Telecom Equipment Makers Are Having A Bad Month, And A Bad Decade

Telecommunications equipment manufacturers that were once giants are now often just a fringe phenomenon. Nokia and Ericsson reported profits last month, but investors were unimpressed with the shares falling 10%.

This decline in revenue was largely cyclical in nature and was associated with a sharp reduction in purchases of 5G equipment by telecom operators. 5G rollout is largely complete in most markets, at least in terms of the level of upfront costs that drive profits for device providers. However, we can't remember the last time these two companies reported stunning investors. Both companies face serious challenges.

Zoom in to observe their actions over a five-year period and the problem becomes clearer.

Source: Yahoo Finance

Ericsson is making the 5G epidemic worse when operators are actually increasing their investments as the units make it easier for them to access multiple locations (ie no one in the office complaining about construction noise on the roof). . However, despite this short-term growth, both companies fell short of expectations.

Editor's Note:
Guest Contributor Jonathan Goldberg is the founder of D2D Advisory, a cross-functional consulting firm. Jonathan has developed growth and alliance strategies for companies in the mobile communications, networking, gaming and software industries.

We chose a five-year period because it coincides with the US imposing restrictions on Huawei, its strongest competitor. If these companies can't outperform when their biggest competitors fail, how good are they?

Both Nokia and Ericsson are facing a major identity crisis. During the telecommunications bubble of the 1990s, they were a major force in the creation of the Internet and later in the mobile use of the Internet. But then the Internet spread and greatly reduced the need for business-oriented networking equipment. This trend is accelerating as cloud spending dominates technology capitalization.

Notice in the graph above that Cisco and Juniper performed much better, or at least not as bad, with a much more diverse customer base. Arista, which is an active investor in data center assets, isn't on the list, so the stock is actually performing better than expected.

Simply put, Ericsson and Nokia make devices for specific customers, mobile operators, and while those customers still want what those companies offer, no one else does. Both companies have tried diversification strategies, working with Internet giants, Cisco, integrators to run their businesses, building their own clouds, helping others build clouds, and more.

Some of these strategies are not well thought out and implemented; see Ericsson's recent $6.2 billion acquisition of Vonage. Other strategies never proved successful and were abandoned after leadership changes at both companies raised concerns among partners and clients.

At the moment there are no simple solutions. The market is so concentrated between these two companies (even Huawei seems to have realized this) that a merger between the two companies would be blocked by regulators. Investors in both companies will be hesitant to pursue the new strategy after trying many others.

People who truly believe in the cult of shareholder value argue that companies should take a step back and focus solely on their core competencies in mobile. This is probably the worst idea. The downside to this is that both companies will essentially miss out on the transition to 6G, which is still several years away.

Cut everything that is not directly related to the telco's services, take advantage of these savings and invest in research and development of the telco's software, further strengthening the service areas and improving their licensing (both software and intellectual property). Combined with targeted implementation, this should at least allow the company to consider getting back on the growth path one day. The benefit of this approach is that we saw what Cisco had truly become: a hardware-based software and services company. It's not an easy method, but it's doable and looks better than the alternatives.

Comparison of global telecom revenues

So how does this fit into the company's finances? Below is a comparison of revenue growth between global telecom equipment manufacturers and cloud service providers.

Sometimes unfair comparisons of apples and oranges are the most revealing.

Below are revenue figures for Nokia and Ericsson compared to their competitors Huawei and Cisco, as well as the three major cloud providers: Amazon AWS, Microsoft Azure and Google Cloud (US, in millions).

A few notes about these numbers. Amazon and Google won't see cloud revenue until 2019, and Azure won't come back until 2018. Ericsson, Huawei and Nokia report results in other currencies (Swedish krona, euro and yuan respectively). We use the latest exchange rates for all three currencies, so there may be differences between Nokia and Ericsson.

However, Huawei's overall sales, including mobile phones, clearly reflect a decline since the US government shutdown. All data is taken from the company's annual report.

Raw numbers can't tell us much. Since we are interested in the revenue growth of each of these companies, we have created the following chart showing overall size growth with a base of 2019 = 100.

And here's the data behind these beautiful images.

From this point of view, the trend is quite clear. Cloud service providers have experienced rapid growth, but telecom equipment providers have not. It's worth noting that this series covers the period when 5G rollout was in full swing, including years when the pandemic was particularly severe. Those years have passed and Ericsson and Nokia have recorded their latest quarterly sales declines compared to last year.

Despite the serious weakness in 5G, neither company sees much growth. It's also worth noting that while Huawei was forced out of many markets, neither Ericsson nor Nokia were able to gain significant market share. Of course, revenue will grow slightly in 2022, but this is a return to 5G growth, and Huawei appears to have bottomed out in 2022.

Finally, let's look at the company's profitability. The same warnings as above apply. We don't have data for GCP and AWS until 2020. It's important to note that Microsoft doesn't disclose information about Azure directly, only about the "Intelligent Cloud," which includes many other products. Interestingly, Cisco is one of the most profitable companies in this group, reflecting its long transition from a technology company to a software and licensing company like Oracle.

Some argue that comparing these companies to cloud providers is a no-brainer. Of course, we are talking about many different companies here. However, cloud service providers are building infrastructure for global data networks and theoretically also use Nokia and Ericsson devices.

All this shows that Nokia and Ericsson are increasingly positioning themselves as future thinkers in the global telecommunications market.

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