Ericsson ERIC reported mixed second-quarter 2019 financial results, wherein the top line beat the Zacks Consensus Estimate but the bottom line missed the same. Following the announcement, the company's shares slipped as much as 6.2% in the pre-market session, which is largely attributable to management's soft near-term margin outlook.
On a GAAP basis, net income for the quarter was SEK 1,705 million ($180.4 million) or SEK 0.51 (5 cents) per share against net loss of SEK 1,885 million or loss of SEK 0.58 per share in the prior-year quarter. The improvement was primarily driven by top-line growth and lower operating expenses.
Non-IFRS earnings came in at SEK 0.59 (6 cents) per share against loss of SEK 0.09 per share in the year-ago quarter. The bottom line missed the Zacks Consensus Estimate by a penny.
Ericsson Price, Consensus and EPS Surprise
Quarterly net sales increased 10% year over year to SEK 54,810 million ($5,800.6 million), primarily driven by growth in Networks in North America and North East Asia. The top line surpassed the consensus estimate of $5,721 million.
Net sales in Networks increased 16.7% year over year to SEK 37.8 billion ($4 billion). The rise was mainly due to strong growth in North America and North East Asia, driven by 4G and 5G investments. The segment's gross margin increased to 41.4% year over year from 38.8% led by higher IPR licensing revenues and a favorable business mix. Operating margin improved to 15% from 10.9% on the back of higher sales and gross margin, partly offset by increased R&D and SG&A expenses.
Digital Services net sales increased 2.3% year over year to SEK 9 billion ($1 billion), driven by growth in the new portfolio for Cloud Infrastructure and Operations Support Systems. However, the momentum was negatively impacted by lower legacy product sales, mainly in India. The segment's gross margin declined to 36.8% from 39.1% due to a business mix with a lower share of software sales.
Net sales in Managed Services decreased 3.1% year over year to SEK 6.3 billion ($0.7 billion) due to customer contract exits. Gross margin slid to 12.3% year over year from 12.4% owing to timing of costs. Operating margin declined to 3.2% from 4.6%, mainly as a result of lower gross margin and increased investments in automation, analytics and AI-driven offerings.
Net sales from Other (including Emerging Business, iconectiv, Red Bee Media and Media Solutions) decreased 19% year over year to SEK 1.7 billion ($0.2 billion), due to the divestment of 51% of MediaKind. The segment's gross margin declined to 18.5% from 24.4%.
Overall gross margin improved to 36.6% year over year from 34.8% driven by improvement in Networks. Total operating expenses were SEK 16.3 billion compared with SEK 17.2 billion in the prior-year quarter. Operating income came in at SEK 3.7 billion compared with SEK 0.2 billion in the year-ago quarter, as a result of increased sales. At the end of the reported quarter, Ericsson had supplied equipment to 15 live 5G networks across radio and core.
Cash Flow & Liquidity
During the first six months of 2019, Ericsson generated SEK 9,388 million of cash from operations compared with SEK 3,015 million in the prior-year period. The company's free cash flow for the first half of 2019 was SEK 6.6 billion against a negative SEK 0.3 billion in the year-ago period.
As of Jun 30, 2019, the Swedish telecom equipment maker had SEK 45,498 million ($4,893 million) in cash and equivalents with SEK 33,040 million ($3,553.3 million) of non-current borrowings. Its net cash as of the same date was SEK 33.8 billion ($3.6 billion) compared with SEK 33.1 billion a year ago.
Ericsson is witnessing strong momentum in its 5G business with both new contracts and new commercial launches as well as live networks. While the company continues to take strategic contracts, large-scale network deployments which are expected to commence in parts of Asia will negatively impact margins in the short term but strengthen its position in the long term.
The company believes continuous technology and market investments, especially in 5G, automation and AI, are fundamental for competitiveness. These form a key part of its strategy to strengthen its business and path to reach targets for 2020 and 2022.
Zacks Rank & Other Stocks to Consider
Ericsson currently carries a Zacks Rank #2 (Buy). Other top-ranked stocks in the industry include Comtech Telecommunications Corp. CMTL , Viasat, Inc. VSAT and PCTEL, Inc. PCTI . While Comtech sports a Zacks Rank #1 (Strong Buy), Viasat and PCTEL carry a Zacks Rank #2. You can see the complete list of today's Zacks #1 Rank stocks here .
Comtech surpassed earnings estimates in each of the trailing four quarters, the average positive surprise being 216.7%.
Viasat surpassed earnings estimates in each of the trailing four quarters, the average positive surprise being 201.1%.
PCTEL surpassed earnings estimates twice in the trailing four quarters, the average positive surprise being 100%.
Conversion rate used:
SEK 1 = $0.105831 (period average from Apr 1, 2019 to Jun 30, 2019)
SEK 1 = $0.107544 (as of Jun 30, 2019)
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