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Ericsson's (ERIC) Q4 Earnings Beat Estimates, Revenues Fall
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Ericsson (ERIC - Free Report) reported mixed fourth-quarter 2023 results, wherein the bottom line surpassed the Zacks Consensus Estimate but the top line missed the same. The company recorded a top-line decline year over year due to a sharp sales drop in North America and soft demand trends in the Networks, Cloud Software and Services verticals. Growing 5G investments in the Middle East and Africa and solid demand for Enterprise Wireless Solutions partially supported the top line.
Net Income
Ericsson recorded a net income of SEK 3.4 billion ($319 million) or SEK 1.02 (10 cents) per share in the fourth quarter of 2023 compared with SEK 6.2 billion or SEK 1.82 per share in the prior-year quarter. The decline was primarily attributable to top-line contraction year over year. Adjusted earnings came in at 16 cents per share, beating the Zacks Consensus Estimate of 14 cents.
In 2023, the company reported a net loss of SEK 26.1 billion or a loss of SEK 7.94 per share against a net income of SEK 19.1 billion or SEK 5.62 per share in 2022. A decline in net sales and goodwill impairment charges of SEK 31.9 billion and restructuring charges of SEK 6.5 billion affected the bottom line.
Ericsson generated SEK 71.9 billion ($6.75 billion) in revenues, down 16% year over year. Net sales, adjusted for comparable units and currency, decreased 17% year over year. Declining trends in the Networks, Cloud Software and Services hindered the revenue growth. The top line missed the Zacks Consensus Estimate of $7.03 billion.
In 2023, the company reported net sales of SEK 263.4 billion compared with SEK 271.5 billion in 2022.
Segment Results
Networks segment generated SEK 45 billion ($4.22 billion), down 23% from the year-ago quarter’s tally of SEK 58.6 billion. The top line missed our revenue estimate of SEK 47.7 billion. The segment’s gross margin declined to 41.4% from 44.4% in the year-ago quarter. Revenues from Networks was impacted by a staggering 50% sales slump in North America. Lower capex investment and inventory adjustments from customers continue to weigh on the top line in this vertical. However, 7% sales growth year over year in India, Oceania and the South East Asian markets partially reversed the declining trend. The company is also witnessing a slowdown in capex investment in India.
Cloud Software and Services contributed SEK 19.6 billion ($1.84 billion) in revenues, down 3% year over year. Sales decline in several end markets impacted the revenue growth. The top line surpassed our revenue estimate of SEK 19 billion. Gross margin improved to 36.7% from 33% in the prior-year quarter. Commercial discipline, improvement in delivery performance and business mix boosted the gross margin.
Enterprise sales aggregated SEK 6.7 billion ($629 million), up from the year-ago quarter’s level of SEK 6.3 billion. Net sales missed our revenue estimate of SEK 8.7 billion. The 6% year-over-year growth was primarily driven by solid momentum in Enterprise Wireless Solutions. Gross margin, excluding restructuring charges, was 44.3%, down from 45.7% in the year-ago quarter. Inventory write-off affected the gross margin.
Other revenues declined to SEK 0.6 billion ($56 million) compared with the prior-year quarter’s figure of SEK 0.8 billion.
Region-wise, South-East Asia, Oceania and India registered revenues of SEK 11.8 billion ($1.1 billion), up from SEK 11.2 billion in the prior-year quarter. Revenues from North East Asia improved 9% year over year to SEK 9.1 billion ($854 million). Net sales from North America decreased 43% year over year to SEK 14.4 billion ($1.35 billion) as a result of inventory adjustments and reduced capital expenditure.
Europe and Latin American markets witnessed an 8% year-over-year decline after a period of high investment in 2022 to SEK 19.2 billion ($1.8 billion). The company’s revenues in Middle East and Africa rose 5% to SEK 7.8 billion ($732 million), backed by rising 5G investments in the Middle East. Revenues from other regions declined to SEK 9.6 billion ($901 million) from SEK 12.8 billion in the prior-year quarter, owing to lower IPR licensing revenues.
Other Details
Gross income, excluding restructuring charges, declined to SEK 29.6 billion ($2.78 billion) from the year-ago figure of SEK 35.7 billion, owing to sales drop and lower gross margin in the Networks business. Gross margin, excluding restructuring charges, was 41.1%, marginally down from 41.5% in the year-earlier quarter.
Cash Flow and Liquidity
Ericsson generated SEK 14.5 billion ($1.36 billion) cash from operating activities during the quarter. In 2023, it generated SEK 7.2 billion cash from operating activities compared with SEK 30.9 billion in the previous year.
As of Dec 31, 2023, the company had net cash of SEK 7.8 billion ($773 million) with SEK 26.2 billion liabilities for post-employment benefits compared with the previous year’s figure of SEK 23.3 billion and SEK 27.4 billion respectively.
Outlook
The company expects market uncertainties to persist in 2024. Normalization of investment in India and the decline of the RAN (Radio Access Network) market outside China will likely have a negative impact on Ericsson’s near-term outlook. However, management believes that a market recovery is imminent as current low investment levels by network operators are unsustainable to match the growing data traffic and 5G demand. In the upcoming quarters, the company will focus on technological innovation, portfolio expansion and operational efficiency. The company is expected to benefit from the newly signed U.S. contracts in the second half of 2024.
For the first quarter of 2024, revenues from the Networks, Cloud Software and Services segment are expected to follow the average seasonality between Q4 and Q1 in the last three years. Ericsson expects gross margin to be in the range of 39-41% for the Networks segment. The usual patterns of seasonality between Q4 and Q1 for operating expenses are projected to be less significant in the first quarter.
Zacks Rank & Other Stocks to Consider
Ericsson currently carries a Zacks Rank #2 (Buy).
Here are some other top-ranked stocks that investors may consider.
NVIDIA is the worldwide leader in visual computing technologies and the inventor of the graphic processing unit. Over the years, the company’s focus evolved from PC graphics to AI-based solutions that support high-performance computing, gaming and virtual reality platforms.
Workday Inc. (WDAY - Free Report) , carrying a Zacks Rank #2 at present, delivered a trailing four-quarter average earnings surprise of 13.24%. In the last reported quarter, it delivered an earnings surprise of 9.29%.
Workday is a provider of enterprise-level software solutions for financial management and human resource domains. The company’s cloud-based platform combines finance and HR in a single system that makes it easier for organizations to provide analytical insights and decision support.
Arista Networks, Inc. (ANET - Free Report) , sporting a Zacks Rank #1 at present, is likely to benefit from strong momentum and diversification across its top verticals and product lines. The company has a software-driven, data-centric approach to help customers build their cloud architecture and enhance their cloud experience. Arista has delivered an earnings surprise of 12%, on average, in the trailing four quarters.
The company holds a leadership position in 100-gigabit Ethernet switching share in port for the high-speed datacenter segment. It is increasingly gaining market traction in 200 and 400-gig high-performance switching products and remains well-positioned for healthy growth in data-driven cloud networking business with proactive platforms and predictive operations.
Note: SEK 1 = $0.0939388 (period average from Oct 1, 2023 to Dec 31, 2023) SEK 1 = $0.0991066 (as of Dec 31, 2023)
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Ericsson's (ERIC) Q4 Earnings Beat Estimates, Revenues Fall
Ericsson (ERIC - Free Report) reported mixed fourth-quarter 2023 results, wherein the bottom line surpassed the Zacks Consensus Estimate but the top line missed the same. The company recorded a top-line decline year over year due to a sharp sales drop in North America and soft demand trends in the Networks, Cloud Software and Services verticals. Growing 5G investments in the Middle East and Africa and solid demand for Enterprise Wireless Solutions partially supported the top line.
Net Income
Ericsson recorded a net income of SEK 3.4 billion ($319 million) or SEK 1.02 (10 cents) per share in the fourth quarter of 2023 compared with SEK 6.2 billion or SEK 1.82 per share in the prior-year quarter. The decline was primarily attributable to top-line contraction year over year. Adjusted earnings came in at 16 cents per share, beating the Zacks Consensus Estimate of 14 cents.
In 2023, the company reported a net loss of SEK 26.1 billion or a loss of SEK 7.94 per share against a net income of SEK 19.1 billion or SEK 5.62 per share in 2022. A decline in net sales and goodwill impairment charges of SEK 31.9 billion and restructuring charges of SEK 6.5 billion affected the bottom line.
Ericsson Price, Consensus and EPS Surprise
Ericsson price-consensus-eps-surprise-chart | Ericsson Quote
Revenues
Ericsson generated SEK 71.9 billion ($6.75 billion) in revenues, down 16% year over year. Net sales, adjusted for comparable units and currency, decreased 17% year over year. Declining trends in the Networks, Cloud Software and Services hindered the revenue growth. The top line missed the Zacks Consensus Estimate of $7.03 billion.
In 2023, the company reported net sales of SEK 263.4 billion compared with SEK 271.5 billion in 2022.
Segment Results
Networks segment generated SEK 45 billion ($4.22 billion), down 23% from the year-ago quarter’s tally of SEK 58.6 billion. The top line missed our revenue estimate of SEK 47.7 billion. The segment’s gross margin declined to 41.4% from 44.4% in the year-ago quarter. Revenues from Networks was impacted by a staggering 50% sales slump in North America. Lower capex investment and inventory adjustments from customers continue to weigh on the top line in this vertical. However, 7% sales growth year over year in India, Oceania and the South East Asian markets partially reversed the declining trend. The company is also witnessing a slowdown in capex investment in India.
Cloud Software and Services contributed SEK 19.6 billion ($1.84 billion) in revenues, down 3% year over year. Sales decline in several end markets impacted the revenue growth. The top line surpassed our revenue estimate of SEK 19 billion. Gross margin improved to 36.7% from 33% in the prior-year quarter. Commercial discipline, improvement in delivery performance and business mix boosted the gross margin.
Enterprise sales aggregated SEK 6.7 billion ($629 million), up from the year-ago quarter’s level of SEK 6.3 billion. Net sales missed our revenue estimate of SEK 8.7 billion. The 6% year-over-year growth was primarily driven by solid momentum in Enterprise Wireless Solutions. Gross margin, excluding restructuring charges, was 44.3%, down from 45.7% in the year-ago quarter. Inventory write-off affected the gross margin.
Other revenues declined to SEK 0.6 billion ($56 million) compared with the prior-year quarter’s figure of SEK 0.8 billion.
Region-wise, South-East Asia, Oceania and India registered revenues of SEK 11.8 billion ($1.1 billion), up from SEK 11.2 billion in the prior-year quarter. Revenues from North East Asia improved 9% year over year to SEK 9.1 billion ($854 million). Net sales from North America decreased 43% year over year to SEK 14.4 billion ($1.35 billion) as a result of inventory adjustments and reduced capital expenditure.
Europe and Latin American markets witnessed an 8% year-over-year decline after a period of high investment in 2022 to SEK 19.2 billion ($1.8 billion). The company’s revenues in Middle East and Africa rose 5% to SEK 7.8 billion ($732 million), backed by rising 5G investments in the Middle East. Revenues from other regions declined to SEK 9.6 billion ($901 million) from SEK 12.8 billion in the prior-year quarter, owing to lower IPR licensing revenues.
Other Details
Gross income, excluding restructuring charges, declined to SEK 29.6 billion ($2.78 billion) from the year-ago figure of SEK 35.7 billion, owing to sales drop and lower gross margin in the Networks business. Gross margin, excluding restructuring charges, was 41.1%, marginally down from 41.5% in the year-earlier quarter.
Cash Flow and Liquidity
Ericsson generated SEK 14.5 billion ($1.36 billion) cash from operating activities during the quarter. In 2023, it generated SEK 7.2 billion cash from operating activities compared with SEK 30.9 billion in the previous year.
As of Dec 31, 2023, the company had net cash of SEK 7.8 billion ($773 million) with SEK 26.2 billion liabilities for post-employment benefits compared with the previous year’s figure of SEK 23.3 billion and SEK 27.4 billion respectively.
Outlook
The company expects market uncertainties to persist in 2024. Normalization of investment in India and the decline of the RAN (Radio Access Network) market outside China will likely have a negative impact on Ericsson’s near-term outlook. However, management believes that a market recovery is imminent as current low investment levels by network operators are unsustainable to match the growing data traffic and 5G demand. In the upcoming quarters, the company will focus on technological innovation, portfolio expansion and operational efficiency. The company is expected to benefit from the newly signed U.S. contracts in the second half of 2024.
For the first quarter of 2024, revenues from the Networks, Cloud Software and Services segment are expected to follow the average seasonality between Q4 and Q1 in the last three years. Ericsson expects gross margin to be in the range of 39-41% for the Networks segment. The usual patterns of seasonality between Q4 and Q1 for operating expenses are projected to be less significant in the first quarter.
Zacks Rank & Other Stocks to Consider
Ericsson currently carries a Zacks Rank #2 (Buy).
Here are some other top-ranked stocks that investors may consider.
NVIDIA Corporation (NVDA - Free Report) , currently carrying a Zacks Rank #2, delivered a trailing four-quarter average earnings surprise of 18.99%. In the last reported quarter, it delivered an earnings surprise of 19.64%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
NVIDIA is the worldwide leader in visual computing technologies and the inventor of the graphic processing unit. Over the years, the company’s focus evolved from PC graphics to AI-based solutions that support high-performance computing, gaming and virtual reality platforms.
Workday Inc. (WDAY - Free Report) , carrying a Zacks Rank #2 at present, delivered a trailing four-quarter average earnings surprise of 13.24%. In the last reported quarter, it delivered an earnings surprise of 9.29%.
Workday is a provider of enterprise-level software solutions for financial management and human resource domains. The company’s cloud-based platform combines finance and HR in a single system that makes it easier for organizations to provide analytical insights and decision support.
Arista Networks, Inc. (ANET - Free Report) , sporting a Zacks Rank #1 at present, is likely to benefit from strong momentum and diversification across its top verticals and product lines. The company has a software-driven, data-centric approach to help customers build their cloud architecture and enhance their cloud experience. Arista has delivered an earnings surprise of 12%, on average, in the trailing four quarters.
The company holds a leadership position in 100-gigabit Ethernet switching share in port for the high-speed datacenter segment. It is increasingly gaining market traction in 200 and 400-gig high-performance switching products and remains well-positioned for healthy growth in data-driven cloud networking business with proactive platforms and predictive operations.
Note: SEK 1 = $0.0939388 (period average from Oct 1, 2023 to Dec 31, 2023)
SEK 1 = $0.0991066 (as of Dec 31, 2023)