Glimmers of hope in 4Q08 telco vendor results

Most significant telecoms vendors have now announced earnings for the last quarter of 2008. Overall results were bleak, especially in the year's last few months.

Tight telco capex budgets, weak handset demand and costly credit are forcing vendors to write down assets, announce layoffs and preserve cash. Yet some vendors are better positioned than others, and could come out of the downturn stronger than before.

For five very large telecoms vendors (Nokia/NSN, Cisco, Ericsson, Motorola, and Alcatel-Lucent), and four smaller suppliers (Juniper, Tellabs, JDSU, and Ciena), calendar-year 2008 (CY08) revenues amounted to $208.2 billion, up 2.4% from CY07.

However, fourth-quarter revenues fell 17.1% year-on-year to $49.9 billion. This drop was in part due to end-of-year dollar appreciation, but more directly to the drop-off in the global economy.

As for profits, net margins for the nine suppliers averaged roughly 10% for both CY07 and 4Q07, but fell to under 4% for CY08 and -6% for 4Q08; this stemmed from large asset/goodwill writeoffs and/or "impairment" charges taken at several vendors, including Motorola, Alcatel-Lucent, Tellabs, and JDSU.

Operating margin, though, which excludes the effect of such anomalies, also fell: from 13% in 4Q07, it measured 4.1% in 4Q08. Most vendors are taking steps to lower their opex base, which will eventually yield better margins, but this takes time. The effects of a weak economy on revenues are much more immediate.

Balance sheets mixed

While much of last year's news was bad, balance sheets, at least on average, are relatively clean. The group's net debt (total debt less cash) ended the year at $5.2 billion. While this is up from $0.5 billion a year ago, this increase is almost entirely due to Nokia, whose net debt increased by $5.1 billion year-on-year; six of the other eight vendors included here (i.e. all except Cisco and Alcatel-Lucent) lowered net debt from 4Q07.

And if net debt is calculated as total debt less cash, and less short-term liquid investments, then group net debt remains solidly negative (i.e. more cash and liquid assets available than debt owed): $35.4 billion in December 2008, from $40.5 billion a year earlier. Another good sign, and one which hints at improved sustainability, is that cash plus liquid assets relative to monthly opex increased slightly in 4Q08. Cost-cutting efforts are starting to take effect.

Assessing the relative prospects of the leading vendors, Cisco, Juniper, Tellabs, Ciena, and Chinese firms Huawei and ZTE are all positioned fairly well despite the downturn.

Juniper, for instance, has high margins (14% net for 4Q08, down just slightly year-on-year), good cash position (cash on hand equivalent to 8.3 months of opex as of December 2008), negative net debt, and 14% revenue growth. Ciena and Tellabs also appear strong due to product mix and cash/debt positions, although their heavy US exposure did drive revenue declines in 2008.

Among larger vendors, Cisco is traditionally viewed as the gold standard, and despite an 8% revenue dip in 4Q08 it retains a huge cash hoard ($29.5 billion cash plus liquid assets), useful for buying weakened competitors or promising startups, or simply getting through tough times.

 

Among other large vendors, the outlook is mixed; their relative degree of exposure to the mobile handset market is an important factor here.

Ericsson is talking up its prospects, and has some credibility: its 4Q08 results were good relative to Nokia, it has had more luck with M&A activity than some others, and it improved its net debt position to negative in 2008 ($4.9 billion cash on hand as of December, versus total debt load of $3.9 billion)

Nokia's broad exposure to the consumer market, device share loss, and continuing integration issues are all problems; high debt is another.

Motorola's position is likely the worst: 4Q08 revenues down 26% year-on-year, and operating margin of -24%. It continues to look for the right mix of management and strategy to regain market confidence.

Chinese vendors were not included in our database because they haven't reported yet, but they are worth addressing: they are uniquely positioned to leverage the global downturn to their benefit.

Huawei is already a household name nearly everywhere but the US and Japan , and ZTE is making strides in both Europe and its traditional growth markets (Middle East, Africa, and India ). Both remain optimistic based on last year's order flow, their lower exposure to North America , and ability to offer financing. Yet there is no doubt that even they are realistic; we are hearing that their hiring plans have been cut back, they're getting tighter on payment terms with customers, and expansion plans have been modified. Chinese vendors have been tested before, and seem determined to not let the current slump curtail their plans to become global giants.

Matt Walker, Principal Analyst, Network Infrastructure

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