Communications

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Market analysis

In the third quarter of 2015, revenue decreased sequentially and year over year for all companies under the scope of study in the Communications sector except for Cisco. Nokia experienced the steepest sequential fall in revenue and net income, at 5% and 57%, respectively.

On a brighter note, the Communications industry is looking forward with renewed vigor towards the 5G generation of radio systems and network architecture for extreme broadband and ultra robust, low-latency connectivity. The 5G buzz is escalating as US operators like Verizon Wireless are announcing 5G field trials within the next twelve months and vendors like Nokia Networks are promising commercial 5G-ready hotspot equipment in 2017. Earlier this year Ericsson began testing a new 5G device on the streets of Stockholm, Sweden and Plano, Texas. Intel recently dubbed 5G the 'fusion of all wireless technology'. It claims it is the next big revolution in technology, driving the development of everything from connected cars to high-speed mobile technology and human augmentation. These developments represent initial steps toward the broader telecom industry radically transforming wireless service by adding significantly higher speed and responsiveness.1

Several companies have already performed independent field tests for the 5G wireless speeds. Companies such as Nokia, Samsung and Huawei (in partnership with NTT Docomo) have reported speeds varying from 3.6Gbps to 10Gbps on spectrum bands varying from 6GHz to 73GHz.2         

In one of the latest developments, Cisco and Ericsson announced a partnership combining Cisco's product line with Ericsson's service organization with a goal of more than US$1 billion in new revenue for each company by 2018. The partnership aims to capture the immense revenue potential offered by service providers aggressively modernizing their broadband, TV and cellular networks to accommodate soaring OTT video consumption. The goal is to offer end-to-end leadership across network architectures for 5G, cloud and IP, and the Internet of Things. This is also seen as a decisive counter-measure to the significant threat posed by the merger of services giant Alcatel-Lucent with Nokia.3

Motorola Solutions reported a 1% year-over-year drop in revenue in Q3 2015. North America, which generated 65% of the company's revenues in the quarter, grew 5% year over year, driven in large part by the US federal business, historically one of the most resilient of MSI's subdivisions. However, weakness in Europe/Africa (representing 15% of Q3’15 revenues and down 23% versus last year) and in Latin America (6% of Q3’15 revenues and down 22% versus last year), driven largely by macro-economic and currency challenges, provided the headwinds. The company’s gross margin improved marginally from 47.7% in Q3 2014 to 48.2% in Q3 2015. Additionally, the company reported a steep increase of 74% in net income year over year. This is due to a 28% reduction in operating expenses. Motorola has succeeded in bringing down its operating expenses significantly by leveraging cost-cutting initiatives and the strengthening dollar. Between 2012 and 2014, the company's SG&A expenses have come down from US$1.5 billion to US$1.2 billion. During the same period, its R&D expenses have fallen from US$790 to US$681 million. Both metrics have also declined relative to revenues.

                                   

1. cnet.com, Sept 2015; FierceWireless, Sept 2015; Dailymail.co.uk, Aug 2015

2. bgr.com, Oct 2015

3. Seeking Alpha, 9 Nov 2015