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Market analysis

The Communications sector posted a fair performance in Q2 2016, with companies reporting a positive quarter-on quarter-growth of 9.4% in terms of revenue and 175.7% quarter-on-quarter growth in terms of net income, which was largely driven by Motorola. The year-on-year revenue for the sector declined by 5.8%, however, and the net income dropped by 88.1%, primarily due to decline in net income for Nokia. Motorola Solutions reported the highest revenue growth, followed by Ericsson. Motorola’s quarter-on-quarter growth of 20% was driven by an upside in the revenue from the Services segment, which included sales from the recently acquired GDCL. The acquisition of GDCL provided US$146 million in Q2 2016 compared to that US$61 million in Q1 2016 of net sales within the EMEA region. Ericsson’s quarter-on-quarter revenue increased by 6.7%, mostly due to an increase in revenue from the Middle East and Mediterranean geographies. 

The second quarter was quite active in terms of technology developments for the sector. Nokia partnered with Singapore's StarHub to provide its customers with 4G upload speeds of 150Mbps with the help of its 4G LTE-Advanced technology. Nokia's carrier aggregation technology, which aggregated spectrum in the 1800MHz and 2600MHz bands, together with 64 QAM, has made it viable to achieve the incredible speed.1

Q2 2016 also saw additional launches of software-defined WAN services (SD-WAN) by network operators serving the enterprise market. In June 2016, CenturyLink joined AT&T and Level 3 with the launch of a new SD-WAN service for multi-site enterprises that offered IT managers the ability to monitor and control WAN performance themselves. These solutions are typically shipped with software-based CPE (Customer Premises Equipment), enabling greater flexibility than traditional solutions have offered.2

Another development includes how LTE is driving the Communications sector through VoLTE. VoLTE will expedite small-cell adoption as mobile carriers have started to roll out VoLTE in increasing numbers, with more than 100 LTE operators offering VoLTE service by end 2016.5 The move will further be affected by the operators intent to turn off their older 2G and 3G networks. Vendors are increasingly looking to capture this opportunity by selling their solutions directly to venue and enterprise owners, leveraging existing relationships with these businesses. Ericsson partnered with HP with the intent to sell through HP's enterprise channels. Similarly, Cisco leveraged its large WLAN enterprise footprint as a platform for selling small cells. The advent of 5G in the near future will further fuel small-cell growth.3

The next evolution in the Communications sector is 5G. Standardization of 5G first started by the International Telecommunication Union in 2012, but the availability of ultra-high frequency spectrum by the Federal Communications Commission in 2016 is a significant milestone for the sector. With the digital wave sweeping over companies across industries and the proliferation of mobile technologies, vendors are working hard to commercialize 5G. The technology will provide quantum leaps forward in three key areas: speeds resembling fiber that are at least 10 times and maybe 100-times faster than today’s 4G LTE networks; responsiveness in less than onethousandth of a second, which enables real-time communication; and network capacity multiples of what is available presently.4

Mobile carriers and wireless companies are developing platforms for initial tests. 5G will be built on the foundation created by 4G LTE. 5G is expected to benefit mobile and smartphone users as well as thousands of internet-connected devices that are entering the everyday world.5

Despite these developments, revenue for Nokia in Q2 2016 was US$6.4 billion, a 9% decline year on year when compared with the US$7 billion in combined revenue Nokia and Alcatel-Lucent would have reported in the second quarter last year. The decline in sales was largely due to a weak performance within Ultra Broadband Networks, and accounted for approximately 80% of the overall decrease in Nokia's Networks business. IP Networks and Applications also contributed to the decrease. The net profit declined steeply by 327% year on year primarily due to increase in the company’s operating expenses. The increase in R&D expenses and SG&A expenses was attributable to Nokia’s Networks business. Nokia’s other income and expenses included an expense of €643 million in the second quarter 2016. The amount was comparatively higher than the last year, primarily due to higher restructuring costs and associated charges as well as the recording of certain provisions due to the risk of asset impairment as a Latin American customer was undergoing judicial recovery.6

In contrast, Motorola Solutions sales for Q2 2016 increased 4.5% year on year to US$1.4 billion. Revenue was positively impacted and included US$146 million in sales associated with the Airwave acquisition. The company’s sales grew by 19.9% quarter on quarter, due to increased revenues from both the Products and Services segments. The inclusion of products from the recently acquired Airwave Solutions significantly contributed to the upside. Motorola’s net income for the second quarter was also higher compared to the first quarter on account of higher revenues. In addition, the company suffered net losses on the sales of investments and businesses of US$21 million in the first quarter of 2016 compared to a profit of US$1 in the second quarter. The company has partnered with Singapore Technologies Electronics to promote the development of specialized technologies for high-security, mission-critical broadband, cybersecurity solutions and purpose-built applications.7

Strong performance in priority areas including security, data center switching and collaboration significantly impacted Cisco revenue for quarter ended July 30, 2016. Revenues increased to US$12.6 billion, reflecting a 5.3% growth quarter on quarter. On August 1, 2016, the company completed its acquisition of CloudLock, Inc., a privately-held cloud security company as a part of its cloud security strategy. With the acquisition Cisco aims to deliver a comprehensive level of visibility into user behavior and exposed sensitive data, and to provide granular controls for both cloud applications you buy (SaaS) and in-house applications (IaaS, PaaS).8 The company has also announced 5,500 lay offs starting in FY 2017 as it transitions from its hardware roots into a software-centric organization.9

1. Nokia News Release, July 2016
2. Cartesian Industry Predictions: Q2 2016 Update
3. Light Reading, Aug 2016
4. Telecoms Tech, July, 2016
5. ITwire, Aug 2016
6. Nokia earning’s release Q2 2016, Aug 2016 
7. Motorola Solutions Q1 2016 press release, May 2016, Q2 2016 press release, Aug 2016
8. Cisco Fourth Quarter and Fiscal Year 2016 Earnings, Aug 2016
9. CNBC, Aug 2016