For the 12 months leading into its 2019 second-quarter earnings report, Telefonaktiebolaget LM Ericsson's (ERIC 0.29%) stock was up 25%, fueled by optimism surrounding new global 5G mobile network standards that are just getting rolling. However, while quarterly results were solid, they were nothing to write home about, and the stock dropped 11% the day the report was released. This could be the buying opportunity investors were waiting for.
Solid yet modest progress
Ericsson's second-quarter revenue was up 10%, or 7% when excluding currency fluctuations, acquisitions, and divestitures. As a result of new 5G equipment and other software and service sales -- including cloud computing solutions and the iconectiv network management business, part of Ericsson's emerging business segment -- gross margins notched a nice year-over-year increase to 36.6%, compared with 34.8% in 2018. It all added up to a pretty good first half of 2019, with sales increasing a total of 11% and Ericsson returning to net profitability.
|
Metric |
Q2 2019 |
Q2 2018 |
YOY Change |
|---|---|---|---|
|
Revenue |
$5.85 billion |
$5.32 |
10% |
|
Gross profit margin |
36.6% |
34.8% |
1.8 pp |
|
Operating income |
$395 million |
$21.4 million |
N/A |
|
Adjusted earnings per share |
$0.05 |
($0.01) |
N/A |
YOY = year over year. Pp = percentage point. All figures converted to U.S. dollars from Swedish kronas using a 1 USD to 9.36 SEK exchange rate on July 17, 2019. Data source: Telefonaktiebolaget LM Ericsson.
CEO Borje Ekholm said that Ericsson has been involved with two-thirds of all commercial 5G network deployments, which started launching in late 2018. So far, projects in North America with Verizon (VZ 2.15%), AT&T (T 0.41%), T-Mobile (TMUS 0.93%), and Sprint (S +0.00%) are leading the charge, as well as the 5G rollout in South Korea. Development is also taking place in China, Japan, and Europe, although management said that up-front costs will hurt profitability before yielding results later on.
Image source: Getty Images.
What's next for Ericsson?
5G is exciting, but the process of deploying the new high-speed and low-latency network will be a long and slow one. First uses for 5G revolve around a few pretty basic priorities, including increasing speed and network capacity. Ekholm had this to say on the earnings call:
It is also clear that the first use case for 5G will be enhanced mobile broadband. But the real potential over time will be enterprise driven use cases, where we build the leverage, the capabilities, 5G can give in terms of high-speed, low latency, low battery consumption, many connections per service units, etc. That will create all of those new use cases. We see sales growing organically by 7%, driven by networks in North America and Northeast Asia. And that's, of course, the market that first launched 5G.
Put simply, this is a long game for Ericsson, and it will take years for 5G to reach its maximum potential. In the meantime, though, much of the world is still working on updating and maximizing the use of 4G mobile standards -- especially in the developing world. That makes the telecom equipment and services company a solid bet for some time, with 5G acting to spice things up a bit. Business is unlikely to set any records, but slow-and-steady growth is certainly in the cards. That likely explains the sell-off post-earnings after the big run-up over the last year.
At any rate, with Ericsson still delivering positive figures on the back of 5G, I'm cautiously optimistic about the stock going forward. This one is worth keeping an eye on.
