Ericsson delivered revenue growth in 3Q14 as it reshapes to capitalize on opportunities outside its core telecom market

By Michael Soper, Analyst

Ericsson is navigating its transformation into an ICT provider while continuing to cater to its core customer base

Ericsson is making headway in its ambition to transform into an ICT provider through acquisitions and internal investment in technologies such as SDN and cloud, but the company’s revenue remains driven by communications infrastructure and the services around these products. Ericsson delivered 8.8% revenue growth — its highest since 3Q11 — due to LTE investment in China, new spending on infrastructure and services in India, and 3G investment in the Middle East.

Ericsson’s biggest challenge is the slow adoption rate of its customer base to technologies such as cloud, SDN and NFV. Most operators will be hesitant to implement virtualization across their networks, and it will be difficult to educate operators on how new architectures will lower costs and boost revenue. Operators are most likely to virtualize parts of their networks rather than entire environments.

Ericsson’s TV-related acquisitions are coalescing to transform the company’s video portfolio

Ericsson is focused on becoming an end-to-end video technology provider. Ericsson is positioning itself not as a content provider, but as a content enabler. This will lead to additional consulting, system integration and managed service opportunities as operators purchase the Ericsson software stack. Ericsson notes that video will comprise 50% of network traffic by 2019. To help operators with this new reality, Ericsson is creating more efficient video delivery systems, such as LTE Broadcast, to ensure operators can provide services such as multiscreen. Ericsson is taking a “video-centric” approach to building networks as video becomes an ever-larger driver of traffic. Ericsson is also leveraging its services organization to optimize networks to enhance the video experience with, for example, lower latency and buffering.

TBR believes that Ericsson is well-positioned in video and has strong assets following its string of acquisitions in the space. Ericsson is taking a leading role in advising operators on how to optimize their infrastructures to better deliver video and to deliver value through video to compete against the over-the-top (OTT) threat. However, the trend of traditional video being disintermediated by OTT is alive and well, and it will be increasingly difficult for incumbent operators to monetize their video assets. Multiscreen helps deliver value, but OTT can also provide these experiences to customers. For operators to keep their hold on the market, they will need to exploit live programming and deliver it in a high-value way to multiple screens. This brings to bear Ericsson’s LTE Broadcast and TV Anywhere solutions.

Ericsson leans on cloud integrity to drive market share

Ericsson’s “one-cloud” strategy aims to overcome gaps in the current cloud market, particularly around integrity. The company’s PaaS leans on a neutral delivery model that targets the typical service provider environment, which often includes a variety of infrastructure and delivery elements. For example, a service provider might be using cloud resources on Amazon and Azure, along with virtualization through VMware, and bare-metal resources, all spread across dozens of countries. Ericsson’s cloud technology enables customers to continue using all of these elements on a streamlined PaaS solution.

TBR believes Ericsson’s success in targeting telco cloud, IT cloud and commercial cloud environments hinges on integrity. Ericsson’s early efforts to ensure trustworthy data-led engagements exhibit valuable differentiation for the company. Service providers delivering cloud to enterprises will hear similar messages from Ericsson’s competitors, but Ericsson’s early experience in helping clients deliver secure, reliable data transactions will help it further penetrate the service provider market.

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AWS will move from public cloud dominance to hybrid IT atop networking partnerships

By Jillian Mirandi, Senior Analyst

AWS’ public cloud dominance will remain unchallenged — but dictates AWS determine its ‘next act’ to stay relevant long-term

Over the last two months, AWS expanded its partner ecosystem, adding AT&T and Verizon to improve networking and hybrid IT integration capabilities, launched its second EU region in Frankfurt to address data sovereignty issues and introduced Directory Service to integrate on-premises Microsoft Active Directory or set up new, AWS-based directories. These launches highlight AWS’ strategic shift to enter global hybrid IT conversations and willingness to work more directly with large, traditional vendors.

TBR believes public cloud IaaS will be dominated for the foreseeable future by AWS, Microsoft, Google and IBM SoftLayer along with regional players including Alibaba. Public cloud IaaS is a scale game, and one which the aforementioned vendors will win. AWS remains significantly larger than Microsoft and Google in public cloud IaaS revenue, generating an estimated $4.7 billion in 2014, while Microsoft will generate an estimated $156 million and Google an estimated $66 million in the year. (To note, Google Compute Engine was made generally available in December 2013, and Microsoft Azure IaaS in April 2013, giving AWS a six-year head start.) Supported by 90% year-to-year AWS usage growth and over 350 service and feature releases over the last nine months, noted by Amazon executives, TBR estimates AWS generated $1.2 billion in 3Q14, growing 43% from the year-ago quarter. However, continued price cuts, such as the 28% to 51% cuts in April, pressure top-line revenue growth and margins but drive increased usage among customers. Continue reading

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Ecosystem engagement will determine the success of Microsoft’s ongoing transition

By Geoff Woollacott, Practice Manager/Principal Analyst

Transitions from transactional business to subscription show Microsoft is successful in transitioning its install base to the cloud

Record third-quarter revenue in 3Q14 demonstrates Microsoft’s success in maintaining solid growth, 11% year-to-year excluding Nokia, amid a large-scale organizational transformation and a shift in the IT industry from a transactional model to subscription. The stickiness Microsoft has in productivity due to an established base of customers and partners around Office provides cross-selling opportunities for subscription-based solutions including Azure and Dynamics CRM Online. Microsoft CFO Amy Hood noted one-third of Office renewals included Office 365, evidence that Microsoft is to date being successful – and likely an industry best-practice use case – in transitioning legacy install base applications over to a cloud subscription model. Continue reading

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Juniper will weather short-term revenue declines by further reducing its operating expenses to fuel margin growth

By Scott Dennehy, Engagement Manager/Senior Analyst

Service provider conservatism will prevent Juniper from achieving revenue growth until 2H15

While Juniper continues to diversify its service provider revenue base to include a higher contribution from cable and content providers, the company remains dependent on healthy spending from traditional telecom providers, i.e., AT&T and Verizon, to achieve overall revenue growth. Juniper’s total revenue declined 5% year-to-year in 3Q14, driven by a weaker-than-expected performance in the Service Provider segment (down 5.9% year-to-year) as large U.S. customers delayed major purchases due to uncertainty surrounding their future network needs. For example, the pending merger between AT&T and DirecTV could have major implications on the strategy of both AT&T and its competitors, and as a result TBR believes telecom operators in the country are being conservative in their spending until the merger is finalized. Continue reading

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Raytheon IIS’ book of classified and training business has been key to navigating the tumultuous federal contracting environment during 2014

By Sebastian Lagana, Analyst

Classified, cyber and training programs are major factors in Raytheon IIS’ push to recapture revenue growth

Raytheon Intelligence, Information and Services’ (IIS) 3Q14 earnings represented another comparatively strong quarter for the group, reporting a year-to-year revenue contraction of 1.2%, multiple percentage points better than that of each of its peers to report thus far in the quarter. Results were buoyed by strong classified orders through the first half of the year, augmented by training engagements, cyber and ISR work for U.S. Air Force clients. Raytheon’s international orders captured during 2014, such as its $195 million international cyber booking early in the year, are beginning to ramp up, helping offset declining volume on legacy programs. Continue reading

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Nokia Networks achieved record operating margin and notched its first revenue increase since 4Q12 on strong LTE sales

By Michael Soper, Analyst

Nokia Networks’ contracts with Tier 1 operators in the U.S. and China will continue to drive revenue and year-to-year margin gains through 1H15

Nokia Networks delivered 13.5% revenue growth and a record 11.8% operating margin as infrastructure sales boomed and restructuring initiatives such as divestments and contract exits no longer impacted results. Mobile Broadband sales are driving overall revenue and margin growth as China Mobile continues to build its TD-LTE network and, to a lesser extent, Sprint pursues its Spark initiative. In early 4Q14 T-Mobile in the U.S. signed Nokia Networks to a new agreement to expand LTE to new frequency bands and deploy LTE-Advanced features. As these projects continue through at least 1H15, Nokia Networks will continue achieving revenue growth in the region. Continue reading

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CA Technologies targets long-term revenue growth through organic development of its enterprise software solutions portfolio

By Andrew Smith, Analyst

CA Technologies’ revenue dropped 2% from the year-ago quarter to $1.08 billion. All three of CA’s business segments experienced decline, with mainframe and enterprise solutions each falling 2% year-to-year and services shrinking 6% year-to-year. CA’s corporate revenue has been suffering from falling subscription and maintenance profits, largely due to the decreasing performance of its Mainframes Solutions segment for the past several quarters. This trend underscores larger market dynamics at play, which are changing how vendors provision their customers with applications and software solutions. 3Q14 marks the 10th consecutive quarter of revenue decline for CA, and the vendor will continue to face a difficult uphill climb to gain traction against competitors like HP, IBM, BMC and ServiceNow. However, CA is comfortable in both its debt position and its ability to generate cash for any buybacks, dividends, and acquisitions necessary to reach its mid-term goal of low single-digit revenue growth. Continue reading

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