[Q4 CY23] Ericsson, Nokia, Lam Research, Tesla, TSMC
Telecom CapEx go **KABOOM**! 5G growth story in shambles.
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Hello wonderful subscribers. Welcome to the first edition of ‘earnings roundup’.
Earnings call transcripts are amazing tools for analyzing stocks, if you read between the lines. Finding important information in an earnings call is like finding a needle in a haystack… gold nugget in a pile of corpo-speak bovine excrement.
Typically, 95% of the transcript is fluff, question dodging, hopium, blame deflection, and so on…
But that 5% is extremely useful, if you can find it.
Here is a quick primer on how earnings calls typically work:
The CEO and CFO are on the call.
On rare occasions, General Counsil, CTO, or other C-suit folks attend.
The VP of investor relations is also there but primarily in administrative capacity. (does not answer questions)
The call begins with the CEO and CFO reading aloud prepared/written remarks.
Most of the time this section is 100% useless and can be skipped.
In rare instances, the CEO might subtly confirm/change roadmaps in prepared remarks. (intentionally or unintentionally)
A group of people (Analysts) who work for various financial institutions will also be on the call.
Typically, they are “sell-side” analysts who do not hold positions in the company and instead sell their research to institutions.
More info from this investopedia.com article if you are curious.
The company leadership picks which analysts get to ask questions.
This is very important!
Analysts who piss off leadership get “taken off the call”, strongly incentivizing them to ask questions in a nice, pseudo-flattering manner.
Sharp questions/follow-ups indicate the Analyst is fed up with company leadership and is willing to risk their ability to ask questions in future calls/quarters.
Because earnings call transcripts are typically quite dry, it is my goal is to cover them in a psuedo-entertaining matter, through the power of memes.
You can scroll through these posts in <60 seconds to catch all the memes (and go back to brain rot via TikTok), or you can scroll back up to (hopefully) learn something.
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(and share)
Ericsson:
Francois Bouvignies -- UBS -- Analyst
Good morning, everyone. So I have two quick questions. The first one is on more high level. But if we look at the current environment, especially in North America, quite extraordinary correction, I mean, with your sales back to 2018 level and now with significant growth decline.
And given the level of macro uncertainty and uncertainty around the recovery, how do you see the pricing evolving going forward? I mean, do you see any pressure from the operators given the challenge they are facing? So it would be very interesting to know your -- the pricing dynamic here and if you see any pressure. And maybe from a very high level, if we look at the past -- last ten years, and you say in your past two decades, you say that the mobile network market has been flattish and your top line is reflecting this dynamic, and yet, level of investment remains very high. When you look at your R&D SG&A, I mean, R&D is 18% of your sales; SG&A, double-digit percentage as well in the network at least. So I'm just wondering is there any thought process that maybe you can make it structurally much more efficient this investment related to the return you get.
And you see that you have a couple of cost-saving programs and is not new. We have been doing that for a few years now. But can you go a bit deeper, maybe internally, in terms of discussion on the level of investment compared to what you return in terms of revenues, in other words, managing the business more for margins or cash flow, if you like, rather than for top-line growth? Does that make sense?
Peter Nyquist -- Vice President, Investor Relations
Should we start with Borje?
Borje Ekholm -- President and Chief Executive Officer
And it's a highly relevant question you're asking. This is one of the areas we're looking at. We do believe and not focusing on the North American market here, but we actually face competitors in all other markets or most other markets that actually where we will be evaluated based on technology leadership and what type of solutions we provide. And therefore, we need to provide leading-edge solutions so that drives a bit of the R&D intensity in the industry, which then is very high.
Having said that, there are areas where we can leverage much more or improve the way our R&D efficiency in many ways. And one of the things we are working on is actually to get more efficient R&D. You know we've been -- take for example BCSS where we have gone from almost a hardware-centric model into a software model, and we see now that we can improve the software development efficiency, and we are working on that. And the same thing on the BNEW side.
So I do think there are opportunities, but I would also say that given that we compete for global scale with vendors that are investing very heavily, we need to match that. So it's really a bit of a tricky question. If you would only have a market where technology would not matter, you could actually slow down a bit of the investments, but that would make us uncompetitive in most parts of the world. So I do think we should expect R&D intensity to be high, but we need to be more efficient in the way we develop our solutions.
And that that is -- you actually see part of the cost savings now come out of -- a bit of a reduction in R&D as well, and you will see that continue.
Peter Nyquist -- Vice President, Investor Relations
Maybe, Borje, you want to take the first question about pricing discussions with customers as well if you --
Borje Ekholm -- President and Chief Executive Officer
Yeah, it is -- I mean, it's actually a global industry. So when we think about prices, it's set in competition with other vendors, and that's kind of where the market environment is. So that's why I would say it used to be very competitive. It continues to be very competitive.
This is the first instance of an Analyst pointing out the raging inferno Ericsson is standing in. He starts by calling out a return to 5-year-ago revenue alongside massive growth decline. He asks about pricing power first, with a few follow ups on cost cutting plans (layoffs) which is boring. The interesting thing is that Ericsson CEO ignored the pricing question at first. When he finally got to it, the answer was “very competitive”.
“very competitive pricing” == commodity product (not good)
“very competitive pricing” == price war (very not good)
All those Huawei export controls seem to not have helped enough. Imagine how bad Ericsson’s situation would be if Huawei was allowed to sell in North America and Europe.
Andreas Joelsson -- Danske Bank -- Analyst
Good morning, everyone. Just a question on a reference that you made very -- in the beginning that you need a catalyst to see investments coming through from the operators over time. Just curious to understand if you are a little bit surprised by the 5G business models from the operators so far because it hasn't really kicked off in terms of ARPU growth, etc. What do you see that they are missing from a 5G business model so far?
Borje Ekholm -- President and Chief Executive Officer
That's a great question. What we see, so far, with the 5G networks launched, it's kind of a little bit better mobile broadband. But to really get -- kind of deliver on the promise of 5G, we need to tap into new revenue pools, and that's where enterprises come in and enterprise digitalization. So we need to basically -- and there is an opportunity, I would say, to leverage wireless for enterprise digitalization, just because of the way -- think about the flexibility of a wireless network.
Think about the global availability of the network. And actually that it has a very high level of security as well, so you -- when you start to put that, we can actually digitalize so many more enterprise processes using 5G That is an area that naturally lends itself. We should enter enterprises with 5G. We see that, of course, on enterprise network, so dedicated networks, for example.
We see that to be a very early market, but that's happening. It's -- we're using wireless networks to digitalize enterprises, and we see that some large automotive OEMs, for example, are deploying them now in -- on their sites to drive new type of automation. But we also see this as the major -- this is the kind of starting point for our Global Network Platform. So if we can create the network into a horizontal platform that can make the features of the network easy to expose, consume, and pay for, we have actually created something for a developer to drive, and we start to see this.
We're launching some new network APIs with great interest from the developer community. And of course, we -- this is a market where we don't want to talk about it until we have launched basically for competitive reasons. But we think it's actually a major opportunity to create this new type of revenue pool that the industry need to drive more investments into the network. Otherwise, the network will –network investments will just continue to be flat.
If the service revenues for the operators are largely flat or very low growth, there is not going to be growth for network investments either. So we need to create this new type of monetization pool in order to drive investments.
The entire wireless broadband industry has spent the last five years pushing a narrative that 5G would enable new markets, leading to growth.
“New” means anything other than smartphone, which is terminal.
The Analyst calls out that 5G has been a total whiff, leading to no ARPU (average revenue per user) growth amongst the operators/carriers.
Right now, all the carriers are squabbling amongst each other, trying to squeeze a few drops of extra juice from a stale orange.
Poaching subscribers from each other with trade-in deals.
Locking-in subscribers into multi-year contracts with trade-in deals.
Raising prices on subscribers.
What do these all have in common? No need for more telco equipment. No growth in data rate. No revenue growth.
Nothing.
Ericsson CEO’s response is quite lame. Bunch of generic stuff that Telco-land has been repeating ad-nauseum since 2019.
WiFi and 10GbE PoE (“Power over Ethernet”) has a massive cost and performance advantage over 5G. The fever dream that factories are going to install private 5G networks en-mass is never going to happen. 5G URLLC (heavily pushed by Ericsson and Qualcomm) has zero traction.
Toward’s the end of his response, Ericsson CEO admits they are doomed if a new monetization stream (non-smartphone) does not materialize soon.
Borje Ekholm -- President and Chief Executive Officer
So tie into your question about the global rollout of 5G, it varies a bit by region. But in average, it's about one in four that's upgraded for mid-band, 5G mid-band. And so it's really -- compared to previous generations, we're still relatively early in the cycle. Investments in Europe have been slower than that in average.
No… you are not early in the cycle! There is no data growth this time so low-band, augmented with a small chunk of mid-band is good enough to serve all existing subscribers.
3G —> 4G/LTE was defined by bit-growth due to subscribers watching HD video.
Borje Ekholm -- President and Chief Executive Officer
Yeah. I would say we're still early in the 5G core deployments. It's -- it really needs to be 5G stand-alone to be widely deployed. And that's so far, call it, is maybe some 40 and 50 networks around the world, very few.
So we're not seeing the big ramp until that happens. So I would not hang it on there. We've seen some good developments in other areas of the business that actually has started to grow, and that's encouraging as well. But I would say the 5G core, the future is ahead of us.
The future is ahead of everyone.
ERIC 0.00%↑ ‘s future is very dark.
Nokia:
A giant layoff announcement is not a surprise. The big surprise is that they are effectively admitting the next 2+ years are going to be hell.
No recovery until 2026…
Pekka Lundmark (CEO): When it comes to pricing, I mean in our market, there are always some case-by-case basis. Cases where there are irrational pricing actions by some competitors. But in the big picture, no, we have not seen such. And what I would like to point out is that we actually have an interest to increase pricing discipline in our industry in order to not only protect our gross margins but also to push them up and at least make sure that all the inflationary rapid costs are due to prices then gradually structurally improve them also going forward.
I wonder who NOK 0.00%↑ CEO could be talking about… regarding irrational pricing actions of wireless patents/IP. \s
Lam Research:
I normally don’t care about LRCX 0.00%↑ , but their non-China revenue collapsed for some reason. Still trying to figure out what happened here and if it will hit my semicap holdings.
Tesla:
AI day is where all the useful/interesting info comes out. I bring up their earnings call because Elon spent a lot of time complaining about interest rates of car loans. Bought more TSLA 0.00%↑ (on sale) and liquidated my Albemarle+BHP positions.
TSMC:
C. C. Wei - Taiwan Semiconductor Manufacturing Company Limited - CEO
Well, Gokul, this is C. C. Wei. Let me answer your question with a very simple answer is that no, but what I will state a little bit long. Actually, we do not underestimate any of our competitors or take them lightly. Having said that, our internal assessment shows that our N3P, now I repeat again,
N3P technology, demonstrated comparable PPA to 18A, my competitor's technology, but with an earlier time to market, better technology maturity, and much better cost.
In fact, let me repeat again, our 2-nanometer technology **without backside power** is more advanced than both N3P and 18A and will be semiconductor industry's most advanced technology when it is introduced in 2025. Does that answer your question, Gokul?
I like the confidence. Curious to see what Intel has to offer with BPD/PowerVia/18A.
Gokul Hariharan - JPMorgan Chase & Co, Research Division - MD, Co-Head of Asia TMT Research, Head of Taiwan Equity Research & Senior Tech
Okay. That's quite clear. Could you talk -- also talk about -- my second question is, could we talk a little bit about the AI-related demand. You've seen a pretty strong demand on the data center side and you talked about AI being about 6% of revenues this year, mostly on the data center side.
Are we starting to see more engagement on AI demand on edge devices? Based on TSMC's expectations, is this going to be a big growth driver in the next 1 to 2 years for TSMC's leading-edge AI devices -- sorry, AI on edge devices? Do you think that, that is a bigger driver for you?
Jeff Su - Taiwan Semiconductor Manufacturing Company Limited - Director of IR
Okay. Thank you, Gokul. So Gokul's second question is on AI-related demand. He notes, of course, that we have talked last time also about our AI-related demand outlook and particularly focused on what we call server AI processors or Gokul referring to data centers.
So his question is really more about on-the-edge devices. Are we starting to see AI-related demand for edge devices? Do we expect this to be a big growth driver in the next 1 to 2 years for our leading-edge technologies as well?
C. C. Wei - Taiwan Semiconductor Manufacturing Company Limited - CEO
Well, the answer is also very simple, yes. We do see some activities from customers who add AI capability in end devices such as smartphone and PCs, through neural engine and AI and PC, whatever. And we certainly hope that this one will add to the course, help TSMC more strengthen under our AI's business.
Gokul Hariharan - JPMorgan Chase & Co, Research Division - MD, Co-Head of Asia TMT Research, Head of Taiwan Equity Research & Senior Tech
**So do you see that happen in the next 1 year?** Or is it something that will happen in a more longer term horizon? Just wanted to understand when to think about the cadence of this growth.
C. C. Wei - Taiwan Semiconductor Manufacturing Company Limited - CEO
Okay. Let me answer briefly. It started right now, and we will expect that the more and more customer will put that AI's capability into the end devices, into their product.
Analyst: Will Edge AI drive meaningful revenue growth in 2024?
TSMC CEO:
TSM 0.00%↑ still thinks edge AI is a non-factor in 2024.