By Dominic Chopping
STOCKHOLM--Sweden's Ericsson AB is due to report second-quarter earnings before markets open Friday. Here's what to watch:
EARNINGS: The telecom-equipment maker is expected to post a net profit of 3.58 billion kronor ($415.5 million), according to a consensus provided by FactSet, up from SEK2.6 billion last year.
REVENUE: Analysts expect sales to rise 3.0% to SEK57.26 billion from SEK55.60 billion a year earlier.
WHAT TO WATCH:
5G PROGRESS: The company's momentum in the 5G market will be in focus after network revenues grew by 15% year-on-year in 1Q at constant currency. Analysts at UBS forecast an 11% rise in 2Q, against consensus at 15%. Ericsson has previously cautioned that Sweden's ban on Huawei gear in the country could see the company face retaliation in China so commentary on its China business is also key. "Investors have questioned the risk and it will be important for the management to reassure," UBS says.
PATENT ROYALTIES: During 2Q Ericsson agreed a patent license deal with Samsung Electronics Co., and although financial details were confidential, investors will look for clues in the earnings report. Ericsson has cautioned that its licensing revenues continue to be affected by other expired patent license deals, geopolitical impact on the handset market, technology shift from 4G to 5G, and possible currency effects, but expects 2Q licensing revenues from intellectual property rights, including the Samsung agreement, to reach between SEK2 billion and SEK2.5 billion. IPR licensing revenue fell to SEK818 million in 1Q 2021 from SEK2.57 billion in 4Q 2020.
MARGINS: Given the high intellectual property rights gross margin of over 90%, UBS believes there is upside to gross margin consensus after the Samsung deal. The bank expects Ericsson's 2Q group gross margin to reach 42.6%, from 37.6% in the same quarter last year.
GUIDANCE: UBS expects Ericsson to report strong 2Q results and 2H 2021 outlook. "However, we look through this, and believe Ericsson is likely to reach a peak in terms of market share, leading to more questions for the 2022 outlook and beyond." Ericsson uses Dell'Oro for its market outlook and the previous company commentary was for the global radio access network equipment market to grow by 3% in 2021, with Mainland China expected to grow by 4%, North America by 2% and Europe by 3%. "Given Dell'Oro increased its guidance from 3% to 10% for 2021 (in May), we expect Ericsson to update its outlook accordingly," UBS adds.
Write to Dominic Chopping at dominic.chopping@wsj.com
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Ericsson 2Q Earnings Seen Rising on Continued 5G Mometum, Patent Deal -- Earnings Preview - MarketWatch
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