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The customer''s always right - focusing on end-markets to bring unique insight to Commtech The underperformance of Nokia and Ericsson shares has partly been driven by slowing demand for new mobile technologies, deflation and competition from cheaper technologies. The capex outlook for telcos is at the heart of these trends. This report focuses on end-market exposure (by geography, technology and operator), leveraging our telco capex forecasts to drive forecasts for both names, which we now integrate into our European telco services/digital infrastructure coverage. Mobile investment likely to slow with pressure on telco FCF ahead Our bottom-up modelling of the major US/European telco capex suggests 2-5% pa revenue decline over the next three years - more bearish than Dell''Oro. Many telcos have struggled to monetise the shift to 5G and are understandably reluctant to sink more capex into 6G technology. US names have historically been able to fund higher levels of investment than the EU telcos, but this is also coming under pressure as competition and tax headwinds suppress cash flow (see our recent US initiation). In Asia the mobile ecosystem is generally healthier, but India capex is set to moderate in 2024. ''Future of Fibre'' provides some relief for Nokia, but not in the near term We are more positive on the mid-term outlook for fixed line investment. The US has lower FTTH coverage than Europe (~50% vs ~70%) and we see a technology upgrade path to newer versions of fibre equipment once the rollout of the current generation of fibre tech is complete. Government subsidies could become a more material contributor to revenues, but not until 2025. Both melting ice cubes, but more downside risk at Ericsson (-) than Nokia (=) We see more downside at Ericsson as a purer play mobile equipment provider (BNPPE estimates are 2%/6% below 2025 revenue/EBIT). Nokia is increasingly a play on fixed network investment, and has already given some 2024 guidance, so...
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We have dropped our coverage of Ericsson, Ericsson ADR (US), Nokia, Nokia ADR (US) owing to internal reorganisation. Our rating, target price and estimates are therefore no longer valid.
Q3 no surprise given pre-announcement but weak Q4 guide Going into Q3 earnings, we were -20% below consensus adj EBITA being cautious on consensus expectations for a Q4 bounce (link). This scenario played out with management guiding for group adj. EBITA margins of ~10%, below consensus expectations of ~12.5%. Networks Q4 revenues were also guided to be ''somewhat below'' typical seasonality of +22% QoQ given continued North America weakness and India revenues being flat QoQ. Cloud Software and Services also benefited from a pull-forward in Q3, leading to Q4 revenues also being guided below seasonality. 2024 guide abandoned on uncertain outlook; Can U.S. RAN bounce back in 2024? Management has finally abandoned 2024 margin targets given market uncertainty which is expected to persist into 2024. Looking ahead to 2024, U.S. RAN is forecasted to be bouncing back +14% y/y according to Dell''Oro. However, looking back at U.S. RAN cycles in the past 15 years, down cycles have usually lasted for at least 2 years which makes us cautious on Networks growth outlook. For 2024, we are forecasting another Networks revenues decline of ~0.5% y/y. Margins going in the right direction; Could Q1 surprise as savings ramp? With Q4 group adj. EBITA margins guided to be ~10% that would be the second consecutive quarter of margin progression. With margins appear to have bottomed, we think the focus has now shifted to 2024. Restructuring cost savings have been upped from SEK11bn to SEK12bn which should add another ~40bps margins on a gross basis. Sentiment along with earnings revisions have been negative. Ericsson has disappointed forward expectations 4 times in a row since 4Q22, but with cost savings ramping could we see a positive surprise in 4Q23? (when they may guide for 1Q23) Remain Neutral on weak demand backdrop. Lower revenues slightly with unchanged TP. We lower our revenue estimates by ~1% while keeping adj. EBITA margins relatively unchanged for FY23-FY25. Our...
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After pre-releasing its results and announcing a SEK 31.9bn impairment last week, Ericsson today released its detailed Q3 result. While the Q3 figures were in line with our estimates, the outlook provided by the company is quite disappointing. Ericsson has also moved its long-standing FY24e EBITA target of 15-18% to the “medium-term”, depending on the market recovery.
Expecting a more gradual recovery; -20% below consensus on Q4 adj. EBITA Ericsson reports 3Q23 earnings on Friday 13 October. Following Ericsson''s 2Q23 reporting on 14 July 2023, Nokia''s Mobile Networks guidance was for flat revenues in 2H versus 1H (link) which is an indicator to us that Ericsson''s Mobile Networks revenues are likely to be below seasonality in Q3 and Q4. Going into Q3, we are ~3% below consensus revenues and ~7% below consensus adj. EBITA driven by Networks. For Networks, we assume flattish QoQ revenue seasonality with ~38.5% gross margins and ~12.5% adj. EBITA margins. For Cloud Software and Services, we think Q3 losses continue to narrow to ~SEK120m given the level of segment restructuring and successive adj. EBIT beats in Q1 and Q2. On a group level, this drives an overall Q3 adj. EBITA margin of ~7% which is an improvement from 5.7% at Q2. Going into Q4, we have ~20% QoQ revenue seasonality with Networks gross margins still under 40% at ~39.5% and a ~250bps QoQ improvement in adj. EBITA margins to ~15%. We think the Street''s estimate of ~480bps QoQ improvement looks aggressive given Nokia''s cautious commentary on Mobile Networks and recent Dell''Oro RAN downgrade (link). On a group level, we are ~20% below consensus Q4 adj. EBITA with ~10.5% adj. EBITA margins versus consensus ~12.5%. U.S. RAN downgrade + India Upgrade = Double Gross Margin pressure? Dell''Oro recently downgraded their 2023/2024 RAN market forecast as U.S. RAN market downgrades outweighed India RAN market upgrades. Assuming India is gross margin dilutive, we think the combination of U.S. RAN market downgrade and India upgrade would imply a double hit to gross margins. This could put consensus Q4 Networks gross margin assumptions of ~41% at risk. Sentiment remains weak with negative FCF this year. Lower estimates and staying Neutral Sentiment in the sector remains weak as investors continue to wait for the gradual recovery before the restructuring cost...
Margins expected to bottom in Q3, cautious on Q4 recovery expectations Ericsson delivered an overall beat to Q2 results driven by catch-up payments in IPR. Assuming one-off IPR catch-up payments of SEK300-400m, we estimate that overall adj. EBITA margins would have come in-line. Going into Q2, the street had modelled for a larger than expected sequential margin recovery from ~5% in Q2 to ~10% in Q3. We were ~25% below consensus Q3 Group adj. EBITA with only ~7.5% margins, with Networks gross margins of 39.5%, below consensus expectations of ~40.5%. Management has now guided for Q3 Group adj. EBITA margins to be ''in-line or slightly better'' versus Q2 with Networks gross margin range of 39-40%. Consensus now has Group ~7% adj. EBITA margins for Q3 and we are currently in-line. However, looking into Q4 we remain cautious and consensus has Group adj. EBITA margins jumping from ~7% in Q3 to 12.5% in Q4, driven by Networks adj. EBITA margins jumping from 12.3% to 17.3%. Given recent Dell''Oro RAN forecast downgrade (RAN Market Update) and Nokia''s lukewarm guidance for Mobile Networks gross margins to only improve towards end of the year, we remain cautious to the extent of Q4 recovery consensus is currently embedding. For Q4, we forecast a more gradual improvement with Group adj. EBITA margins of ~9.5% and Networks adj. EBITA margins of ~13.5%. Making some progress on IPR growth, but restructuring slower than expected Ericsson has made some progress with IPR run-rate now up to a range of SEK2.5-2.8bn and we now forecast IPR to exceed SEK11bn in FY24. However, on the other hand, restructuring has been slower than expected with Q2 restructuring costs of SEK3.1bn below initial expectations of exceeding SEK3.5bn. We think this could push out potential restructuring cost benefits further out, though consensus is already significantly below the FY24 targets of 15-18% adj. EBITA margin. Restructuring in tough operating environment with cash outflows this...
Ericsson published better-than-expected Q2 23 figures, thanks to a better performance in Networks as well as its CSS businesses. However, the company’s Q3 23 guidance is below consensus expectations and its ability to achieve the 2024 targets seem to be further away. As a result, we will revise our estimates downwards and also expect a consensus downgrade.
Will Q2 finally be the bottom or another deja vu? Ericsson reports Q2 earnings this Friday Going into 1Q23 earnings, consensus had expected 1Q23 to be the bottom in terms of Networks earnings. But at 1Q23 earnings, management guided for Networks gross margins to step down again in Q2 from 40.6% in 1Q23 to a range of 37% to 39% in 2Q23 driving group-level mid-single digit adj. EBITA margins. Going into 2Q23 earnings, we expect Networks gross margins of ~37% and adj. EBIT margins of 10.3% (below consensus 11.1%). Our group level adj. EBITA margins are ~5%, which is in-line with consensus and company guidance. RAN market downgrade potentially pushes out 2H recovery Given the recent Dell''Oro RAN market downgrade (click here: RAN market update) where ex-China RAN revenues were cut by 1-5% for 2023-2027 and highly profitable region North America bearing the brunt of the cuts (4-8%), we think this could push out 2H margin recovery assumptions. In particular, consensus has Networks gross margins recovering back to 40% in Q3 with group-level adj. EBITA margins nearly doubling to ~10%. We still have Networks gross margins below 40% in Q3. For Q4, consensus has group-level adj. EBITA margins back up to ~14.5% close to FY21 levels, also driven by Networks adj. EBITA margins recovering back to ~20% at FY22 levels. We remain cautious at the extent of margin recovery consensus is expecting in the 2H for Networks. We think the risk scenario (deja vu) here is for Networks margins to be guided down again in Q3, which would push out margin recovery trajectory for the remainder of 2023. On FCF, consensus is also expecting an ~SEK8.5bn inflow despite an ~SEK8bn outflow in 1Q23 with negative earnings and FCF in Q2. Restructuring in a tough market remains tricky; Remain Neutral We think restructuring in a tough market remains tricky, and we continue to prefer Nokia (+) due to its diversification and capital returns (click here: Choppy year ahead; Prefer Nokia''s...
Ericsson published weaker-than-expected Q1 23 figures, impacted by a change in business mix and a SEK 1bn restructuring charge (SEK 7bn for the full year). The company guided for a weaker Q2, with a mid-single-digit EBITA margin despite a slight increase in revenues driven by a seasonality effect in CSS and growth (albeit slow) in the Enterprise segment. We expect the cost saving efforts to be visible from H2 23, with the transformational efforts completely visible from 2024 onwards.
Q1 not the bottom - Margins to step down again in Q2. Is Q2 finally the bottom? Ericsson delivered an OK set of Q1 results with Networks adj. Gross Margins of ~41% coming in-line with guidance and expectations. Losses at Cloud Software and Services also continued to narrow. Outside of the weak FCF due to employee incentives, lower payables and higher customer financing, Q1 was better than expected. However, Q1 is not yet the bottom in terms of demand headwinds and margin pressures, which was unexpected. Earnings visibility has indeed been challenging. Networks adj. Gross Margins have been guided to step down again to 37-39% range in Q2, with flattish revenues QoQ (versus typical seasonality +12% QoQ). We think this ''resets'' the margin trajectory with Q2 margins potentially being the bottom. We have Q2 adj. EBITA margins of ~5.5% which is in-line with management guidance of ''mid-single digits''. Q2 should be another quarter of cash outflows with negative EBIT. Restructuring ramped. But is it enough to save the margins? To counter the effects of stronger margin pressures and weaker demand from operators'' inventory normalization and CAPEX reduction, Ericsson has accelerated the pace of restructuring. Management is now aiming for SEK11bn of gross cost savings, up from SEK9bn earlier. We think in a modest scenario, with 2Q23 adj. EBITA margins hitting 5-6% before recovering to ~10% in 4Q23, it still implies a significant step-up to achieve ~15% in 2024. Entering 2024 with ~10% margins would mean 2H23 margins would have to be significantly higher than 15% to achieve 15% for FY. Tough start to 2023, with CFO departure introducing more uncertainty. Remain Neutral. Ericsson has had a tough start to 2023 with 2024 targets now more challenging. The departure of the CFO also adds to uncertainty. We reduce our FY24 revenues by ~2% and EBIT margins by ~120bps. Given weaker earnings ahead, reduced visibility and weaker FCF, we remain Neutral on Ericsson. We...
Q1 Networks guidance issued, no surprises? Ericsson had issued Q1 Networks adjusted gross margin guidance range of 40-42% with revenues expected to come in below typical seasonality of -23% QoQ. Our Q1 Networks adjusted gross margins estimates are ~41% with revenues at -30% QoQ (-27% QoQ excluding one-offs in 4Q22). On the group level, management also indicated adj. EBITA to come in below 1Q22 levels of SEK5bn, and we have Q1 adj. EBITA of SEK4.3bn. We are above SEK90m consensus estimates for Cloud Software segment to account for the EBIT beat in 4Q22 (excluding IPR one-off and restructuring cost) driven by better cost control. We estimate Cloud Software segment close to break-even in FY23. Overall, for 1Q23, we are ~0.5% below consensus revenues but ~8% above on EBIT (5.7% margins versus consensus 5.3%). Q1 results to be announced on Tuesday, pre-market. Easier 2H ahead but FY24e Adj. EBITA margin range of 15-18% still looks ambitious Management had indicated that the SEK9bn cost-out program should start helping margins in 2H23, alongside normalization of CSP inventory de-stocking helping demand headwinds. We have FY23 adjusted operating margins of ~13.5% reaching ~14.5% in FY24, which is ~50bps below the low-end of the guided range. We have above consensus FY24 IPR revenues of SEK11bn versus consensus of SEK 10.8bn. Should Ericsson manage to hit SEK13bn IPR revenues in FY24, that should bring adj. EBITA margins to ~15%. Restructuring in a weak market is tricky; Remain Neutral on Ericsson We expect Mobile Networks earnings to decline ~25% in 1H23 with only ~2% RAN market (ex-China) growth expected for the next 2 years. We think this makes restructuring efforts and execution more difficult to drive margin expansion back to ~15% (a level not achieved in the last decade), especially in a weaker market. We reduce our revenue estimates by ~2% and operating margins by 50-120bps for FY23-FY25 (details within) and remain Neutral on Ericsson, still...
We hosted Ericsson CFO and Head of IR for in person investor meetings on 24 Jan Clarity was well appreciated entering tricky dynamics in 1H We summarize the key messages and discussions within this note. The near term Q1 guidance issued by management was well appreciated by investors, especially entering tricky dynamics in 1H. Networks Q1 GM is guided to be within the 40-42% range with more pronounced average seasonality of -23% QoQ (ex-IPR) with Group level Q1 adj. EBITA guided to be SEK5bn. Management has also indicated that Q1 assumption embeds a level of conservativeness. ...Things expected to improve in 2H Despite the tough near-term setup, the operating environment is expected to improve in 2H23. This is driven by 1) CSP Inventory back to normal levels, and 2) Restructuring cost savings ramping, and 3) Peaking of India deliveries in 2H. Management has also pointed out historically the cost savings program in 2017 had exceeded the SEK10bn target. FY24 adj. EBITA margin target perceived as ambitious Investors remain sceptical of the company''s FY24 adj. EBITA margin target of 15-18%, given the expected weak start to 1H23. This is also reflected with sell-side FY24 adj. EBITA margins of 14%. The CFO has also detailed the main margin drivers including 1) Restructuring cost savings, 2) Cloud and Software Services turnaround, 3) Growth in IPR revs, and 4) Continued product efficiency gains. Nokia Readacross (Nokia reports Q4 results and will update 2023 guidance on Thursday) It remains to be seen to what extent Ericsson''s margin pressures will be reflected in Nokia, given Ericsson''s commentary on CSPs'' destocking being an industry-wide event. Nokia should also benefit from long-term opportunity in IPR at unlicensed vendors. Going into Q4, we are cautious on 1) Mobile Networks margin pressures, 2) IPR miss, 3) FY23 Margin Guide, and 4) FY23 Revenue Guide. We continue to prefer Nokia given its diversification and long-term Mobile Networks...
Ericsson''s Supply Chain Dilemma - Good for FCF but bad for demand and margins As supply chain continued to ease, lower inventories helped Ericsson deliver strong Q4 FCF of SEK16.9bn well ahead of consensus expectations. However, as CSPs continue to de-stock their own inventory, they order less, hitting Ericsson''s top-line and margins as operating leverage falls. This saw Ericsson miss Networks consensus revenues by 2%, and is also expected to continue into 1H23. Margin pressures to accelerate as FX boost fades Margin pressures were greater than expected at Networks with operating margins of 21.4% coming in -220bps below consensus expectations. We estimate that Networks ex-IPR margins fell ~600bps y/y, a steep acceleration from ~200bps decline observed in 3Q22. Based on the company''s 1Q23 Networks GM guidance of 40-42%, we expect Networks ex-IPR margins declines to accelerate further in 1Q23 to ~700bps y/y bringing Networks overall margins down to ~14%. The company has guided for Group 1Q23 adj. EBITA to be ''somewhat lower'' than 1Q22, though management has commented that they have planned for a rather conservative scenario. Focus on 2H where margin pressures start to alleviate Despite the tough setup in 1H, we expect margin pressures on Networks to alleviate in 2H as the company starts benefitting from 1) Restructuring cost savings, 2) Easing supply chain situation, 3) IPR new customers, and 4) Recovering Networks demand. Readacross to Nokia reporting on Thursday Ericsson''s margin pressures is also expected to be manifested at Nokia, but we highlight Nokia''s diversification, strong execution and relative stock catalysts. (click here for the note: Choppy year ahead; Prefer Nokia''s diversification.) Lower TP to SEK64 (from SEK70), remain Neutral on tough near-term setup We lower our TP to SEK64 (ADR to USD6.2), still valuing Ericsson on FY25e ~8x P/E, discounted back. We remain Neutral on tough near-term setup, despite low valuation.
Complicated Q4 set-up; Multiple one-offs at Ericsson and no Licensing deal at Nokia Ericsson is due to report 4Q22 earnings on 20 January 2023 and Nokia on 26 January 2023. We see a complicated Q4 earnings season ahead. Ericsson should have multiple earnings one-offs including 1) SEK 0.8bn restructuring EBIT impact to Cloud Software and Services, and 2) higher amortization of SEK 1bn in the Enterprise segment, 3) SEK 1.1bn impact from sale of IoT business in the Enterprise segment, and 4) IPR catch-up payments of SEK ~4bn. But we do expect an IPR driven consensus beat in FQ4 (unless consensus adjusts beforehand). For Nokia, overall consensus still has the embedded assumption of Oppo and Vivo licensing negotiation conclusion within Technologies (which drives our below-consensus EBIT for Q4). In the last set of 3Q22 earnings, despite an overall in-line set of earnings at Nokia (ex-Licensing) in our view, the shares still traded ~8% lower. We see another IPR miss for Nokia in Q4, unless consensus adjusts prior to results. Choppy year ahead; Nokia''s diversification should help Looking ahead to 2023, we see a choppy year ahead and we prefer Nokia to Ericsson. RAN market growth is expected to slow to flattish (click here: From growth to value. RAN growth to slow, but value remains) while Nokia''s more diversified end-markets including Network Infrastructure should help support demand. From a stock catalysts perspective, Nokia has also the upcoming Oppo and Vivo renegotiation yet to come (with recent Huawei extension as a good proxy) while the DoJ / SEC investigation at Ericsson remains an overhang on the stock. Longer term, Nokia also has optionality in Mobile Networks margins, along with potential political swap gains in Network Infrastructure. Downgrade Ericsson to Neutral as catalysts dry up, prefer Nokia as Outperform Both stocks have improved margins and FCF generation vs the past, but entering into a slowing RAN market, with some margin pressures...
RAN growth set to slow after 4 year boom The broader RAN market excluding China grew +1% y/y in 3Q22, missing Dell Oro estimates by -5% driven by vendor exits in Russia, weaker macroeconomic outlook and stronger dollar. By region, North America (+16% y/y) grew the strongest while other key regions were weak across the board. Due to the weaker macroeconomic outlook, FY22 and FY23 RAN market growth excluding China was downgraded from +5% y/y to -0.5% y/y and +2% y/y to -0.7% y/y respectively. The downward revisions were driven by Europe (-8%/-17% for FY22/FY23) and APAC excluding China (-14%/-9% for FY22/FY23). On the balance, FY22 North America market was increased by +2%. Nokia gaining share, strongest quarter in Europe in a decade Nokia gained significant share in 3Q22, with global ex-China share increasing to ~27% back to 2020 levels before loss of Verizon. Significant share was won in Europe with quarterly relative gain versus Ericsson (+0.8%) highest since 2015. Nokia saw the strongest quarterly share in Europe in a decade recording ~1/3 of total European RAN revenues. Ericsson CMD Preview - Possible lower numbers, but already factored in by Consensus Ericsson is holding its CMD on 15 December, and likely topics of discussion include broader market growth outlook, long-term margin and FCF targets, restructuring plan details, Digital Services turnaround plan, and Vonage and Enterprise strategy. On a group level, we think the following targets are reasonable: in excess of low-single digit growth, 14-17% adj. EBITA margins, and FCF (before MandA) at 8-11% of sales. For Networks, we think ''in excess of'' flattish growth with 20-22% adj. EBIT margins. For Cloud and Software Services, we think low-single-digit to high-single-digit growth (in excess of) with adj. EBIT break-even in 2024 and low-single-digit margins thereafter. For Enterprise, growth should be in double digits with the segment remaining loss-making as a key area of investment. However,...
We hosted investors for 3 days of in-person meetings with 19 companies across the semis and IT Hardware supply chains. Key topics include: the linearity of inventory realignment, the dichotomy between cloud and enterprise spending, WFE capex, SiC/Auto demand; and cyclical vs. structural arguments for PCs and smartphones. Companies We Met On The Road - Ramel: Lam Research (LRCX), Qualcomm (QCOM), Intel (INTC), NXP (NXPI), KLA Corp (KLAC), Advanced Micro Devices (AMD), Microchip (MCHP), onsemi (ON), Sambanova (private), Katana Graph (private), International Business Strategies (private) - Ackerman: Micron (MU), Seagate (STX), Skyworks (SWKS), Power Integrations (POWI), Juniper Networks (JNPR) - Slowinski: Ericsson (ERIC), Logitech (LOGI), SoundHound AI (SOUN) The entire BNP Paribas IT Hardware and Semiconductor team is very appreciative of the valuable time given by all the executives who participated in this event. On the subsequent pages of this report, we present detailed takeaways from our meetings with senior management from all the companies listed above. We will be hosting a recap conference call for investors at 9:00AM EST on Tuesday, November 15. Please contact your BNP Paribas sales representative for details, and we look forward to you joining that discussion.
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Mobile demand fine but margins remain under pressure Ericsson delivered a +2% beat versus consensus revenues driven by Networks revenues which grew +4% ccy. Near-term demand is also expected to be supported by 5G roll-outs in India as the North America market growth fades. However, margins remained under pressure, missing consensus expectations across the board. Compared to Nokia, Ericsson has suffered more on margins. Q3 margins were impacted primarily by continued supply chain tightness and inflationary pressures, as well as larger share of services from footprint gains. More margin pressures ahead; Digital Services turnaround still challenging Is this the end of margin pressures? We think there may be more margin headwinds to come. As North America growth fades and the mix shifts towards Europe and Emerging Markets, margins may be further under pressure. Near-term rollouts in new geographies such as India, which tend to be gross margin dilutive. Positive leverage effects also take time to play out. Supply chain tightness and inflationary pressures are also expected to continue into Q4 and 2023. FCF has been weaker than expected with another quarter of inventory build. NWC is expected to remain high as Ericsson prepares for India 5G rollouts. Digital Services also saw another implied ''downgrade'' with FY22 losses now expected to be similar to FY21, which implies a Q4 EBIT of only ~SEK100m versus consensus expectations of SEK1.1bn. 5G Core traffic volumes have also yet to pick up as integration and service costs run high, driving continued EBIT losses. Restructuring costs are also expected to pick up to ~1% of revenues to improve margins over time. Remain Outperform on valuation, reduce TP to SEK95 Ericsson faces near-term margin and continued supply chain and inflationary pressures, but we remain Outperform on valuation, which is severely discounted in our view. We lower our revenues by ~1% and operating margins by ~1% for FY22-FY24. We now...
Ericsson has published strong sales but several headwinds are impacting its margin generation which has caused a significant miss in profitability. Although some of the effects are one-offs, most are expected to remain around over the long term. The capex of mobile operators is also expected to decrease in FY23, which implies less growth for the coming year. In addition, there is still no news from the DoJ.
Mixed outlook, but 5G RAN spend should be more resilient in a slowdown India''s Jio recently selected Ericsson and Nokia to build India''s first 5GSA network, with new reports suggesting spending up to USD25bn to roll out its 5G services across India by the end of 2023 which is a positive for the sector. Dell''Oro''s recent Q2 RAN update - while having missed initial expectations largely due to Russia exits, China lockdowns and tougher comparisons - has left FY22 RAN guide unchanged. On the other hand, Dell''Oro has also downgraded global Telecom CAPEX from 0% CAGR between 2021-2024 to now -3% CAGR. Despite the mixed outlook and increased risks of weaker economic environment, we think 5G RAN spend should be more strategic in a downturn as countries continue to roll out 5G networks. Supply chain and inflation risks still remain challenging Ericsson missed on operating margins in Q2 largely driven by inflationary pressures in the supply chain. Our recent catch-up with the company indicated that supply chain still remains tight with inflation remaining high, similar to Q2, leading us to be cautious on margins (we are -70bps below consensus operating margins for Q3). The company continues to combat inflation primarily through product substitution but has cautioned that this depends on product renewal and refresh cycles, implying that price increases are not as immediate. Inventory has been high, but the company expects inventory to start trending down towards the end of the year which should help cashflow. Remain Outperform on Ericsson on deeply discounted valuation and resilient cashflows Ericsson continues to be deeply discounted in our opinion, trading only at FY23e 4.7x EV/EBITA (Exane adj.) and ~17% FY23 FCF Yield. Our revenue estimates increase by 4-12% driven by stronger dollar and Vonage scope additions and our operating margins decrease by 30-80bps driven by higher amortisation from Vonage. We continue to value Ericsson at FY23e ~8x EV/EBIT with...
Q2 RAN revenue growth impacted by Russia exits and China The broader RAN market growth declined -1% y/y in 2Q22, missing estimates by -7% driven by vendor exits in Russia, lockdowns in China, tougher comparisons in India and Japan and a somewhat weaker macroeconomic outlook. Supply chain impacts were not significant in the quarter, echoing recent commentary from Cisco who saw supply chain pressures easing. Even though Russia was only ~10-15% of European RAN market, vendor exits saw the region revenue decline by -7% y/y after having grown +18% y/y in 1Q22. APAC excluding China was also weak, with revenues declining -20% y/y. India and Japan faced tougher comparisons due to spectrum auctions, but according to various news reports India is set to begin rolling out its 5G network in the 2H22. Reliance Jio Infocomm also recently committed a spending target of USD25bn for its 5G services rollout till end of 2023, which should benefit both Ericsson and Nokia in 2023. Global RAN growth excluding China is expected to be +5% in 2022 and +2% in 2023, and has been growing healthily now since 2018. 2022 Open RAN revenue estimates revised upwards by +50%, with large vendors winning Open RAN revenue estimates for 2022 were revised upwards by +50% from USD1.6bn to USD2.4bn, with expected penetration increasing from 5% to 6% of the global RAN market. This is driven by strong deployments at Samsung with Verizon in North America. Other smaller Open RAN vendors such as Fujitsu and NEC however saw revenue growth pulling back, and other vendors like Altiostar (Rakuten), Mavenir and Parallel Wireless remain under pressure. Huawei regains some share in Europe, but we don''t expect that to last Huawei''s quarterly share in Europe recovered slightly from ~26% in 1Q22 to ~28% in 2Q22. Nokia also saw a ~2% increase in RAN revenue share in Europe against Ericsson. Overall, we expect Ericsson and Nokia to continue to take share at Huawei''s expense and remain Outperform on...
Ericsson has announced a vast reorganization of the group reporting structure and of its executive board members. Through the merger of two business divisions and the creation of a new one, we believe Ericsson wants to ring fence the strong performance of its Enterprise business, one of the pillars of its future profit generation strategy. The plan involves the replacement of three executive board members with two new ones.
Ericsson has missed the consensus in profitability due to several one-offs. Rising inventory levels and increased R&D spending are expected to stay and will weigh on cash generation for the coming quarters. The DoJ’s potential sanction is imminent, and there is still limited visibility of what it is likely to be.
Ericsson is in an embarrassing situation whereby it may have been involved in embezzlement to a terrorist organisation. Its business in Iraq has undergone an internal investigation after Ericsson had discovered irregularities in its transactions. Under media pressure, Ericsson has disclosed the situation, and it does not look pretty.
Ericsson has proved once again that it has managed to offset the market share loss in China by strong organic growth and better than anticipated profitability. It has recorded the best FCF in its history and has announced an impressive dividend increase for FY21. Globally, strong results and a strong year ahead.
Ericsson released solid Q3 results. As a reminder, the Chinese ban on the Swedish Telecom Equipment manufacturer has been the reason for the recent poor momentum, down 20% since mid-April. These results could change this as Ericsson has proved that it doesn’t need China to generate strong margins.
Ericsson published revenues and EBIT below consensus as a result of a SEK-2.5bn sales decline in China and a decrease in IPR of SEK0.5bn. In its previous guidance, China was expected to be its main growth driver. The group will now have to organise outside China as more market share loss is expected.
Ericsson published its fourth quarter figures with a strong beat in profitability. While sales were slightly above expectations thanks to a strong 5G roll-out, the operating margin level has already reached the 2022 guidance range. Throughout the final quarter of 2020, Ericsson managed to strengthen its market position, boding well for subsequent years.
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