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Ericsson (ERIC) Q1 Earnings and Revenues Miss, Down Y/Y

Ericsson ERIC reported non-IFRS earnings per share (excluding amortizations, write-downs of acquired intangible assets and restructuring charges) of SEK 87 (10 cents) for the first quarter of 2016, missing the Zacks Consensus Estimate by 23.1% (3 cents). However, the bottom line surged a decent 13% from the prior-year tally of SEK 0.77.

The bottom-line decline can be attributed to the low revenues recorded in the quarter.

Inside the Headlines

In the first quarter, revenues fell 2.4% year over year to SEK 52.5 billion ($6.2 billion) and also lagged the Zacks Consensus Estimate of $6.5 billion.

The dismal top-line performance can be largely attributed to softness in European markets and other emerging countries. Decline in sales in two of the three sub-segments also affected the results.

Segmental Performance

On a segmental basis, Networks revenues fell 2.3% year over year to SEK 25.8 billion ($3.0 billion). Macroeconomic woes in the Middle East and Latin America proved to be drag on sales at this segment. Also, lack of revenues on account of completion of major European mobile broadband projects in 2015 compounded the company’s problems. However, strong mobile broadband sales in North America and rapid 4G deployment in China compensated the decline to some extent.

Global Services revenues fell 3.4% year over year to SEK 23.0 billion ($2.7 billion). Lower Network Rollout activities in Europe and Latin America are largely attributable to the unimpressive sales at the segment. 

However, Support Solutions revenues were up 9.7% year over year to SEK 3.4 billion ($403 million), driven by an improvement in IPR licensing revenues.

Ericsson’s gross margin (excluding restructuring charges) in the quarter declined to 33.9% from 36.3% in the prior-year quarter. Factors like lower margin in Global Services and reduced software sales in IP and core networks impacted the gross margin.

Nonetheless, operating margin (excluding restructuring charges) was up 280 basis points to 7.9% on a year-over-year basis. Stellar performance by the Networks division drove the growth in operating margin.

Three-Pronged Growth Plan

Ericsson is presently following a three-pronged strategy to drive growth. The first strategic area is “core business growth,” in which the company is focusing on deployment of 4G and promotion of 5G. The company constantly seeks to seize business opportunities as operators shift toward 4G deployment and prepare grounds for the forthcoming 5G revolution. 

In this regard, during the Mobile World Congress (MWC) in Barcelona in March, the company managed to gain 21 customer contracts, thereby bolstering its 5G leadership.

The second area of focus, which is to improve profitability in the targeted growth areas, is witnessing the company concentrate on “software sales” and “recurring businesses” to drive growth in its thriving Professional Services. During the reported quarter, Ericsson reported modest progress in this area. The final growth area is “cost and efficiency program” that has been devised to generate higher cost savings.

During the first quarter of 2016, the global cost and efficiency program managed to generate savings of SEK 0.5 billion in operating expenses. Ericsson believes it is well on track to achieve its target to save around SEK 9 billion by 2017. As a matter of fact, during the first-quarter 2016, the company took additional measures to adapt its operations to the current “mobile broadband project volumes” in order to improve service delivery under the cost and efficiency program and enhance operational efficiency.

Incorporating Changes

Concurrent with its earnings release, Ericsson announced a set of structural changes to improve strategy execution and drive efficiency. The company plans to design five business units and one dedicated customer group for Industry & Society in line with its three-pronged growth strategy. With these changes, Ericsson believes it will be better equipped to cater to the needs of multiple customer segments and leverage market opportunities to drive faster growth.

Liquidity

Exiting the quarter, Ericsson’s cash utilized in operating activities was SEK 2.4 ($0.28 billion), compared with a cash utilization of SEK 5.9 billion at the end of first-quarter 2015. Increase in working capital owing to higher proportion of coverage projects in emerging markets adversely affected the cash flow.

Ericsson’s cash and cash equivalents as of Mar 31, 2016 totaled SEK 35.9 billion ($4.4 billion), compared with SEK 35.3 billion as of Mar 31, 2015.

To Conclude

There is no denying the fact that Ericsson’s first-quarter 2016 results were disappointing, largely on account of macroeconomic volatility in its end markets. Despite this, the company’s focus on growth areas reinstates hope. Ericsson is making steady progress in all of these areas which signals at bright prospects ahead.

Ericsson currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the industry include Motorola Solutions, Inc. MSI, Nuance Communications, Inc. NUAN and NetSol Technologies, Inc. NTWK. All the three stocks flaunt a Zacks Rank #1 (Strong Buy).

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