Will Operating Expenses Hurt Ericsson's (ERIC) Q2 Earnings?

Telefonaktiebolaget LM Ericsson (ST:ERICAs) (publ) (NASDAQ:ERIC) is set to report second-quarter 2016 results on Jul 19.

Last quarter, the company missed estimates, posting a negative surprise of 23.1%. However, for the trailing four quarters, the company recorded an average positive surprise of 5.2%, beating estimates twice.

Let’s see how things are shaping up for this announcement.

Factors to Consider

Of late, escalating restructuring charges in business segments is proving to be a significant drag on Ericsson’s margins. During first-quarter 2016 earnings release, the company had hiked its expectation for 2016 restructuring charges from SEK 3–4 billion to SEK 4–5 billion, largely attributable to revamping of Networks and Global Services. Higher operating expenses stemming from cost-saving programs can dent the company’s profitability during the second quarter.

Waning sales in key end-markets may prove to be a matter of concern for Ericsson in the soon-to-be reported quarter. Ericsson has been witnessing sluggish mobile broadband sales in key markets like North America and India, delays in spectrum auctions and spectrum trading deals, slowdown in 4G deployments in China and unimpressive investments in other key markets that can mar the company’s top line during the second quarter of 2016.

In addition, weakening currencies across key markets in Latin America can have material impacts on the company’s top and bottom line. Dwindling investments in regions including Mediterranean, Northern Europe and Central Asia (especially Russia), Latin America and the Middle East are expected to add to Ericsson’s woes. Also, stiff competition, spectrum crunch and net neutrality are likely to play spoilsport for the network equipment and software behemoth during second-quarter 2016.

Despite these challenges, Ericsson’s strengths including leading market share in LTE technology, strengthening foothold in the broadcasting and media industry and ongoing global cost and efficiency programs are expected to offset some of the aforementioned challenges and drive growth. The company constantly seeks to seize business opportunities as operators shift toward 4G deployments and prepare grounds for the forthcoming 5G revolution. During the second quarter of 2016, Ericsson was selected by MTN Ghana for the deployment of a new LTE network and teamed up with Japanese operator KDDI to enable cellular IoT.

Additionally, Ericsson stands to benefit significantly as operators across the globe are focusing to improve their OSS and BSS solutions. During the second quarter of 2016, Ericsson inked managed services contract with Makedonski Telekom in Macedonia and Omantel in Oman telecommunications, entered in an agreement to act as the revenue manager for T-Mobile Czech Republic and simplify infrastructure of Dubai-based operator Du. This apart, the company’s lucrative deals on the media business front are prospective growth drivers for the second quarter.

For instance, during the quarter to-be-reported, the company entered into an exclusive multi-year access services contract for offering live captioning services for New Zealand and Australian parliaments and Australian public service broadcasters, ABC and SBS. In addition to this, the company inked a multi-year contract with FOX Networks Group in the Middle East to provide playout services for three new HD channels and will help South Korean satellite television provider KT SkyLife offer Ultra High Definition services. Also, impressive market traction of newly launched media services like MediaFirst Video Processing, MediaFirst Video Delivery and Piero Augmented Reality are expected to bolster sales.

Earnings Whispers

Our proven model does not conclusively show that Ericsson will beat earnings estimates in this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) for this to happen. This is not the case here as you will see below.

Zacks ESP: Earnings ESP for the stock currently stand at 0.00%. This is because both the Zacks Consensus Estimate and the Most Accurate estimate are pegged at 14 cents.

Zacks Rank: Ericsson carries a Zacks Rank #4 (Sell). Please note that we caution against Sell-rated stocks (Zacks Rank #4 or 5) going into an earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks That Warrant a Look

Here are some companies that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter:

QUALCOMM Inc. (NASDAQ:QCOM) has an Earnings ESP of +3.61% and a Zacks Rank #2. The company will report results on Jul 20.

Intel Corporation (NASDAQ:INTC) has an Earnings ESP of +5.66% and a Zacks Rank #2. The company will report results on Jul 20.

Core Laboratories NV (NYSE:CLB) has an Earnings ESP of +2.86% and a Zacks Rank #3. The company is expected to release earnings results on Jul 20.