NEC posts networks loss amid 5G slowdown and open RAN 'caution'

Months after complaining about open RAN wariness among brownfield operators, the Japanese company reports losses at its networks division.

Iain Morris, International Editor

January 30, 2023

5 Min Read
NEC posts networks loss amid 5G slowdown and open RAN 'caution'

NEC's determination to be a 5G force is coming at a cost. The Japanese electronics giant has just recorded an operating loss of 600 million Japanese yen ($4.6 million) at its smallish networks unit for the first nine months of the current fiscal year. As minuscule as that sounds for a group that makes about $23 billion in annual sales, it compares with a JPY15.8 billion ($120 million) nine-month operating profit the year before. And NEC's networks business made nearly JPY20 billion ($150 million) the year before that.

This should alarm other companies trying to carve out a foothold in the networks sector, especially ones that don't have NEC-like resources. The mini boom in 5G spending – more controlled explosion than seismic event – is over, Ericsson has warned, guiding for zero annual growth in radio access network (RAN) market revenues between now and 2025. Data supplied by research firm Dell'Oro Group underpins that expectation. Upstarts will have to elbow aside incumbents fighting to protect their sales.

NEC blames its networks loss on "an increase in strategic expenses for global 5G deployment and the one-time costs for streamlining assets and booking a strategic project." As it points out, its revenues were up 3.1%, to JPY361 billion ($2.8 billion), compared with the year-earlier period. Figures also look much better for the recent third quarter alone, with operating profit up 71%, to about JPY12.7 billion ($98 million), on sales growth of 13.5%, to JPY141.4 billion ($1.1 billion).

Figure 1: (Source: Finn Hackshaw on Unsplash) (Source: Finn Hackshaw on Unsplash)

Nevertheless, NEC seems a long way off its 2025 target of generating about JPY700 billion ($5.4 billion) in annual sales, along with an operating margin of 10%. And in September, it complained that most operators had grown warier of open RAN, the movement it hopes will buoy its 5G fortunes, since carrying out trials in 2021.

"Compared to greenfield operators like Rakuten Mobile, brownfield companies tend to be cautious to open RAN deployment," said Atsuo Kawamura, the president of NEC's network services business, during a presentation to investors. "They conducted open RAN tests last year and with that result they have gone somewhat cautious."

At the time, it prompted NEC to lower sales expectations for the current fiscal year by JPY45 billion ($350 million), to JPY530 billion ($4.1 billion). The company also slashed its outlook for operating profit by JPY15 billion ($120 million), to JPY31 billion ($240 million). In a LinkedIn post commenting on NEC's targets, James Crawshaw, a principal analyst with Omdia (a Light Reading sister company), said they would be difficult to achieve without success across the entire product portfolio – from radio software through to systems integration.

Fuzzy outlook

The open RAN picture remains fuzzy. The idea, essentially, is to ensure that an operator can use interoperable products from multiple suppliers at a given site, instead of buying a whole stack from one big vendor (as most operators do now). Dell'Oro has just upped its forecasts, predicting open RAN will account for between 15% and 20% of the entire market by 2027 (it's unclear what the forecast was previously – but it was presumably lower, judging by the wording from Dell'Oro). The question is now about the guise in which open RAN will appear.

Just because operators can pick from and mix different suppliers doesn't mean they will. Colin Evans, the senior director of business development for Juniper Networks, told a recent podcast that he expects most open RAN activity to be "single vendor" in nature – meaning deployments conform with open RAN specifications but continue to rely on one end-to-end supplier per site.

This would inevitably make life harder for specialists. And while NEC is branching out, it lacks experience in some areas. Nor does it have Ericsson's annual research-and-development budget of about $4.5 billion to fling mainly at mobile infrastructure and related efforts. In its last fiscal year, NEC spent just JPY126.3 billion ($970 million) across the entire group.

Figure 2: NEC's share price in Japan (Japanese yen) (Source: Google Finance) (Source: Google Finance)

The Japanese firm clearly has an opportunity in some countries to replace Huawei and/or ZTE, Chinese vendors that have grown unpopular since Donald Trump sat in the White House. But dislodging Ericsson and Nokia will be tougher. Outside China, the Swedish vendor claims to have grown its share of the RAN market by six percentage points since 2017, to about 39% now, and it still believes it can add a percentage point each year. A resurgent Nokia is similarly targeting RAN market-share gains, CEO Pekka Lundmark told Light Reading last week. NEC also faces tough competition from other big Asian companies on the 5G attack, including local rival Fujitsu and South Korea's Samsung.

NEC's long-term goal is to capture 20% of the global open RAN market. But if open RAN itself makes up only 20% of the RAN market by the late 2020s, this would equate to less than $2 billion in annual sales and an operating profit of not even $200 million, based on NEC targets. The Japanese company may be hoping the forecasters have underestimated by a country mile.

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— Iain Morris, International Editor, Light Reading

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About the Author(s)

Iain Morris

International Editor, Light Reading

Iain Morris joined Light Reading as News Editor at the start of 2015 -- and we mean, right at the start. His friends and family were still singing Auld Lang Syne as Iain started sourcing New Year's Eve UK mobile network congestion statistics. Prior to boosting Light Reading's UK-based editorial team numbers (he is based in London, south of the river), Iain was a successful freelance writer and editor who had been covering the telecoms sector for the past 15 years. His work has appeared in publications including The Economist (classy!) and The Observer, besides a variety of trade and business journals. He was previously the lead telecoms analyst for the Economist Intelligence Unit, and before that worked as a features editor at Telecommunications magazine. Iain started out in telecoms as an editor at consulting and market-research company Analysys (now Analysys Mason).

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