Nokia and Ericsson pin hopes on 5G to catch up with Huawei

As happens so often nowadays, Nokia and Ericsson could only watch in envy as Huawei posted yet another strong set of results. Ericsson’s quarter had shown some small shoots of recovery, while Nokia’s was lacklustre. By contrast, their Chinese rival – despite being subject to mounting suspicions and trade tensions with the US and other countries – turned in 15% year-on-year revenue growth for the first six months of 2018.

That took total sales to RMB325.7bn ($47.7bn), and the growth rate was the same as for the first half of 2017, even though Huawei is virtually excluded from the US equipment market and has been finding barriers raised against it in Australia and some other markets too. It also saw its operating margin rise to 14% from 11% a year earlier, and operating profits leapt by 46% year-on-year, to around RMB45.6bn ($6.7bn).

However, Huawei does not provide, at the half-year stage, a breakdown of how those revenues are split between its three business divisions – carrier, enterprise and consumer. For its full year 2017, much of its growth had come from the two non-carrier units, while it had suffered from price pressures and capex slowdowns among telcos, though to a lesser extent than Nokia, Ericsson and ZTE.

In 2017, carrier revenues were up 2.5% compared to 2016, and reached RMB297.8bn ($43.6bn), while its total sales were up 16%, to RMB603.6bn ($88.3bn). If that growth rate of 2.5% has persisted in the first half of 2018, for the telco business, it would not be far ahead of Ericsson and Nokia, both of which posted second quarter year-on-year organic growth of about 2% in their core networks businesses.

All three leading OEMs will be looking for a boost from 5G, even if that is unlikely to yield a major capex windfall in the short term (see lead article). Nokia, Ericsson and Samsung are battling it out for the US early movers, since the Chinese firms cannot compete there. Huawei and ZTE do not have a mirror image of that situation in China – although they do benefit from some home advantage in what should become the world’s largest 5G market, and that may increase as trade wars with the US intensify, Ericsson and Nokia have both won significant shares of 4G and 5G-ready contracts with the three Chinese MNOs.

All three vendors will compete aggressively for the early 5G contracts – to build confidence among other potential clients, and to try to tip the balance of power. All three are at the cutting edge in certain, different respects, and Ericsson and Huawei, in particular, have been boosting R&D investment to ensure they can lure new customers. Huawei has been in front of the field in areas such as Massive MIMO and flexible spectrum usage; Ericsson in providing a relatively smooth migration path from ‘5G-ready’ to real 5G; Nokia in the virtualized and edge-oriented architectures.

They need to win some early contracts, because these are looking fairly conventional in terms of equipment and even margins – in later stages, there will be a shift to virtualized RANs, smaller cells and open platforms (see lead article), which will change the economics and may introduce new competitors.

Of course, to win the first 5G deals, they have to offer leading technology, but also have to be more price-competitive than ever before. The premium prices secured from early movers in past generations are unlikely to be on offer this time, as operators squeeze their capex spending and insist on a lower cost base for the RAN. Ericsson has been reported to have won many deals for its successful, 5G-ready Ericsson Radio System platform with aggressive price-cutting (that product now accounts for 84% of RAN sales). That has netted it contracts in China, and a recent win at Telefónica Argentina, partly at Huawei’s expense, was also said to have been won on very keen pricing.

But Huawei has some early 5G wins too, and not just in China. Last week, the UK’s fourth operator, Three UK, said it would turn to Huawei for its 5G network upgrade, having been a Nokia customer for 3G and Samsung for 4G. Three said Huawei’s leadership in Massive MIMO and other 5G technologies outweighed the potential expense and complexity of supporting equipment from three vendors, and that the Chinese firm would now also he involved in 4G enhancement. That is bad news for Samsung, which has been aiming to get back into the RAN market at the 5G stage, leveraging successes in the USA and its home country. It is also bad for Nokia, which provides Three’s core network, and may have hoped that would put it in pole position for an end-to-end 5G deal.

Three played down security fears about Huawei, saying that most of these relate to older network equipment. Telefónica O2, the UK’s second MNO, was said to be distancing itself from Huawei, although all four of the country’s operators do use kit from the Chinese supplier.

On Nokia’s earnings call, CEO Rajeev Suri said: “There will be a couple of waves depending on the spectrum awarded. South Korea will happen later this year and then you will have Japan starting at some point in the first quarter of next year followed by China around the end of Q2 or in Q3 next year. Then you have some Middle Eastern and Nordic countries in the first half. These are the lead countries.”

Suri was seeking to reassure shareholders that the collapse of second quarter profits in the Networks business would be righted by the start of 5G sales, and Nokia had its win at T-Mobile USA to support his case.

Nokia’s share price dropped more than 7% on the report of its quarterly results. Its operating profit fell by 42% year-on-year to €334m (non-IFRS rules), while net sales were down 6% to €5.3bn. Nokia made a €221m operating loss after some one-off costs (charges related to the Alcatel-Lucent acquisition, goodwill impairment charges, intangible asset amortization) were included.

Business and regional mix continued to have some impact on gross margin,” said Suri. The worst falls in the Networks business were in Asia-Pacific and Greater China.

But Suri insisted the company is on track to achieve its full year targets, and like Ericsson, Nokia is pinning its hopes on 5G contracts in key markets, notably the USA. “Our view about the acceleration of 5G has not changed and we continue to believe that Nokia is well-positioned for the coming technology cycle given the strength of our end-to-end portfolio. Our deal win rate is very good, with significant recent successes in the key early 5G markets of the United States and China,” said Suri.

Nokia Technologies, the licensing unit, only accounts for 7% of Nokia’s total revenues, but it generated over 87% of operating profit, up 27% on the year-ago quarter. However, its revenues were down 2% to €361m.

In fact, Nokia’s mobile networks revenues were up at about the same rate as Ericsson’s, around 2% year-on-year. The early indicators are that Ericsson is beating Nokia in 5G-ready RAN contracts, as highlighted by its success in replacing its Finnish rival at Deutsche Telekom.

However, Nokia looks stronger in non-RAN areas, with its software division achieving 2% rise in underlying revenues, by contrast with a sales decline at Ericsson’s digital services unit. Once MNOs start looking at end-to-end systems and broader architectures to surround the 5G RAN, Nokia should reap some of the benefits – as should Huawei, which has the most comprehensive catalog of all.

Suri claims “end-to-end” deals already account for 40% of Nokia’s sales pipeline, up from 30% a year ago. “You lock in the customer on various fronts, you get more strategic, you’re talking about long term network architecture,” he said on the analyst call. “If you have more of the end-to-end portfolio, you have more offsetting mechanisms if a discount is asked for.”

ZTE revises Q1 report to show $790m loss:

ZTE revised its first quarter earnings report to reflect the impact of the recent US ban on it buying American components. It is now reporting losses of more than RMB5.4bn ($790m) for the quarter.

It had previously reported a net profit of about RMB1.8bn ($260m) for the period ending on March 31, a rise from a net profit of RMB1.2bn ($180m) in the same period of 2017.

In its update, ZTE said it had booked about RMB6.7bn ($980m) in non-operating expenses as a result of the US ban. It had recorded non-operating expenses of just RMB28,000 ($4,100) in its original report.

The ban has now been lifted after a second deal between ZTE and the US Commerce Department, to settle accusations of illegal trading with Iran and North Korea.