Ericsson Earnings: Weak Results Are as Expected; Selloff Unwarranted Despite Soft Outlook

As expected, Ericsson’s ERIC B second-quarter results were weak, with reduced wireless network spending in the U.S. causing a big dip in organic sales and pressuring margins, relative to last year. While the second-quarter performance was in-line to slightly better than what management had publicly anticipated, management wavered on the timing of a reacceleration, which it previously expected in the second half of 2023. None of this has any bearing on our long-term forecast. We expect mobile network spending to be cyclical, but for there to be very little average annual growth over the long term. We are maintaining our SEK 95 fair value estimate and believe the stock is undervalued.

Adjusted for currency movements and acquisitions, sales were down 9% year over year. We estimate the gross margin and operating margin, excluding restructuring and last year’s Vonage acquisition, contracted nearly 5 percentage points and 6 percentage points, respectively. Extraordinary strength in India—where network sales more than doubled—couldn’t make up for the huge pullback in North American network spending. Sales in India also caused the margin drag, as the region has a lower margin profile.

With the boost from India, Southeast Asia sales reached nearly SEK 14 million, up more than 70% year over year and nearly as high as sales in North America and Europe-Latin America. North American sales were down 37% year over year, to just over SEK 14 million. The big North America inventory buildup that occurred last year is diminishing, and management expects performance to improve, but carrier capital spending in the U.S. remains down. Management expects U.S. performance to pick up, but now says it’s difficult to pinpoint when, after previously guiding to a turn in this year’s second half.