Huawei's growth outpacing Ericsson's this year July 21 2014

As one report says the Chinese firm has overtaken the leader in carrier networks, Ericsson benefits from shift to capacity

By Caroline Gabriel

While Ericsson boasted of strong improvements in its margins during the second quarter, as operators move towards capacity-driven projects, its optimism was overshadowed by Huawei's own rapid revenue growth, and reports that the Chinese firm has now snatched Ericsson's crown as telecoms equipment leader.

Huawei reported preliminary figures for the first half of 2014, which showed a 19% year-on-year revenue leap to CNY135.8bn (€16bn), with an operating margin of 18.3%. It has not yet published additional details, but credited a range of factors with its uptick - growing investment in LTE worldwide, also cited by Ericsson; rising carrier spend on software and services; "sustainable growth" in handsets; and a buoyant enterprise business.

"Driven by increasing investments in LTE networks worldwide, Huawei has further solidified its leadership position in mobile broadband," said CFO Cathy Meng, in a statement. "Rapid growth in software and services helped maintain steady growth in our carrier network business ... We are confident that in 2014 we will achieve sustainable growth, robust operations, and healthy financials."

Meanwhile, Ericsson turned in solid Q2 results, though its revenues were down 1% on the same period last year, to SEK54.8bn ($8bn). Its performance cannot be compared directly with that of its arch-rival until Huawei publishes full quarterly breakdowns later this month, but it will be very aware of the shift in major spending from north America, where Huawei is all but excluded, to China, as well as its competitor's broader reach, with its handset and enterprise businesses both on the rise.

But the improvement in margins is an important achievement for Ericsson, building on the start of that pattern in Q114. Last year, the Swedish firm's profits were depressed by the carriers' emphasis on lower margin modernization and coverage projects, but now, many are starting to invest in capacity, especially in LTE.

Gross margin was up by four percentage points to 36.4% while operating margin rose by 2.8 percentage points to 7.3%. That helped drive up net income by 76% year-on-year to SEK2.7bn.

In the quarter, 53% of revenues came from the Networks division, 42% from Global Services, and 5% from Support Solutions (which includes the growing TV Media activity).

As well as mobile broadband capacity roll-outs, including in north America, CEO Hans Vestberg also singled out the IP router business - which has 120 customers now - and managed services, as highlights. In the latter category, Ericsson won 21 new deals in Q2, including projects in Greater China, and "one of the largest transformation deals we have ever done", with T-Mobile USA, whose BSS Ericsson will upgrade and manage. OSS/BSS, including virtualization, will be important growth drivers, said Vestberg.

The CEO also said Ericsson's handset modem business "will start generating sales by the end of this year", as the company's M7450 modem begins to feature in "smartphones and data devices".

On the negative side, Ericsson said the Middle East and Africa businesses were hit by political unrest while there were "lower revenues from two large mobile broadband coverage projects in North America, that peaked in the first half of 2013, and reduced activity in Japan".

According to new calculations from analysts at Infonetics, Huawei overtook Ericsson as the leading telecoms equipment supplier to service providers in 2013. With Chinese roll-outs gaining volume as several major US deployments slow down, the benefits of the company's position in its homeland are more than offsetting the effective bar on Huawei kit in the US, where Ericsson has been part of the leading LTE roll-outs.

In the overall telecoms and datacomms equipment space, which rose by 3% year-on-year to $183bn, Cisco leads because of its enterprise power, followed by Huawei, Ericsson, Alcatel-Lucent and ZTE. In the enterprise, Cisco's challengers (though all well behind the leader) are Avaya, Brocade, HP and Juniper, sharing similar market shares. The analysts project that a cumulative $1.01 trillion will be spent by service providers and enterprises on telecoms and datacomms equipment, and software, between 2014 and 2018.