Telecom Italia wrestles with Europe’s biggest COVID-19 dent

Telecom Italia (TIM) has released its latest financial results, revealing painful battle scars as European nations continue to fight the coronavirus pandemic.

While it should come as little surprise when you look at which countries were most severely impacted by COVID-19, the figures have confirmed it. Telecom Italia is still profitable, which is often forgotten when companies miss expectations, but the impact of the coronavirus pandemic has been very notable.

Total revenues for the three-month period to March 31 stood at €3.9 billion, down 11.3% year-on-year, while profits declined 10.8% year-on-year to €1.7 billion.

Financial results for European telcos through to March 31 (Euro (€), thousands)
Telco Revenue Year-on-year Profit Year-on-year
BT (£) 5,632 -4% 2,007 -2%
Telecom Italia 3,964 -11.3% 1,735 -10.8%
Orange 10,394 1% 2,602 0.5%
Telefonica 11,366 -5.1% 3,760 -11.8%
DT 19,943 2.3% 6,940 7.4%

Although it does look like business as usual at Deutsche Telekom, let’s not forget that as well as the country effectively combatting the coronavirus, the Group also contains T-Mobile US, which has been flying over the last few years. Total revenues in the US grew 0.3% to $11.1 billion over the quarter, while profits shot up 11.6% year-on-year to $3.6 billion.

What is worth noting is that it is not all bad news at Telecom Italia. This is a company which is under extraordinary pressure because of a truly unforeseeable event, but previous initiatives to create a healthier and more sustainable business are seemingly working. Improvement in cash generation (14% year-on-year increase) and debt reduction (down €923 million) have continued through the three-month period thanks to strategic initiatives launched in 2019. The underlying business model and strategy is still theoretically sound.

One of these projects, the network sharing agreement with INWIT and Vodafone, and subsequent sale of a stake in the towers joint venture, contributed €650 million to the debt reduction mission. Negotiations with KKR, for the sale of a minority share of the secondary fibre network, are continuing which will also reduce debt. It is not necessarily perfect scenario to be offloading assets, but needs must occasionally when pressure mounts on the spreadsheets.

It might be tempting to look at the surface figures, but it is always important to remember that COVID-19 is creating trading conditions no-one could foresee. TIM is still a business which is under threat from a highly competitive landscape in Italy, but the reaction from the team still looks competent.

Looking at the non-financial performance data, TIM Vision, the content platform saw a 20% increase in active users across the period, though mobile subscriptions dropped 579,000 year-on-year. IOT connections slightly compensated, but not enough. In fixed broadband, net customer losses across both consumer and wholesale totalled 233,000. It is clear the business is still adjusting to the new market dynamic with Iliad on the scene.

Segment Subscriptions Year-on-year
TIM Vision (TV) 1.85 million 21%
Mobile 20.42 million -2.8%
Fixed (retail) 8.98 million -1.5%
Fixed (wholesale) 8.01 million -0.6%

SoftBank fire sale could include T-Mobile US stake

Japanese conglomerate SoftBank had a nightmare quarter thanks to massive losses at its Vision Fund investment arm and it might need to raise a few yen quickly.

Most of SoftBank group is doing fine. Its Japanese operations, its stake in Alibaba and ARM have no worries, and it finally managed to complete the merger of its Sprint MNO with T-Mobile US. But boss Masayoshi Son just couldn’t resist getting funny ideas about investing in all kinds of other unrelated stuff and it turns out a lot of those bets were bad ones.

As warned a month ago, WeWork is the major bust in the portfolio, but the whole thing has taken a severe kicking thanks to the business world grinding to a halt coz of coronavirus. The quarterly presentation seemed to essentially amount to an extended apology to shareholders for losing so much of their cash on reckless punts, followed by a plea for them to stay the course to give his unicorns (very large private companies) a chance to fly over the Valley of Coronavirus, to the fertile pastures beyond.

Even if Son’s pleas are well received, SoftBank may well join many other companies in having to manage a cashflow crisis until things start to pick up again. For that reason it seems possible that it will flog some of its stake in new, improved TMUS to Deutsche Telekom in order to bolster its working capital. A WSJ report speculated that such a move would give DT the majority share in the company and relegate SoftBank to relatively silent partner. On current form, that might not be such a bad thing for all concerned.

Global smartphone shipments fall by 17% coz of coronavirus

The latest smartphone shipment numbers from Strategy Analytics reveal an unprecedented drop that can only be due to the COVID-19 pandemic.

Total shipments of 274.8 million units in the first quarter of this year represent a 16.8% decline on the year-ago total. No vendors were spared the austerity, bar Xiaomi, which at least managed to tread water thanks to its Indian presence. Apple declined the least out of the big three, so has gained a chunk of global market share compared to Q1 2019.

“As expected, the global smartphone market delivered its worst performance since records began,” said Linda Sui of SA. “Demand for smartphones slammed to a halt in the quarter, as the Covid-19 virus scare shut down major economies like China and shoppers placed their spending plans on hold.”

“This was Samsung’s lowest quarterly smartphone shipments for eight years,” said Neil Mawston of SA. “Despite a strong line-up of A, S and Note series models, Samsung was unable to escape the virus-led plunge in smartphone demand. Despite US-China trade wars and the Covid-19 virus scare, Huawei was able to maintain its global smartphone share at a respectable 18 percent during the quarter. China remains Huawei’s core region and most of its sales take place there.”

“Apple’s global smartphone market share has risen from 13 percent to 14 percent in the past year,” said Woody Oh of SA. “Apple’s new iPhone SE model with lower pricing and larger presence in emerging markets like India will give volumes a further bump in the coming months.”

If the production forecast is anything to go by, the global smartphone numbers could be even worse next quarter. Supply chains are disrupted and discretionary consumer spend has gone down the toilet, while everyone sits tight and waits to see how things will play out. As with so many other industries, the smartphone sector will have its fingers crossed for an explosion of pent-up demand in the second half of this year.

Incidentally, other analyst firms are increasingly publishing their numbers on the same day as SA, which we use as our primary source. It’s interesting to see how their estimates vary, so we’ve copied the Omdia and IDC tables below too.

Smartphone production forecast to drop by 16.5% in Q2

Taiwanese analyst firm TrendForce has been having a look at the effect of the COVID-19 pandemic on the smartphone supply chain and concludes it has had a significant impact.

It found global smartphone production (most of which takes place in China and the Far East) fell by 10% in Q1 2020 to 280 million units. Despite China claiming to have largely shaken the virus off by April, Trendforce reckons Q2 will see an even bigger drop-off in smartphone production – down 16.5% to 287 million units. For the full year it’s forecasting an 11.3% decrease to 1.24 billion units.

While Samsung is the global market leader, it doesn’t have much of a presence in China and, we’re told, does most of its smartphone production in Vietnam and India. So while its supply wasn’t constrained by the factory closures in China, it has chosen to dial down supply in response to anticipated softening of demand in its biggest markets.

Conversely Huawei is increasingly reliant on the Chinese market as US sanctions hit its ability to make smartphones anyone would want elsewhere, so its smartphone production could also be affected by demand. Apple production was apparently hit to the tune of 9% in Q1 but is expected to recover this quarter, depending on demand in the US and Western Europe. Of the other big Chinese vendors Vivo somehow managed to increase its production in Q1 somehow.

Nokia rolls with the COVID-19 punches in Q1 2020

Finnish kit vendor Nokia managed a solid set of numbers in the first quarter of this year, despite supply hassle created by that most disruptive of viruses.

Revenues were down a little bit, year-on-year, but they would have been slightly in the black if not for €200 million worth of supply disruption causes by that goddamn coronavirus. On the other hand the operating loss was significantly reduced from €524 million a year ago to €76 in the most recent quarter, indicating the cost reduction programme is going more or less according to plan.

“Nokia’s solid first quarter results showed broad year-on-year profitability improvements as our transformation and product cost reduction efforts started to take hold,” said CEO Rajeev Suri in his prepared commentary. “On a year-on-year basis, group-level non-IFRS operating margin was up by 3.6 percentage points; Networks gross margin increased by 3.5 percentage points; Nokia Software had an excellent quarter with sharp margin improvements and strong momentum with customers in North America; and, Nokia Enterprise delivered double-digit sales growth.

“These improvements are, of course, coming at a time of unprecedented change, given the impact of COVID-19. Our top focus areas are protecting our employees, maintaining critical network infrastructure for customers, and ensuring we have a strong cash position. In Q1, we saw a top line impact from COVID-19 issues of approximately €200 million, largely the result of supply issues associated with disruptions in China.

“We are adjusting the mid-points within our previously disclosed Outlook ranges for full-year 2020 to reflect the increased risks and uncertainty presented by the ongoing COVID-19 situation. We expect the majority of this COVID-19 impact to be in Q2 and believe that our industry is fairly resilient to the crisis, although not immune.

“We did not see a decline in demand in the first quarter. As the COVID-19 situation develops, however, an increase in supply and delivery challenges in a number of countries is possible and some customers may reassess their spending plans. Pleasingly, despite the majority of our R&D employees working from home, we have not seen any impact on our roadmaps, and, in fact, some key software releases are proceeding ahead of schedule. Additionally, we saw a massive increase in network capacity demands.”

You can see selected slides from the Nokia presentation below. Note the 29% decline in Greater China sales, which seems to be offset by improved fortunes in the Middle East and Africa. Nokia seems to have been totally excluded from the Chinese market when it comes to the 5G RAN build-out, but its core and fixed line fortunes in the region remain unclear. Investors seemed happy enough with the numbers on the whole, with Nokia’s shares up 4% at time of writing.

Chinese smartphone sales plummet

The latest numbers from Counterpoint Research reveal Q1 2020 smartphone sales in China plunged by 22%.

Somehow Huawei managed to buck that trend, however, as it continues to go from strength to strength in its home market. The table below reveals all of Huawei’s Android competitors experienced annual sales declines of between 27% and 40%, yet Huawei miraculously increased its smartphones sales by 6%. Looks like all that R&D spend is really paying off! Meanwhile Apple held firm as rich people continued to be rich.

“The drastic fall in Q1 China market was primarily dragged down by the dismal sales of smartphones in February (-35% YoY), when the country was severely impacted by the COVID-19 pandemic and commerce activities were minimal,” said Flora Tang of Counterpoint. “However, during the lockdown period in China, local e-Commerce giants such as Alibaba and JD.com managed to sustain efficient business operations and delivery services in major Chinese cities outside of Hubei province.

“For the strong support from these e-Commerce players, China’s smartphone sales appeared less negative than our original expectation.  We also estimate that the online share of smartphone sales in China surged to over 50% during Q1, from about 30% in 2019, though the share is likely to drop in Q2 after the pandemic is largely contained.”

“iPhone 11 was the best-selling smartphone model in Q1; it has topped China’s best-selling models list for 7 consecutive months,” said Ethan Qi of Counterpoint. “Consumers continued to purchase iPhones from e-commerce platforms despite the shutdown of Apple stores across China during February. As for the Huawei group, it continued to lead and gained share with a complete product portfolio covering the entry-level to premium segments. Huawei Mate 30 5G, Mate 30 Pro 5G, Huawei Nova 6 5G, and HONOR 9X were all among the top-selling models list during the quarter.”

On reason for Huawei’s exceptional performance could be its early entry into the 5G market. According to Counterpoint that market alone grew by 120%, compared to Q4 2019. “The dominance of Huawei in China’s 5G smartphone market was more evident— it contributed to over half of the total 5G phone sales in Q1, followed by Vivo, OPPO, and Xiaomi,” said Mengmeng Zheng of Counterpoint.

“By Q1 2020, various vendors had launched the sub-US$400 5G smartphones in China, such as Vivo Z6 5G, Xiaomi K30 5G, realme X50 5G, and ZTE AXON 11 5G. For the aggressiveness of Chinese OEMs to grow the penetration of 5G phones to lower-tier price bands, we expect 5G smartphones to rise to account for over 40% of total smartphone sales in China by the end of 2020.”

Despite that, Huawei was still in second place globally in terms of Q1 5G phone sales, according to Strategy Analytics. “Samsung vaulted into the lead in Q1 2020, shipping 8.3 million 5G smartphones globally in Q1 2020,” said Ville-Petteri Ukonaho of SA. “Samsung has strong global distribution networks and operator partnerships and new 5G smartphones in Q1 2020. Nearly all of Huawei’s 5G smartphones were shipped in China.”

“Chinese smartphone vendors captured 61 percent of top 5 vendor 5G smartphone shipment volumes in Q1 2020, with the majority of those volumes going to the Chinese market,” said Neil Mawston of SA. “This reflects the speed with which Chinese operators have rolled out 5G networks, as well as the underlying demand for 5G smartphones, despite the Covid-19 pandemic that shut down large parts of China during the Q1 2020 period. As China continues to ramp up economic activity, we expect 5G shipments to this market to continue to expand dramatically in 2020.”

Here’s the SA Q1 table. They might want to have a rethink about that moody bold font.

Ericsson celebrates telecoms industry resilience after a solid Q1

Swedish kit vendor Ericsson delivered Q1 2020 numbers broadly in line with expectations and was cautiously positive about how the telecoms industry is handling the coronavirus crisis.

Revenues of SEK 49.8 billion (~$5 billion) represented a 2% decline when adjusted for adjustments, but that seems fine with investors, who had boosted Ericsson shares by 5% at time of writing. Regarding the pandemic, the official line is that it has had ‘limited’ impact on business, but has definitely created greater uncertainty for Q2. Despite that Ericsson is sticking with its previous outlook.

“Ericsson delivered a solid result during the first quarter, with limited impact from the Covid-19 pandemic,” said Ericsson CEO Börje Ekholm. “We expect our industry to show resilience throughout the pandemic and we are well positioned with a competitive 5G product offering and cost structure. There is near-term uncertainty around sales volumes due to Covid-19 and the macroeconomic situation, but with current visibility we have no reason to change our financial targets for 2020 and 2022.

“For 2020 we estimate the RAN market to grow by 4%, however for Q2 we expect somewhat lower than normal sequential sales growth as there are uncertainties impacting short-term growth negatively. Covid-19 and actions taken by governments to slow down the spread are making our service delivery and supply harder due to lockdowns and travel restrictions in many countries. In addition, while we have seen no material effects so far on our demand situation, it is prudent to believe that the slowdown in the general economy may lead some operators to delay investment programs.

“We are determined to come out of the Covid-19 situation in a stronger competitive position and our investments in R&D is a strategic cornerstone which we will not sacrifice. We also continue investments in digital transformation which is expected to generate competitive advantages.

“The current global uncertainty requires a humble attitude towards predicting the near-term future. We remain positive on the longer-term outlook, but the second quarter is likely to be a tad softer than normal due to timing of strategic contracts and uncertainty induced by Covid-19.”

We spoke to Ericsson Head of Networks Fredrik Jejdling and he largely echoed Ekholm’s sentiments. He flagged up the China Mobile wins and the completion of the TMUS/Sprint merger as specific positives, but cautioned that delayed spectrum auctions could have a negative effect in the industry. Jejdling was keen to stress the strategic aim of emerging in a stronger competitive position and the consequent need for Ericsson not to over-react to the crisis.

In that respect Ericsson seems to be adopting a similar strategy to Sweden in general, which has been relatively laissez faire when it comes to shutting itself down. Now that the dust has settled on the first phase of the pandemic, and catastrophe seems to have been averted, it’s sensible for companies and governments alike to start thinking about cautiously opening up once more.

Here are some slides from the earnings presentation.

Huawei insists everything’s fine after revenue growth slows dramatically

Chinese telecoms vendor Huawei just about managed to grow its revenues in Q1 2020 in the face of mounting challenges.

Huawei’s quarterly announcements tend to be pretty minimal, since it’s not a public company and thus doesn’t have to publish any of its numbers if it doesn’t feel like it. All we got this time was CNY182.2 billion ~$27 billion) in revenue, which was an increase of 1.4% year-on-year, and a net profit margin of 7.3%. “Huawei’s business is continuing as usual and its overall business results in Q1 2020 are in line with expectations,” said the announcement.

Assuming these numbers are legit, independently audited, etc, it seems like a decent effort to keep growing after a quarter in which the coronavirus pandemic affected China first and most severely. On the other hand, Huawei managed to grow its revenues by 19% last year, so this represents a dramatic slowdown and points towards negative growth next quarter.

Because Huawei didn’t fancy even breaking down the numbers by business group, we don’t know which of business or consumer spend was more responsible for the slowdown at Huawei. The chances are the split was fairly even since the whole world has slowed down too. One silver lining for Huawei is that the US is too distracted by the crisis to impose more punishments on it. But considering the daily deterioration of relations between the US and China, it’s surely just a matter of time before they resume.

Huawei spent the rest of its announcement banging on about what a great job it’s doing with helping the world deal with the crisis. Since the outbreak, Huawei and its partners have rapidly launched many 5G- and AI-powered medical applications,” said the press release. “We are using our expertise in communications technologies to help fight the pandemic and save more lives… In addition, Huawei has been doing its best to get masks, test kits, and other protective supplies to the countries and organizations that need them.”

The earnings announcement signed off on a philosophical note. “A seed that survives the storm will sprout and then blossom,” it mused. “Even though it is impossible to know when the tides of this pandemic will turn, we at Huawei believe that this challenge will be overcome by standing together.” Fine sentiments but global geopolitical trends would suggest it’s a forlorn hope.