ZTE gains confidence on the back of solid earnings growth

Perhaps ZTE has just been enjoying an uncomfortable silence and an expensive milkshake in recent months, but its financials for the first half of 2019 are screaming for attention.

It is quite difficult to measure the performance of the business looking at the financials alone, ZTE found itself in the Trump crosshairs in H1 2018, though the team is hyping itself up now, seemingly to gain attention in a very noisy segment. ZTE is often overlooked when considering the major network infrastructure vendors, but it certainly does warrant mention.

Revenues for the first half of 2019 stood at roughly $6.23 billion, up 13.1% year-on-year, profits increased a massive 118% to $210 million. The team is now forecasting profits between $530-640 million for the first nine months of the year.

These numbers might sound very impressive, but it was at this point last year when President Trump and his administration targeted ZTE. In May 2018, ZTE announced its major operating activities had ceased after the US Department of Commerce’s Bureau of Industry and Security (BIS) placed an export ban on the vendor. Without the US complement in the ZTE supply chain, the firm was almost extinct, though concessions were made and now it appears it is business as usual.

This is why the year-on-year gains are largely irrelevant. ZTE was a shell of a company at this point last year, fighting for its very survival.

That said, the company is surging towards the 5G finish line just like its rivals, and now it needs to convince potential customers it is a stable, reliable and innovative partner. Being selected to supply equipment to any telco will be after intense scrutiny, and thus the charm offensive has begun.

First of all, lets start with the R&D spend. ZTE has suggested it has spent roughly $900 million on R&D for the first six months of 2019, a 14.5% ratio of the total revenues for the period. This is an increase from the 12.8% share of the same period of 2018, with the new figure just ahead of the 13.8% share of revenues (estimate) Huawei allocated to R&D last year. The domestic rival has promised to increase this figure by 15-20% for 2019, though the overall percentage will not be known until the full year financial figures are known.

In comparison, Ericsson said it attributed 18.5% of net sales revenue to R&D over the course of 2018, a figure which increased to 18.7% by the end of the first six months of 2019. At Nokia, 18.4% of net sales revenues were directed towards the R&D department for the first six months of this year.

This part of the business has largely been focusing on the development of basic operating systems, distributed databases and core chipsets most recently. The company has completed the design and mass production of the 7nm chipsets, while it is currently undergoing the R&D phase for 5nm chipsets.

All this work has resulted in 3,700 5G patents being granted to the firm, though this number might notably increase in the near future. ZTE has also said it is partnering with various Chinese universities to source 5,000 new employees to bolster the R&D ranks. Once again, these are numbers which are being cast into the public domain to enhance the reputation of the business at a time where vendors are facing scrutiny at an unprecedented level.

Of course, when we are talking about creating a perception of stability and reliability, as well as increased scrutiny, you have to discuss security.

ZTE might have managed to avoid US aggression over the last couple of months, Huawei has been the primary target, but as a partly state-owned entity, such questions will never be that far away. This is where the cybersecurity centres will play an important role.

Opened in Nanjing, Rome and Brussels, the cybersecurity centres will allow potential customers to test and validate the security credentials of the firm prior to installing any equipment or software in the network. Some will not be convinced this is a fool-proof way to ensure resilience, though it is an act of transparency which the industry and governments have been crying out for.

The result of this work is 60 memorandums of understanding (MoU) with telcos around the world, 50 5G demonstrations in 20 industry verticals, 300 strategic collaborations and 200 5G products to date.

It is often easy to overlook ZTE and designate the firm as a poor man’s version of 5G network infrastructure, but the numbers justify inclusion at the top table. The challenge which ZTE now faces it making prominent strides into Western markets, the very ones which are getting twitchy over security and price today.

Is Xiaomi filling a Huawei-shaped hole in the smartphone market?

Huawei might be suffering in today’s political climate, but every action gets a positive and negative reaction and could Xiaomi be benefitting from its rival’s misery?

The Chinese challenger brand might have missed on market expectations for revenue, but it is not the worst set of financial results you have ever seen. Looking at the most simplistic measure of a company, it made more money than last year, brought in more profits and sold more products; not too bad.

“Thanks to the Xiaomi relentless efforts, we have managed to achieve solid growth in our businesses, posting a consensus-beating profit and becoming the youngest Fortune Global 500 company in 2019, despite global economic challenges,” said Xiaomi CEO Lei Jun.

“Our performance is testament to the success of our ‘Smartphone + AIoT’ dual-engine strategy and the Xiaomi business model. Looking ahead, we will continue to strengthen our R&D capabilities and investments so as to capture the great opportunities brought by 5G and AIoT markets and strive towards ongoing achievements for the company.”

Financial analysts will be pouring over the spreadsheets to understand why Xiaomi seemingly missed market expectations, but let’s not forget, the smartphone market is in a notable slump right now. Sales are slowing and the 5G euphoria is yet to hit home to compensate. No-one is immune from overarching global trends.

However, there is a glimmer of hope on the horizon for the majority of smartphone manufacturers; there are gains to be made from the Huawei misery.

According to the latest smartphone shipment numbers from Canalys, Huawei’s smartphone shipments in Europe have declined year-on-year by 16%, while Samsung and Xiaomi have grown their numbers by 20% and 48% respectively. Other factors will contribute to the increase, though there will be former-Huawei customers who are seeking alternatives brands at the end of their replacement cycle.

Huawei is in a bit of a sticky situation right now. Firstly, its credibility has been called into question, thanks to President Trump’s trade war, while its supply chain is suffering due to the tariffs from the aforementioned trade war. The supply of critical components is under threat, as are security updates from Google’s Android operating system. Both of these concerns will impact consumer buying decisions.

Looking at Huawei’s financial figures, the consumer business unit is still on the rise, revenues were up 23%, though when you take into consideration the analyst estimates, it would seem these gains are from the domestic market. If Xiaomi can avoid collateral damage, it could benefit from Huawei’s alleged downturn in the international markets.

This does seem to be the case. For the first half of 2019, Xiaomi’s revenues increased 20.2% year-on-year to roughly $13.55 billion. The international markets, an area of significant potential for Xiaomi, accounted for 42.1% of the total, compared to a 36.3% proportion in the same period of 2018.

The gains in Europe have been highlighted above, though the Indian market is looking like a very profitable one. IDC estimates suggest Xiaomi is still leading smartphone shipments in India and has done for the last eight consecutive quarters. Estimates from eMarketer state smartphone penetration will grow to 29% of the Indian population in 2019, year-on-year growth of 12.5%. There is still a massive amount of growth potential in this market which is undergoing its own digital revolution.

Another area which has been highlighted for gains by the Xiaomi management team is the increasing diversity of the product portfolio.

Aside from the Mi 9 series and Redmi Note 7 series, the team launched the new K20 flagship during the second quarter, with shipments exceeding one million in the first month. The CC Series has also seemingly gained traction with female audiences, while the Mi MIX 3 5G was one of the first 5G compatible devices to hit the market. Numerous telcos have partnered with Xiaomi for this device, suggested the team is taking the shotgun approach as opposed to signing exclusive partnerships.

What is clear, Xiaomi is a smartphone manufacturer which is heading in the right direction. However, the gains could be increased should the misery continue for Huawei.

Cisco hits expectations once again, but disappoints on forecast

Cisco has released financials for the final three-month period of 2018, beating market expectations for the 21st consecutive quarter.

He might not be the most flamboyant of CEOs, but like Satya Nadella over at Microsoft, Chuck Robbins is letting the business do the talking. Since his appointment in 2015, the vendor has gone from strength-to-strength, with these results adding another feather to the cap.

Looking at the financials, total revenue for the three months reached $13.4 billion a 5% year-on-year increase, while net income was down 42% to $2.2 billion. Although the latter figure might shock some, CFO Kelly Kramer has suggested this is only a blip on the radar, with the hole attributable to US Treasury Regulations issued during the quarter relating to the Tax Cuts and Jobs Act.

In terms of the numbers across the year, total revenues stood at $51.7 billion, up 7%, while net income was $13.8 billion, an increase of 9% compared to the previous year.

However, it is not all glimmering news.

“Let me reiterate our guidance for the first quarter of fiscal ’20,” Kramer said during the earnings call. “We expect revenue growth in the range of 0% to 2% year over year.”

Considering the ambitious plans set-forward by the business over the last few years, this would not seem to be the most generous of forecasts. The dampened forecast might well disappoint a few investors. What is worth noting, it that despite having strong and stable foundations, Cisco is not immune to global trends.

Looking at the telco customers, Asia is demonstrating weakening demand for Cisco. The China telco business is weakening, while demand in India has dropped off as aggressive network roll-outs in 2018 are not being replicated today.

In terms of working with enterprise customers, the team had two major software deals in 2018 which are “tough to compare against”, according to Robbins, while the Chinese and UK markets are demonstrating weakened positions thanks to events which are outside of the control of the team. No prizes for guessing what those events might be.

What is worth noting is that while it is easy to point the finger of blame towards China in the current political climate, take    this explanation from Robbins and Kramer with a pinch of salt. Cisco’s revenues in China might have declined by 25% this year, though the market only accounts for less than 3% of total revenues.

Cisco is no different from any other vendor in the telco space right now. It might be performing healthily, though it is reliant on telcos getting their act together and pushing network investments forward. The 5G bonanza to boost profitability in the telco ecosystem is yet to appear, though there are hints it might be just around the corner (as always…).

“I would say don’t anticipate that being a huge profit driver off of the 5G transition that’s going to come when they build more robust broader 5G infrastructure where they’ll deliver enterprise services and that’s going to come after they do the consumer side,” Robbins said.

“So, it’s a bit unclear when that will take place. I’d say we’re not modelling and don’t anticipate any significant improvement in this business in the very near term.”

This is where the 5G hype can be slightly misleading. There are of course telcos who are surging ahead, but these are only a fraction of the networks around the world. It is promising, but the market leaders or fast followers are not going to flood vendors bank accounts with profits.

There are numerous markets who are still in the testing phases of 5G, with the telcos aiming to figure out the commercial business model to make the vast investments in future-proofed markets work. When we start getting to the steep rises of the bell curve, this is where the profits will start rolling in.

That seems to be the message from the Cisco management team today; we’re in a healthy position, but don’t expect this quarter to blow anyone’s mind away. The 5G euphoria is on the horizon, but investors will have to wait just a little bit longer.

Convergence may well pay off for Virgin Media

It might not be setting the world on fire, but Virgin Media is proving the slow, steady approach to business is certainly worth paying attention to.

On the financial side of the business, total revenues grew marginally by 0.4% to £1.279 billion for the second quarter. Broadband customer acquisitions bolstered the financials, though these gains were mainly offset by customer losses in TV and mobile. This doesn’t seem to be the most attractive of statements, though the management team doesn’t seem to be worried as the convergence mentality becomes more prominent.

“Our disciplined and balanced approach to customer acquisition and capital expenditure has seen a return to growth in our sector-leading cable ARPU and strong free cash flow generation,” said Lutz Schüler, CEO of Virgin Media.

“Underpinning this is the continued success of our network expansion, new initiatives to improve sales and customer service and our fixed-mobile Oomph bundles which have already seen a doubling of customers attaching a mobile SIM to their package with meaningfully higher ARPU.”

An important aspect to always consider when discussing convergence is the incremental nature; this is a strategy which casts an eye to the horizon. Quarter-on-quarter you might not see the benefits, but in a few years’ time, a few will look back and wonder how they got by without such a considered approach to customer management, acquisition and retention.

Looking at the business objectives, there are four strategic pillars; converged customer contracts, increased sales efficiencies, improvement in base management and digital transformation. None of these strategies are a silver-bullet to find the next billion, but this is looking like a business which is in a healthy position, posed for growth in the next era of connectivity.

In the broadband business, Protect Lightning (the fibre buildout programme) now passes 1.8 million premises throughout the UK. Subscriptions increased by 5,000 across the period, taking the total to 14.7 million. Video cable subscriptions are down, though with a new bundle offering launched focused on sport, this could be an interesting area of growth for the business.

Over the next couple of weeks, we strongly suspect there will be an aggressive advertising campaign to glorify the benefits of Virgin Media’s TV subscriptions. Bundling together Sky Sports, BT Sport and Amazon (separate subscription) into a single aggregated content platform might be attractive to numerous sports fans, and at a cheaper price than competitors, it has the potential to cause disruption.

This has been a pain-point for Virgin Media for the last few years. Speaking from experience, your correspondent can detail the inadequacies of the TV package, though industry analysts are increasingly confident this new approach from Virgin Media is much more comprehensive. The management team are also putting a brave face on the loss of TV subscriptions, suggesting the strategy is to move away from entry-level customers, focusing on higher-end, higher-value targets.

These are two of the convergence prongs at Virgin Media, with mobile being the final. This is another area where subscriptions declined, primarily pre-paid, though as Virgin Media is currently an ‘also-ran’ in the mobile segment there is significant room for growth if the proposition is fairly priced in.

Working with EE/BT, the opportunity is certainly there to create an effective mobile proposition. EE/BT regularly has the highest rated network in terms of overall performance, though perhaps Virgin Media’s ability to offer 5G tariffs will play a notable role here. We’re not too sure what the agreement is between the two parties, though should it be able to offer 5G services over the EE/BT network sooner rather than later, the convergence strategy may well receive a boost.

Looking at the benefits of convergence, many point to higher ARPU, though perhaps the more significant, longer-term advantage is customer retention. Virgin Media experienced 15% customer churn at the end of 12-month contracts, though many accept churn rates decrease for converged customers. Considering the cost of acquiring new customers in a saturated market like the UK, anything which can be done to improve retention is a massive bonus.

In terms of convergence, the number of fixed-mobile converged customers has improved to 19.9%, as the proportion of new customers taking mobile with cable services doubled post launch. We have asked for more details on the number of converged customers as a percentage of the total, churn rates in comparison between the two and differences in ARPU, and at the time of writing Virgin Media is yet to respond.

We suspect the numbers will be positive, though nothing that will stop the world from spinning. That said, that is not a bad thing. Convergence is about incremental gain, the slow and steady approach to business improvement.

Convergence is about setting goals a few years in the future, it’s a gradual gander forward. You might not see the benefits, but looking back, you’ll wonder how you operated without such a considered approach to business. Virgin Media is looking like it is in a healthy position.

Skyworks financials reveal the cost of working with Huawei

Mobile chip maker Skyworks solutions has released its financial results for the third quarter of 2019, with a $127 million hole in comparison to the same period of 2018.

In most circumstances, a 16% drop in revenues for a three-month period would send the office into meltdown. Executives and shareholders will of course not be thrilled, but this downturn was expected by pretty much everyone involved; this is the cost of doing business with Huawei.

As you can see from the table below, there are certainly some numbers which will cause a persistent twitch.

Q3 2019 Q2 2018
Net revenue $767 million $894.3 million
Gross profit $312.5 million $442.7 million
Net income $144.1 million $286.5 million
Earnings per share (Basic) $0.83 $1.58

What is worth noting is that there are factors contributing to this downturn outside the Huawei saga. Semiconductor sales across the world are in a trough currently, the Semiconductor Industry Association (SIA) unveiled quarterly figures earlier this week, with the global smartphone shipments impacting financials everywhere.

Perhaps due to a lack of innovation in the smartphone arena or consumers afraid of purchasing new devices with a new ‘G’ on the horizon, shipments have declined. History suggests this is cycler, though the depressed states of affairs can also be contributed to Huawei business.

Skyworks solutions is one of those businesses which is in a somewhat difficult position. There might a brief reprieve for those working with Huawei, though the damage has clearly been done.

In entering Huawei onto the Entity List, effectively banning any US company from working with the Chinese vendor, President Trump released a wave of collateral damage. Skyworks was not one of the worst effected, though as you can see there clearly is friendly fire from the White House.

During last years Annual Report, Skyworks told investors Huawei was one of three firms which accounted for more than 10% of annual revenues. With a third of generated revenues being attributed to three companies, this is not the healthiest position, but in the smartphone segment it is largely unavoidable; there aren’t than many manufacturers after all.

Interestingly enough, while the firm did beat market expectations, this does not seem to have diluted fears from investors.

The management team has greenlit a 16% increase of dividend payments, while there is hope it might be able to continue work with Huawei, but investors are seemingly voting with their feet. At the time of writing, share price declined by almost 7.4% in overnight trading.

This is not a firm which will cease to exist because of these negative events, however it is wounded right now. Huawei is a massive customer for the team and an account which was only getting more profitable as Huawei grew its global smartphone market share. This is not the beginning of the end, but it doesn’t make for the most comfortable reading.

BT CEO calls for more state assistance after delivering flat numbers

UK operator group BT reported a small revenue decline in Q2 2019 and once more fished for public help with its network investment.

In his comments accompanying its quarterly earnings announcement, Chief Exec Philip Jansen acknowledged that BT needs to raise its game across the board and said all the right things about Prime Minister Boris Johnson’s bold ambitions for the fibre rollout. But he also maintained his predecessor’s stance of indicating that he expects the government to materially contribute to the effort.

“In building a better BT for the future we need to be even more competitive,” said Jansen. “We will continue to take decisive action, including on price, to further strengthen our customer propositions and market position, both to respond to any short-term market pressures and to capitalise on longer-term opportunities.

“On network investment, we welcome the government’s ambition for full fibre broadband across the country and we are confident we will see further steps to stimulate investment. We are ready to play our part to accelerate the pace of rollout, in a manner that will benefit both the country and our shareholders, and we are engaging with the government and Ofcom on this.”

The numbers themselves were nothing to write home about, with both revenues and EBITDA declining by 1%. “BT delivered results in line with our expectations for the quarter, with adjusted EBITDA declines in Consumer and Enterprise partly offset by growth in Global,” said Jansen. “We are on track to meet our outlook for the full year.”

It seems that investors were hoping for a bit more, however, with BT’s shares down 4% at time of writing. New Prime Minister Boris Johnson has indicated a greater inclination to spend big than his predecessors and Jansen seems to be challenging him to put his money where his mouth is.

BTQ2 2019 table

Solid if unspectacular results for Three UK as it prepares for the 5G era

Three UK has unveiled its financial results for the first half of 2019, and while it is nothing to shout and scream about, the bigger prizes are coming into view on the horizon.

Revenue might have decreased by 2%, but that is nothing to worry about when you look at the bigger picture. Subscribers are increasing, net promoter score is on the up, margins are remaining consistent and the enterprise business unit is demonstrating steady growth. 5G is on the horizon and Three is in a healthy position to demonstrate growth.

“We’re pleased with the progress we’re making going towards 5G,” said CFO Darren Purkis. “Feel we’re setting up the business well for the launch in the second half of the year.”

This might have been a bit of a tricky period for the Three business to navigate, as while it has a reputation for disrupting the status quo and playing a different ball-game from its rivals, it has been relatively quiet over the last six months. There have been no antagonistic marketing campaigns and little wow factor to report. Three has its eyes set on the 5G era and all announcements have focused on the preparations.

Currently the UK is sitting in the calm before the storm. EE and Vodafone might have launched their 5G networks already, but the marketing A-Bomb has not been dropped yet. We suspect over the next couple of weeks there will be a marketing blitz as Three and O2 prep themselves to launch; you won’t be able to suck a polo without being bombarded with 5G messaging before too long.

Looking at the financial side of the results, Purkis highlighted there was no reason to be concerned about a slight revenue dip. More customers have been migrated to unlimited data tariffs, removing charges for exceeding data bundles, while international calling regulations have changed, and new accounting principles have been applied. Revenue might have dipped, but the margins have remained.

When talking to Three today and over the last couple of months, the tone has been much more reserved than in previous years. This is a company which is prepping for 5G and there will be much more excitable spokespeople and marketing campaigns when the network is up-and-running.

On the network side, the Nokia 5G core is running and the team are migrating customers onto the new network. IT transformation has continued, as CAPEX increased by 23% over the first six months, and the launch of 20 data centres around the country will shift the mobile experience closer to customers. Three has regularly been criticised for having a poor network in comparison to rivals, though few can say it is doing nothing about it.

This is one perception which will have to be addressed if Three is going to be a major force in the 5G world, though all the signs are looking positive.

“Three’s results held few surprises as it reported a solid if unspectacular performance during the first half of the year,” said Kester Mann of CCS Insight. “The number of active customers nudged up just 1%. This glacial growth illustrates a leading reason why Three sees 5G as a catalyst to reinvigorate its brand and achieve the scale it has long for craved.

“Given its strong position in 5G spectrum – a major advantage over rivals – Three was understandably keen to talk up its 5G credentials once again. When it launches later this month, expect it to focus on unlimited data, low prices and disruption in home broadband.”

Purkis highlighted consumer mobile will remain the core focus of the business moving forward, it is known as the brand for data-intensive users after all, though there are other opportunities to be aware of.

In the home, the 5G FWA offering presents a significant threat to the traditional broadband service providers, demonstrated by the 4G FWA offering which the company already offers. Three currently has 830,000 home broadband customers, a number which could very much increase as increased speeds are offered over the new airwaves.

This diversification to the core mobile business was brought about by the acquisition of UK Broadband in 2017, though it has also offering them a glimpse into the world of enterprise business services.

Enterprise business services represents a very small aspect of the overall Three business now, but this is a big opportunity for the team. With UK Broadband as part of the Three family, the team is learning the tricks of the trade, and in September, Mark Stanfield will join as MD for Enterprise Services adding to the momentum. Stanfield’s role will be to set-up a more complete enterprise business function, which will include more attention for the wholesale segment.

Once again, the consumer business will continue to be the core of Three’s activities, but there are opportunities to attract more revenue through enterprise services. Currently the team are focusing on Small Office and Home Office (SOHO) customers, businesses no-larger than nine people, though once a firm foundation has been created here the team will look to engage larger businesses.

Another opportunity which is being evaluated in the UK Broadband business unit is for private campus networks. UK Broadband MD Ros Singleton is leading the charge here, and while the team currently manages a number of different networks already, it is actively engaged in various tender processes to expand the footprint.

The financial results here are nothing to write home about, but this is a business which is in preparation mode for the 5G era. We suspect there will be bigger things to come here as Three has crafted a position and collected assets to mount a considered challenge to its three larger rivals.

Downbeat outlook fuelled by Huawei situation hits Qualcomm shares

Mobile chip giant Qualcomm delivered solid Q2 numbers but a gloomy outlook thanks largely to the Huawei export ban drove down its share price.

Qualcomm’s core numbers were broadly in line with expectations, with revenues a bit below but earnings per share above. But in the ensuing earnings call Qualcomm CEO Steve Mollenkopf warned of a few factors that are likely to negatively affect the company in the coming quarters.

“The Huawei export ban, along with the pivot from 4G to 5G which accelerated over the past couple of months, has contributed to industry conditions particularly in China that we expect will create headwinds in our next two fiscal quarters,” said Mollenkopf. “As a result of the export ban, Huawei shifted their emphasis to building market share in the domestic China market, where we do not see the corresponding benefit in product or licensing revenue.

“In addition, our customers in the China market are working through their existing 4G inventory and deemphasizing their second half 2019 4G launches, as they shift their priorities to their 5G launches in early 2020. As a result, we do not expect the typical seasonal benefits given this unique market dynamics. For the first calendar quarter of 2020, we anticipate reaching the inflection point as our financial results begin to reflect the benefits of our substantial efforts over the years to bring 5G to the market worldwide.”

The reason Huawei’s increased emphasis on China is to Qualcomm’s detriment is two-fold. Huawei presumably uses its own chips in devices it sells within China, so Qualcomm doesn’t have a piece of that action. It does, however, sell components to the other Chinese smartphone makers, so any increase in competitive pressure from Huawei will affect Qualcomm’s revenues from sales to them.

Compounding this is a general softness observed in the Chinese market, which Qualcomm seems to mainly attribute to a lull before the 5G storm. It looks like the channel is trying to reduce the amount of 3G/4G inventory ahead in anticipated demand for 5G devices. As a result Qualcomm has reduced its expectations for global connected device shipments this year by around 100 million.

In the longer term Qualcomm still feels pretty bullish, largely on the back of its claimed 5G modem leadership. Qualcomm reckons the Huawei 5G modem is at least 50% bigger than its one and, of course, Intel’s efforts turned out to be a complete bust. It’s hard to argue with this conclusion so, while Qualcomm’s shares were down 6% in pre-market trading at time of writing, its long term modem prospects still look pretty healthy.

Qualcomm shipment outlook

Qualcomm Earnings Infographic Q32019

Apple and Samsung both had a mixed second quarter

While Apple registered modest growth, with the strong performance of Services compensating the declining iPhone sales, Samsung’s revenue and profit continued to plummet, thanks to weakness in the semiconductor market.

Apple’s Q2 2019 results (its financial Q3 2019) were respectable, if not exciting. The total sales went up by 1% to $53.8 billion from $53.3 billion a year ago, therefore making it the company’s record June quarter in terms of revenue. Gross margin slightly declined from 38.3% to 37.6%, and the operating margin dropped from 23.7% to 21.5%.

The iPhone contributed almost $26 billion, a decline of 12% from $29.5 billion the same quarter in 2018. This represented the first quarter when the iPhone accounts less than half of the total revenues since 2012. Notably, the iPhone is the only product category that reported year-on-year decline this quarter, with growth reported in Mac (+10.7%), iPad (+8.4%), Wearables, Home and Accessorie (+48%), and Services (12.6%). The $11.5 billion revenue generated by Services now accounts for 21.3% of the company’s total income.

“These results are promising across all our geographic segments, and we’re confident about what’s ahead,” said Tim Cook, the CEO. “The balance of calendar 2019 will be an exciting period, with major launches on all of our platforms, new services and several new products.”

If by “promising” Cook meant decelerated decline, he was right. Apple’s revenues continued to drop in Europe (-1.8%) and Greater China (-4.1%), the second and third largest markets after the Americas, albeit at a slower pace. Greater China would have registered a growth on constant currency, Cook insisted.

When it comes to the “balance of calendar 2019”, Apple gave a guidance showing mild improvement in Q3 (its financial Q4). The midpoint guidance points to a 16% growth in revenue, largely similar gross margin (38%), similar operating expenses, implying an improved operating margin of about 24%.

While the iPhone’s shrinking contribution may be expected, the strong performance of Services was encouraging. The company claimed it now had 480 million subscriptions across all its service portfolio, and both Apple Pay and the ad income from App Store search delivered triple-digit growth. The 3rd-party subscription revenue generated by the App Store went up by 40%. The Service growth momentum is likely to be further strengthened by the launch of the video streaming service Apple TV+ and the subscription gaming service Apple Arcade in the next quarter. The Services strength helped lift Apple’s share price by 4.2% pre-market.

Apple 2019_Q2A

Apple 2019_Q2B

A few hours later Samsung Electronics announced its less impressive though not surprising Q2 numbers. The company continued to see its profit plummeting by more than half, a trend we have seen in the preceding quarters, and largely in line with the profit warning the company published earlier this month. The total revenues declined by 4% to KRW 56.13 trillion ($47 billion) with the operating profit coming in at KRW6.6 trillion ($5.6 billion), down from KRW14.87 trillion ($13 billion) a year ago, indicating an operating margin of 11.8%, down from 25.4%. The net profit of KRW 5.18 trillion ($4.4 billion) represented a 53% decline from Q2 2018.

Not everything is bleak. IT & Mobile Communications division, Samsung’s largest revenue generator and which includes Samsung’s mobile handset business, reported a 7.8% sales growth although the operating margin declined by 41.5%. The revenue growth was largely driven by the strong sales of the Galaxy A series geared towards the young users. This has helped Samsung gain market share in a contracting smartphone market. On the other hand, the flagship Galaxy S10 series have met “weak sales momentum”, the company conceded. Recently Samsung announced that it has fixed the problem with the Galaxy S10 Fold and is now ready to launch it in “select markets”.

Continued to be worrying is the Display and Semiconductor business division, the biggest profit generator for Samsung. Despite that the display panel business turned profitable after making loss in Q1, weakness in the memory chip segment drove the operating profit down by 71%, on the basis of a revenue decline of 27%, indicating strong price pressure. This has led to the data centre customers to continue to adjust the inventory levels, Samsung claimed.

Another uncertain, though Samsung did not explicitly discuss, is the on-going trade dispute with Japan, which has resulted in trade embargo on the export of selected high-end equipment from a few Japanese companies. This could potentially impact Samsung’s plan to deliver the more advanced semiconductors in the second half of this year. Samsung insisted that it did “see 2H demand recovery” though.

At the time of writing Samsung’s share price was down by 2.6%.

Samsung 2019_2Q

 

Huawei defies waves of accusations to 23% growth

It seems not even the White House can stop the progress of Huawei as the vendor records 23% H1 year-on-year growth despite being the focal point of the US/Chinese dispute.

It’s been banned in some market, ignored in others, entered onto the US trade Entity List, the subject of espionage accusations and faced continued scrutiny over the security credentials of its products, but somehow Huawei has managed to register another period of financial growth.

Just to put these results into perspective, Ericsson grew its revenues by 10% over the first six months of 2019, while Nokia’s sales increased by 4% year-on-year during its latest quarter. Huawei might be having a tough time of it, but it still managed to eclipse its rivals with 23% revenue growth over the first six months.

“This has been a unique period in Huawei’s history,” said Huawei Chairman, Liang Hua.

“Given the situation, you might think that things have been chaotic for us. But that’s far from the case. We have been working hard to ensure smooth operations, and our organization is as sound as ever. With effective management and an excellent performance across all financial indicators, our business has remained robust in the first half of 2019.”

With 50 commercial 5G contracts and 150,000 base stations shipped, there still appear to be interested customers despites the efforts of the US and its propaganda campaign to undermine the reputation of the network infrastructure market leader. This is a metric which Huawei has always been confident in publicly stating, though it is difficult to compare apples with apples as neither of its main rivals are prepared to declare the number of base stations shipped.

What will continue to surprise many around the world is the continued growth of the business despite the on-going storm of controversy which is swirling above. Some might also be gobsmacked about the inability of Ericsson and Nokia to capitalise of the situation. This is not the end of the 5G race for the network infrastructure vendors, but Huawei is still the clear leader.

What we don’t know is where these 150,000 5G base stations are being shipped. As more Western nations surge towards the 5G economy Nokia and Ericsson might be able to steal market share. For all we know, the 150,000 base stations are being shipped to Chinese telcos, with the other 40-odd contracts simply accounting for a few here and there.

Looking at the smartphone business, this is also remaining remarkably resilient despite the worries it will not be able to work with a number of key suppliers in the US. Google is the biggest concern as its Android operating system is unrivalled outside of the iPhone.

“In our consumer business, smartphone shipments (including Honor phones) reached 118 million units, up 24% YoY,” Liang said. “We have made great progress delivering services to our consumers across all scenarios, and have seen rapid growth in shipments of tablets, PCs, and wearables.”

Once again, the Huawei business has seemingly been able to defy trends in a way which has only associated with Apple. Smartphone shipments are declining all across the world, but in China this impact seems to be very notable. That said, no-one seems to have told Huawei.

According to Canalys, total smartphone shipments in China declined 6% year-on-year for the second quarter, though Huawei managed to increase its own sales by 31% in the market. This will explain growth in the consumer business, with Canalys suggesting 64% of its smartphone shipments in Q2 were in its domestic market.

“Huawei’s addition to the United States Entity List caused uncertainty overseas, but in China it has kept its foot on the accelerator,” said Canalys Analyst Mo Jia. “Its core strategy remains investing in aggressive offline expansion, and luring consumers from rival brands Oppo and Vivo, while unleashing a wave of marketing spend to support new channels and technologies.

“But the US-China trade war is also creating new opportunities. Huawei’s retail partners are rolling out advertisements to link Huawei with being the patriotic choice, to appeal to a growing demographic of Chinese consumers willing to take political factors into account when making a purchase decision.”

While growth is growth, if these estimates are accurate few Huawei executives will be thrilled by a dwindling influence on the global markets. Huawei might be able to be a very profitable business by focusing on its domestic market, but that is not the ambition of anyone involved; it has established a leadership position worldwide and it will not want to lose it.

For the moment, Huawei is in a healthy position. It is seemingly maintaining relationships with telcos around the world, but these are still early days. US aggression towards the vendor does not look like it will subside at any time in the near future, quite the opposite in fact. It remains a much more likely outcome this assault will intensify over the coming months, especially with President Donald Trump on the campaign trail, rousing supporters into a frenzied euphoric state of patriotism and xenophobia.