Ericsson optimism grows after another solid quarter

Swedish networking vendor Ericsson reckons it’s capturing market share after announcing sales growth of 3% in Q3 2019.

Ericsson derives much of its market sizing estimate from analyst firm Dell’Oro and last we heard they were saying the overall market is currently growing at 2%. That does point towards Ericsson increasing its market share and also makes us wonder about Huawei’s 24% growth, unless nearly all of that was down to its smartphone division.

Ericsson Q3 2019 slide 1

As you can see from the first slide above, quarterly profits were more than wiped out by the one-off hit from the US fine for historical dodgy dealings. But that was already priced in and investors seem to be pleased by the sales and margin numbers, as well as an improved outlook on both fronts that you can see in the second slide blow.

Ericsson Q3 2019 slide 4

“We continue to see strong momentum in our business, based on the strategy to increase our investments for technology leadership, including 5G,” said Ericsson CEO Börje Ekholm. “We saw organic sales growth of 3% in the quarter, driven by the early adopters of 5G, in North America and North East Asia.”

Ericsson Q3 2019 slide 2

We spoke to Ericsson’s networks head Fredrik Jejdling about the numbers and he echoed Elkolm’s words about the 5G market ramping earlier than previously expected. However he insisted that the improved sales outlook was more down to Ericsson’s underlying strategy paying off than broader market movement, hence the claimed increased share. China remains the biggest market for 5G gear and Ericsson is doing its best to compete there but it will be tougher than the US.

Ericsson Q3 2019 slide 3

For the longer term enabling operators to compete in the industrial IoT market, which is increasingly viewed as the biggest commercial opportunity created by 5G, is a major strategic priority for Ericsson, according to Jejdling. But he was keen to avoid downplaying the consumer applications of 5G and pointed to South Korea as the best current example of where some of this is becoming reality.

Once more Ericsson has delivered a solid but unspectacular set of results, which seems to be just fine by Ekholm, Jejdling and co. Ericsson’s share price was up 7% at time of writing, which implies investors were pleased by the slightly improved outlook. The networks division remains the driver of the majority of Ericsson’s revenue, but as the industrial IoT market starts to mature, investors will presumably look for a greater contribution from the other divisions as evidence that Ericsson is seizing that opportunity.

Huawei brushes aside US sanctions with continued strong growth

US hostility seems to have had minimal effect on Chinese telecoms giant Huawei’s numbers, with strong growth reported across the board.

For the first three quarters of this year Huawei brought in CNY610.8 billion in revenue, which was a year-on-year increase of 24%. The first two quarters of the year recorded 23% revenue growth so, if anything, business is picking up. With the rollout of 5G ramping up it’s not surprising to see kit vendors’ revenue numbers pick up, but it’s nonetheless surprising to see how little impact all the US aggro seems to have had on the Huawei top line.

It should be noted that Huawei isn’t a public company, so there will be limited, if any, independent auditing of these numbers. Having said that the financial commentariat seems happy to take them at face value, so we will too. Huawei says the numbers are compiled in compliance with the International Financial Reporting Standard.

On the networking side Huawei now claims it has signed 60 commercial 5G contracts, which is ten more than a quarter ago. It also says it has shipped 400,000 5G Massive MIMO active antenna units, which seems like a lot. Huawei dropped some numbers about how many big companies are partnering with it over digital transformation, but the other key metric is cumulative smartphone shipments, which Huawei puts at 185 million units, an annual increase of 26% that indicates Q3 numbers of 67 million, which is impressive.

It’s hard to imagine, however, that the Android situation won’t have a profound effect on Huawei smartphone sales in the coming quarters, and the Q3 numbers could have been boosted by discounting to shift stock before that effect kicks in. Regardless Huawei’s numbers are holding up very well, considering the geopolitical headwinds it faces. Maybe this puts the presumed power of the US over global trade in a new perspective.

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.

Jio surges forward with subs and profits

Reliance Jio has unveiled its latest quarterly figures and, surprise surprise, subs are once again on the up as well as profits.

Monthly ARPU might have be on the decline, down to $1.77, a trend which is not showing signs of slowing, but scale seems to be the answer for Jio. The firm now has a subscriber base of 331 million, adding 24.5 million over the last three months and 116 million during the last year.

“Growth in Jio mobility services has continued to surpass all expectations,” said Mukesh Ambani, MD of Reliance Industries, Jio’s parent company.

“In less than two years of commercial operations, Jio network carried almost 11 Exabytes of data traffic during the recently concluded fiscal quarter. Jio management is focused on giving unmatched digital experience at most affordable price to every citizen of the country, and accordingly expanding the network capacity and coverage to keep pace with demand.”

The progress which has been made by the firm over the course of the last two years is remarkable and perhaps demonstrates how under-developed the Indian market actually was. Although India has been seen as a growth economy, part of the now old-fashioned BRICs group, it wasn’t until Jio shook up the market the digital revolution took hold.

Average consumption of data is now up to 11.4 GB a month, with Jio suggesting customers used 10 exabytes over its network during the quarter. The Indian consumer certainly has an appetite for data and they don’t seem to be satisfied whatsoever.

Looking at the financials, these are also very promising. Early criticism of Jio was that it was negatively impacting competition in the market as there was little profit being made by the firm. This is generally seen as a negative, as running loss leaders to kill off competition very rarely works for the greater good in the long-term, though the numbers speak for themselves.

Quarterly revenues increased 44% year-on-year, while the firm collected profits of $119 million, a 45% year-on-year boost. These numbers are attractive for the moment, but profitability currently looks to be reliant on scale and subscriber growth. Sooner or later, this growth will slow, and the team will have to look at the worrying rate at which ARPU is declining.

Period Q1 2019 Q3 2018 Q1 2018
ARPU (Indian Rupee) 122 130 154

Microsoft profits soar on back of cloud

Microsoft has unveiled it earnings for the quarter ending June 30 and it has certainly given investors something to smile about.

Revenues for the fourth quarter stood at $33.7 billion, a year-on-year increase of 12%, while net income increased by 49% at $13.2 billion. For the full year, revenues totalled $125.8 billion while net income was $39.2 billion, a 137% increase on the previous year. Investors certainly seemed happy with the results, with Microsoft’s share price increasing 3.4% in pre-market trading.

“It was a record fiscal year for Microsoft, a result of our deep partnerships with leading companies in every industry,” said CEO Satya Nadella.

“Every day we work alongside our customers to help them build their own digital capability – innovating with them, creating new businesses with them, and earning their trust. This commitment to our customers’ success is resulting in larger, multi-year commercial cloud agreements and growing momentum across every layer of our technology stack.”

With Nadella at the helm and cloud computing driving momentum, Microsoft has reaffirmed itself as the most valuable company on the planet, with market capitalisation now standing at $1.05 trillion.

Although the cloud business segment will steal the headlines, the More Personal Computing unit, the legacy shunned child of the Microsoft family, drove year-on-year growth of 4% for the final three months of the year.

Looking at the growth segments of the business, Productivity and Business Processes, featured the LinkedIn and Office products, bolstered revenues by $11 billion, a 14% year-on-year increase. The Intelligent Cloud unit brought grew 19% accounting for $11.4 billion.

There might have been some mixed headlines across the last couple of days, Teams overtaking slack was balanced by the Office 365 ban in schools in Germany, but Nadella and his cronies will certainly be sleeping comfortably.