* 5G timelines are accelerating globally
With all major US operators recently announcing 5G network rollouts in 2019 (and some in H2
2018), and with China, South Korea and Japan continuing to push their 5G ambitions forward, we
reiterate our view that 2019 will be the first year of 5G, not 2020. Governments globally are looking
to incentivise and accelerate 5G deployments in order to ensure economic competitiveness.
* The sector may bottom sooner than expected
Six months ago, industry forecasters had the mobile equipment market returning to growth in 2021.
That has now been brought forward to 2020, and we believe that 2019 may actually see a return to
growth. That would make 2018 the bottom of this post 4G cycle.
* 5G acceleration is putting a strain on R&D budgets
In September, we warned that Nokia would likely have to raise its R&D spend to match Ericsson
and others, and to prepare for 5G. Since then, we have seen consensus Nokia Networks 2018 non
IFRS EBIT fall ~40%. Nokia has also hiked its guidance for swap costs by EUR500m and for cash
restructuring by EUR100m in 2017-19, and also guided for 2018 capex to be more than EUR200m
higher than in 2016. ZTE and Huawei have also recently raised 5G R&D spending intentions. While
a 2019 recovery is increasingly possible, H1 2018 will likely remain difficult for the industry.
* Remain selective. Prefer Ericsson over Nokia
We believe 2018 will see market share gains by Ericsson, which is replacing Nokia in some
Vodafone, China Mobile, Deutsche Telekom footprint, and we now believe Sprint as well.
Ericsson’s expanding gross margins in H2 2017, expected 2018 improvements, and lack of non
IFRS swap charges, indicate it is not winning on price but rather on technology, as we have
argued. Nokia’s 10.5x 2018 EV/EBIT multiple does not allow for this risk, or for Nokia’s poor cash
flow, in our view. Ericsson has made significant progress on its turnaround (mainly on the balance
sheet in 2017). Borje Ekholm’s gross margin plan is already showing progress, and Ronnie Leten’s
arrival as Chairman should help drive operating margin improvement acceleration in H2.