Huawei 2013 – Harder road ahead

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Huawei will miss its 10% revenue growth target this year

  • Huawei has released its preliminary statements regarding its performance in 2013.
  • Like Ericsson, 2013 has been a great year with revenues growing 8-9% but profits growing around 40%.
  • This increase in margin that drove the profit growth is symptomatic of the recent product mix away from new network roll-outs towards capacity upgrades and software.
  • New networks are very competitive and most manufacturers will take tiny margins in order to get a foot in the door.
  • All networks need to be upgraded at some point with both new line cards and new software.
  • The innards of the boxes and the software code are proprietary to each manufacturer in question.
  • Hence, no one else can upgrade the line cards or the software other the vendor itself.
  • This makes the business of upgrading the system extremely profitable with gross margins of 80%+.
  • Therefore, when telecom capex shifts from roll-outs to upgrades, vendor margins increase substantially.
  • This is what lies behind the profit growth which is unlikely to be repeated in 2014.
  • This is where I have a problem with Huawei’s forecast of 10% revenue growth over the next 5 years or so.
  • The infrastructure market is likely to grow very modestly and I am somewhat concerned that capex spending could be even weaker than that.
  • Huawei’s growth will have to be found elsewhere.
  • Handsets do not really offer this opportunity as the smartphone market is slowing and the Android segment which Huawei occupies is already horribly overcrowded and brutally competitive.
  • Enterprise and network infrastructure is also not that promising as Cisco’s performance is a canary for this sector.
  • This is because Cisco has a very high percentage of its business in turns (short term orders) and therefore it feels spending cuts long before others with longer term contracts.
  • Consequently, I think that the outlook for infrastructure and network equipment is weak for 2014 and that Huawei will miss its 10% revenue growth forecast by a greater margin than it did in 2013.
  • I would look to PCs and the forgotten stories in the mobile ecosystem for the excitement this year.
  • Hence I like Microsoft, Yahoo! and Intel for this year.

 

RICHARD WINDSOR

Richard is founder, owner of research company, Radio Free Mobile. He has 16 years of experience working in sell side equity research. During his 11 year tenure at Nomura Securities, he focused on the equity coverage of the Global Technology sector.