Ericsson shares fall on sales miss, weaker networks outlook despite Q2 profit

Investing.com -- Shares of Ericsson (ST:ERICb) fell more than 3% on Tuesday after the telecom equipment maker missed revenue expectations in the second quarter and issued a softer-than-expected outlook for its core mobile networks division, dampening the impact of an otherwise sharp earnings rebound.

The Swedish telecom company reported a net profit of SEK 4.6 billion for the quarter ending June 30, reversing a loss of SEK 11 billion in the same period last year. 

The turnaround was driven by higher intellectual property licensing income and significant cost reductions, even as total reported sales declined 6% to SEK 56.1 billion.

Analysts had expected SEK 59.2 billion in revenue, according to Morgan Stanley (NYSE:MS) estimates.

Adjusted EBITA rose to SEK 7.4 billion from SEK 4.1 billion, with the margin improving to 13.2%, the highest level in three years. 

Reported EBITA grew to SEK 6.8 billion, while operating income swung to SEK 6.4 billion from a loss of SEK 13.5 billion a year earlier.

Gross income, excluding restructuring charges, came in at SEK 27 billion, up slightly from SEK 26.3 billion, though short of expectations. 

The adjusted gross margin improved to 48%, up from 43.9%, benefiting from higher-margin licensing revenue and a more favorable product mix. Currency headwinds shaved SEK 2.4 billion off gross income.

Intellectual property rights licensing revenue surged 25% to SEK 4.9 billion, driven by a partial settlement of a patent dispute and the recognition of revenue from previously unlicensed periods. 

This income accounted for the bulk of segment profits and helped offset softness in Networks, where reported sales fell 5% to SEK 35.7 billion. 

While organic sales in Networks grew 3%, adjusted EBITA for the segment declined to SEK 6.5 billion, missing Morgan Stanley’s forecast.

Cloud Software (ETR:SOWGn) and Services revenue declined 5% to SEK 14.4 billion, though profitability improved, with adjusted EBITA rising to SEK 1.4 billion from just SEK 0.1 billion a year ago. 

The Enterprise segment saw sales fall 14% to SEK 5.5 billion, but narrowed its loss to SEK 0.5 billion from SEK 1.2 billion. Segment “other” reported flat revenue of SEK 0.5 billion.

Regionally, organic sales increased 10% in the Americas and were stable in Europe, the Middle East and Africa. 

However, sales declined 22% in South East Asia, Oceania and India, and 15% in North East Asia. Management attributed the decline in India to delayed network investments by operators.

Ericsson guided for Q3 Networks sales to come in below the three-year seasonal average, reflecting the absence of Q2’s one-time licensing gains.

The company expects Networks gross margin to range between 48% and 50%, in line with consensus but implying a potential dip in gross income.

Ericsson ended the quarter with SEK 36 billion in net cash and SEK 73.3 billion in gross cash. The company employed 91,937 people as of June 30.