had a lower gross margin when compared to the rest of the Enterprise segment.
Other revenues were SEK 0.5 billion ($47 million), down 32% year over year due to disinvestment in loT business.
Revenues from South East Asia, Oceania and India generated SEK 13.8 billion ($1.31 billion), up 74% year over year. The upside was driven by 5G expansions in India and several project wins in Oceania and other parts of South East Asia. Revenues from Europe and Latin America increased 4% year over year. Net sales from North America decreased 37% as a result of inventory adjustments and reduced capital expenditure spending.
North East Asian markets witnessed a 31% year-over-year decline after a period of high 5G investment in 2022. Revenues from other regions rose to SEK 9.8 billion ($931 million) from SEK 3.8 billion in the prior-year quarter, owing to growth in IPR licensing revenues and Enterprise Wireless solutions.
Other Details
Gross income decreased to SEK 24.7 billion ($2.34 billion) from the year-ago figure of SEK 26.3 billion due to lower sales in the Networks segment. However, higher IPR revenues partially reversed this trend. Gross margin, excluding restructuring charges, declined to 38.3% from 42.2% in the prior-year quarter, owing to the changed business mix in Networks.
Cash Flow and Liquidity
Ericsson utilized SEK 2.9 billion ($275 million) cash in operating activities during the quarter. As of Jun 30, 2023, the company has net cash of SEK 1.9 billion ($175.3 million) compared with the previous year’s figure of SEK 70.3 billion.
Outlook
Management foresees that the market mix and trends experienced in the second quarter will persist in the third quarter as well. The company anticipates that migration to 5G standalone will continue and average smartphone usage is likely to surpass 20 GB/month in 2023. Furthermore, the fixed wireless access market is likely to grow quickly.
Based on these factors, Ericsson remains confident about favorable demand trends and gradual market recovery. However, management remains cautious about the current environment and focuses on enhanced research and development productivity, portfolio adjustments, IPR growth and cost optimization.
For the third quarter, Ericsson expects gross margin to be in the range of 38-40% for the Networks segment. It expects operating expenses to follow the average seasonality of the past three years. The EBITA margin is expected to be in line with or marginally better than the Q2 levels.
EBITA for Cloud Software and Services is anticipated to remain consistent with the second quarter and likely to reach breakeven in fiscal 2023. For the full year, the company estimates restructuring costs of around SEK 7 billion. These restructuring charges are likely to normalize at about 0.5% of sales in 2024.
Zacks Rank & Stocks to Consider
Ericsson currently carries a Zacks Rank #2 (Buy).
InterDigital, Inc. (IDCC - Free Report) , sporting a Zacks Rank #1 (Strong Buy), delivered an earnings surprise of 170.89%, on average, in the trailing four quarters. In the last reported quarter, it pulled off an earnings surprise of 579.03%. You can see the complete list of today’s Zacks #1 Rank stocks here.
It is a pioneer in advanced mobile technologies that enable wireless communications and capabilities. The company designs and develops a wide range of advanced technology solutions, which are used in digital cellular and wireless 3G, 4G and IEEE 802-related products and networks.
Akamai Technologies, Inc. (AKAM - Free Report) , carrying a Zacks Rank #2 at present, delivered an earnings surprise of 4.86%, on average, in the trailing four quarters. In the last reported quarter, it pulled off an earnings surprise of 6.06%.
It is a global provider of content delivery networks and cloud infrastructure services. The company’s solutions accelerate and improve the delivery of content over the Internet, enabling faster response to requests for web pages, streaming of video & audio, business applications, etc. Its offerings are intended to reduce the impact of traffic congestion, bandwidth constraints and capacity limitations on customers.
Viasat, Inc. (VSAT - Free Report) , currently sporting a Zacks Rank #1, delivered an earnings surprise of 7.98%, in the last reported quarter. Viasat designs, develops and markets advanced digital satellite telecommunications and other wireless networking and signal processing equipment. The company serves its high-bandwidth, high-performance communications solutions to the public, as well as military, enterprises and government enterprises.
Viasat provides broadband services named ‘Exede’ in North America. This features the world's highest capacity satellite, ViaSat-1; satellite broadband networking systems, global mobile satellite services comprising high-speed in-flight Internet, as well as global tracking and messaging; and Wi-Fi and other hotspot support, operations and management systems.
Note: SEK 1 = $0.0950076 (period average from Apr 1, 2023 to Jun 30, 2023)
SEK 1 = $0.0923088 (as of Jun 30, 2023)