Communications
Market analysis
Global economic instability, intense competitive pressures, and decreased spending by communications service providers (CSPs) are all forcing networking equipment vendors to streamline and refocus their business strategies to maintain profits. Eight of the top global networking equipment vendors, collectively generating 90% of total worldwide network infrastructure revenue, are placing significant emphasis on professional services and software product enhancements that give access to CSP operating expenditure and capital budgets. Vendors profiled include Alcatel-Lucent, Ciena, Cisco, Ericsson, Huawei, Juniper, NSN, and ZTE. Pressure is mounting on CSPs to reduce their capital expenditure in 2013 and analysts expect this to impact many of the leading telecom equipment vendors. As equipment vendors must become more flexible and agile, CSPs must focus on reducing their operating expenses, improving time to service, and offering more profitable and innovative mobile broadband and cloud-based virtualization services. As network equipment continues to commoditize, vendors are selling software-based product offerings, value-added services, and network equipment to drive margin expansion. Vendors who focus on virtualized product strategies and embrace open software-based architectures will have the greatest impact on the telecom market.1
Worldwide mobile phone sales to end users totaled approximately 1.75 billion units in 2012, a 1.7% decline from 2011. Smartphones continued to drive overall mobile phone sales. 4Q12 saw record smartphone sales of 207.7 million units, up 38.3% YoY.2
Cisco latest quarter revenue was in-line with expectations. The slower than expected global recovery is still hindering Europe - revenue and orders declined 5% and 6% YoY respectively in EMEA. US enterprise revenue grew marginally. Services grew by approximately 10% YoY. SP WiFi drove 27% YoY growth in wireless while UCS boosted data center revenue by 65%. Cisco returned cash to its shareholders in the form of US$1.25bn in dividends and stock buybacks. China contributed to AJPC's revenue growth of 8% YoY. The routing business declined 6% YoY.3
Nokia’s 4Q12 results were in line with its guidance except for the company’s decision to scrap dividend. NSN and Asha series were the positives this quarter and analysts expect these to continue to grow in 2013. The impact of the Lumia ramp up is still not clear. Restructuring activities led to better cash flows and improved margins for the quarter. Nokia continues to face Windows transition uncertainty compounded by Symbian ramp-down. Nokia has entered into a distribution agreement with Verizon and China Mobile which will help extend its reach.4
Motorola’s revenue growth in 4Q12 was led again by Government contracts. Sales were relatively strong at 6% growth (~4.5% excluding acquisitions). Enterprise sales remained weak. Analysts expect further revenue growth of 5.0% driven by the need to revamp US aged public-safety infrastructure; LTE public safety roll outs; and a refreshed portfolio.
LM Ericsson reported better than expected network margins led by very strong North American sales and an improved product mix. North American revenues were up 50% in Q4, positively impacted by rapid growth in capital expenditure. Networks also benefited from strong sales in Korea (LTE), 3G in China and a recovery in Europe. For the services segment analysts expects Ericsson to benefit from Alcatel and NSN exiting some service contracts.
- IDC, Dec 2012
- Gartner, Feb 2013
- Morgan Stanley, Jan 2013
- Deutsche Bank, Feb 2013
Revenue and gross margin
Cisco, LM Ericsson, Motorola Solutions and Nokia Corp revenue increased by 1.9%, 27.8%, 13.4% and 11.3% respectively. LM Ericsson’s sharp jump in revenue was led by Networks sales growth of 31%, primarily due to higher year-end business activity. Motorola Solutions’ increase in sales was led by multi million dollar contracts in the Government segment. Nokia’s revenue increase was due to increased sale of smart phone devices and also a rise in ASPs of smart devices. Cisco’s revenue was relatively flat.
Gross margin (GM) was relatively flat for all the companies in the sub-sector, except for Nokia which reported a sharp increase in gross margin. Nokia’s GM increased by 463bps led by an increase in Smart Devices gross margin in 4Q12. The gross margin increase was primarily due to the absence of approximately EUR 120 million of inventory related allowances which were recognized in the third quarter 2012 as well as a product mix shift towards higher gross margin devices, and lower Symbian fixed costs per unit. LM Ericsson’s GM increased by 71bps due to increased software share and lower Global Services share.
R&D expenditure
R&D expenses increased QoQ for all communications companies analyzed. Cisco’s R&D expenditure increased marginally by 1.5% to US$1.45bn. Nokia’s R&D expense was flat QoQ with a 0.55% increase to US$1.47bn. LM Ericsson’s R&D increased by 28.9% QoQ led by higher restructuring charges and acquisitions. Motorola Solutions’ R&D increased 10.7% QoQ led by increased investment in new products.
R&D expense as a percentage of sales was relatively flat for all the companies except Nokia. Nokia’s R&D as a % of Sales decreased by 150bps to 14% sequentially.
Net income
All companies in this sub-sector reported a significant improvement in net income except for LM Ericsson. Cisco, and Motorola’s net income increased QoQ by 50.2% and 63.1% respectively. Nokia reported a positive net income number US$265mn compared to last quarters US$(1.3bn).
LM Ericsson’s sharp drop in net income sequentially was led by a non-cash charge related to ST-Ericsson of and a reduction of deferred tax assets related to lowered corporate tax rate in Sweden.
Nokia Corp reported a positive net income led by increased sale of Lumia series which has higher margins and moving out of the Symbian based phones.
Motorola Solutions’ increase in net income was due to increased revenues from the government segment and also due to improved margins.
Cisco System’s net income increased by 50.2% QoQ, that was attributable to the recognition of tax benefits in this quarter.
Inventory and receivables
Days inventory on hand (DOI) decreased for all the communications companies analyzed. Cisco, LM Ericsson, Motorola Solutions and Nokia’s DOI decreased sequentially by 3, 21 ,7 and 8 days respectively. The dip was due to higher sales in most of the companies due to seasonal factors, improved inventory management and also in some cases due to write off of obsolete inventory.
Days sales in receivables (DSO) decreased for all companies QoQ except for Cisco, which increased by 3 days. LM Ericsson’s DSO decreased by 16 days QoQ due to sharp increase in sales in comparison to accounts receivable. DSO decreased for Motorola Solutions and Nokia by 2 days and 5 days respectively due to significant increase in revenues.
EPS
EPS for all the companies in the subsector were in line with net income. Cisco reported an EPS of US$0.59 , an increase of 51% QoQ. LM Ericsson delivered an EPS of US$(0.31), a sharp decrease of 409% Q0Q. Motorola Solutions’ EPS grew by 64% QoQ to US$1.18. Nokia Corp’s reported EPS improved from US$(0.34) to US$0.07 this quarter in line with its net income.
The P/E multiple for Motorola Solutions and Cisco System Inc. were 12.2×,and 18.6× respectively. The P/E multiple for LM Ericsson increased significantly QoQ to 40.3× due to a sharp decrease in EPS in the last quarter.
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