Mobile giants: 4G is so yesterday. Better IT can kickstart revenue growth

Just as operators struggle to make direct profit improvements from LTE, so the vendors have long given up on 4G upgrades being the solution to all their problems.

LTE is the most significant factor in driving revenue growth for the big five infrastructure suppliers, for sure, but the margins and differentiation in the equipment itself are in sharp decline, and trends such as virtualisation and HetNet will only worsen that trend for the OEMs.

As Nokia’s and Ericsson’s third quarter results show, the vendors are shifting more aggressively than before to the key new technologies – which will not only deliver the revenues of the future, but could do so with more attractive margins.

A few years ago, the companies’ CEOs would have talked of little but LTE network deployments and managed services as the key to a golden future.

Now it is all about software – radical concepts like virtualisation and SDN (software defined networks) hover on the horizon, but the companies see their carrier customers already thinking about their networks in a new way, and recognising that their own future success will lie in new core and back office platforms that can squeeze maximum value out of their LTE and LTE-A investments.

Look to Nokia Networks

Nokia Networks has been a trailblazer in many areas of network software, paving the way for a fully software-defined future with its Liquid architecture. This seeks to allocate network resources flexibly – and increasingly, dynamically – where they are needed, throughout the RAN, core and transport. With the Liquid Applications offering, it also pushes more applications, content and intelligence to the edge of the network. This draws Nokia into valuable alliances with the IT giants like IBM, alliances which are increasingly targeting carriers as networks turn into applications platforms. Last week, Nokia established an industry alliance around its edge-based architecture in the hope of driving de facto standards.

Nokia hopes such activities will give it a headstart in terms of operator trust, stable technology and industry alliances, as carriers start to deploy their networks in a new, more virtualised way. Its Liquid approach has already started to boost its LTE sales and mobile broadband contracts were the star of its strong third quarter. However, CEO Rajeev Suri was clear that wireless infrastructure has become a very seasonal and fluctuating business, and that other revenues, in software and services, would be essential to delivering predictable levels of profitability in future.

Ericsson’s third quarter raises US fears

As for Ericsson, those fluctuations are already affecting its performance, notably in its largest market, North America, and that will intensify its efforts to dominate the process of transforming the OSS/BSS platforms for a virtualised era, and to become an IT powerhouse as well as a telecoms giant.

The Swedish firm’s third quarter revenues came in above expectations, but were overshadowed by concerns about north America, which has been its strongest region since it acquired the bulk of Nortel Networks in 2009. In north America and globally, the strongest area of growth was support solutions, particularly OSS/BSS, in which Ericsson has made important investments and acquisitions in the past couple of years – most recently Metratech.

Support solutions rose by 30 per cent year-on-year in revenue terms, while global services, including outsourcing, were up just two per cent.

Once a difficult market for Ericsson, the company changed its US situation around when it acquired much of Nortel out of bankruptcy and laid the foundations of a strong US presence, fortified by big wins in the early LTE rollouts at Verizon and AT&T. North America is now the company’s largest region by revenue.

Overall, Ericsson’s net income fell by 13 per cent year-on-year to SKr2.65bn ($365m), hit by higher R&D expenses and the impact of currency hedge contracts. However, total sales were up 8.7 per cent on the year-ago quarter, reaching SKr 57.6bn ($7.94bn), and one of the most important metrics, gross margin, held steady, rising from 32 per cent to 35.2 per cent, in line with analyst forecasts.

In the Networks unit, sales were up 13 per cent. As in Q214, and at Nokia Networks, this was helped by a shift in carrier spending from upgrades, modernizations and coverage extension, to high capacity mobile broadband contracts, which are more lucrative and profitable in general. Ericsson saw its best mobile broadband growth in the Middle East, China and India rather than its traditional European and US territories.

Sales in North America fell by three per cent year-on-year and eight per cent compared to Q214. In contrast to more emerging markets and newer LTE deployers, the North American carriers are cutting back on network quality and capacity projects, said Ericsson, and focusing on “cashflow optimization”.

It added that the change in operator spending patterns in the region made it hard to forecast near term sales. "I think that is the main uncertainty for Q4," CFO Jan Frykhammar said on the earnings call.

CEO Hans Vestberg commented: "But we're not seeing any change in the underlying market demand in the US. Demand for new smartphones remains high."

However, investors were concerned that Nokia had reported a 53 per cent leap in Norht American revenues, admittedly from a far lower base, especially in LTE, where the Finnish firm only recently secured major contracts, notably with T-Mobile and Sprint (Ericsson is also a Sprint supplier).

Over-reliance on China

"The trend is clear: Ericsson's biggest customers in North America and Japan have largely completed their large roll-out programmes of LTE, and revenues are to an increasing level coming from other markets, among them Middle East and China," Bengt Nordstrom, CEO of telecoms consultancy Northstream, told Reuters.

"It will be increasingly important to grow market share in China which by far will be the biggest LTE market for the coming three to four years." Sales in north east Asia were up 16 per cent year-on-year, boosted by China and Taiwan but offset by lower spending in Japan and South Korea.

This raises a common concern for infrastructure players – over-reliance on China, where LTE rollouts are indeed huge, but where there is fierce competition from the incumbents Huawei and ZTE.

This was clear in ZTE’s Q3 results, which were in sharp contrast to those of its European rivals, with profit soaring 191 per cent year-on-year to CNY703m ($114m). This was driven by strong revenue increases in LTE, especially in China, Japan, north America and Europe, said the firm, as well as by a 40 per cent leap in its handset sales. Network equipment sales were up by 13 per cent and software and services by 6.63 per cent. Total company revenue grew 24 per cent to CNY21.1bn.