Solid, Growing Orders in Europe and North America... Will It Break the 3-Year Loss Streak?

Supply of Repeaters (DAS) and Wired Transmission Equipment
Main Customers Include Domestic Major Telecoms like SKT and KT
Signs of Q4 Turnaround with Overseas Orders
Rental Income Generated and Subsidiary Sollid Labs in Focus

A favorable wind is blowing in the 5th generation mobile communication (5G) equipment market. 5G equipment companies recorded sluggish performance this year as 5G-related investments by global telecom operators decreased due to COVID-19. However, starting next year, 5G investments are expected to resume in major countries including the United States, drawing renewed attention to domestic companies supplying related equipment. Asia Economy analyzed KMw and Sollid, 5G equipment companies preparing for a leap forward.

[Asia Economy Reporter Jang Hyowon] Telecom equipment company Sollid is stirring. It had been struggling with losses for three consecutive years, but 5G investments, which had been contracted due to COVID-19, are resuming. Sollid has recently secured orders in Europe and North America, leading to expectations of meaningful performance improvements starting next year.

Consecutive Orders from the UK, Germany, and the US

Sollid is a company that develops and manufactures network equipment related to telecommunications. It mainly supplies repeaters (DAS) used in wired and wireless communications and wired transmission equipment.

Its major customers are the three leading domestic mobile carriers: SK Telecom, KT, and LG Uplus. The market size is determined by the investment scale of these operators. Accordingly, Sollid’s sales fluctuate. Recently, demand in overseas telecom equipment markets has also been increasing.

However, Sollid has not escaped losses since 2019. In 2019, Sollid recorded consolidated sales of 229.3 billion KRW and an operating loss of 3.5 billion KRW, turning from an operating profit of 1 billion KRW the previous year. The shift to losses was due to rising cost of sales and increased R&D expenses.

In the following year, sales were 172.9 billion KRW with an operating loss of 16.9 billion KRW, widening the deficit. Sales dropped by 24.6%, while R&D expenses increased and selling and administrative expenses remained steady, enlarging the loss. This was due to delayed investments by domestic and international telecom operators amid COVID-19, while personnel and development costs expanded.

Through the third quarter of this year, losses continued. As of the end of Q3, consolidated cumulative sales were 120.1 billion KRW with an operating loss of 6.9 billion KRW. However, this is an improvement compared to the same period last year.

The market expects Sollid to show signs of a turnaround starting from Q4 this year. Recently, order achievements have appeared in the UK, Germany, and the US. In July, Transport for London (TfL) selected global telecom infrastructure provider BAI as the contractor for the London Underground communication network construction project. BAI has maintained a 20-year partnership with Sollid, collaborating on communication infrastructure projects for major US facilities including the New York subway.

Additionally, Sollid was responsible for manufacturing the ‘indoor 5G repeater’ equipment launched in Germany by Techmaker, a company established through cooperation among SK Square, SK Telecom, and global telecom operator Deutsche Telekom. Sollid cooperated with Techmaker from the early development stage and supplies the equipment to Deutsche Telekom.

Furthermore, in October, Sollid signed a supply contract worth 19.6 billion KRW for 4G and 5G DAS equipment for North American sales with its US local subsidiary.

Rental Income Generated... Development Costs Also Reduced

Despite sustaining losses for over two years, Sollid is not under significant financial burden. Currently, Sollid’s debt ratio stands at about 119.6%. Total borrowings amount to 74.2 billion KRW, but it holds approximately 70.3 billion KRW in cash equivalents, resulting in a net borrowing of only 3.9 billion KRW.

The reason Sollid holds a large amount of cash is due to a capital increase. In June, Sollid raised 43.9 billion KRW through a rights offering followed by a general public offering of forfeited shares.

Of these funds, 3 billion KRW was used to repay part of previously issued convertible bonds (CB), and 15.9 billion KRW was spent on purchasing raw materials related to the 5G business. The remaining 25 billion KRW is planned to be used for repaying the lease deposit of the Sollid building.

Sollid leases five floors of its ten-story building to Smilegate Entertainment. Currently, it holds 46.6 billion KRW as a deposit under a jeonse (lump-sum deposit lease) contract, of which 25 billion KRW will be repaid, and the contract will be renewed in a form that receives monthly rent. The lease contract ends this year, and upon renewal, monthly rent is estimated at 100 million KRW, generating about 1.2 billion KRW in annual non-operating income.

Now, market attention is focused on Sollid’s subsidiary, Sollid Labs. In March, Sollid invested 7.5 billion KRW to establish Sollid Labs. Subsequently, in September, it invested an additional 11 billion KRW, totaling 18.5 billion KRW.

Sollid Labs is a corporation conducting research and development on Open Radio Access Network (O-RAN). As of the end of Q3 this year, it has recorded a cumulative loss of 3.8 billion KRW. This is why Sollid also posts losses on a consolidated basis.

Kim Hongsik, a researcher at Hana Financial Investment, said, "From 2022, Sollid Labs will no longer incur O-RAN investment costs, while O-RAN sales are expected to exceed 20 billion KRW annually. Not only will sales increase significantly, but operating expenses may also decrease, making it the first year since the introduction of 5G that Sollid shows remarkable performance improvement."