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India market helps temper the US slowdown for Nokia and Ericsson in 2023

Nokia and Ericsson, in their recently announced Q2 2023 results find that their respective financial numbers in the second-quarter are not worse hugely due to the increasing revenues from the rapid pace of 5G rollouts in India.

Nokia India net sales in Q2’23 was Eur 1043 mn, as against Eur 241 mn in Q2’22, a 333 percent increase, and Eur 1896 mn in Q1-Q2’23 compared to Eur 440 mn in Q1-Q2’22, a 331 percent increase.

Some extracts from Nokia earnings call and results:
“Our Mobile Networks business continued to benefit from 5G deployments in India offsetting on-going weakness in North America, delivering 5% net sales growth in constant currency. Gross margin was largely in line with Q1 and continued cost discipline led to an operating margin of 7.9% in Q2.”

“Optical Networks net sales grew 16% on a constant currency basis showing continued strong momentum and customer engagement with our PSE-V solutions. Growth was driven primarily by India.”

“The strong growth in net sales in India was related to Mobile Networks, as 5G deployments continued to ramp in Q2 2023. Network Infrastructure also saw strong growth, mainly driven by Optical Networks.”

Some extracts from Ericsson earnings call and results:
“So, looking here at the geographies, we saw rapid 5G rollout in India. It’s very clear. And network sales in India doubled year over year. This resulted in an organic growth in our market area called Southeast Asia, Oceania, and India by 71% organically year over year.”
“No doubt, the initial phase, the ramp-up phase in India, the deployment primarily comes with low margins, which will then gradually improve as you move further in that project.”

“And then, the gross margin question, the reality is we’re going from about 35-ish percent share of North America to about 25% share of sales. And India goes from, I believe, for 3% to 16%. So, it’s a big mix shift. And we can still execute with a gross margin that’s about 39% in network.”

“We see changed business mix with North America, representing one of the lowest shares we’ve seen in many years. But on the other hand, we see India growing very, very fast. Our strategy, as you all know, is focused on three priorities: the first one, to bolster our leadership in mobile networks; second is to grow our enterprise business; and thirdly, drive a cultural transformation of the company. Mobile networks continues to be the bedrock of Ericsson.”

That’s not to say the results are great for either Nokia or Ericsson– they’re just not as bad as they could have been given current network infrastructure market conditions.

A severe slowdown in network investments by telcos in nearly all major markets has hit both of the industry’s major equipment vendors this quarter. This is compounded by generally negative macroeconomic trends, as inflation lights a fire under costs, and higher interest rates squeeze capital investments in general. While Ericsson reported a 9% year-on-year decline in like-for-like revenues for the second quarter, Nokia reported revenues of €5.7bn and an operating profit margin of 8.3%, down from 9.6% a year ago. Nokia’s broad telecom network technology portfolio is helping it to weather the economic storm, the vendor has an expansive product line and a global customer base.

And these trends are expected to continue in H2 2023.
Pekka Lundmark, Nokia’s CEO, added to the second-half warning proclamations in the vendor’s earnings report. “Earlier in the year I highlighted that we were starting to see signs of macroeconomic challenges along with inventory digestion impacting customer spending and this has intensified through the second quarter. In the second half, we expect these trends to continue to impact our business,” he noted.

Ericsson CEO Börje Ekholm noted the company is encountering “challenging conditions” and cited the “inventory adjustments” that network operators are making on multiple occasions during the vendor’s earnings presentation, but claimed the vendor “delivered a solid quarter” that met with expectations. Investors didn’t agree – Ericsson’s share price took a 7.8% hit on the Stockholm exchange to drop to SEK54.02, meaning the stock has lost almost 14% of its value this calendar year.

However, both the vendors’ management teams are bullish about future growth and ongoing demand for their products.

“Whilst we see some short-term challenges impacting the business, particularly with a softening environment for CSP spending, we remain highly confident in the opportunities ahead for our Network Infrastructure division. In optical, we continue to believe we are gaining market share and… we are very optimistic about the potential to continue to grow in this business. In fixed broadband networks, we understand there might be some concerns that we are now seeing some slowdown in sales, which is why we want to make it clear… that the decline is primarily related to fixed wireless, due to its sensitivity to a small number of customers. In fibre [passive optical networking equipment for fibre-to-the-premises rollouts], after two to three years of significant growth, we are now seeing some moderation in growth rates and some short-term inventory digestion. But the outlook remains strong for this business, with a number of government subsidy programmes in both the US and Europe only just starting to benefit the market,” stressed Lundmark.

According to Ekholm, “three quarters of all base stations outside of China are not yet updated with 5G mid-band. So this, in combination with the migration to 5G standalone, will continue to drive investments in 5G networks around the world, so we are confident the market will recover… of course, the exact timing of the recovery is in the hands of our customers. But we are encouraged by the discussions we’ve had with several customers where we see a recognition of the need to strengthen capacity in the network. That said, we expect a gradual recovery late in 2023 and then an improvement in 2024. When that happens, Ericsson is really well positioned,” stated the CEO confidently.

Complete results:

CT Bureau

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