Ericsson, NSN and ZTE all report improving gross margins, but top line growth remains elusive. Cost cuts are helping these companies become more profitable, and while growth may not be as robust as they would like, contracts appear to be increasingly profitable.
“The second quarter of 2013 may mark the small start of a turning point, with a shift towards more profitable contracts starting to be seen at Ericsson and Nokia Siemens,” said Maravedis-Rethink’s Caroline Gabriel in a research note.
NSN, soon to be fully owned by Nokia, saw its gross margin improve from 26.6% a year ago to 38.3% in the most recent quarter. Ericsson said gross margin was 32.4%, barely higher than last year’s 32%. And China’s ZTE did not disclose its gross margin, but said it was higher in the first half of 2013 than in the first half of 2012.
As relatively low cost providers of infrastructure solutions, ZTE and Huawei have both put downward pressure on margins for their competitors. “While NSN has been shying away from many low margin infrastructure deals in its quest to return to sustainable profits, Ericsson and Huawei have been leveraging their economies of scale to chase the modernization contracts, with the aim of retaining or establishing a broad installed base which will, they hope, then start to make more profitable upgrades,” said Gabriel. In addition to upgrade potential, a larger installed base creates an opportunity for vendors to sell network software that leverages their infrastructure. Furthermore, NSN appears to be getting more aggressive; the company reportedly came in with a lower bid than either ZTE or Huawei in China Mobile’s LTE TDD radio access network equipment tender.
Despite improving margins, macroeconomic factors and slowing 3G investment continue to limit carrier spending, and that is limiting overall growth for infrastructure vendors. NSN and ZTE both reported lower revenue versus the year-ago period, and Ericsson said revenue was basically flat.
