Analysts examine Ericsson and Nokia in light of recent legal developments.
Early this morning, Ericsson (NASDAQ:ERIC) and Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930) announced they have reached a settlement ending an ongoing legal dispute on patents relating to GSM, UMTS, and LTE standard technology. The agreement includes a catch-up payment and ongoing royalties from Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930). While full details of the agreement were not disclosed, ERIC stated that Q4 sales and net income will be impacted by SEK 4.2B and SEK 3.3B respectively.
Ericsson has not been recognizing any payment from Samsung since 2011
Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930) stopped paying ERIC royalties in 2011 as the 2006 licensing agreement expired, and it had not yet been renewed. The dispute revolved around FRAND – Fair, Reasonable, and Non-Discriminatory terms – a patent licensing clause. We had been anticipating an agreement mid-to-late 2014 and had talked about this as a potential upside driver. See our 9/25 note: ERIC – “Rolling Thunder” Moving to Europe; Raise Ests and Target.
Adding about 6 cents+ or SEK 0.40 to Ericsson’s ongoing earnings
Ericsson (NASDAQ:ERIC)’s IPR revenues are included in its Network division and also part of the other geography of which the company has disclosed that SEK 6.6B of the SEK 12.3B in CY12 was due to IPR. Assuming the SEK 4.2B was ‘catch-up’ revenue from mid-2011, we estimate the new annualized run rate could add ~ SEK 1.7B ($260M) and SEK 0.40 or $0.06 to our LT EPS of ~ $1.25 and to our CY15 EPS of SEK 5.62 / $0.88, assuming 100% margins taxed at ~ 21%.
Timing good for Ericsson; Expect a muted report this Thursday
We expect a sub-seasonal December report from Ericsson (NASDAQ:ERIC) this Thursday before the NY open. See our Comms Infrastructure – Bankshots from NOK/NSN following NOK’s report for more detail. In summary we see a general pause in global capex as the US LTE coverage is largely done and shifting to capacity, and Europe/ CHL are not ramping quickly enough to fill in in the near-term.
NOK situation more unclear; Arbitration scheduled for 2015
Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) finds itself in a similar position reaching a settlement with Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930) last week, though with little detail disclosed. We believe NOK has been conservatively accruing royalty payments from Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930), and may have included partial contribution in their 600M run-rate for IPR post Microsoft Corporation (NASDAQ:MSFT). We still expect an incremental up-tick following the final arbitration which Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) expects to be completed in CY15. See our note on NOK NOK – NSN “pause” in 1H; Advanced Tech guide disappoints for more detail.
Ericsson Valuation & Risks
Our $17 PT is based on just below 14x our LT EPS power forecast of $1.25 and corresponds to 19x our CY15 EPS. Risks include delayed carrier capex spending recovery, depressed margins due to modernization projects not generating capacity sales, and the emergence of small cells.
NOK Valuation & Risks
Our $7 price target is based on 17x our CY15 EPS of $0.42 and corresponds to 10x plus an estimated 8B or $2.76 per share in net cash post the Microsoft Corporation (NASDAQ:MSFT) deal. Risks include 1) NSN’s performance in the highly competitive wireless infrastructure space, 2) NSN’s major US and Japanese projects are nearing completion, and 3) the Microsoft Corporation (NASDAQ:MSFT) deal could fall through despite the $750M termination fee.