Markets

Ericsson (ERIC) Q4 Earnings Miss, Revenues Beat Estimates

EricssonERIC reported non-IFRS earnings per share (excluding amortizations, write-downs of acquired intangible assets and restructuring charges) of SEK 62 (7 cents) for the fourth quarter of 2016. Earnings lagged the Zacks Consensus Estimate of 11 cents by 36.4%, marking the fourth 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 quarterly earnings plunged 75.2% from the prior-year tally of SEK 2.50.

For full-year 2016, the company's non-IRFS earnings per share declined 56.1% year over year to SEK 2.66.

Ericsson Price, Consensus and EPS Surprise

Ericsson Price, Consensus and EPS Surprise | Ericsson Quote

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

Inside the Headlines

Net Sales for the quarter fell 11% year over year to SEK 65.2 billion ($7.2 billion). Nonetheless, the top line beat the Zacks Consensus Estimate of $6.8 billion.

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

For full-year 2016, the company's revenues decreased 9.8% to SEK 222.6 billion. The lackluster top-line performance for the full year is attributable to weakness in key end markets like Latin America, the Middle East and Africa, which continue to face waning mobile broadband investments.

Segmental Performance

On a segmental basis, Networks revenues declined 13% year over year to SEK 32.4 billion ($3.6 billion). Reduced investment by a major customer in the U.S. and completion of key mobile broadband projects in Europe resulted in the poor performance of this segment.

Global Services revenues fell 4% year over year to SEK 29.4 billion ($3.2 billion). Lower sales in Managed Services hampered the segmental performance, leading to the decline.

Support Solutions revenues were the worst hit. The revenues from this segment plunged 39% year over year to SEK 3.4 billion ($375 million), primarily due to lower IPR licensing revenues and lower TV & Media sales. Lower sales in OSS and BSS added to the woes.

Ericsson's gross margin (excluding restructuring charges) in the quarter declined 720 basis points year over year to 29.4%. A bigger share of lower margin business, escalating restructuring charges and lower IPR licensing revenues, contributed to the margin compression.

The decline in Ericsson's operating margin (excluding restructuring charges) was even more pronounced - down 930 basis points on a year-over-year basis to 6.7%. The effect of lower gross margin trickled down to operating margins, with lesser IPR licensing revenues further contracting it.

Updates on Cost and Efficiency Program

The formerly announced cost and efficiency program, through which Ericsson intends to achieve savings of SEK 9 billion in 2017, is moving ahead per the plan. For full-year 2016, operating expenses, excluding restructuring charges, amounted to SEK 56.4 b., which in turn led to a full-year reduction of SEK 5 billion. However, the pace of execution of the Cost and Efficiency Program, which was accelerated during the fourth quarter, resulted in full-year restructuring charges of SEK 7.6 billion compared with the estimated SEK 5.5-6.5 billion. In full-year 2017, the company expects restructuring charges of SEK 3 billion.

Ericsson plans to reduce the annual run rate of operating expenses (excluding restructuring charges) to SEK 53 billion in the second half of 2017, through these initiatives. This is comparable to SEK 63 billion in 2014, and equates to double the amount of savings in operating expenses than previously targeted.

Liquidity

During the quarter, cash flow from operating activities was SEK 19.4 billion ($2.1 billion) compared with SEK 21.9 billion at the end of fourth-quarter 2015.

Ericsson's cash and cash equivalents as of Dec 31, 2016 totaled SEK 37.0 billion ($4.0 billion) compared with SEK 40.2 billion a year back.

To Conclude

Ericsson had an uneventful 2016 and exited the quarter on a rather dull note. Over the past one year, soft mobile broadband demand and slowdown in emerging markets significantly dented sales. Challenging macroeconomic conditions in the emerging nations acted as a deterrent for major investments by telecom equipment behemoths. These factors were manifested in the company's poor sales.

Amid these pressing concerns, it is highly unlikely for the Zacks Rank #4 (Sell) company to stage a comeback in 2017. To weather the bad times, the company is heavily relying on investments in strategic areas and efficiency across all operations.

Stocks to Consider

Some better-ranked stocks in the same space include Exa Corp. EXA , Harris Corporation HRS and Barracuda Networks, Inc. CUDA . While Exa Corp. flaunts a Zacks Rank #1 (Strong Buy), both Harris Corporation and Barracuda Networks carry a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here.

Exa Corp. beat estimates each time in the trailing four quarters and has an average positive surprise of 68.1%.

Harris Corporation has an impressive earnings surprise history for the trailing four quarters, beating estimates all through, with an average positive surprise of 4.2%.

Barracuda Networks company has a striking earnings surprise history. It surpassed estimates in each of the trailing four quarters with a remarkable average positive surprise of 475%.

Zacks' Best Private Investment Ideas

In addition to the recommendations that are available to the public on our website, how would you like to follow all Zacks' private buys and sells in real time?

Our experts cover all kinds of trades… from value to momentum . . . from stocks under $10 to ETF and option moves . . . from stocks that corporate insiders are buying up to companies that are about to report positive earnings surprises. You can even look inside exclusive portfolios that are normally closed to new investors. Starting today, for the next month, you can have unrestricted access. Click here for Zacks' private trades >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

Ericsson (ERIC): Free Stock Analysis Report

Harris Corporation (HRS): Free Stock Analysis Report

Exa Corporation (EXA): Free Stock Analysis Report

Barracuda Networks, Inc. (CUDA): Free Stock Analysis Report

To read this article on Zacks.com click here.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story

ERIC

Other Topics

Earnings Stocks

Latest Markets Videos

    Zacks

    Zacks is the leading investment research firm focusing on stock research, analysis and recommendations. In 1978, our founder discovered the power of earnings estimate revisions to enable profitable investment decisions. Today, that discovery is still the heart of the Zacks Rank. A wealth of resources for individual investors is available at www.zacks.com.

    Learn More