Ericsson reported growth in all its regions, with the top markets in terms of revenue being North America, up 27.3 percent, Europe and Latin America, up 9.4 percent, and Southeast Asia, Oceania and India, up 12, 2 percent. The Middle East and Africa region also recorded strong growth of 17.1 percent. Nokia reported growth in several regions (excluding Europe and India), with its strongest markets being North America, up 34.6 percent, the Middle East and Africa, up 22.8 percent, and China, up 13.9 percent. .
North America remains the dominant market in terms of revenue for both vendors. And as has been the case for several quarters, Nokia’s strong growth in the US was driven by double-digit growth in network infrastructure, helped this quarter by a return to growth in its mobile business.
Network infrastructure continues to be the big star for Nokia with overall growth of 21 percent, led by Fixed Networks up 34 percent and Submarine Networks up 27 percent. Nokia reports that increasing penetration of 5G and fiber access is driving demand for backhaul solutions, driving sales of its IP routing and metro/backbone fiber network solutions. Although Nokia expects continued double-digit growth in the short term, sustaining this growth rate will inevitably become more difficult over time.
Despite this, Counterpoint Research expects Nokia’s network infrastructure revenue to exceed mobile network revenue before the end of 2023, driven mainly by continued growth in fixed networks. In fact, fixed line revenue equaled IP routing revenue for the first time at the end of the second quarter, and together the two businesses now account for 67 percent of total network infrastructure revenue. Exhibit 1 compares the growth of Nokia’s mobile networks compared to its network infrastructure over the past two years.
Both vendors carefully manage their supply chains, but with perhaps a slightly different focus, with Ericsson appearing to be more concerned with maintaining top-line growth. Overall, Ericsson said supply chain issues have had no impact on revenues so far, with products delivered in quantity and on time thanks to good supply chain management. However, increased inventory costs are clearly impacting the bottom line, reducing its gross margin and reducing its cash flow metrics.
In contrast, Nokia appears to be more focused on managing the bottom line and keeping costs under control. During 2021, it faced challenging supply chain constraints with many of its suppliers. However, the vendor recently reported that these limitations are now more vendor-specific, with the lack of optical components being a particular concern. Faced with volatile delivery times, Nokia increased inventory by $240 million in the second quarter and will maintain that inventory level until delivery times become less volatile. Both suppliers expect supply chain challenges to begin to ease in late 2022 and early 2023.
Like most 5G vendors, the two Nordic vendors believe the 5G capex peak will be higher and last longer than previous generations, although some normalization may occur in 2024. Nokia continues to see strong investments in 5G connectivity and fiber deployment, two priorities for CSP and their business users, because they face increased data consumption and the need to improve productivity. To date, Nokia claims it has not seen any major changes in customer demand and orders remain strong, with the company more supply constrained than demand. Ericsson also expects continued solid demand through 2022 and has raised its forecast revenue for North America.
However, a worsening macro environment could weaken customer demand over the next few months, particularly in emerging market countries, where exchange rate fluctuations could affect the affordability of 5G products that are typically priced in dollars or euros. In addition, suppliers face other obstacles such as inflation, higher R&D costs, etc. However, Counterpoint Research believes that both companies have a limited degree of pricing power, and by increasing prices and the pace of new products, they should be able to alleviate some of the inflationary pressures. , For example, offering new products that reduce operating costs—such as smaller, lighter, lower-power radios—would allow CSPs to justify additional investment.
Counterpoint Research expects the secular growth pattern of the 5G market to continue, as even in a deteriorating macro environment, CSPs need to invest in networks to increase bandwidth and improve productivity. It is also unlikely that the need for enterprise digitalization will weaken in the short term. Outside of China, 5G and fiber penetration remains low. For example, in North America, 5G mid-band penetration is less than 25 percent, while in Europe it is under 15 percent. With such low penetration, CSPs are expanding 4G network coverage, densifying networks while simultaneously transitioning to 5G. Therefore, unlike many other industries, the impact of the coming recession could be minimal for 5G infrastructure providers.