Ericsson Earnings: Awful Results Aren’t Indicative of a Broken Business

Ericsson ERIC B previously forecast a soft third quarter, but the results were even worse than we anticipated. Management said the fourth quarter looks similarly difficult and that current business conditions should continue into 2024. While we think the firm has stumbled in its capital allocation strategy—as witnessed by this quarter’s huge goodwill write-down—we don’t think the poor current results reflect a declining need for Ericsson’s products. We’re maintaining our SEK 95 fair value estimate and think the stock remains undervalued.

Networks, which is Ericsson’s biggest segment, was again the weak spot, as a huge slowdown in North American spending continues to outweigh strength in India. Year-over-year segment sales were down 16% in constant currency, the second straight quarter of double-digit declines. Carrier spending in the U.S. set records in 2022, as those carriers spent aggressively on 5G and built inventory to guard against supply chain disruptions. North American networks revenue dropped by about 60% year over year.

Just as the market correctly didn’t believe the 15% networks revenue growth during 2022 was representative of a normalized pace (as evidenced by a steadily declining stock price), we don’t think investors should read much into 2023′s results, which include networks sales down 6% year to date despite more than 100% growth in Southeast Asia and India. We expect spending on mobile networks globally to be lumpy from year to year, but we’re confident carrier network investment will persist indefinitely, and we don’t see any evidence that other vendors are benefiting at Ericsson’s expense.

The fault we find with Ericsson is not with its performance in its crown jewel networks business, but rather with its straying from this core competency and overpromising on margin expansion. On the former, Ericsson took a SEK 32 billion goodwill impairment charge related to Vonage, or nearly half of what it agreed to pay less than two years ago.