Ericsson Can Overcome Challenges In The Mobile Infrastructure Business

Ericsson (NASDAQ:ERIC) has long been a leader in the global mobile infrastructure market, holding a market share of over 30%. However, its share has declined over the past three years due to a technology shift from CDMA to 3G-4G/LTE as well as growing competition from Chinese counterparts such as Huawei and ZTE. The company’s mobile infrastructure equipment revenues have been down 6% since 2011, and this trend is expected to continue in the near future, with the Nokia-Alcatel Lucent merger emerging as a threat in the U.S. and Huawei presenting a serious challenge in Europe.

However, there are factors that can help Ericsson arrest the decline in its mobile infrastructure equipment revenues. The market is expected to expand going forward with growth in data traffic, continued adoption of 4G in developing countries and the emergence of 5G. The company is looking to build its capacity in the LTE equipment domain, mainly in markets such as India and China, where the LTE presence is still limited. While the technology shift from CDMA/2G/WCDMA to 3G-4G/LTE has negatively impacted Ericsson, the company is not dwelling much on its dominance in the older CDMA domain. Instead, it is evolving with the market, investing in research and development (R&D) related to 4G/LTE and 5G technologies.

We currently estimate Ericsson’s mobile infrastructure equipment revenues to decrease another 6% over the next three years and remain stable thereafter. However, if the aforementioned mitigating factors help the company sustain its market share at current levels, and the overall market grows a little faster than expected, there can be about a 10% upside to our price estimate for the company.

We have a price estimate of $12 for Ericsson, which is about a 20% premium to the current market price.

See Full Analysis For Ericsson Here

Mobile Infrastructure Equipment Revenues Have Declined Slightly

With the exception of an increase in 2011, Ericsson’s mobile equipment revenues have declined consistently over the past six years, mainly due to the technology shift from CDMA to 3G-4G/LTE. The company’s stronghold on the CDMA market has not reaped it much of a reward lately, as carriers have been investing in newer technologies such as 4G LTE. Although a shift from CDMA has weighed heavily on Ericsson’s mobile infrastructure revenues, increased demand for mobile broadband equipment (packet core, IP routers and microwave-based backhaul) and a smooth migration of customers to 3G-4G/LTE has helped it counter the impact to an extent. Between 2009 and 2014, Ericsson’s mobile infrastructure equipment revenues have declined at a compound annual growth rate (CAGR) of 0.4%. In 2014, the segment generated estimated revenues of around SEK 96 billion (~$14 billion). ^{[1] [2]}

Note: Revenues have been estimated using the overall mobile infrastructure equipment market size and Ericsson’s market share gathered from multiple sources.

Improving Revenues Will Be Challenging

Despite the smooth customer transition from CDMA to 3G-4G/LTE, which helped Ericsson increase its mobile infrastructure revenues in 2014, the future appears somewhat challenging. Competition remains one of the biggest concerns for the company, even though it is still the market leader. The merger of Nokia and Alcatel-Lucent has created a network equipment giant that may prove to be a thorn in Ericsson’s side. Alcatel-Lucent has longstanding contracts with major U.S. carries such as Verizon and AT&T, which can help Nokia gain share in the U.S. market at the expense of Ericsson. This could make things worse for the company, which is already struggling to stabilize its mobile broadband business in North America.

In Europe, Huawei has signed a number of deals this year to strengthen its position in the telecom equipment market. Outside of China, Huawei plans to make Europe its stronghold, which is a big concern for Ericsson. ^[3] Ericsson has seen only moderate growth in Europe in recent years, and Huawei’s expansion is only going to increase its troubles. In fact, Ericsson may have to engage in some price-based competition to gain some ground in the market and fend off the Chinese network equipment giant. This will make revenue growth in the region even more arduous.

However, These Factors Can Help

Global Market To Expand: With net subscriber additions in developed markets slowing down and voice minutes showing limited incremental elasticity, data is likely to provide the next wave of growth for wireless carriers. Accelerated adoption of smartphones, flat rate unlimited data plans and a suite of applications including music, navigation, games and mobile video will prompt carriers to invest in capacity-efficient technologies such as HSPDA, LTE and EVDO-DV. In developing markets, continued deployment of 3G and 4G will keep mobile infrastructure investments running. In China, 4G penetration in mobile phone users was at just 10% at the beginning of 2015, indicating a significant scope for expansion. ^[4] In fact, the number of 4G mobile users in China increased by a sizable 60 million in the first quarter of 2015. ^[5] With a surge in demand for 4G, Chinese carriers are spending aggressively on building and upgrading their network infrastructure. Furthermore, the global telecom industry is beginning to warm up to 5G, which holds considerable potential for the mobile infrastructure market.

Ericsson Building Capacity, Focusing On LTE: Ericsson is looking to build its capacity in markets such as India and China, which have substantial room for LTE deployment. The company has done well in China so far, supporting China Mobile for its converged LTE FDD/TDD and Evolved Packet Core network. ^[6] In India, Bharti-Airtel has handed Ericsson and Huawei a contract to set up 4G networks in four circles, and Tikona Digital has reportedly shortlisted the Swedish company for its TDD-LTE roll out. ^[7] In addition to India and China, Ericsson’s foray into the 4G market in Latin America is also going to contribute substantially in its attempt to gain share in the global wireless equipment market. It currently maintains a strong presence in the region, with around a 40% share in the telecom equipment market. ^[8] Overall, Ericsson has bagged over 160 contracts across the globe for LTE deployment, which should keep its mobile infrastructure equipment revenues running. ^[9]

Development Of 5G: With the development of fifth-generation networks showing tremendous potential, Ericsson is pooling its resources in R&D and aggressively collaborating with mobile operators to run 5G trials. The company has cut several jobs in its R&D unit, related to 2G and 3G, in order to divert its resources to the development of 4G, 5G and small cell technologies. During the last quarter, Ericsson collaborated with Softbank in Japan and Turkcell in Turkey to run 5G trials. ((Ericsson collaborates with Softbank on 5G trials in Tokyo, Ericsson, Jul 16 2015)) ^[10] It also strengthened its collaboration with leading South Korean telecom operator KT by adding the “Internet of Things” to the scope of collaboration. ^[11] These steps clearly indicate Ericsson’s intent to aggressively explore the 5G space.

Potential For Upside

We currently estimate Ericsson’s share in the mobile infrastructure market to decline from 32% in 2014 to about 29% around the end of the decade. We expect the overall market to grow slowly from around $45 billion in 2014 to about $46 billion by 2022. However, if the global market grows to $47 billion  and Ericsson’s market share remains stable at 32%, backed by the aforementioned factors, there would be about a 10% upside to our price estimate for Ericsson. Such a scenario could unfold if Ericsson manages to curb the growing competitive threats from Nokia and Huawei, and makes the most of its opportunities in the 5G space.

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1. Mobile Infrastructure Equipment market size [↩]
2. Ericsson’s Market Share [↩]
3. Huawei Says Is “Like A Second Home Market, The Wall Street Journal, Jul 17 2015 [↩]
4. Penetration rate of 4G subscribers exceeded 10% in China, C114, Mar 18 2015 [↩]
5. China 4G Mobile Users Reached 160 Million in Q1 2015, China Internet Watch, Apr 30 2015 [↩]
6. Ericsson continues to support China Mobile with LTE TDD innovations and rollout, Ericsson, Aug 6 2015 [↩]
7. Report Card: Here’s what happened in India’s 4G market so far, Economic Times, Mar 4 2015 [↩]
8. Ericsson strengthens TIM Brazil’s 3G coverage in São Paulo, Ericsson, Sept 9 2014 [↩]
9. Ericsson demonstrates HD Voice over TD-LTE with commercial Sony smartphone, Ericsson, Jun 27 2013 [↩]
10. Turkcell and Ericsson collaborate on 5G research and development in Turkey, Ericsson, Jul 13 2015 [↩]
11. Ericsson and KT strengthen collaboration to develop 5G and IoT technologies, Ericsson, Jun 5 2015 [↩]