Huawei 2013 – Harder road ahead

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.