Should You Invest in These 3 Communications Equipment Makers

Madhukar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The global communication equipment industry is expected to reach $185 billion by 2015, a nearly 34% rise as compared to 2010. The key factor for growth in the industry is the increasing demand of advanced network technology in different sectors. Three companies from this industry recently signed major contracts to meet this increasing demand of advanced network technology.

Let us find out how these contracts will impact their revenue in the long run. 

New contracts will increase revenue in the long run

Ericsson (NASDAQ: ERIC) in agreement with Mobile TeleSystems, or MTS, will develop ICT infrastructure in order to roll out LTE networks. Ericsson has catered services to 150 LTE networks globally with MTS. This new contract will expand its services to half of Russia. The contract was signed in June 2013 for the period of three years. MTS will initially roll out the 4G network in four regions in Russia, followed by covering 15 regions this year. According to the agreement, Ericsson will supply approximately 10,000 RBS6000 series base stations along with network hardware and services in the initial phase of the project starting in the second half of 2013. With this contract, Ericsson is expecting to generate revenue of $150 million in its initial phase, along with the incremental revenue of $50 million for network hardware and services. The three-year deal is expected to be a multi-billion dollar opportunity for Ericsson, providing infrastructure to half of Russia.

Ericsson is the world's largest maker of wireless networks. It is planning to expand its service business with VimpelCom under a contract in Russia. The company deployed its first LTE service in Moscow with VimpelCom on June 25, 2013. These services are in the center area of the city and are expected to be available throughout Moscow by end of this year. It is a five-year agreement in which Ericsson will manage nearly 10,000 locations in Siberia and Urals in Russia. Under this agreement, it will manage the network operations along with its maintenance. Prior to this, it also received a contract of $1 billion from Reliance Communication to manage its wire line and wireless networks in India.

Ericsson's efficient services in wireless networks and rising contracts will accelerate its revenue in coming years. The company's managed services segment reported growth of 11.1% year-over-year and $3.7 billion last year. Due to rising contracts, revenue of the company will be $3.89 billion this year and $4.1 billion in 2014.

New contracts will help to balance company's earnings 

Harris' (NYSE: HRS) RF segment received a contract worth $55 million on June 16, 2013 to provide Falcon tactical radios. These radios are widely used for defense security. Harris will provide Falcon RF-5800H and RF-5800V from its line of falcon radios. These radios have very high frequency and also deliver ''beyond-line-of-site terrestrial'' voice and data communications. These radios are also comparatively small in size, light weight, and have a long battery life. These features generate product demand among defense and homeland security missions.

Another contract was awarded by a Middle East nation to Harris for an integrated command, control, and communication system. The contract awarded is worth $92 million. As per the contract, the company will provide integration of fusion LTE and strong subscriber terminals. It will use both tactical cellular system and LTE system to provide secured terminal services. This system will have advanced features and capabilities that are used in defense and security missions. Harris will deliver the Fusion tactical system in which users can make voice calls and access secured data service, including email, mapping, and text messaging.

In spite of new contracts from the international market in RF segment, the company is expecting a decline in revenue in 2013 and 2014 as the majority of its revenue comes from U.S. government. This decline is mainly due to reductions to the U.S. government’s defense budget. Revenue of Harris is expected to be $1.8 billion in fiscal year 2013 and $1.6 billion in 2014, compared to $2.1 billion in fiscal year 2012.

Service segment and ''Moto X'' launch will boost revenue

Motorola Solutions (NYSE: MSI) has significant room for growth in providing software upgrade services under its government service segment. This segment contributed $2.3 billion, 27%, of total revenue in 2012. Government public safety devices were the main revenue driver in this segment. Furthermore, the company expects it to be dependable revenue for the future.

Motorola has deployed maximum analog systems globally, and it has an excellent opportunity to grow by upgrading these systems to digital systems. Increasing complexity, mobility in networks, and more digital content requires regular maintenance and software upgrades. The new digital systems are more cost effective and are efficient systems with improved services. It will also reduce cost of further upgrades by decreasing operating costs and expenses of the company, which are associated with a less efficient network system. It is expected that this segment will grow approximately 3%-6%, year-over-year. The company is expecting an increase the government service segment by $6.2 billion in 2013 and $6.7 billion in 2014, compared to $5.9 billion in 2012.

The U.S. smartphone market increased to 39% in the first quarter of 2013, compared to 36.3% in the fourth quarter last year. In order to monetize the growth in this industry, Motorola is planning to launch a new smartphone in the U.S. market in October. This new product, Moto X, will be the first smartphone to be manufactured and assembled in the U.S. Motorola has chosen the U.S. market for manufacturing as it has a business advantage of a special team of designers and engineers. Also, looking at growing demand for smartphones in this market, the company has decided its complete process of designing and delivery distribution in the U.S. will allow the company to work at a faster rate. The new smartphone will have features like ultra-low power sensors and processors that will save battery life. With the new launch, the company’s retail segment is expecting revenue growth of 3% to 4% year-over-year, by 2013 end. 

Bottom line

The new launch of Moto X smartphone in the U.S. market and service segment of Motorola Solutions will boost its revenue in the long run. Also, new contracts of Ericsson with Vimpelcom and MTS will enable the company to enter new markets. These contracts will increase its market share along with its revenue. Therefore, buy is recommended for both these stocks.

Due to reduced government budgets, Harris will see a decline in profits for the time being. However, new contracts raise hope of balancing earnings. I recommend a hold for this company, until I see further developments.


Madhu Dube has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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