Ericsson Q2 Earnings Miss Estimates, Top Line Falls

Ericsson ERIC reported modest second-quarter 2024 results, with the top line surpassing the Zacks Consensus Estimate and the bottom line missing the same. In spite of steady sales in the Enterprise, Cloud Software and Services segment, soft demand in the Networks led to a top-line contraction year over year. Solid sales growth in North America is offset by declining capex investments in India. Higher IPR licensing revenues, cost optimization and a robust portfolio boosted the gross margin. Healthy improvement in free cash flow backed by improvement in working capital is a tailwind.

Net Income

Ericsson reported a net loss of SEK 11 billion ($1.03 billion) or a loss of SEK 3.34 (31 cents) per share in the second quarter compared with a net loss of SEK 0.6 billion or SEK 0.21 per share in the prior-year quarter. Non-cash impairment charges of SEK 11.4 billion and a decline in net sales impacted the bottom line during the quarter. Adjusted earnings came in at a penny per share, missing the Zacks Consensus Estimate of 5 cents.

Revenues

Ericsson generated SEK 59.8 billion ($5.59 billion) in revenues, down 7% year over year. Demand softness in the Networks segment impeded the top line. However, the top line surpassed the Zacks Consensus Estimate of $5.29 billion.

Segment Results

The Networks segment generated SEK 37.7 billion ($3.53 billion), down 11% from the year-ago quarter's tally of SEK 42.4 billion. The top line beat our revenue estimate of SEK 36.3 billion. The segment's gross margin improved to 46.1% from 39.3% in the year-ago quarter. The unit registered a 55% sales decline in South East Asia, Oceania and India. Following a record level of investments in 2023, operator capex significantly declined in India. However, sales in the Networks segment from North America improved 20% year over year due to increased network investments.

Cloud Software and Services contributed SEK 15.2 billion ($1.42 billion) in revenues, marginally up from SEK15.1 billion in the year-ago quarter. The top line surpassed our revenue estimate of SEK 14.7 billion. Adjusted gross margin improved to 37.2% from 33.9% in the prior-year quarter. Increased IPR licensing revenues, commercial discipline and improvement in delivery performance propelled the gross margin.

Enterprise sales remained flat at SEK 6.5 billion ($608 million), up 2% year over year. Net sales beat our revenue estimate of SEK 4.77 billion. Growth in Enterprise Wireless Solutions supported the top line. However, declining sales in the Global Communication Platform reversed the positive trend. Adjusted gross margin was 51.1%, up from 46.3% in the year-ago quarter.

Other revenues was SEK 0.5 billion ($47 million) matching the prior-year quarter's figure of SEK 0.5 billion.

Region-wise, South-East Asia, Oceania and India registered revenues of SEK 7.7 billion ($720 million), down from SEK 13.8 billion in the prior-year quarter. Revenues from North East Asia fell 10% year over year to SEK 4.6 billion ($430 million). Net sales from North America increased 15% year over year to SEK 16.6 billion ($1.55 billion) backed by contract wins and growing network investments.

Europe and Latin American markets witnessed a 2% year-over-year decline to SEK 15.6 billion ($1.46 billion). Revenues in the Middle East and Africa fell 8% to SEK 4.9 billion ($458 million) due to a slowdown in capex investments. Revenues from other regions rose to SEK 10.4 billion ($972 million) from SEK 9.8 billion in the prior-year quarter.

Other Details

Adjusted gross increased to SEK 26.3 billion ($2.46 billion) from the year-ago figure of SEK 24.7 billion. Adjusted gross margin was 43.9%, up from 38.3% in the year-earlier quarter, driven by an enhanced gross margin in the Networks segment. Higher IPR licensing revenues, cost reduction actions and a competitive product portfolio elevated the gross margin.

Cash Flow and Liquidity

Ericsson generated SEK 9.3 billion ($870 million) cash from operating activities during the quarter. As of Jun 30, 2024, the company had a net cash of SEK 13.1 billion ($12.36 billion) with SEK 26.1 billion liabilities for post-employment benefits.

Outlook

Management anticipates market conditions to remain challenging this year due to a slowdown in network investments in India. However, contract deliveries in North America will likely improve net sales in the second half of the year.

For the third quarter of 2024, revenues from the Networks, Cloud Software and Services segment are expected to follow the average seasonality between the second and the third quarter in the last three years. Adjusted Gross margin in the Networks segment is likely to be in the range of 45-47%. Restructuring charges are projected to be around SEK 3-4 billion in 2024.

Zacks Rank & Stocks to Consider

Ericsson currently carries a Zacks Rank #3 (Hold).

NVIDIA Corporation, sporting a Zacks Rank #1 (Strong Buy) at present, delivered a trailing four-quarter earnings surprise of 18.43%, on average. In the last reported quarter, it delivered an earnings surprise of 11.48%.

NVIDIA is the worldwide leader in visual computing technologies and the inventor of the graphic processing unit. Over the years, the company's focus evolved from PC graphics to AI-based solutions that support high-performance computing, gaming and virtual reality platforms.

Motorola Solutions Inc. MSI provides services and solutions to government segments and public safety programs, along with large enterprises and wireless infrastructure services. Motorola carries a Zacks Rank #2 (Buy) at present.

It delivered a trailing four-quarter average earnings surprise of 7.54% and has a long-term growth expectation of 9.47%. In the last reported quarter, Motorola delivered an earnings surprise of 11.51%.

Silicon Motion Technology Corporation SIMO, carrying a Zacks Rank #2 at present, delivered a trailing four-quarter average earnings surprise of 4.72%.

It is a leading developer of microcontroller ICs for NAND flash storage devices. The semiconductor company also designs, develops and markets high-performance, low-power semiconductor solutions for original equipment manufacturers and other customers.

Note: SEK 1 = $0.0935081 (period average from Apr 1, 2024 to Jun 30, 2024); SEK 1 = $0.0943156 (as of Jun 30, 2024).

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