Market Woes Drag Vendors Down

What price to be a fly on the wall in some of the telecom vendor community's most influential boardrooms today after a brutal end to the first quarter of 2015?

Following the publication of its first-quarter financials on Thursday, Nokia Corp. (NYSE: NOK) saw its share price close down 10.7%. (See Nokia Slumps on Networks Malaise.)

It's not alone. The share price of Alcatel-Lucent (NYSE: ALU), the company Nokia hopes to subsume, lost 9.7% of its value on the Paris exchange. (See Nokia's Suri Defends AlcaLu Deal Against Critics and Nokia & Alcatel-Lucent: What's Going On?)

There's more. Sweden's Ericsson, which had suffered a similar drop after reporting declining profits last week, has continued to flounder. Its stock lost 2.9% of its value in Stockholm on the day of Nokia's earnings update. (See Ericsson Sinks on North American Slowdown.)

These are indisputably tough times for the equipment titans of the Western world, but is the market overreacting?

At least one analyst thinks the punishment meted out to Nokia was unwarranted. In a research note sent late Thursday, Michael Genovese of MKM Partners described the negative reaction to Nokia's earnings update as "overdone," lauding growth in revenues and the performance of the company's mapping and licensing businesses during the first three months of the year.

"GMs [gross margins] missed … due to … lower software and systems integration sales, upfront costs for LTE builds in China and increasing competition in the market," added Genovese. "Mix and Chinese LTE profitability should improve later in the year. Additionally, the merger with ALU [Alcatel-Lucent] should help address some of the competitive environment-related issues over time."

It is worth noting that Ericsson AB (Nasdaq: ERIC) also reported sales growth in the January-to-March quarter but struggled to maintain profitability because of restructuring costs. Flattered by foreign exchange movements, Ericsson's sales fell in constant-currency terms, unlike Nokia's. Yet the Swedish player blamed its setback on a slowdown in North America, where Nokia flourished (albeit due partly to its takeover of SAC Wireless last year). By contrast, Ericsson's Asia business was a high flyer. "It's a long time since we've seen that level of growth in any region," said CEO Hans Vestberg about the improvement in India. (See Ericsson Sinks on North American Slowdown.)

Investors might also take heart from comments made by Nokia's senior executives during yesterday's earnings call. The January-to-March quarter in 2014 was an unusually strong one for software sales, said CFO Timo Ihamuotila, making a year-on-year comparison look unfavorable. Nokia won a major systems integration deal in the first quarter that should bolster results over the rest of the year, according to CEO Rajeev Suri.

Moreover, as Genovese has intimated, the margin impact of entry deals in China's 4G market may be a short-term one, as deployments gather pace. "The situation will ease in the second half of the year," said Suri.

Want to know more about 4G LTE? Check out our dedicated 4G LTE content channel here on Light Reading.

On the other hand, some analysts seemed perplexed about the sudden intensification of "competitive dynamics" that Suri held partly responsible for Nokia's margin squeeze. Was there an insinuation that Suri had been remiss in not alerting the investment community to this development at an earlier stage? "You have to give it a period of observation to know it's a trend," insisted Nokia's boss. "Based on what I see, I now think it's worth pointing out that competitive intensity has increased."

Next page: Merger misgivings

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brooks7 5/3/2015 | 6:32:10 PM
Re: Down down down Fundamentally, the market has changed - starting about 15 years ago - and leaders of the companies often act that things have not changed.

Before 2000, carriers bought a common architecture for a LONG time and bought generations of products to replace existing parts of the deployment.  So, if you missed an RFP you could catch it next time.  Carriers multi-sourced lots of things and split things 50/50.

Now, it is winner take all (or mostly all) in any given situation.  If you lose the first RFPs for the spot in the network, then cancel the product for that generation and work on the next one.  Architectures evolve relatively quickly (think about what we were deploying in 2000) and so products have short deployment cyles and really long tails.  There are spares/small adds that will go on for a LONG time.  But there will not be a replacement RFP.

Let me use my friends at Calix.  They can't enter Verizon and AT&T until there is an RFP for something that they make.  Guess what...no RFP is coming - probably not for the rest of the decade.  So, they are stuck and this is true for them in the major carriers worldwide.  It is not a fault of Calix.  It is just that the market works differently than it used to be.  So either they are going to have to buy their way in to some new large customers or do something else.

In the long term, the major markets will be dominated by the huge players (E, Nokia/Alcatel, Huawei, Cisco).  There will be spots for the smaller players.  The way to think of the market is that it will be a lot like the airplane manufacturing business.  Airbus and Boeing dominate, but there are niches for other players.  We are still weaning out the problem of the "Optical Bubble" creating too many companies that are too small in what is a commodity business.

Wait till NFV hits and carriers think that software ought to be free.  :)


danielcawrey 5/2/2015 | 1:37:57 AM
Re: Down down down I'm surprised that there are market problems at all – it would seem to me that there would be a demand for additional capacity given the fact that we're all using more data then ever before. 

And I certainly wouldn't trust China for sustained growth – that sounds like false pretense to me. 
Mitch Wagner 5/1/2015 | 5:56:42 PM
Down down down Seems like we've been hearing aboout slow carrier demand reducing vendor results for years now. I wonder if things will turn around now that uncertainty has been removed from the Comcast/TWC merger?
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