Ericsson Earnings: Cisco Partnership, Apple Pact Can Drive Growth Going Forward

The key highlights of Ericsson‘s (NASDAQ:ERIC) Q4 fiscal 2015 results were its cost cutting efforts taking effect and its renewed patent license deal with Apple (NASDAQ:AAPL). Both these developments helped the company report a 65% year-over-year (y-o-y) rise in net profits to $827 million. On the top line front, currency fluctuations helped Ericsson report 8.2% growth in revenues, while in constant currency they were down 1%. ^[1] Looking ahead, the company is relying on its recent deal with Cisco (NASDAQ:CSCO) to provide some growth in the next couple of years. The management said that the company still needs to work out certain specifics of the deal centered on product ranges and marketing strategies, but it can begin to reap the benefits this year. With the Nokia-Alcatel Lucent merger in the U.S. and Huawai’s strength in China set to make life hard for Ericsson, the network infrastructure giant needs a competitive advantage, and the Cisco alliance can provide it one. On the profitability side, patent income from Apple should have a moderate positive impact on Ericsson’s income going forward, though it remains unreported how much the contribution will be.

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

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Cisco Can Help Ericsson Against Competition

In China, Ericsson is facing stiff competition from Huawei, which enjoys tremendous customer trust and government support being a local player. Huawei has also emerged as a formidable threat for Ericsson in Europe with its recent deal signing frenzy. Within the U.S., the Nokia-Alcatel Lucent merger has created a telecom giant, which will definitely give Ericsson a run for its money. Accordingly, it has become somewhat more difficult for Ericsson to compete with players who offer complete networking solutions. This is where an alliance with Cisco can work well for Ericsson. Bundling Cisco’s products with its wireless infrastructure equipment can help Ericsson offer end-to-end solutions to its customers, who are expanding their 4G, 5G and IoT capabilities. Subsequently, Ericsson should be able to fend off competition and stem the decline in its wireless market share to an extent. The company expects the alliance to start contributing to its bottom line this year, and generate almost $1 billion in incremental sales by 2018.

Apple Pact Provides Steady Income

Apple was paying Ericsson a licensing fee for a mobile technology contract signed in 2008 until January last year, but it refused to re-sign the agreement, putting a sudden halt on Ericsson’s licensing income. ^[2] A month back, the company announced that it had signed a patent licensing deal with the smartphone maker for technology that enables mobile devices to connect to networks. The deal, which ended a 12-month dispute between the companies, is expected to lay the foundation for collaborations on future technologies. Though the value of the monetary benefit for Ericsson remains unknown, UBS analysts estimate that the pact could boost the company’s profits by 10% in 2016. This may go on for as long as the pact lasts. ^[3]

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1. Ericsson Reports Fourth Quarter 2015 Results, Ericsson, Jan 27 2016 [↩]
2. Ericsson unloads legal barrage against Apple in ongoing patent dispute, Apple Insider, Feb 27 2015 [↩]
3. Ericsson signs patent deal with Apple, share roar, Reuters, Dec 21 2015 [↩]