Ericsson Q3 Earnings Surpass Estimates, Revenues Decline Y/Y

Ericsson ERIC reported relatively healthy third-quarter 2024 results, with both the top and bottom lines beating the respective Zacks Consensus Estimate. However, the company reported a top-line contraction year over year, owing to demand softness in Asia, Africa, The Middle East, and Oceania region. Solid sales growth in North America partially reversed this negative trend.

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Higher IPR licensing revenues, cost optimization and a robust portfolio boosted the gross margin. Healthy improvement in free cash flow backed by improvement in inventory and supply chain management is a tailwind.

Net Income

Ericsson reported a net income of SEK 3.9 billion ($374 million) or SEK 1.14 (11 cents) per share in the third quarter against a net loss of SEK 30.5 billion or a loss of SEK 9.21 per share in the prior-year quarter. A significant drop in other operating expenses, owing to a decline in non-cash impairment charges and cost discipline boosted the bottom line. The bottom line beat the Zacks Consensus Estimate by 2 cents.

Revenues

Ericsson generated SEK 61.8 billion ($5.93 billion) in revenues, down 4% year over year. Demand softness in the Mobile Networks vertical impeded the top line. However, the top line surpassed the Zacks Consensus Estimate of $5.73 billion.

Segment Results

The Networks segment generated SEK 40 billion ($3.84 billion), down 4% from the year-ago quarter’s tally of SEK 41.5 billion. The top line beat our revenue estimate of SEK 38.09 billion. The segment’s adjusted gross margin improved to 48.7% from 39.9% in the year-ago quarter. The unit registered a 49% 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 a staggering 80% year over year, owing to greater network investments from large customers. Healthy growth in IPR licensing revenues backed by new 5G licensing agreements also supported the top line.

Cloud Software and Services contributed SEK 15 billion ($1.44 billion) in revenues, down from SEK 15.6 billion in the year-ago quarter. The segment witnessed healthy demand in North America, the Middle East and Africa. However, it was offset by weakness in other regions. The top line missed our revenue estimate of SEK 15.8 billion. Adjusted gross margin improved to 38.7% from 36.2% 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 6.3 billion ($605 million), down 5% year over year. Net sales missed our revenue estimate of SEK 6.45 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 52.4%, up from 48.8% in the year-ago quarter. Other revenues were SEK 0.5 billion ($48 million) compared with the prior-year quarter’s figure of SEK 0.7 billion.

Region-wise, South-East Asia, Oceania and India registered revenues of SEK 7.7 billion ($739 million), down from SEK 13.8 billion in the prior-year quarter. Revenues from North East Asia fell 31% year over year to SEK 3.7 billion ($355 million). Net sales from North America increased 51% year over year to SEK 20.4 billion ($1.96 billion) backed by contract wins and growing network investments. Europe and Latin American markets witnessed a 2% year-over-year decline to SEK 15.2 billion ($1.46 billion). Revenues in the Middle East and Africa fell 24% to SEK 4.9 billion ($470 million) due to a slowdown in capex investments and macroeconomic headwinds. Revenues from other regions rose to SEK 10 billion ($960 million) from SEK 9.9 billion in the prior-year quarter.

Other Details

Adjusted gross income increased to SEK 28.6 billion ($2.74 billion) from the year-ago figure of SEK 25.3 billion. Adjusted gross margin was 46.3%, up from 39.2% 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 14.4 billion ($1.38 billion) cash from operating activities during the quarter. As of Sept. 30, 2024, the company had a net cash of SEK 25.5 billion ($2.52 billion) with SEK 24.7 billion liabilities for post-employment benefits.

Outlook

Management anticipates solid demand in North America will drive sales in the Networks segment in the forthcoming quarter. However, demand in the Enterprise segment will likely remain soft.

For the fourth quarter of 2024, revenues from the Networks, Cloud Software and Services segment are expected to follow below average seasonality between the third and the fourth quarter in the last three years. Adjusted Gross margin in the Networks segment is likely to be in the range of 47-49%. Restructuring charges are projected to be around SEK 4 billion in 2024.

ERIC’s Zacks Rank & Stocks to Consider

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

Zillow Group, Inc. ZG carries a Zacks Rank #2 (Buy) at present. In the last reported quarter, it delivered an earnings surprise of 25.81%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

ZG delivered an earnings surprise of 37.41%, on average, in the trailing four quarters. The company is witnessing solid momentum in rental revenues, driven by growth in both multi and single-family listings, which is a positive factor. 

Ubiquiti Inc. UI carries a Zacks Rank of 2 at present. The company offers a comprehensive portfolio of networking products and solutions for service providers and enterprises.

Its excellent global business model, which is flexible and adaptable to evolving changes in markets, helps it to beat challenges and maximize growth. The company’s effective management of its strong global network of more than 100 distributors and master resellers improved its UI’s visibility for future demand and inventory management techniques.

Workday Inc. WDAY sports a Zacks Rank of 1 at present. In the last reported quarter, it delivered an earnings surprise of 7.36%.
 
WDAY is a leading provider of enterprise-level software solutions for financial management and human resource domains. The company’s cloud-based platform combines finance and HR in a single system that makes the process easier for organizations to provide analytical insights and decision support.

Note: SEK 1 = $0.0959631 (period average from July 1, 2024 to Sept. 30, 2024); SEK 1 = $0.0988166 (as of Sept. 30, 2024).

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