Last week we saw Ericsson boasting of continuing progress in its turnaround plan, when it announced solid quarterly results. Nokia, Huawei and ZTE all followed up with their own financial statements, and Nokia was also claiming gains from its own turnaround program, as it returned to profit.
Nokia’s plan to restore its fortunes is newer than Ericsson’s – the Finnish firm changed CEO only last August, when Pekka Lundmark took the helm, while Börje Ekholm took over at Ericsson four years ago. But both men were appointed as turnaround leaders, setting out far-reaching reorganization, cost-cutting and revenue growth plans within months of taking the top spot.
The timing means Nokia’s challenges look tougher than its competitor’s, as it strives to recover both from its own errors of judgement, such as the costly mistake of its first 5G base station architecture, and from pressures on its markets. However, it does have the benefit of a growing enterprise and private network business, and of course, the weakening of another arch-rival, Huawei, in some of its biggest regional markets.
Lundmark was in bullish mood, despite continuing challenges such as disruption to semiconductor supply, failures to win new business in China, and the loss of some contracts with Verizon.
Nokia returned to profit in the quarter, reporting almost $319m in net income on sales up 3% year-on-year to $6.15bn. In the year-ago quarter, the company reported a net loss of $139m.
The star of the show in terms of growth was the Network Infrastructure division, which reported a revenue increase of 22% to almost $2.1bn. “The standout was our network infrastructure business, which had a fantastic quarter,” said Lundmark. “This business group builds on strong technology leadership, and we see robust demand for its products.” The division houses fixed, IP, optical and submarine networks and is led by Federico Guillén, who said the shift to home working as a result of Covid-19 had been one factor in the growth.
He said: “Customers used to tell us that 5G was their number one priority, but while 5G continues being a priority, fiber is as important as 5G these days for two reasons: One, to support the growing traffic volumes; and two, when you go deep with 5G and you’re going to millimeter wave, you’re going to need to backhaul all the small cells that are deployed, and you cannot do that with point-to-point fiber – you will need point-to-multipoint, and that’s the reason why our technologies are evolving to 25Gbps PON for the right level of latency.”
However, the largest division, Mobile Networks, reported a 4% year-on-year decline in revenue to €2.3bn ($2.74bn), though it would have been 2% growth on a constant currency basis. This was better than last year, when revenues fell 3% on a constant currency basis, but far less impressive than the 15% increase Ericsson’s networks business reported for Q1.
Analysts on the call were quick to blame the lackluster mobile performance on loss of business with Verizon, one of Nokia’s largest customers. Lundmark insisted the US operator was still a top three customer, though acknowledged most new sales to Verizon were for non-RAN equipment such as IP networks. “There’s a lot of Nokia radio in their network. At the same time, it is a fact that we have not announced any large-scale 5G C-band radio deals with them,” he said. Verizon recently said that Ericsson and Samsung – which shared its original 5G contracts with Nokia – would be its C-band RAN suppliers.
Lundmark said the impact of the Verizon situation would be felt in earnings for the rest of this year, though he claimed the Mobile Networks unit had been largely able to compensate for the Verizon loss with new Q1 contracts elsewhere. Nokia claims 160 commercial 5G contracts and 63 live 5G deployments worldwide to date.
Of the two smaller business units, Cloud and Network Services saw its revenue fall by 9% to $817m, while Nokia Technologies, the licensing and IP unit, reported a 5% year-on-year revenue increase to $442m. Cloud and Network Services includes the 5G core; analytics and AI; private wireless; digital operations and automation; and managed security. Lundmark said the revenue fall was by comparison with a particularly strong Q1 in 2020. Nokia said it signed contracts with 63 new enterprise customers in the quarter, about half of them buying private network products or services, bringing the company’s total base of private wireless customers to over 290.
Nokia expects its total addressable market to grow by 3% this year, driven by 5G and also by residential broadband in the wake of pandemic-inspired changes in working habits. “We also see growth opportunities in the market for enterprise and webscale with IoT, edge, and industrial digitalization,” Lundmark said on the earnings call last week.
“Consumers, businesses, and governments are all pushing for ultra-fast connections to homes and workplaces, as working from home looks like it is here to stay,” he added.
He also said the worst was over in the expensive process of converting all Nokia’s 5G RAN products to the new system-on-chip (SoC), from the original processors, which proved to be costly and caused network teething troubles in some key deployments such as Sprint’s in the USA. The new platform was present in 44% of base stations shipped in the first quarter of 2021, and the company is on target to reach its target of 70% by the end of this year.
However, Lundmark tempered that confidence with the warning that “there is now less visibility to the semiconductor market in the second half of the year. … We want to see how the situation develops and continue to give it our full attention in close dialog with our suppliers.”
He highlighted the promise of a new Massive MIMO 5G radio, which will boast wider bandwidth and lower weight and size than Nokia’s current antenna arrays, or those of the competition, it claimed. As operators deploy Massive MIMO at a faster rate than previously anticipated, the race to offer smaller, less energy-hungry units is a key aspect of the 5G market in 2021, with Ericsson recently unveiling its own new family of compact products.
“We believe that ours will be a highly competitive Massive MIMO radio,” Lundmark said on the earnings call last week.
Meanwhile, Nokia’s challenges are dwarfed by those facing its rival Huawei, which has been officially barred from 5G infrastructure contracts in the USA, Japan and some European markets, and in some other markets in Europe and Asia, is suffering from operators’ uncertainty about potential future sanctions. Huawei has been further hit by US restrictions on its access to suppliers that use American technology, such as the world’s largest semiconductor foundry, TSMC.
Huawei’s finances held up surprisingly well against these pressures in the earlier part of last year, but the cracks are starting to show and the company announced a 16.5% year-on-year drop in revenues for the first quarter of 2021, to RMB152.2bn ($23.5bn). This was the second consecutive quarter of revenue decline, after an 11% year-on-year fall in the last quarter of 2020.
The company did not disclose net income, but said its net profit margin was 3.8% in the quarter, which translates to net profit of $2.6bn, according to Bloomberg. Margins will have been increased by a greater attention to monetizing Huawei’s huge store of patents – this generated $600m in revenue in the quarter.
The worst-hit business was in smartphones and consumer products – Huawei not only has issues with access to advanced chipsets for handsets, but also cannot offer Android with popular Google services. It has resorted to selling off its midrange smartphone business, Honor, to improve its ability to use western technology, and to designing its own mobile operating system – which has a good chance of gaining adoption in China, where Google is largely barred, but faces a steep mountain in markets where Android is synonymous with Google services such as Search, Maps and Play Store.
Huawei did not break out the results of the different divisions, but blamed the overall sales decline primarily on falling smartphone sales and the offload of Honor. “2021 will be another challenging year for us, but it’s also the year that our future development strategy will begin to take shape,” said Eric Xu, Huawei’s rotating chairman. The company did say that its networks division had experienced continuing “steady growth”, though it is not clear whether that was any higher than the 0.2% sales increase that business managed in full year 2020.
With 5G RAN and core equipment restricted in many countries, Huawei is looking to cloud computing and software to drive new growth. Last week, the firm unveiled a range of new cloud products in a challenge to Chinese giant Alibaba, and is pursuing the ambitious goal of becoming a hyperscaler to rival Microsoft Azure, Amazon AWS and Google Cloud – especially in markets that are suspicious of the increasing power of these US majors.
“No matter what challenges come our way, we will continue to maintain our business resilience. Not just to survive, but do so sustainably,” Xu said. “As always, we remain committed to technological innovation and investing heavily in R&D as we work to address supply continuity challenges caused by restrictions in the market.”
As for ZTE, the smaller Chinese supplier is no longer on the US entity list – which restricts a firm’s ability to buy US technology – having paid fines back in 2018. This enables it to buy American chips and software, and the effect is seen in its relatively strong quarter. It reported its best quarter since 2012, with sales up over 22% to RMB26.2bn ($4bn), and net profit leapt by 180% year-on-year to nearly RMB2.2bn ($340m).
ZTE has always been more reliant on its home market than Huawei, which in the past was often seen as a weakness, but is now protecting it from the worst impact of international sanctions against Chinese 5G equipment. And unlike Huawei, it is not running short of access to semiconductors for its networks and devices.
The company did not break out the quarterly results between its three divisions – Networks, Enterprise and Devices. The first is the biggest, accounting for 73% of revenues last year, and is likely to have enjoyed the best performance, thanks to ZTE’s large role in the huge 5G awards and roll-outs of the three main Chinese operators in 2020 and 2021. ZTE reportedly won 29% of China Mobile’s most recent 5G tender, against Huawei’s 57%, which means the smaller company won a higher share of the spoils relative to its size.
Of course, ZTE has risks. It is over-exposed to the inevitable slowdown in the Chinese 5G roll-out after 2022, and there is the chance that it will be returned to the US entity list as geopolitical tensions between the USA and China show few signs of easing in 2021. But for now, it remains free to access important software, components and foundry services, and can boast of being the fastest growing of the major 5G network suppliers.