Peaks and troughs

It was an overwhelmingly numbery week this week, as Q1 financials deluged the Informer’s inbox. Over the weekend the mainstream press were all aflutter about the fact that Apple was going to report a drop in quarterly profits. This duly happened, but fluctuations are relative and when your profits are plummeting all the way to $9.5bn for the quarter, it’s hardly a catastrophe.

April 26, 2013

9 Min Read
Peaks and troughs

By The Informer

It was an overwhelmingly numbery week this week, as Q1 financials deluged the Informer’s inbox. Over the weekend the mainstream press were all aflutter about the fact that Apple was going to report a drop in quarterly profits. This duly happened, but fluctuations are relative and when your profits are plummeting all the way to $9.5bn for the quarter, it’s hardly a catastrophe.

That said, it was the first drop in a decade, the latest bump in the road for CEO Tim Cook, who was never going to have an easy time picking where Steve Jobs left off. Revenue was up, on the other hand, to $43.6bn, although the margin was down from 47.4 per cent to a wafer thin 37.5 per cent.

In a bid to keep the shareholders happy Apple announced plans to return $100bn to them by the end of 2015, by which time the firm will have repurchased $60bn of its own shares. It also increased its quarterly dividend by 15 per cent. The firm ended Q1 this year with $145bn in cash.

For the next quarter Apple expects revenues to slacken to somewhere between $33.5bn and $35.5bn with a margin between 36 and 37 per cent.

Meanwhile Apple’s biggest rival in the device space, Korea’s Samsung, grew profits by 42 per cent for the quarter, to $6.4bn, on revenues of $47.5bn. The firm’s IT and Mobile Communications business was the heavy hitter, contributing 62 per cent of revenues, with Samsung remaining coy on device shipments, saying only that sales of the SIII and Galaxy Note II were “sound”.  It warned that growth might weaken as the year unfolds.

“Although market uncertainties from the European crisis and the slow global economic recovery are still lingering, we expect to increase R&D spending for strengthening our competitiveness ahead of planned new product launches,” said Robert Yi, senior VP and head of investor relations.

“We may experience stiffer competition in the mobile business due to expansion of the mid- to low-end smartphone market while TV growth will continue to wane in developed markets.”

Samsung added that smartphone sales are expected to stay flat in the second quarter but will pick up again in the second half of the year.

Fortunately research outfit IDC was on hand to fill in some of the blanks. Samsung’s concerns over the creep of low-end smartphones seem well justified, with IDC reporting this week that smartphones out-shipped feature phones for the first time in the industry’s history during Q1 this year.

418.6 million devices were shipped in the quarter, of which 216.2 million were smartphones. That is a 41.6 per cent increase on the same period last year.

“In addition to smartphones displacing feature phones, the other major trend in the industry is the emergence of Chinese companies among the leading smartphone vendors,” said Ramon Llamas, research manager with IDC’s Mobile Phone team. “A year ago, it was common to see previous market leaders Nokia, BlackBerry (then Research In Motion), and HTC among the top five. While those companies have been in various stages of transformation since, Chinese vendors, including Huawei and ZTE as well as Coolpad and Lenovo, have made significant strides to capture new users with their respective Android smartphones.”

IDC put Samsung’s smartphone shipments at 70.7 million for the quarter, more than the combined totals of Apple, LG, Huawei and ZTE, which occupy the rest of the top five rankings.

Samsung wasn’t the only Korean going great guns this week (that’s not a reference to Kim Jung Un, by the way)  as SKTelecom announced that, just 21 months after launching its LTE service, it has passed the ten million subscriber mark. SKT took 37 months, by comparison, to hit the same milestone on its WCMDA network, it said, and LTE now accounts for 37 per cent of its total mobile subscriber base.

South Korea and Japan are about a year ahead of their nearest rivals in terms of LTE progression, according to Thorsten Robrecht, head of portfolio management at NSN, which is one of SKT’s network suppliers. The operator said that it will be introducing some LTE-Advanced features from September this year to improve the service and aims to sign up a further five million LTE subs by the end of this year. It’s ranging 25 LTE-capable smartphones, five tablets, two USB modems and an LTE-enabled camera.

Here in the UK we’re a smidgen off that pace. EE, the first and so far the only UK LTE operator, announced this week that it has 318,000 LTE subscribers. The operator, which reported quarterly revenues of £1.4bn, 5.4 per cent down on the same period last year, said that it signed up 166,000 new postpaid subs during the three month period and is on track to hit one million LTE subs by year’s end.

US operator Verizon is the subject of much speculation at the moment, with many in the industry clearly expecting it to make a muscular bid for the 45 per cent of Verizon Wireless that is currently held by the UK’s Vodafone. Reuters cited people “familiar with the matter” as revealing the US carrier’s intention to offer Vodafone $100bn for its stake.

Only time will tell us whether  this is indeed true, or whether the matter these people are familiar with is actually bovine and faecal in nature.

$100bn is big money and this week Verizon reported quartlery net profit of $1.95bn for 1Q13, a 16 per cent year on year increase on the $1.69bn generated in 1Q12. The firm’s first-quarter revenues hit $29.4bn, a 4.2 per cent increase on 1Q12.

The operator said earlier this year that following the introduction of its shared data plans it would switch from using average revenue per user (ARPU) to average revenue per account (ARPA) as an indicator. This increased by 6.9 per cent year on year to $150.27 per month, the firm said.

At the end of the first quarter, smartphones accounted for more than 61 per cent of the Verizon Wireless retail postpaid customer phone base, up from 58 per cent and Verizon Wireless saw total revenues rise 6.8 per cent year on year to $19.5bn.

The news was less rosy at TeliaSonera, which saw revenue fall by 4.5 per cent year on year to SEK24.5bn ($3.75bn) for 1Q13. Net profit dropped more modestly, by 0.3 per cent to SEK4.1bn. Over the period, the Swedish operator group also saw its customer base shrink by 800,000 customers.

“Our industry continues to go through a period of change where traditional business models are being challenged by new customer behaviour,” said acting president and CEO Per-Arne Blomquist.

Blomquist also warned that the group would have to take cost-cutting measures to get it back on track.

“In order to maintain our ability to invest in future growth, it is essential to manage our cost base in a prudent way. We have continued to put significant emphasis on implementing the efficiency measures initiated at the end of last year. There were effects within Mobility Services already in the quarter, while within Broadband Services they will come in the latter part of the year. We remain determined to bring total costs down by SEK2bn net over a two year period.”

And Mexico-headquartered AméricaMóvil saw its net income fall by 17.4 per cent year on year to 26.87bn pesos ($2.34bn). First quarter revenues stood at 193bn pesos, which were up just 0.2 per cent higher than those of the prior year in Mexican peso terms, and 6.1 per cent up at constant exchange rates, according to the firm.

The group finished March with 328.2 million customers, a 7.4 per cent year on year increase. Of that number, 262.9 million customers were wireless subscribers, 30.3 million landline customers, 17.8 million broadband users and 17.2 million PayTV subscribers.

The firm’s mobile subscriber base rose 6.9 per cent year-on-year, most notably in Brazil, where 1.1 million subscribers got on board and in Mexico where it won 854,000 new subscribers. In the US, its Tracfone MVNO also gained 839,000 users, twice as many as the firm gained last year in the country.

Over on the infrastructure supply side, Ericsson’s first quarter profits fell year on year to SEK1.2bn $182m) from SEK8.8bn for the same period in 2012, largely due to the boost given to 1Q12 numbers by the firm’s exit from the SonyEricsson device JV. While the vendor recorded a two per cent uptick in sales to SEK52bn it was hit by currency fluctuations and a disappointing performance from its network rollout business.

Sales in the Networks and Global Services units were up three and four per cent respectively, hitting SEK28.1bn and SEK 21.5bn. But Support Solutions, behind which Ericsson has been putting considerable weight in the last year, saw sales drop by 19 per cent to SEK2.4bn.

Managed and Professional Services held steady but the Global Services unit was pulled down by  the Network Rollout unit, which saw operating income drop by 73 per cent to a loss of SEK1.1bn. Ericsson CFO Jan Fryhammar described this as “nothing dramatic” and due to unforseen delays in LTE deployments, particularly in Latin America where Ericsson had “some idling resources,” he said.

Frykhammar said that, while there were positives in the top line, and in the profitability of the Networks division, he was concerned by Ericsson’s cashflow. “I will never be happy when the cashflow is negative,” he told “We have a tendency towards a strong finish on our operating cashflow but this time it was negative SEK3bn. That’s something we will work hard to improve going forward.”

North America and North East Asia remain the most important regions for Ericsson, given the advanced state of LTE deployments. Frykhammar said that one of its key North American LTE projects (presumably Verizon) had now “peaked” but that he expected high activity levels in the market to continue, shifting to capacity rather than coverage as the year goes on.

In North East Asia Ericsson’s most important upcoming project is the deployment of TD-LTE by ChinaMobile, although that operator’s retreat from GSM investment impacted on Ericsson’s first quarter, Frykhammar said.

While Ericsson’s core business will remain the provision of equipment and services to the world’s telecoms operators long into the future, the firm is looking to other sectors as operators endure turbulent times. Frykahmmar pointed towards contracts with shipping giant Maersk and energy supplier Eon as examples of important diversification, as well as its growing business in the media segment.

But the firm wants direct relationships with customers and, in pursuing them, could find itself at times in competition with its core customers. “We will expand into other customer bases,” said Fryhammar. “We want to do direct business, though; we don’t do indirect sales.”

Finally this week NASA sent three Android smartphones into space. The idea under investigation is that smartphones could be used as “the main flight avionics of a capable, yet very inexpensive, satellite,” NASA said. Given that the Informer’s G-Nex can be brought more or less to its knees by ten minutes’ of Solitaire, this seems something of a gamble.

Anyway, those Android devices are up there, watching you.

Take care

The Informer

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