Ericsson Stock Falls After Earnings as 5G Spending Slows

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Ericsson

stock fell sharply Tuesday, after the Swedish telecommunications hardware provider posted disappointing first-quarter results and softer-than-expected guidance for the June quarter.

The company’s cautionary comments have spurred a widespread selloff in shares of other networking hardware providers—and, in particular, companies selling hardware for building out 5G wireless networks.

Ericsson stock slid 9% to $5.39 Tuesday. Shares of rival

Nokia

(NOK), which reports results Thursday, were recently 4.4% lower at $4.64.

Among other players in the sector,

Ciena

(CIEN) fell 3.4% to $47.94;

CommScope

(COMM) declined 2.9% at $4.81; and Juniper slipped 1.3% to $33.15. Shares of

Cisco Systems

(CSCO) and

Arista Networks

(ANET) were both fractionally lower.

Ericsson (ticker: ERIC) reported first-quarter sales of 62.6 billion Swedish kronor, (about $6.1 billion). While marked a 14% increase from a year ago as reported, sales were about flat from a year ago when adjusting for acquisitions and foreign exchange, as the company had forecast. Sales declined 27% from the December quarter.

The company’s results were buoyed by huge growth in India, offsetting a 30% revenue decline in the North American market. Gross margin in the quarter slipped to 39.8% from 42.3% a year, a decline the company blamed on a business mix shift. Ericsson noted that due to a free cash flow loss of 8 billion kronor, its cash position fell by SEK 9.7 billion to SEK 13.6 billion kronor.

For the second quarter, Ericsson sees network product sales in line with the first quarter, with a smaller-than-usual seasonal increase in cloud software and services revenue. It also said that slow enterprise demand experienced in the first quarter will remain an issue in the second quarter. The company continues to be affected by both lower customer capital spending and high customer inventory levels, it said.

Raymond James analyst Simon Leopold, who has a Market Perform rating on Ericsson shares, said high inventory at the company’s telecom customers explains the company’s outlook for flat hardware growth.

“Rapid growth and share gains in India did not offset slowing elsewhere and pressured margin,” he writes. “Despite improved transparency and forecasting, the business remains choppy and the modeling tricky.” 

Evercore ISI analyst Amit Daryanani notes that network hardware sales were down 2% from a year ago due to softer spending on 5G hardware, as most telecom customers have largely completed their 5G rollouts. He adds that the weak free cash flow report in the quarter—he says expectations were for modestly positive free cash flow—reflected working capital headwinds, with higher customer financing costs.

Write to Eric J. Savitz at [email protected]