Ericsson ERIC reported impressive second-quarter 2020 results, with the bottom and the top line beating their respective Zacks Consensus Estimate. The Sweden-based telecom equipment maker stated that the COVID-19 pandemic had a limited impact on its operating income and cash flow in the quarter.
Net income in the June-end quarter was SEK 2,585 million ($266.9 million) or SEK 0.74 (10 cents) per share compared with SEK 1,847 million or SEK 0.51 per share in the prior-year quarter. The improvement was driven by stronger operating income and improved financial net. The bottom line beat the Zacks Consensus Estimate by 3 cents, delivering a positive surprise of 42.9%.
Ericsson Price, Consensus and EPS Surprise
Quarterly net sales inched up 1.5% year over year to SEK 55,578 million ($5,737.7 million). 5G deployments in North-East Asia contributed positively. Sales in India and Latin America fell due to COVID-19 and macroeconomic instability. The top line surpassed the consensus estimate of $5,587 million.
Net sales in Networks (which accounts for the lion’s share of total sales) increased 5.3% year over year to SEK 39.8 billion. Sales growth was strong in North America and North-East Asia while it declined in Latin America and India. The segment’s gross margin fell to 40.2% year over year from 41.4% due to inventory write-down in Mainland China. The operating margin declined to 13.2% from 15%, reflecting the negative impact of the acquired antenna and filter business.
Digital Services’ net sales fell 4.5% year over year to SEK 8.6 billion, due to lower sales of services and hardware partially offset by higher software sales. Services sales declined because of market uncertainty related to COVID-19. The segment’s gross margin improved to 43.6% from 36.8%, supported by a business mix with a higher share of software sales. Also, increased IPR licensing revenues and a lower negative impact from the critical contracts contributed to.
Managed Services’ net sales fell 11.1% year over year to SEK 5.6 billion. This was primarily due to reduced variable sales in a large contract in North America post the merger between two larger operators as well as the transfer of a contract from Ericsson to Ericsson Nikola Tesla d.d., an associated company, where Ericsson has a 49% ownership. Gross margin improved to 17.1% year over year from 12.3%, mainly owing to efficiency gains. Operating margin rose to 4.7% from 3.2%. The company’s investments in automation, analytics and AI-driven offerings are supporting 5G and efficiency in service delivery.
Net sales in Emerging Business and Other declined 5.9% year over year to SEK 1.6 billion, due to lower sales in Red Bee Media while sales in Emerging Business increased slightly. The segment’s gross margin declined to 12.6% from 18.5%.
Overall, gross margin improved to 37.6% year over year from 36.6%, driven by improvements in Digital Services and Managed Services as well as a higher share of IPR licensing revenues. Total operating expenses were SEK 17.1 billion compared with SEK 16.3 billion in the prior-year quarter. Operating income was SEK 3.9 billion compared with SEK 3.7 billion in the year-ago quarter.
As of Jul 17, Ericsson has 99 commercial 5G agreements with operators, including 54 live 5G networks.
Cash Flow & Liquidity
In the first half of 2020, Ericsson generated SEK 9,751 million of cash from operating activities compared with SEK 9,388 million in the prior-year period. The company’s free cash flow was SEK 5,298 million compared with SEK 5,363 million in the first quarter half of 2019.
As of Jun 30, the company had SEK 45,655 million ($4,889.1 million) in cash and cash equivalents with SEK 22,581 million ($2,418.2 million) of non-current borrowings compared with the respective tallies of SEK 48,347 million and SEK 23,381 million at the end of the previous quarter. Ericsson’s net cash at the end of the reported quarter was SEK 37.5 billion compared with SEK 33.8 billion a year ago.
Ericsson is optimistic regarding the longer-term outlook. With current visibility, it maintains the Group targets for 2020 and 2022. The company’s patent licensing business continues to perform well led by a strong IPR portfolio. Ericsson has accelerated its R&D investments in Digital Services to capture further business opportunities.
Conversion rate used:
SEK 1 = $0.103237 (period average from Apr 1, 2020 to Jun 30, 2020)
SEK 1 = $0.107088 (as of Jun 30, 2020)
Zacks Rank & Other Stocks to Consider
Ericsson currently carries a Zacks Rank #2 (Buy) and has a VGM Score of B.
Some other top-ranked stocks in the broader industry are Turtle Beach Corporation HEAR, T-Mobile US, Inc. TMUS and Ooma, Inc. OOMA. While Turtle Beach and T-Mobile sport a Zacks Rank #1 (Strong Buy), Ooma carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
Turtle Beach has a trailing four-quarter earnings surprise of 46.4%, on average.
T-Mobile has a trailing four-quarter earnings surprise of 19.4%, on average.
Ooma has a trailing four-quarter earnings surprise of 228.2%, on average.
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