Vodafone balances Indian nightmare with solid numbers elsewhere

The latest numbers from telecoms group Vodafone are a mixed bag, with India casting a shadow over some solid performances elsewhere.

In the UK Vodafone said it had its best ever quarter for new customers, with nearly double the number of mobile contract customers joining in Q3 2019 than in the year-ago quarter. On top of that the prepaid business grew for the first time in a decade and Vodafone managed to steal Virgin’s MVNO business from BT, so not a bad quarter at all for Vodafone UK.

Across the whole group revenue was flat year-on-year, EBITDA was up a bit and operating profit was back in black. As you can see from the table below Europe is pretty stable and Vodafone has upgraded its EBITDA guidance by around a billion euros, thanks mainly to the completion of its Liberty Global acquisition. That has massively increased its debt, however, and any optimism is tempered by Vodafone’s exposure to the dire situation in India.

“I am pleased by the speed at which we are executing on the strategic priorities that we announced this time last year,” said Nick Read, Vodafone Group Chief Executive. “This is reflected in our return to top-line growth in the second quarter, which we expect to build upon in the second half of the year in both Europe and Africa.

“The consistency of our commercial performance has improved in both regions, and we have made a fast start on integrating the acquired Liberty Global businesses, where we see significant long-term opportunity. Our digital transformation is already creating a better experience for our customers, improving our differentiation, supporting growth and at the same time reducing our structural costs.

We have now secured network sharing agreements across most of our major European markets, and we recently announced a major long-term wholesale partnership with Virgin Media in the UK, in order to improve the utilisation of our network assets. And we expect our European TowerCo to be operational by May next year, enabling us to continue to unlock the significant value embedded in our tower infrastructure.”

Amit Pau, former Vodafone Managing Director and currently Chief Operating Officer of Accloud, had this to say. “It has been a year of two halves for Vodafone and their new CEO. Nick had a tough start with the reaction to his dividend cut, but Vodafone has fought back and today sees one of the best set of results from across its peers in 2019 thanks to successes in key markets, including Germany. Vodafone now seems to be operationally stable and gives the impression it’s turned the corner of organic growth.

“But, dig a little deeper, and the top-line results disguise the fact that there has been little innovation, which would drive Vodafone’s long-term growth and expansion. Given the phenomenal levels of innovation in the mobile world, it is strange that it is in decline at the business. A clear example is how they have failed to recognise the vast opportunity that exists in the Indian market. A decision that is likely to prove unwise in time, simply because they are ignoring one of the largest and most diverse mobile economies in the world.”

We don’t know the extent of Vodafone Group’s exposure to the Vodafone Idea joint venture, but it presumably remains a major shareholder and, even if it doesn’t have to cover the Indian government’s cash grab, still has a massive interest in the company’s success. Considering how much debt Vodafone is already in, it’s questionable how much more cash it will be prepared to chuck at the Indian market.

O2 UK reports steady customer and revenue growth

The UK bit of Telefónica has reported healthy Q3 2019 numbers, with all the key metrics headed in the right direction.

Total revenues at O2 UK grew by 4.1% year-on-year, operating income was up 5.7% and the total customer base expanded by 5.6% to 34.1 million. O2 also reckons it has the lowest contract churn in the sector at 1%. Having said that the net adds were fairly flat, maintaining its mobile customer base at 26 million.

“Our Q3 performance continues the strong momentum we saw in the first half of the year, powered by a relentless focus on our customers through award-winning coverage and great offerings such as flexible Custom Plans and limitless data,” said Mark Evans, CEO of Telefónica UK

“We’re moving at pace with our 5G rollout, already live in six UK cities rising to twenty by the end of the year. 5G offers critical support to the UK’s digital economy, supporting jobs and growth. That’s why we welcome Ofcom’s recent statement updating the rules for the planned auction of more 5G airwaves. This will help operators to deliver greater value and better connectivity to the public.”

The other thing O2 seemed keep to flag up was its involvement in a scheme to test driverless vehicles in London via its recently launched 5G network. The project is being run by an organisation called the Smart Mobility Living Lab and it seems to have a fair bit of industry and public sector buy-in.

“At O2 we’re determined to help businesses of all sizes realise the potential of fifth-generation mobile technology,” said Brendan O’Reilly, O2’s CTO. “We know that the transport sector is going to be one of the key beneficiaries of 5G – and that the technology has the potential to reduce traffic congestion, as well as making journeys safer and more enjoyable.

“That’s why we’re excited to be working with the teams at the Smart Mobility Living Lab, who are driving forward our understanding how this next generation technology will fundamentally change the fabric of the cities in which we live and work as well as creating entirely new methods of travel.”

Apple continues its transition from products to services

Quarterly revenues for gadget giant Apple were up year-on-year but down for the full year, as the company increasingly relies on services.

The headline of Apple’s latest quarterly announcement read: ‘Services Revenue Reaches All-Time High of $12.5 Billion’. This achievement masked the fact iPhone revenues continue to decline, which in turn dragged full year revenues into the red. On the whole, however, these were solid results for Apple and it seems to be managing its strategic transition well.

“We concluded a groundbreaking fiscal 2019 with our highest Q4 revenue ever, fueled by accelerating growth from Services, Wearables and iPad,” said Tim Cook, Apple’s CEO. “With customers and reviewers raving about the new generation of iPhones, today’s debut of new, noise-cancelling AirPods Pro, the hotly-anticipated arrival of Apple TV+ just two days away, and our best lineup of products and services ever, we’re very optimistic about what the holiday quarter has in store.”

The services side of things was the focus of the tech press in its analysis. Apparently Apple pay transaction volume overtook that of PayPal in the most recent quarter. A significant initiative that illustrates the symbiosis of the services and hardware side is Apple’s decision to offer interest-free financing of new iPhones through its own credit card. This will also be a significant blow for the postpaid phone contract sector as subscribers will no longer be dependent on operators for handset financing.

The fact that iPhone shipments are declining is not disastrous, so long as Apple maintains the massive iOS installed -base. As the Apple Pay numbers show, Apple’s services are bound to do well so long as there are lots of iPhones in use. The financing initiative implies Apple is worried about that installed-base declining, however, and may not be the last time we see Apple further incentivising people to buy iPhones.

The columns in the table below are as follows: fiscal Q4 2019, Q4 2018, full fiscal year 2019, full year 2018.

Samsung smartphone recovery overshadowed by semiconductor gloom

Samsung’s Q3 2019 numbers show improved performance in the smartphone business, but the semiconductor sector remains weak, which contributed to the 56% decrease in corporate level operating profit.

Overall the company has delivered sequential improvement over Q2. Total revenues stood at KRW 62 trillion ($53 billion), representing a 10% QoQ improvement despite being 5% lower than the same quarter a year ago. The corporate level operating profit of KRW 7.78 trillion ($6.7 billion) was 56% lower than a year ago, albeit registering a growth of 18% over the previous quarter.

The IT & Mobile communications group, which includes the smartphone and mobile network businesses, now the biggest revenue generator of the company, delivered the strongest recovery. Total income from mobile handsets, predominantly smartphones, amounted to KRW 28.1 trillion ($24 billion), a 17% increase over a year ago, and 16% over last quarter.

More impressive was the profit growth: operating profit at the business group level grew by 31.5% year-on-year, and 87% quarter-on-quarter. The company attributed the profit improvement to “a product mix improvement and cost reduction after a lineup transition” including contributing from the new phablet Note 10 as well as the entry level A series. The “extended technology leadership via launch of Galaxy Fold and additional 5G models” also helped. At the last IFA show in September Samsung announced it had already shipped 2 million 5G phones and expected the volume to exceed 4 million by the end of 2019. Samsung is believed to have increased its smartphone market share to 21%, retaining the global leadership.

In contrast to the smartphone business’s recovery was the continued depressed performance of the Device Solutions group, which includes the semiconductors and display panel businesses, and is by far Samsung’s biggest profit generator. To illustrate the importance of this group to Samsung’s overall performance, the group level revenue, KRW 26.64 trillion ($23 billion), represented 43% of the company’s total revenue, but the operating profit, KRW 4.24 trillion ($3.6 billion), accounted for 55% of the total operating profit of Samsung Electronics, at a 16% operating margin. In comparison, the IT & Mobile group’s operating margin was at less than 10%.

The memory chip sector was particularly weak, where the revenues went down by 37% from a year ago to reach $13.26 trillion ($11 billion) although it was an 8% improvement from last quarter. The operating profit collapsed to KRW 3.05 trillion ($2.6 billion), a mere 22% of the level a year ago, and also more than 10% drop from an already weak Q2. This indicated increased demand for shipment but at depressed price levels.

Looking at Q4 and 2020, Samsung believes 5G will have a big impact on the company’s performance. It foresees that the profitability of the smartphone business will continue to be a challenge in Q4 “due to weaker mix from dissipating new model effects of Note 10 and increased marketing cost under strong seasonality”. For 2020 this group will “enhance competitiveness throughout entire lineup and by addressing growing 5G demand; strengthen foundation for further sales growth, mainly driven by foldable; expand sales of premium models and optimize operations for low-end to mid-range models to improve profitability.”

For the semiconductor sector, Samsung expects the demand for memory chips to be solid in Q4 as clients are replenishing inventory again, although it does note “uncertainties likely to linger due to issues in the external environment.” The system large-scale integration (S.LSI) business expects growth in “shipments of 5G 1-Chip SoC and 64Mp & 108Mp high-resolution image sensors”.

Global smartphone market returns to growth, driven entirely by Samsung and Huawei

Shipments in the global smartphone industry returned to growth for the first time in two years according to the latest numbers from Strategy Analytics.

A total of 366 million smartphones were shipped in Q3 2019, which is 2% up on the year-ago number. Only two vendors experienced growth themselves, however, with market leader Samsung up 8% and second-placed Huawei up 29%. Huawei has doubled its share of the global smartphone market in the past three years, largely at the expense of the long tail, with once prominent brands like Sony, HTC and Alcatel being swallowed up.

“Samsung shipped 78.2 million smartphones worldwide in Q3 2019, jumping 8 percent annually from 72.3 million units in Q3 2018,” said Neil Mawston of SA. “Samsung has lifted its global smartphone marketshare from 20 percent to 21 percent in the past year. Strong sales of the premium Galaxy Note 10 and mass-market A Series models boosted Samsung’s smartphone shipments and profit during the quarter.

“Huawei once again surprised everyone and grew its global smartphone shipments by an impressive 29 percent annually from 51.8 million during Q3 2018 to 66.7 million in Q3 2019. Huawei captured a record 18 percent global smartphone marketshare in Q3 2019, up sharply from 14 percent a year ago. 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.”

That’s an understatement if we compare SA’s global numbers with Canalys’s China ones from yesterday. Canalys has Huawei’s shipments in China alone increasing by 16.5 million units, while SA has its global shipments increasing by 12.5 million. In other words Huawei shipments to everywhere except china decreased by 4 million, which is considerable.

There’s something odd about those Huawei China numbers. To suddenly grab 18 points of market share in such an incredibly competitive market stretches the limits of plausibility. But even if we assume the numbers are legit, Huawei must have made some pretty exceptional business moves to pull them off and we have to question how sustainable they are.

 

Huawei destroys the competition in Chinese smartphone market

According to the latest numbers from research firm Canalys, Huawei’s Q3 smartphone shipments in China increased by 66% while all its competitors declined.

Huawei’s massive shipment numbers are all the more impressive when you consider the overall market is in decline, with total Chinese smartphone shipment numbers down 3% year-on-year. Somehow, in the space of a year, Huawei has managed to turn a competitive market into one it dominates, with more than double the market share of the second placed vendor.

“Huawei opened a huge gap between itself and other vendors. It has 25% more share than this quarter’s runner-up, Vivo,” said Nicole Peng of Canalys. “Its dominant position gives Huawei a lot of power to negotiate with the supply chain and to increase its wallet share within channel partners. Huawei is in a strong position to consolidate its dominance further amid 5G network rollout, given its tight operator relationships in 5G network deployment, and control over key components such as local network compatible 5G chipsets compared with local peers. This puts significant pressure on Oppo, Vivo and Xiaomi, which find it very hard to make any breakthrough.”

“Vivo, Oppo and Xiaomi’s shipments are in freefall, despite new products constantly being pushed to market,” said Louis Liu of Canalys. “Smaller vendors hope to leverage 5G to rapidly boost market share given that China major operators have aggressively pushed 5G pre-registration with plentiful discounts and free 5G data allowance, which has resulted in over 10 million subscribers registering an interest to move to 5G.

“In addition to Huawei, Vivo, ZTE, Xiaomi and Samsung have launched 5G-capable smartphones between US$500 and US$1000, with more products likely to follow in Q4. However, Canalys expects 5G tariffs and device prices to fall rapidly to attract mass market consumers, with similar intense competition to the 4G era among major vendors, causing first-mover advantage in 5G to diminish in next to no time.”

So apart from simply acknowledging Huawei’s overall size and strength, Canalys seems to think its advantages in 5G account for this violent swing in its favour. This may be a factor but it seems unlikely to be the main reason. More likely Huawei has been aggressively cutting prices and incentivising the channel to show preference to its products as it seeks to show the US its sanctions aren’t biting.

This enabled Huawei to be bullish over its last quarterly numbers, but it’s not a sustainable strategy. The overall market is in decline and smartphone replacement cycles are typically at least two years. Huawei may have one or two more quarters of domestic smartphone growth to come, but after that it may not find revenue growth so easy to come by.

Amazon profits fall and its share price follows

Internet giant Amazon announced strong sales growth but that didn’t translate into profit after it invested heavily in one-day shipping.

The consequent significant year-on-year rise in operating expenses, combined with shrinking margin at AWS, where most of Amazon’s profit comes from, resulted in quarterly operating income declining for the first time in a while. While investors had been warned about the increased overheads, they were apparently even greater than expected, because Amazon’s share price declined 6% on the news.

“We are ramping up to make our 25th holiday season the best ever for Prime customers — with millions of products available for free one-day delivery,” said Jeff Bezos, Amazon founder and CEO. “Customers love the transition of Prime from two days to one day — they’ve already ordered billions of items with free one-day delivery this year.

“It’s a big investment, and it’s the right long-term decision for customers. And although it’s counterintuitive, the fastest delivery speeds generate the least carbon emissions because these products ship from fulfillment centers very close to the customer — it simply becomes impractical to use air or long ground routes. Huge thanks to all the teams helping deliver for customers this holiday.”

As you can see from the table below, Amazon’s total overheads were 14 billion bucks higher in the most recent quarter than they were a year ago. North America is still where most of its sales are and thus where most of the overheads come from too. Profits disproportionality come from its AWS cloud services division, but even there margins are significantly reduced year-on-year.

Amazon has spent its entire history sacrificing profit on the altar of investment, and that seems to have paid off. So it’s hard to read too much into the share price fall other than a realisation among investors that Amazon is serious about this one-day delivery stuff. That will probably pay off in the long term too, and we expect Bezos isn’t very bothered about the short term reaction to his grand plan.

Nokia shares tank after 5G weakness admission

Finnish kit vendor Nokia announced the suspension of its dividend and a significantly downgraded outlook as it struggles to make a profit from 5G.

Investors were clearly not expecting such a downbeat outlook and punished Nokia’s share price accordingly, sending it down 20% at time of writing to its lowest level for years. As you can see from the table below the sales performance wasn’t bad, with year-on-year growth of 1%.  The key downer, however, is declining margin and the consequent effect on Nokia’s cash position.

Nokia doesn’t see the margin situation improving, even in the mid-term, and consequently downgraded its margin outlook for both this year and next. Full year 2019 has had its margin downgraded by a couple of percentage points, while the 2020 margin outlook is now 5.5 percentage points lower than previously.

The most immediate crisis, however, seems to be Nokia’s cash position, which is now a mere €344 million. Nokia paid out around that amount in dividends last quarter, during which its cash pile was diminished by €160 million. If this trend continues then it will have run out of cash in a couple more quarters, so something clearly needed to be done. That took the form of an indefinite suspension of the dividend until the Nokia bank balance hits €2 billion, with a significant improvement expect at the end of the next quarter.

“Many of our businesses are performing well and we expect Q4 to be strong, with a robust operating margin and an increase in net cash of approximately EUR 1.2 billion,” said Nokia CEO Rajeev Suri. “At the same time, some of the risks that we flagged previously related to the initial phase of 5G are now materializing. In particular, our Q3 gross margin was impacted by product mix; a high cost level associated with our first generation 5G products; profitability challenges in China; pricing pressure in early 5G deals; and uncertainty related to the announced operator merger in North America.

“We expect that we will be able to progressively mitigate these issues over the course of next year. To do so, we will increase investment in 5G in order to accelerate product roadmaps and product cost reductions, and in the digitalization of internal processes to improve overall productivity. We will also continue to invest in our enterprise and software businesses, which are developing rapidly and performing well. Given these investments and the risks we see materializing, we are adjusting our targets for full-year 2019 and 2020; and we expect our recovery to drive improvement in our 2021 financial performance relative to 2020.

“I am confident that our strategy remains the right one. We continue to focus on leadership in high-performance end-to-end networks with Communication Service Providers; strong growth in enterprise; strengthening our software business; and diversification of licensing into IoT and consumer electronics.”

Suri seems to be saying it’s harder to make money out of 5G than had previously been thought. This is presumably due to a combination of the gear being more expensive to make than hoped and customers paying less for it. Huawei will be competing extra hard in those markets it’s allowed to participate in and Ericsson seems to be growing in strength, so Nokia is facing some pretty stiff competitive pressures.

With the suspension of the dividend Nokia will have several hundred thousand euros of extra working capital to invest in R&D and to cut prices of necessary. For some reason Nokia seems to be less competitive in 5G than expected, maybe it took its eye off the ball a bit during the Alcatel Lucent acquisition. Whatever the reason, it’s now playing catch-up and will ask its investors to remain patient for at least another year.