Samsung and Xiaomi benefit from Huawei misery

US aggression towards Huawei seems to be paying-off as smartphone shipments in Europe swing away from the Chinese vendor, towards Samsung and Xiaomi.

Although Huawei is still a profitable and growing company, some might fear this growth is too concentrated on the Chinese market thanks to US attempts to damage credibility internationally. According to Canalys estimates, this could be the case, with European smartphone purchases shifting away from the previously surging Huawei brand and towards rivals Samsung and Xiaomi.

“For years, a focus on operating profit has stifled its product strategy,” said Analyst Ben Stanton. “But this year, the shackles are off, and winning back market share is its clear priority. But its success is not solely due to product strategy.

“Samsung has been quick to capitalize on Huawei’s US Entity List problems, working behind the scenes to position itself as a stable alternative in conversations with important retailers and operators.

“A lack of brand loyalty among users of low-end and mid-range Android smartphones, which has blighted Samsung for so long, has become the catalyst for its best performance in years. Europe keeps its reputation as one of the most brand-volatile smartphone markets in the world, rife with danger, but also opportunity.”

As you can see from the table below, the instability of the European market is living up to its reputation.

Brand Q2 2019 Shipments (millions) Q2 2019 market share Annual change
Samsung 18.3 40.6% +20%
Huawei 8.5 18.8% -16%
Apple 6.4 14.1% -17%
Xiaomi 4.3 9.6% +48%
HMD 1.2 2.7% -18%
Others 6.4 7.7% -17%
Total 45.1

Looking at the shift, there is clearly homage being paid to the troubles of the Chinese vendor.

Last month, Huawei unveiled its financial results for the first six months of 2019 with a 23% year-on-year increase. It did appear many of the gains, including in the fast-growing consumer business unit, were in its domestic Chinese market and this research from Canalys backs-up the assumption, at least for smartphones.

Perhaps this also demonstrates the smartphone has become merely a vessel for bigger and better things. With marginal differentiation between flagship devices nowadays, Huawei made gains with products which met consumer expectations but undercut rivals on price. This pricing strategy was paired with an aggressive above-the-line advertising campaign through football sponsorship and traditional advertising to build brand credibility.

However, the White House endorsed propaganda campaign seems to be hitting home. The only difference between now and 2018 is the dents to Huawei’s credibility. It appears European consumers are much more Android-loyal than they are to the smartphone brand.

The beneficiaries of this fall from favour has been Samsung and Xiaomi. Canalys claims three of the top five selling devices in the European market were Samsung, reasserting its dominance, though Xiaomi has continued its impressive rise through the ranks. This might be down to two reasons.

Firstly, Xiaomi’s reputation as a more price-aware brand is clearly catching-on. The Chinese challenger has been making promising gains in some of the developing markets, India is a prime example, though it has managed to position itself as a cheap but reliable alternative for cash-conscious consumers in the European market also. A 48% year-on-year gain is impressive in anyone’s eyes.

Secondly, telcos and distributors might be pushing Xiaomi and alternative Android devices more heavily through advertising campaigns. The more Android fanboys who are turned-off by Huawei, the more prominent Samsung becomes. The more prominent Samsung becomes, the greater its weight during negotiations with channel partners. A market dominant smartphone brand is not good for any of the telcos or the distributors.

The Apple decline is certainly an interesting one also. This is traditionally a quiet quarter for the iLeader, with flagship devices usually launched in September, though a 17% decline is a worrying sign for executives. With the fall in smartphone shipments significantly below the global total decline, either the iCultists are becoming much more price-sensitive, or they are being tempted by Android rivals. Neither is good news.

The global smartphone market is in decline currently, which is perhaps down to two factors more than anything else. Firstly, the current 5G hype might have consumers delaying the purchase of a new device, and secondly, the high-prices of largely uninspiring smartphones might be encouraging longer replacement cycles.

There will of course be numerous other factors to consider, but one thing is clear, some brands are negotiating the baron times much more successfully than others.

The calm before the storm – semiconductor sales plummet in Q2

Data from the Semiconductor Industry Association (SIA) show semiconductor sales are hitting depressing levels, though history suggests this might be the fast before the feast.

The SIA statistics suggest worldwide sales of semiconductors reached $98.2 billion during the second quarter of 2019, a minor increase on Q1 (0.3%), but a massive 16.8% crash on the same period of 2018. Cumulatively, year-to-date shipments during the first half of 2019 were 14.5% lower than through to the same point in 2018.

“At the midpoint of 2019, the global semiconductor market remains in a period of decreased sales, with revenues through June lagging the mid-year totals from last year by nearly 15%,” said SIA President John Neuffer.

“Year-to-year sales were down across all major regional markets and semiconductor product categories. One silver lining was that sales during the second quarter of 2019 narrowly outpaced sales during the first quarter.”

Looking at the data, there is a sense of history repeating itself.

Semiconductor Sales

Although it is not necessarily the easiest of graphs to read, there are a few peaks and troughs which can loosely be attributed to significant events.

Starting with the troughs, each can be attributed to two or three different things. Firstly, macroeconomic events which would have impacted purchasing patterns and investor confidence, and secondly, the introduction of a new ‘G’, therefore a new refreshment cycle for devices.

For the two troughs which can be seen following ’01 and ’09, these could perhaps be attributed to the burst of the dot-com bubble and the 2008 global financial crisis. Following both of these incidents, not only did consumer spending decrease, leading to fewer device shipments, business confidence in mobile technologies would have been impacted. Naturally, purchases of semiconductors would have decreased dramatically.

Another factor to consider is the prospect of a new ‘G’ on the horizon. This evolution could explain the troughs on the graph, but also the surging spikes. If we are to suggest 2G devices achieved mass market penetration in ‘00/01, 3G in ‘04/05 and 4G in ‘11/12, the spikes in semiconductor purchases could be explained by device manufacturers preparing for flagship launches.

Looking at the troughs, these could be explained by consumers delaying the purchase of new devices in anticipation of next-generation launches.

Perhaps this explains the dip which the semiconductor industry is currently navigating at the moment. Smartphone shipments have been steadily declining year-on-year, while the consumer appetite for 4G devices seems to be weakening with the prospect of 5G on the horizon. Smartphone manufacturers and the telcos are hyping up this new ‘G’ so much perhaps we should have little surprise demand for 4G devices is flagging.

Looking at the big chip manufacturers, the misery has been well spread. At Samsung, the most recent quarterly earnings demonstrated 4% decline in revenues and a 53% crash in net profit. The sluggish semiconductor business, often the profit driver for the business, has been the scapegoat this year. At Broadcom, another significant supplier in the mobile space, revenues attached to the Semiconductor solutions declined 10% year-on-year. For Qualcomm, the CDMA Technologies unit saw revenues decline by 12.7% year-on-year, while the Technology Licensing business felt a decrease of 10.5%.

Although the semiconductor industry will not be happy with declining revenues, if history has taught us anything, a spike in purchasing is not far away. 5G networks have been launched and early adopters have their hands on devices right now. It might be a year or two before mass market penetration is achieved, but the preparation for flagship launches will take place in the short- to mid-term future. This means smartphone manufacturers spending a lot more on new, and potentially more expensive, components.

The semiconductor industry is heading through a tough period at the moment, but this appears to be nothing new; a cornucopia of cash might just be around the corner.

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

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

Q2 smartphones: Samsung grows, Huawei slows and Apple flows

The latest global smartphone shipment numbers reveal a return to growth for Samsung, a major reduction in growth for Huawei and transition for Apple.

As you can see from the table below, Q2 2019 marked the first quarter in which Samsung registered year-on-year smartphone shipment growth for the first time in almost two years, in an overall market that continues to contract. One of the reasons for this could be the Galaxy S10 being better received than its predecessor as well as it being the main early 5G phone.

“Samsung shipped 76.3 million smartphones worldwide in Q2 2019, jumping 7% annually from 71.5 million units in Q2 2018. Samsung has lifted its global smartphone marketshare from 20% to 22% in the past year,” said Neil Mawston of analyst firm Strategy Analytics. “Strong sales in midrange and entry segments increased Samsung’s shipments, but its profit margin declined due to fierce price competition.”

While Huawei’s smartphone shipments continued to grow, it was at a much slower rate than for the past couple of years, but that was still a considerable achievement all things considered. “Huawei captured a healthy 17 percent global smartphone marketshare in Q2 2019, up from 15 percent a year ago,” said Mawston. “Huawei surged at home in China during the quarter, as the firm sought to offset regulatory uncertainty in other major regions such as North America and Western Europe.”

Apple iPhone shipments declined for the third quarter in a row, as Apple continues to diversify in favour of services such that iPhones accounted for less than half of total Apple revenues for the first quarter ever. “Apple iPhone shipments fell 8 percent annually, making it the worst performer among the world’s big-five smartphone players,” said Woody Oh of SA. “Apple is stabilizing in China due to price adjustments and buoyant trade-ins, but other major markets such as India and Europe remain challenging for the expensive iPhone.”

The rest of the table is all about the Chinese vendors, all of whom saw flat year-on-year growth. “Oppo took fifth position with 9 percent global smartphone marketshare during the quarter, holding steady from 9 percent share a year ago,” said SA’s Lindi Sui. “Oppois expanding hard into Western Europe, with new models like the Reno 5G, but it is coming under pressure at home in China from a resurgent Huawei.” Lucky Western Europe.

Talking of Chinese vendors, Counterpoint Research has identified massive growth from a new brand called Realme, which managed to ship almost five million units, having only started a year ago. Realme seems to specialize in the sub-premium category, in common with OnePlus, which is also owned by Shenzhen-based BBK Electronics, along with Oppo, but the focus of Realme’s hard expansion seems to be India.

q2 2019 smartphones

Ericsson happy to remain on track with Q2 numbers

Swedish kit vendor Ericsson is determined to make life difficult for journalists these days by delivering solid but unspectacular quarterly numbers.

Gone, it seems, are the heady days of quarterly high drama that accompanied the end of the Vestberg era and the start of the Ekholm one. For the past year or so Ericsson has just boringly hit its numbers, sometimes beating them, sure, but never spectacularly so. Where’s the story in that?

We chatted to Head of Networks Fredrik Jejdling, who has stepped into the void left by the departure of Helena Norrman to handle the hacks at quarterly time. His core narrative was that Ericsson is laser-focused on hitting its 2020 target numbers and remains on course to do. We noted that a share-price fall of 5% indicates investors expected more and Jejdling, reasonably, declined to speculate on the workings of investors’ minds.

As ever Ericsson’s numbers are all about the networks division, which we focused on since Jejdling is in charge of it. As you can see from the tables below Networks accounted for the majority of the revenue and pretty much all of the growth. While North America continues to be by far its biggest region, Jejdling was keen to bring attention to North East Asia, which includes China and Korea, as a significant source of growth. He also echoed his CEO’s regular comments that global regulators could do a better job of making more spectrum available.

The big macro driver for this growth was, of course, 5G. Jejdling said client conversations are much more focused on upgrading to 5G than they were only recently and indicated that interest in is more globally ubiquitous than is was for 4G at a similar stage. He did stress however, in classic Ericsson style, that it’s still early days and nobody’s getting too carried away. “As long as we feel we’re meeting the key milestones on the 2020 track then we’re quite happy,” said Jejdling.

We didn’t really get into the other business units, so here’s some of CEO Börje Ekholm’s statement accompanying the quarterly report. “We see strong momentum in our 5G business with both new contracts and new commercial launches as well as live networks. To date, we have provided solutions for almost two-thirds of all commercially launched 5G networks.

“5G momentum is increasing. Initially, 5G will be a capacity enhancer in metropolitan areas. However, over time, new exciting innovations for 5G will come with IoT use cases, leveraging the speed, latency and security 5G can provide. This provides opportunities for our customers to capture new revenues as they provide additional benefits to consumers and businesses.

“In Digital Services we continue to execute on the plan to reach low single-digit margins for 2020. In Managed Services the strategy is to enhance the customer offering by relying more on automation, machine learning and AI, which will longer-term change and improve the margin profile of the business. Near-term margins are negatively impacted by the increase in R&D investments.

“Organic sales growth in Emerging Business and Other was 24% driven by a continued growth in iconectiv. In this segment we invest in initiatives that aim to scale and help create future business for Ericsson. With the exception of iconectiv, the portfolio is still in an early investment phase.”

Ericsson’s share price was down 6% at time of writing, which seems a bit harsh, but that probably reflects disappointment from investors that all the early 5G hype hasn’t translated into even bigger gains and a more bullish outlook. But 5G was never going to result in sudden massive spikes in investment and, however difficult it may find it to do otherwise, Ericsson is probably sensible to caution against too much exuberance at this stage.

Ericsson q2 19 numbers

Ericsson q2 19 numbers segments

Ericsson q2 19 numbers networks

Ericsson q2 19 numbers digital

Ericsson q2 19 numbers managed

Ericsson q2 19 numbers other

Broadcom hit by friendly-fire in US/China trade war

Broadcom has unveiled its financial results for the last three months, though it isn’t the rosy picture some might have hoped for as ‘continued geopolitical uncertainties’ weigh heavy on the spreadsheets.

Although total revenues were up 10% from the same period of 2018 to $5.5 billion, the team has lowered its forecast for the remainder of the financial year. The new forecast for 2019 is now $22.5 billion, $2 billion lighter than the team was initially aiming for.

“We currently see a broad-based slowdown in the demand environment, which we believe is driven by continued geopolitical uncertainties, as well as the effects of export restrictions on one of our largest customers,” said CEO Hock Tan.

“As a result, our customers are actively reducing their inventory levels, and we are taking a conservative stance for the rest of the year.”

Although not mentioned here, guessing who Tan is referring to is not the most taxing of tasks. While Broadcom does not have as much exposure to Huawei as some US firms, it is its biggest customer; the unintended consequences (or at least we hope they were unintended) of President Trump’s Executive Order continue to pile up.

Estimates might vary, though the general consensus is that Huawei, the world’s largest manufacturer of telecoms equipment, purchases around $20 billion of semiconductors each year. Broadcom is being impacted here, though Qualcomm, Intel, Xilinx and several other smaller firms will also be feeling the pinch.

Although the year-on-year stats are still encouraging, investors might be a bit turned off by the sequential 4.7% decrease in revenues. Net income stood at $691 million, though this is not comparable to the year as this was the period Broadcom realised the benefits of changes to tax laws in the US.

The last couple of years have certainly been an interesting saga for Broadcom. Having shifted its HQ to the US in an effort to buy favour with authorities while attempting to acquire Qualcomm, the transaction was eventually blocked by the White House on the grounds of national security. With financials now being hit because of the anti-China mission of the Oval Office, Tan must be wondering why he bothered to cosy up with the US.

Ciena bags 20.5% growth perhaps thanks to Huawei dilemma

Optical networking company Ciena posted positive results for the first quarter of 2019, with total revenues of $778.5 million beating analyst expectations.

There have been whispers in corners of various conferences that a Huawei ban could benefit some, and it may well be having a positive impact for Ciena. While there are numerous other companies which would compete with Huawei in the optical equipment segment, with Ciena one of the few ‘pure-play’ companies it might have a more notable impact on the financials.

That said, irrelevant of where the favourable fortune has come from investors will be happy. $778.5 million represents a 20.5% year-on-year increase for the first quarter, while nearly all geographical markets have shown healthy growth.

“We began fiscal 2019 with a very strong first quarter performance, including outstanding top and bottom line growth as well as continued market share gains,” said Gary Smith, CEO of Ciena. “We believe that the combination of our leading innovation and positive industry dynamics will enable us to further extend our leadership position.”

Net income for the quarter stood at $33.6 million, though this is incomparable to the same period of 2018 which registered a loss of $473.4 million thanks to President Donald Trump’s US tax reform.

Looking at the regions, in the US, a market which now accounts for 62% of the company’s total revenues, the earnings grew just over 20% to $485.5 million, while 20% growth was also registered in the APAC region. The big success story however was in Europe, where the team grew the business by 32% to $129.2 million. This is still only 16.6% of the total haul for Ciena, but more geographical diversification will certainly be welcomed.

For Ciena, Europe could be a very interesting market over the next couple of months. With Huawei coming under increasing scrutiny globally, telcos will look to further diversify supply chains to add more resilience and protect themselves from potential government bans. While the anti-China rhetoric being spouted out by the White House is losing momentum, the European Union is reportedly looking some sort of ban, even if this puts the Brussels bureaucrats at odds with some member states.

For such vast investments, telcos will be looking for certainty and consistency from government policies. When looking at Huawei as a potential vendor, telcos will naturally be nervous, even if they don’t want to admit it.

With Huawei’s ban set to have little impact on the US market, it is not a major supplier to the market historically, the Europe could be a hidden goldmine for Ciena.

Interestingly enough, this scenario also seems to be paying off dividend in the APAC markets as well. Smith notes the success in the APAC region has come from Australia, Japan and Korea, three markets where Huawei has either been explicitly banned or is receiving a rather frosty welcome.