Nokia finishes the year on a relative high

Finnish kit vendor Nokia banked a bit more profit than expected in Q4 2019, to finish a tough year on a slightly positive note.

Earnings per share were €0.15, up from €0.13 a year ago, which was apparently what was expected again this time. Nokia seemed pretty pleased with its cashflow too, having significantly topped up its flagging bank balance in the quarter. Shares experienced a minor bump, taking them near the top end of the range they have inhabited since they tanked after a gloomy outlook a quarter ago.

“Nokia’s fourth quarter 2019 results were a strong end to a challenging year. We saw strength in many parts of our business in the quarter, delivered a slightly better operating profit than the same period in 2018, generated solid free cash flow, and increased our net cash balance to EUR 1.7 billion,” said Nokia CEO Rajeev Suri.

“When I look at Nokia’s full-year 2019 performance, we saw good progress in our strategic focus areas of enterprise and software… We recognize, however, that we have faced challenges in Mobile Access and in cash generation. We will have a sharp focus on these two areas over the course of 2020, which we believe to be a year of progressive improvement as the actions we have underway start to deliver results.

“While I believe that 2020 will present its share of challenges, I am confident that we are taking the right steps to deliver progressive improvement over the course of this year and to position us for a stronger 2021.”

Suri’s words were pretty measured and indicated that it’s still mainly in recovery mode this year, so you can see why investors didn’t get too excited. 4G/5G radio market share outside of China is expected to stabilize at 27% over the course of the year and the current count of 5G deal wins is 66. Once more Nokia’s financial situation feels a bit like Ericsson’s a year or two ago, in so much as it’s all about providing a stable foundation for future growth.

Vodafone claims removing Huawei from its European cores will cost €200 million

Vodafone group reported solid Q4 2019 numbers for Europe but says it  will have to blow €200 million on swapping Huawei out of many of its network cores.

Group revenues were up 7% year-on-year, driven by a 10% jump in Europe, which in turn was helped by the Liberty Global acquisition. Having said that, organic service revenue growth was flat, which is probably why the Vodafone share price is unmoved by the results. An additional factor will be an unchanged outlook.

“I am pleased with the pace at which we have executed our commercial and strategic priorities, which has allowed us to maintain our momentum in the quarter,” said Group Chief Exec Nick Read. “Competition in Europe remains challenging, primarily in the value segment, however we continued to improve customer loyalty and to grow in broadband, and we achieved good growth in Africa. We expect a further gradual improvement in service revenue growth in Q4, led by Europe.

“We have recently announced the proposed sale of our stake in Vodafone Egypt, which simplifies the Group into two scaled regional platforms – Europe and sub-Saharan Africa – and reduces our net debt. We have also appointed the senior management team for our European TowerCo, and we are preparing for a potential IPO in early 2021.”

The juicy bit of the quarterly presentation concerned Huawei, inevitably, with Vodafone detailing the implications of the recent decisions made by the UK and the EU on its business. The good news is that Vodafone UK is already complying by the restrictions, so no adjustments are needed. In parts of Europe, however, there are bits of Huawei gear in the core, which will apparently cost around €200 million to rip and replace.

We spoke to telecoms Analyst John Strand and he was keen to flag up the wording on the last part of the above slide, noting the €200 million number was just a ‘position’, rather than a piece of hard accounting. He also noted that, in the UK, BT has said the cost of replacing Huawei is essentially priced into regular network investment, so why is Vodafone implying this is extra cost. That whole section of the slide could be interpreted as laying the ground to get compensation from the EU and to lobby against quotas in countries where it has a lot of Huawei in the RAN, like Germany.

Other than that, the hell that is the Indian telecoms market remains a major issue. “In October, the Supreme Court gave an adverse judgement in the adjusted gross revenue (“AGR”) case against the industry,” said the Vodafone report. “The outlook for Vodafone Idea Limited (“VIL”) remains critical. VIL is actively seeking various forms of relief from the Indian Government to ensure that the rate and level of payments it makes to the Indian Government is sustainable and it can meet its other commitments as they fall due.

“In November, the Department of Telecommunications granted a two-year spectrum moratorium to the industry. In January, the Supreme Court rejected the review petition filed by VIL and other industry participants in relation to the AGR judgement. Both VIL and Bharti Airtel Limited have subsequently filed modification petitions, which are expected to be heard imminently, to request the Court to order the Department of Telecommunications to determine a payment schedule in relation to AGR dues and other reliefs.”

So Vodafone seems to be keen on state aid pretty much everywhere. To be fair a lot of the special circumstances it finds itself in have been brought about by state activity, but it still needs to be strategic about how often it extends the begging bowl. If governments and regulators start to perceive Vodafone as excessively opportunistic, they’re likely to lose sympathy fast.

The global tablet market is shrinking

The latest global tablet shipment numbers from Strategy Analytics show the overall market shrank by 10% in Q4 but was otherwise boringly stable.

SA reckons 48.5 million tablets were shipped in Q4 2019, a significant decline from 54.4 million in the year-ago quarter. Annual shipments fell from 173.1 million to 160,2 million, implying the rate of decline may be accelerating. Within that, however, market shares remained very stable, with Apple still way ahead of any Android or Windows vendor.

“A massive shift has taken place for Huawei to focus on the domestic Chinese market and sell older inventory in EMEA and Asia (excluding China),” said Eric Smith of SA. “This pattern will intensify until the China-US trade war reaches detente and while there have been positive signs with the Phase 1 trade deal signed last month, tariffs and US component/software supply restrictions are still in place, and will likely will be until after the November 2020 US presidential election.”

“The commercial refresh has been a disappointing period for Detachables as Windows mobile computing demand has favored thin-and-light notebooks in the premium tier,” said Chirag Upadhyay of SA. “Adding to this trouble, most Windows Detachable 2-in-1 vendors are exclusively targeting the premium tier for enterprise users to make higher profits but a crowded market prevents all vendors from growing at once, especially now that Apple is competing strongly with two iPad Pro models and an iPad Air (with keyboard) in this price tier.”

So it looks like part of the blame for the tablet market decline is the US China trade aggro, but if so why are tablets more exposed to it than smartphones, which seem to be doing fine? The advent of hybrid laptop/tablets with detatchable keyboards seems to complicate the job of classifying shipments, but we suspect the main reason for the decline is that tablets have a much longer refresh cycle than phones as newer models offer nothing more than minor spec upgrades.

Q4 2019 smartphone market: Apple bounces back as Huawei retreats

The Strategy Analytics numbers for the Q4 2019 global smartphone market are out and a couple vendors fared much better than the rest.

The overall market contracted for the second year running, but less so than in 2018, perhaps indicating a 5G-fuelled recovery. For the quarter the big success story was Apple, which reversed its declines in previous quarters and delivered its best shipment numbers for a couple of year. Similarly Xiaomi rescued its year with a massive 27% increase in smartphones out the door.

The big loser in Q4 2019 was Huawei, which saw the end of a two-year growth spurt by shipping 7% few phones than it did a year ago. How much of this down to all the hassle it’s getting from the US is unclear, but it can’t have helped. The long tail also contracted by 13% at the global smartphone market continued its consolidation towards the big six.

“Worldwide smartphone demand remains mixed for now, with sharp declines in China balanced by strong growth across India and Africa,” said Linda Sui of SA. “Full-year smartphone shipments hit 1.41 billion in 2019, dipping 1 percent from 1.43 billion in 2018, due to mild inventory build in the second half of the year. Looking ahead, US trade wars and the China coronavirus scare will be among barriers to growth for smartphones in 2020.

“Xiaomi had a great quarter in Western Europe and held steady in its biggest market India. Xiaomi is pushing hard into the 5G smartphone category and this will be a solid growth area for the vendor in 2020. Oppo is expanding hard into Western Europe, with new models like the Reno 5G, but it remains under persistent pressure from giant Huawei at home in China.”

“Apple is recovering, due to cheaper iPhone 11 pricing and healthier demand in Asia and North America,” said Neil Mawston of SA. “Samsung’s global marketshare stayed flat at 18 percent, the same level as a year ago. Samsung continues to perform relatively well across all price-bands, from the entry level to premium models such as Galaxy Note 10+ 5G.”

The chances are Apple will carry that momentum into this year and will probably experience a spike when it enters the 5G market in Q4. Demand for 5G phones seems to be exceeding expectations, so it wouldn’t be surprising to see the whole market return to growth in 2020.

 

Ericsson shares drop on disappointing North America numbers

Sales at kit vendor Ericsson barely grew in Q4 2019, with most of the blame being pinned on the protracted merger of T-Mobile US and Sprint.

When adjusted for adjustments total sales increased just 1% year-on-year, thanks to a 9% decline in North America. As you can see from the tables below, Ericsson had plenty of growth earlier in the year in North America, so this is a fairly significant reversal of fortunes. Ericsson would like us to believe it was an aberration brought about by the uncertainty surrounding the TMUS/Sprint merger, but that’s been going for a while so it’s not obvious why it would suddenly have such a profound effect.

“Due to the uncertainty related to an announced operator merger, we saw a slowdown in our North American business in Q4, resulting in North America having the lowest share of total sales for some time,” said Ericsson CEO Börje Ekholm. “However, the underlying business fundamentals in North America remain strong.

“Operating income was impacted by increased operating expenses. The increase is related to the Kathrein business acquisition, increased investments in digitalization and added resources to strengthen security as well as our Ethics and Compliance program. For 2020 we expect somewhat higher operating expenses, which will not jeopardize our financial targets.”

It looks like investors didn’t totally buy the North America narrative either, with Ericsson’s shares down around 8% at time of writing. Ekholm spoke at length about how important it is to continue to build for the long term and not sacrifice that for short-term gains. That’s fine, but many more quarters like this and even that strategy will be called into question.

Netflix reports solid Q4 but braces for a challenging 2020

Video streaming giant Netflix reported revenue growth of 31% on the back of 21% subscriber growth, but it will face a lot more competition this year.

These numbers were a bit better than forecast and were rewarded with a small share price bump. Perhaps investor exuberance was tempered by the need for Netflix to invest ever greater amounts of cash on content in the face of relentless competition. With the ramping of a bunch of fresh rivals from the US in the form of Disney, HBO and Apple, this pressure to invest will only increase, but the cash has to come from somewhere.

“Worryingly, the company is burning through a lot of cash,” said Paolo Pescatore, Analyst at PP Foresight. “It needs to recoup this by adding customers more quickly, increasing prices or taking on more debt. Therefore, expect price rises in all key markets during 2020.”

“There’s a fine juggling act by raising revenue through price increases vs. retaining subscribers. This could backfire as many of the new and forthcoming video streaming services are cheaper than Netflix. This makes Netflix vulnerable in its home market where it stands to lose out, quite considerably as underlined by these latest results.”

“Let the streaming video wars commence. Netflix has a huge head start and remains in pole position given its broad content catalogue and extensive relationships with telcos and pay TV providers. It should be able to weather the streaming battles over the short to medium term. All the future subscriber growth will come from its overseas operations. EMEA is and will continue to be a key region of growth for coming quarters.”

Of all the new competitors Netflix seems to be most wary of Disney+, with its massive back catalogue of family blockbusters. You can hear in the earnings chat below that the Netflix leadership reckon most of the growth for Disney+ will be taken from linear TV rather than Netflix, but there is presumably an absolute ceiling on the amount a typical household is willing to pay for video content of all types. Faced with all these new offerings some people are bound to reconsider their Netflix membership in 2020.

 

Micron expects up-tick after Huawei licence application win

US semiconductor firm Micron Technologies has said it expects a greatly improved 2020 after US authorities granted the firm a licence to trade with its largest customer, Huawei.

Although Micron was not one of the worst impacted firms following the decision from the Government to ban any US company from working with Huawei, the firm’s earnings call in September showed the damage. Revenues for the final reporting quarter of 2019 stood at $4.87 billion, down 43% from the previous year. Being unable to trade with Huawei was a major contributor to this downturn.

During the September earnings call, CEO Sanjay Mehrotra said the situation might get worse, though with the new licences being granted, the team is optimistic once again.

“As previously disclosed, we are continuing to ship some products to Huawei that are not subject to Export Administration Regulations and Entity List restrictions,” Mehrotra said this week.

“We applied for, and recently received, all requested licenses that enable us to provide support for these products, as well as qualify new products for Huawei’s mobile and server businesses.

“Additionally, these licenses allow us to ship previously restricted products that we manufacture in the United States, which represent a very small portion of our sales. However, there are still some products outside of the mobile and server markets that we are unable to sell to Huawei.”

This is major news for Micron. Across the financial period for 2019, sales to Huawei accounted for 12% of total revenues. There are firms who are significantly more dependent on Huawei as a customer, though any accountant will tell you that losing a customer worth 12% of total revenues is a devasting impact to the spreadsheets.

Looking at the financials for the latest earnings call, total revenues stood at $5.1 billion, up 6% sequentially, but down 35% in comparison to the same period of 2019. This is unsurprising considering the situation, though it will get better. Lost revenues will not be recovered immediately, new products need to be qualified with Huawei’s mobile and server businesses prior to contributing to revenue, but that is the only dampener here.

The next three months are traditionally the weakest for Micron throughout the year, though CFO David Zinsner expects recovery to begin in the third quarter of 2020. This is when the renewed relationship with Huawei will start to show on the spreadsheets.

Although the trade conflict between the US and China is still raging on, Micron will be hoping this will be the end of the collateral damage impacted by the US Government. Theoretically, this nightmare is in the rear-view mirror for Micron.