April 19, 2018 / 1:56 PM / in 2 months

ZTE woes may boost network rivals Ericsson and Nokia

STOCKHOLM/LONDON (Reuters) - Investors are warming to beleaguered mobile network makers Ericsson and Nokia as they begin to recover ahead of a once-a-decade uplift from a new business cycle and an unexpected boost from a U.S. ban on exports to low-cost Chinese rival ZTE.

FILE PHOTO - Visitors pass in front of the Chinese telecoms equipment group ZTE Corp booth at the Mobile World Congress in Barcelona, Spain, February 26, 2018. REUTERS/Sergio Perez/File Photo

ZTE has snatched market share in Europe and the Americas, growing four times faster in those markets last year than it did its home market and acting as a drag on contract pricing and revenue growth for Ericsson and Nokia.

But now, ZTE has been slapped with a potentially devastating seven-year export ban. It has yet to say how it may respond to U.S. threats to cut off its supply chain.

Ericsson is due to report results on Friday and Nokia next Thursday and the focus is likely to be on next-generation 5G network upgrades expected to start later in 2018 or during 2019, ending a three-to-four year dry spell in network spending.

ZTE, meanwhile, has postponed its own quarterly results announcement, which was due on Thursday.

Ericsson shares are up 3 percent in April while Nokia has gained 6 percent.

Bengt Nordstrom, head of telecoms consultancy Northstream, said it could take several months for ZTE to find alternative suppliers and redesign its products, including optical and mobile gear. “This is a very serious setback for ZTE,” he said.

Whether or not a Commerce Department ban on U.S. firms supplying components to ZTE holds up, Ericsson and Nokia still face a tough year ahead amid weak overall market demand as telecom operators keep a tight lid on network capital spending.

Three big players dominate the global market for mobile network gear: Huawei, of China, is the biggest, followed closely by Ericsson and Nokia. Complicating the picture is that Huawei [HWT.UL] and Nokia have more revenue from serving other telecom segments.

The three face competition from ZTE and Korean electronics giant Samsung Electronics, a relative newcomer to the network gear market, and a growing number of more focused software and services challengers.

MODEST REBOUND

Quarterly financial reports for the European names are likely to deliver only muted signs of recovery, even if prospects seem to be brightening further out.

“No one on this planet is ready to break the bank for 5G, even less so with a total lack of 5G business cases,” IHS Markit mobile equipment analyst Stephane Teral told Reuters. Even when 5G hits its stride sometime next decade, he warns that capital spending may never return to 4G peak levels of 2015.

Revenue for Europe’s two big network gear suppliers remains under pressure in 2018, even if they are making progress towards seeing growth stabilize in 2019, analysts at UBS said, adding this is “more so for Nokia than Ericsson, where there remains much work to be done to rationalize contracts”.

Sweden’s Ericsson has made sweeping cost cuts, changed most of its management and is focusing on profitability over growth.

Ericsson has spied signs of recovery in a few key markets but cautions that it has more work to do in order to hit profit improvement targets it has pledged to deliver by 2020. A Reuters poll shows that analysts, on average, expect sales to fall 9 percent in the first quarter, with its main networks business declining 11 percent.

Nokia has said it expects its results to bottom this year, and has forecast a recovery in profits by 2020, encouraging investors spooked last year by the general decline in global network spending and acquisition integration missteps.

Most analysts see Nokia recovering faster than Ericsson, which, in a nutshell, is why Nokia shares are up 22 percent so far this year, while Ericsson is up just 1 percent, after the latest in a string of downbeat quarterly reports in January.

Northern Trust analyst Gary Paulin considers Nokia an especially safe bet in a volatile tech market, classifying it as a “fallen angel” - a cheap stock that has suffered a round of setbacks but is on the mend, ready to demonstrate its underlying earnings power once its short-term issues resolve.

By contrast, Credit Suisse says stock market expectations are still too high for Ericsson, which it says will underperform the market due to execution risks from its ongoing restructuring and slower than expected benefits from 5G adoption.

Activist investor Cevian Capital said it is betting on Ericsson to improve profits by increasing efficiency and simplifying how it operates, rather than counting on any 5G boost later this decade.

“When 5G comes it could lift growth and profitability further,” said Christer Gardell, managing partner at Cevian Capital which owned 8.5 percent of Ericsson outstanding shares as of February.

Reporting by Olof Swahnberg in Stockholm and Eric Auchard in London; Editing by Keith Weir

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