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Market analysis

The Communications industry group experienced 7.6% revenue growth year over year due principally to growth in Nokia’s revenues resulting from the acquisition of Alcatel. Excluding Nokia, the group experienced a 5.9% decline in revenue year over year, and a decline of 3.9% from the prior quarter. However, Motorola Solutions reported positive revenue growth of 7.7% and 7.1% year over year and sequentially, respectively. In terms of net income, Motorola Solutions reported strong growth of 67% year over year and 79% sequentially. LM Ericsson reported marginally declining revenue of US$6.0 billion, but net income declined by more than 100%, resulting in a net loss of US$27.3 million.

Traditional telecom equipment providers have been reinventing themselves to remain relevant in an increasingly digital world. Simply selling routers, towers and boxes is not enough to survive as margins on hardware become increasingly slim. These companies have to find new ways to leverage their core assets, while simultaneously acquiring new skills to align with the rapidly changing market landscape.1

The recent merger of Nokia and Alcatel-Lucent, along with Huawei's aggressive stance in the market, has put enormous pressure on other key players like Ericsson, but this also underlines the big efforts all major companies are making to align themselves with the new realities of the digital economy.1

Telecom services companies are presently more inclined to use a single strategic telecom equipment supplier for a combined software and services offering. Infrastructure technology suppliers are now expected to cover the entire end-to-end functionality across virtualized network infrastructures, IT software and cloud data center capabilities. This has come as a big opportunity for the major players. However, the challenge is to operationalize and monetize new cloud-based technologies, like software-defined networks and network function virtualization. Communications companies that are able to provide viable end-to-end solutions to capitalize on the market potential of future technologies, such as 5G, machine-to-machine, the Internet of Things and cloud, will gain significant leads.2

To cater to the telecom operators, the telecom equipment providers must redesign their business to address larger digital transformations. This will require a total transformation of vertical operations support system (OSS)/business support system (BSS) stacks to fully automated, horizontal execution environments. They need to assist with the design of new operating models with operational network and IT alignment.2

As telecom operators change the way they create, manage and deliver digital services, the big communications equipment suppliers must shift to facilitate the move toward digital infrastructure. There is a huge market opportunity in architectural integration and ensuring interoperability across an end-to-end digital infrastructure. The shift to new digital development and operations paradigms is a key opportunity for these companies.1

Motorola Solutions reported strong numbers in Q3 2016, despite the competitive environment, which is impacting margins for all the major companies. Motorola Solutions revenue increased 8%, including US$131 million in Airwave sales. The Products segment sales declined 1% due to softness in Africa and China, but the Services segment grew 23% including Airwave, while Managed and Support Services grew 5%. The operating margin was 22.3% of sales, compared with 16.2% last year, reflecting higher sales and gross margin associated with Airwave, as well as lower operating expenses. (Operating expenses declined US $27 million compared with the year-ago quarter). The company also announced plans to acquire SpillmanTechnologies, a provider of comprehensive law enforcement and public safety software solutions for computer-aided dispatch and records management systems. Spillmanis expected to complement Motorola Solution’s high-tier command center software offerings.

Nokia and Ericsson have had a decrease in margins. Another key trend in this sector has been the consolidation in the radio and core network space. This has produced only three major players out of a once fragmented business, with close to a dozen companies competing. Another critical issue is the pricing pressures these companies face. With the advent of Chinese equipment provider Huawei, the low-cost producer of equipment has been able to undercut its European peers by driving costs and prices as low as possible. This has led to major challenges for the established players.2

Servicing large telecom providers has now become a tricky business. During major infrastructure upgrades, as mobile technology transitioned from 3G to 4G LTE, margins remained strong for equipment suppliers. Now, most of the global service providers have largely completed their 4G upgrades and have retreated into capex-savings mode. This trend presents major challenges for telecom equipment providers as the great majority of their revenues come from the telco client segment.2

1Gartner, Oct 2016, Oct 2016