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Huawei Slowdown Casts Pall Over Network Sector

Iain Morris
7/27/2017
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A sharp slowdown in sales growth at China's Huawei has cast an even darker cloud over global network equipment markets after European rivals Ericsson and Nokia said conditions this year would be worse than previously feared.

The Chinese vendor, which has continued to grow sales while its Western rivals struggle, today reported its slowest rate of revenue growth in about four years, with revenues from carrier and enterprise customers up just 9.6% year-on-year in the first six months of 2017, according to Light Reading's calculations.

Overall sales for the first six months of the year were up 15%, to 283.1 billion ($42 billion) Chinese yuan, compared with the year-earlier period, said the company in a statement.

This time last year, Huawei Technologies Co. Ltd. flagged a 40% year-on-year increase in revenues, and sales were up one third in 2016. (See Huawei's Sales Soar but Profit Growth Grinds to a Halt.)

The update comes after Huawei told Light Reading earlier this year that its main carrier business, which accounts for about 56% of revenues, would grow at a much lower rate over the next five years because of reduced spending by communications service providers. (See CEO Interview: Huawei's Eric Xu.)

"Even a 10% [annual] growth would be a stretched target to work on," said Rotating CEO Eric Xu during a discussion with Light Reading at the Mobile World Congress.

In its six-month updates, Huawei does not break out all details of performance across its three main business areas of carrier, consumer (handsets) and enterprise, but it said it had achieved "solid growth" across all three groups in the first half of 2017.

According to a separate update from the consumer business, however, sales from gadgets were up 36.2% in the first six months, to RMB105.4 billion ($15.6 billion), compared with the first six months of 2016.

That means revenues from the carrier and enterprise divisions combined rose just 9.6%, to RMB177.7 billion ($26.4 billion), over the same period.

Having last year overtaken Ericsson AB (Nasdaq: ERIC) as the world's biggest supplier to communications service providers, Huawei has become increasingly reliant on its consumer and enterprise divisions for overall growth. (See Huawei: New King of the CSP Market.)

Sales at each of those businesses increased by more than 40% last year, while the carrier business reported revenue growth of about 24%.

Like Finland's Nokia Corp. (NYSE: NOK), Huawei has been targeting other sectors to offset the slowdown in telco markets. In April it announced a bold push into the market for public cloud services -- a move that puts it in competition with hyperscale web players such as Amazon.com Inc. (Nasdaq: AMZN) and Google (Nasdaq: GOOG) -- although it made zero mention in its first-half sales update of the cloud division it was reported to have set up at the time. (See Huawei Takes Aim at AWS, Google With Public Cloud Move.)

The revenue slowdown has also fueled concern within Huawei about dwindling profitability. In a New Year message in January, Eric Xu complained that operating efficiency and cash flow at Huawei had seen little improvement in 2016 and promised to cut down on "empty and extravagant marketing events and conferences" and to avoid "blind rhetoric and optimism about Huawei as an industry leader." (See Is Huawei in for a Bumpy 2017?)

Huawei registered no meaningful improvement in net income in 2016 and its operating margin shrank to 11% in the first half of this year, from 12% in the year-earlier period.

That implies an increase of just 5% in operating income, to about RMB29.5 billion ($4.4 billion), compared with the first six months of 2016.


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Huawei's update came on the same day that Nokia reported a 5% decline in sales at its main networks business and said its telco markets would shrink by 3% to 5% this year, having previously guided for a decline of 2.2%. (See Nokia Shames Ericsson on Profits but Sees Trouble Ahead.)

Swedish rival Ericsson, meanwhile, is now forecasting a "high single-digit percentage" decline in the market for radio access network equipment this year, up from an earlier forecast that market sales would fall by 2% to 6%. (See Ericsson Shares Slump on Gloomy Q2 Update.)

While Huawei still appears to be outperforming its chief competitors, its slowdown shows it is also feeling the pain as communications service providers cut spending on network equipment.

The arrival of 5G technology in the next couple of years could persuade telcos to open the purse strings once again, although operators may be in little hurry to roll out 5G networks on a massive scale while their own revenues continue to shrink.

— Iain Morris, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profile, News Editor, Light Reading

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komatineni
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komatineni,
User Rank: Lightning
7/31/2017 | 10:50:40 PM
Spend cycles
Without a doubt that's the trend. Huawei revenue is from carrier business and especially from mobile businesses. APAC is still investing in last mile fiber but the radio, core, vas are invested for the LTE cycle. The 5G is still far ahead. 2G-->3G-->4G was rather fast and excellent demand from users. But now we all have reached a point where the higher speed itself is not sufficient for higher pay, but something else which the industry couldn't figure out yet. 

So going to be a gloomy period for the next 3-5 years at least. 
danielcawrey
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danielcawrey,
User Rank: Light Sabre
7/30/2017 | 1:38:03 PM
Re: Slowdown in Telecom
It seems like a general slowdown to me. When you look at companies like Huawei, they don't show slowdowns in the numbers until much later. I think we're still seeing some issues from last year, when expansion pulled back a bit. 
James_B_Crawshaw
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James_B_Crawshaw,
User Rank: Blogger
7/28/2017 | 2:56:53 PM
Re: Slowdown in Telecom
It is darkest before the dawn. And perhaps 2Q17 is a turning point for telcos (famous last words). Telefonica, Orange and Verizon have all beaten market expectations for growth in the latest results season. See FT article (paywall) for the details but in brief: 

* Orange's 0.5% revenue growth in France was the first growth since 2009.

* Telefonica delivered 1.9% revenue growth in Q2 and raised its full year guidance from "stable" to +1.5%. 

* Verizon reported its first revenue growth in 4 quarters (expectations were for a 2% decline). 

It's not all roses of course and these growth rates are still anemic compared to Google and Facebook. 
SystemEn18668
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SystemEn18668,
User Rank: Lightning
7/27/2017 | 11:56:15 PM
Slowdown in Telecom
These might be numbers based on local trends but telecom itself everywhere is on downfall as an industry. Vendors even the giants are struggling to push business and numbers. This may reflect more going forward as operators are moving more towards open source and cots based solutions
James_B_Crawshaw
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James_B_Crawshaw,
User Rank: Blogger
7/27/2017 | 6:17:50 PM
Re: Hockey stickonomics
I don't think they've released a geographical breakdown for 1H17 but what for it's worth last year China was 45% of group revenue and grew 41%, EMEA was 30% and grew 23%, APAC was 13% and grew 37% and Americas was 9% and grew 13%. 
mendyk
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mendyk,
User Rank: Light Sabre
7/27/2017 | 10:22:02 AM
Hockey stickonomics
I'm not sure how anyone could have expected massive growth rates to continue in a sector that has clear limitations by nature (as in, there are only so many network operators who have only so much to spend). Also, how much of Huawei's slowdown in growth can be traced to its home market?
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