Shares of Ericsson/Telefonaktiebolaget LM Ericsson (Nasdaq: ERIC) fared poorly on Friday following the report of weak revenues in the fiscal 2021 second-quarter, primarily due to poor sales in Mainland China. Notably, net income increased from last year. However, both revenues and adjusted earnings per share missed analysts’ estimates.
In a separate news release, the company revealed a multi-billion dollar deal with Verizon for expediting 5G facilities in the US. The stock closed Friday’s trading at kronor $11.82, down $1.43 or 10.79% from the prior close.
The Stockholm, Sweden-based company reported second-quarter revenue of kronor (SEK) 54.90 billion ($6.52 billion), down 1.30% from SEK55.60 billion in the comparable period last year. On a y-o-y basis, the group’s organic sales increased 8%, even though Mainland China posted a SEK2.5 billion drop in sales. Analysts polled by Thomson Reuters had anticipated revenues of $6.67 billion for the second quarter.
Ericsson’s net income was SEK3.90 billion ($437 million) in 2Q 2021, an increase of 51% from SEK2.60 billion in the prior-year period. On a per-share basis, earnings were SEK1.10 in Q2 2021, up from SEK0.74 per share in the comparable quarter of 2020. The reported earnings surpassed the net profit of SEK 3.58 billion ($415.50 million) anticipated by analysts surveyed by FactSet.
Also, EBIT (earnings before interest and taxes) rose 51% y-o-y to SEK5.80 billion in 2021. Excluding restructuring charges, EBIT increased to SEK5.80 billion, from SEK4.50 billion in the second quarter of 2020.
On a per-share basis, the company reported earnings of $0.13 per share for 2Q21. On an adjusted basis, earnings were $0.14 per share for the reported period. Analysts polled by Zacks investment research had anticipated earnings of $0.15 per share for the second quarter.
With respect to revenues, network sales increased 11%, led by an increase in market share. Notably, network segment sales dropped by SEK 2 billion in Mainland China. Digital services segment revenues remained stable, despite a SEK 0.50 billion sales decline in China.
Excluding restructuring charges, gross margin improved to 43.4% in the June 2021 quarter, from 38.2% in the similar quarter last year. The increase was led by the networks segment.
The company also revealed that it has entered into an $8.30 billion contract with Verizon Communications. Under the multi-year agreement, Ericsson will offer 5G solutions to expedite the deployment of the 5G network by Verizon in the US.
Furthermore, Ericsson will also provide solutions such as Massive MIMO, Ericsson Cloud RAN, and relevant software to widen and fortify Verizon’s state-of-the-art 5G network.
Last year, Verizon became the foremost telecom company to be offered a commercial 5G mmWave (millimeter wave) Street Macro base station by Ericsson’s manufacturing facility in Lewisville, Texas. Notably, in the Mobility Report published mid-June, Ericsson had stated that the count of 5G mobile subscribers across the globe is assessed to surpass 580 million by the end of this year.
During the first quarter of 2021, the number of 5G subscribers owning a 5G handset increased by 70 million. The report also forecasts an increase in 5G subscribers to 3.50 billion, with 60% 5G population coverage in five years.
Regarding the future growth prospects, Börje Ekholm, President and CEO of Ericsson, said: “We are well-positioned to take advantage of continued market momentum with our competitive 5G product portfolio and cost structure. However, it is prudent to forecast a materially lower market share in Mainland China for Networks and Digital Services as the earlier decision to exclude Chinese vendors from the Swedish 5G networks might influence market share awards.”
The quarterly earnings miss and issues being faced in Mainland China are expected to keep the stock range-bound with a slight bearish bias.
Technically, the stock is declining after facing resistance at 13.50 levels. The next support is anticipated only near 10. Additionally, the stock has closed below its 50-day moving average, while the MACD indicator is descending deeper into the negative zone. Therefore, we are anticipating the stock to remain in a downtrend in the short term.
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