Tech Stock Under Pressure: Telefonaktiebolaget LM Ericsson (NASDAQ: ERIC)

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Telefonaktiebolaget LM Ericsson (NASDAQ: ERIC) stock fell over 2% on 22nd April, 2021 (as of 10:26:55 UTC-4 · USD ; Source: Google finance) as the company missed the earnings estimates for the first quarter of FY 21. IPR revenues fell by SEK 1.6 billion year over year due to these expired contracts that we are negotiating for renewal currently. Networks sales rose organically by 15%, despite a decline in IPR licensing revenues. This growth came due to continued high activity levels in all market areas, except in the Middle East and Africa. The company continued to grow market share in the first quarter with strong order intake. The gross margin of the segment for Q1 had improved to 46.0% (44.6%). With proactive and continuous measures for supply chain resilience the company have to date been able to manage the global semiconductors shortage situation without impact on the customer deliveries.

Moreover, Managed Services had delivered a gross margin of 21.0% (20.6%) in the quarter. EBIT margin had decreased to 8.1% (11.4%), including a one percentage point one-time negative impact related to an exit from a non-core business. IPR licensing revenues amounted to SEK 0.8 (2.5) b. in the quarter. The decline is mainly due to the expired contracts pending renewal and lower volumes with one licensee. For the largest contract under renewal, both legal and negotiation processes are continuing.

ERIC in the first quarter of FY 21 has reported the adjusted earnings per share of 12 cents, missing the analysts’ estimates for the adjusted earnings per share of 13 cents. The company had reported the adjusted revenue growth of 10 percent to $5.93 billion in the first quarter of FY 21 primarily driven by market share gains in Networks. Adjusting for declining IPR revenues, organic sales grew 14%. Gross margin had expanded to 42.9% (40.4%) YoY and margin increases in all segments more than offset lower IPR licensing revenues. The EBIT margin expanded to 10.7% despite significant investments in the business and headwind from currency. Within both networks and digital services, the company saw a good operational leverage, contributing to these higher margins and despite the lower IPR.

Meanwhile, the company now estimates the RAN market to grow by 3% in 2021, of which China, 4%; North America, 2%; and Europe by 3%.

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