Cowen Downgrades Ericsson, 'Yet Another Operating Disappointment'

Ericsson (ADR) ERIC reported another disappointing quarter in 1Q16. Cowen’s Paul Silverstein downgraded the rating for the company from Outperform to Market Perform, while reducing the price target from $11 to $7. The analyst commented that the company’s restructuring effort appear belated and insufficient, and there was “no meaningful improvement in sight.”

Poor Operating Results

Ericsson reported revenue of 52.2B SEK, down 2.4 percent y/y, below Street’s expectation of 54.9B SEK. The overall shortfall was due to weak Services, which was offset partially by better North America Network performance and two new IPR agreements, analyst Paul Silverstein said.

“The revenue decline was driven by double-digit Y/Y declines in virtually every region —especially notable, the completion of 4G rollout in Europe and macroeconomic softness in a number of key emerging markets,” Silverstein noted

The company’s EPS came in at $0.10, short of the Street’s $0.13 estimate, due to lower gross margins. The shortfall was cushioned by a lower tax rate and significantly better opex, the analyst mentioned.

The operating estimates for 2016, 2017 and 2018 have been reduced to $28.1B/$0.61; to $28.7B/$0.67 and to $29.8B/$0.80, respectively.

Profitability: An Ongoing Challenge

Ericsson indicated that it may be able to achieve a breakeven operating margin by 4Q16 for Network Rollout and a 12 percent operating margin for Professional Services. This implies more thn 9 percent operating margin for Global Services.

“We note that the last time Global Services achieved 9+% oper margin in any quarter was over five years ago and for a full year was eight years ago,” Silverstein wrote.