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Ericsson (ERIC) Q1 Deep In The Red, Posts Loss, Sales Shrink

Published 04/24/2017, 10:38 PM
Updated 07/09/2023, 06:31 AM

In the first-quarter 2017 results, Ericsson (BS:ERICAs) (NASDAQ:ERIC) reported a huge non-IFRS loss of SEK 2.42 (27 cents) per share (excluding amortizations, write-downs of acquired intangible assets and restructuring charges). Declining sales and shrinking adjusted gross margins put immense pressure on the bottom line. The figure also compared unfavourably with the Zacks Consensus Estimate of earnings of 3 cents, marking the fifth consecutive earnings miss for the Swedish communication technology and services giant.

The bottom-line performance was even worse on a year-over-year basis. The loss was comparable to earnings of SEK 0.87 recorded in the prior-year quarter.

Previously announced provisions, write-downs and restructuring costs pushed the company’s earnings deep into the red, as the Swedish firm reported a massive net loss of SEK 10.9 billion ($1.2 billion), in stark contrast to net income of SEK 2.1 billion a year ago.

Ericsson Price, Consensus and EPS Surprise

The dismal bottom-line performance can be attributed to sluggish industry trends significantly reducing product demand. Moreover, a steep decline in revenues over the past few quarters made things worse for Ericsson.

Inside the Headlines

Net sales for the quarter fell 11% year over year to SEK 46.4 billion ($5.2 billion). The top line also missed the Zacks Consensus Estimate of $5.3 billion. Weak mobile broadband market and lower investments in parts of Europe, Latin America and Africa dragged down revenues.

The decline in sales was all-pervasive, with all three operating segments of the company charting decline in revenues. Lower IPR licensing revenues, in particular, were a major drag on first-quarter sales.

Segmental Performance

As part of its recently announced restructuring plans, Ericsson reorganized its operations to focus on three core areas – Networks, Digital Services and the Internet of Things. The three segments which will now comprise the company’s reporting structure are: Networks, IT & Cloud and Media.

On a segmental basis, Networks revenues were down 13% year over year to SEK 34.9 billion ($3.9 billion). Persistent low investments in mobile broadband in certain markets and lower IPR licensing revenues resulted in the poor performance of this segment.

IT & Cloud revenues fell 3% year over year to SEK 9.5 billion ($1.1 billion). Lower product sales hampered the segmental performance, although strong services performance somewhat restrained the fall.

Media revenues were the worst hit. The revenues from this segment plunged 20% year over year to SEK 2 billion ($200 million), primarily due to lower IPR licensing revenues and lower sales of legacy products.

Ericsson’s gross margin (excluding restructuring charges) in the quarter declined 340 basis points year over year to 30.5%. A bigger share of lower margin business (particularly in IT & Cloud and Media), along with poor IPR licensing revenues, resulted in the margin contraction.

The decline in Ericsson’s operating margin (excluding restructuring charges) was even more pronounced – down 1300 basis points on a year-over-year basis to 3%. The impact of lower gross margin trickled down to operating margins.

Restructuring Plan

Late in March, Ericsson’s new CEO – Börje Ekholm – revealed a restructuring plan to cut costs and streamline the company’s focus areas, as well as explore options for the media business. Per the restructuring, Ericsson expects to take provisions, write-downs and restructuring charges this year, with most of them already booked in the first quarter.

The company planned to write down assets in first-quarter 2017, which are projected to hurt operating income by as much as SEK 4 billion. Further, restructuring charges for 2017 are anticipated to come in the range of SEK 6 billion–SEK 8 billion, up from a previous estimate of SEK 3 billion. Of this, Ericsson will book about SEK 2 billion in the first quarter as Ekholm accelerates cost cuts.

Provisions of an estimated SEK 7 billion–SEK 9 billion have also been made in the first quarter, related to negative developments in certain large customer projects.

Liquidity

During the quarter, cash flow used in operating activities was SEK 1.5 billion ($170 million) compared with SEK 2.4 billion in first-quarter 2016.

Ericsson’s cash and cash equivalents as at Mar 31, 2017 came in at SEK 33 billion ($3.7 billion) compared with SEK 35.9 billion a year back.

To Conclude

Telecom equipment makers across the world are distressed as customers invest less in 4G services, and even less in 3G, while waiting for the introduction of 5G networks. The year 2016 was a particularly harrowing year for Ericsson, a year in which the company ousted CEO Hans Vestberg, and stunned investors with a massive profit warning.

Soft mobile broadband demand and slowdown in emerging markets significantly dented Ericsson’s performance. Challenging macroeconomic conditions in the emerging nations acted as a deterrent for major investments by telecom equipment behemoths. These factors manifested in the company’s poor sales. In fact, the company expects the industry trends and business mix in mobile broadband to prevail this year as well.

The company’s CEO – Ekholm – is confident of making “significant improvements” in the business next year, under stable market conditions. Ekholm’s restructuring plan will help streamline Ericsson’s focus areas, improve profitability and revitalize its technology and market leadership. Ericsson also plans to explore options for the company’s media business and review “low-performing” contracts in its managed service business.

Whether these steps will allow Ericsson to jump back on the growth track, remains to be seen. However, as of now, we have a Zacks Rank #4 (Sell) on the stock, as we are apprehensive over the effect of the restructuring on the company’s profits and share price in the near term.

Zacks Rank & Stocks to Consider

Ericsson presently holds a Zacks Rank #4 (Sell). Some better-ranked stocks in the broader sector include Motorola Solutions, Inc. (NYSE:MSI) , PC-Tel, Inc. (NASDAQ:PCTI) and NCR Corporation (NYSE:NCR) . While Motorola and PC-Tel sport a Zacks Rank #1 (Strong Buy), NCR holds a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Motorola has a striking earnings surprise history for the last four quarters, having beaten estimates all through, for an impressive average beat of 16.4%.

PC-Tel generated three massive beats in the trailing four quarters, for an average positive surprise of 125%.

NCR also has an excellent earnings surprise history, with an average beat of 11% for the trailing four quarters, beating estimates all through.

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SEK1 = $0.1120 (Period average from Jan 1, 2017 to Mar 31, 2017)

SEK1 = $0.1119 (as at Mar 31, 2017)



NCR Corporation (NCR): Free Stock Analysis Report

Ericsson (ERIC): Free Stock Analysis Report

Motorola Solutions, Inc. (MSI): Free Stock Analysis Report

PC-Tel, Inc. (PCTI): Free Stock Analysis Report

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