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Telco capital intensity hits 10 year peak in 2Q22

Posted on | by Matt Walker

Vendors continue to wrestle with supply chain constraints in the telecom sector. That’s clear from several recent vendor earnings reports, including those issued by Dell, HPE, and Ciena in recent weeks. Telco spending, though, has surged in recent quarters. With 2Q22 results now compiled, the industry has reached a new capex peak. For the 12 months ended June 2022, telco capex was $329.5 billion (B), while the ratio of capex to revenues (i.e. capital intensity) was 17.8%. Both figures represent new record highs, at least for the 46 quarter (11.5 year) period that MTN Consulting data covers (1Q11-2Q22).  

On the supply side, vendors selling into the telco vertical are seeing some growth, in aggregate. For the broadly defined “telco network infrastructure” (telco NI) market, revenues were $60.1B in 2Q22 (up 4.1% YoY), or $237.6B on an annualized basis, up 6.7% YoY. The telco NI market includes some vendor revenue streams which dip into telco opex, not capex, but there is usually a correlation between total capex and vendor revenues.

The figure below illustrates telco capital intensity over the last several years.

What’s behind recent capex growth

One factor behind the recent capex spending spike is a post-COVID bump. Economies shutdown during COVID, depressing network spend. The capital intensity effect is shown in the figure, above (“COVID slide”). Capex also dropped in absolute terms. Annualized capex bottomed out at $299.8B in 2Q20. Some of the current growth is just making up for lost time. The quarterly average hasn’t changed much, if you expand the time horizon. For the last ten quarters, from 1Q20 (the onset of COVID) through 2Q22, telco capex averaged out to about $77.9B per quarter. For the ten pre-COVID quarters, the average was $78.5B.

Another factor is many telcos are scaling up initially small 5G deployments, and beginning to build out 5G SA core networks. 5G RAN builds have been underway for several years, but the spending has been small to start due both to the software-centric nature of 5G networks and telcos’ desire to wait for new revenue models to emerge. Incidentally, a shift to 5G core spending tends to benefit a different type of vendor – not just the Ericssons and Nokias of the world. Cloud providers AWS, Azure and GCP, for instance, are all actively involved in helping telcos with 5G core migrations. Their collective revenues in the telco vertical were about $3.4B for the 12 months ended June 2022, up nearly 80% YoY. Many of the vendors involved in this are less vulnerable to supply chain issues.

Another capex plus: fiber spending is strong in a number of markets, especially the US but also in Europe, Australia, China, and India. That’s to support FTTx deployments but also to connect together all the new radio infrastructure needed to support 5G. Government subsidies and other investment incentives are a factor as well. Vendors focused on fiber optics are seeing strong growth right now. For instance, Corning and Clearfield saw their telco vertical revenues grow by 25% and 84% YoY in 2Q22, respectively.

Supply chain limitations have a mixed effect. They sometimes mean delay or cancellation of projects, which cuts capex in the short term. They also can mean price increases, though, as telcos push suppliers to accelerate timelines or adjust designs to work with available alternatives. This can result in projects costing more than expected. Let’s not forget, though, that a huge portion of telco spend is unaffected by current supply chain constraints. Services- and software- focused vendors – like Accenture, Amdocs, IBM, Infosys, TCS and Tech Mahindra – are not citing supply chain issues as a drag on results. 

Inflation is a bit more straightforward. This has impacted the entire telecom food chain, from chips to components to systems to services. All else equal it causes an increase in US$ capex, though the impact on capital intensity is less clear. 

Finally, there’s China. Given how closed a market this is, there’s not as much attention paid to it nowadays. But China’s capex has been growing recently. For the 2Q22 annualized period, Chinese telco capex totaled $58.3B, up 12% from 2Q21. That growth comes despite efforts to share costs on the network side.

China is also relevant to the vendor share question. Huawei continues to rank at the top of the global telco network infrastructure (telco NI) market. For the 2Q22 annualized period, we estimate its telco NI share at 18.7%, far ahead of Ericsson (10.9%) and Nokia (8.9%). This surprises some, as Huawei has become a non-factor in many markets over the last two years. Yet Huawei’s stability is no mystery. It’s dominant at home, and local telcos have been spending big, and steering more of their capex dollars to local suppliers over the last couple of years. Huawei also has a huge customer list overseas – these revenue streams don’t just disappear overnight, especially since many telcos remain loyal to the vendor.

Hardware hit hardest in supply chain crunch

Vendors recorded about $237.6B in sales to the telco vertical for the 2Q22 annualized period. This is a huge market, with many different players; MTN Consulting stats track 132. Some supply the latest and greatest hardware innovations. They often have high margins but can also be subject to supply chain hiccups. Vendors specializing in solutions which revolve more around software and/or services tend to have different constraints. Labor cost and availability is always a concern, but hardware is rarely an issue. We believe the current supply chain disruptions will improve in the next couple of quarters, though. Even those vendors hit by short-term supply issues are generally optimistic. For instance, Gary Smith, Ciena’s CEO, noted last week that “Despite supply chain challenges and elongated lead times, strong secular demand trends show no signs of abating. And we remain confident that the fundamental macro drivers propelling this demand are durable over the long term.”

The biggest near-term risk to that is China’s ongoing series of COVID shutdowns. Longer term, the bigger risk is any interruption to Taiwan’s ability to continue functioning as an independent, self-governing country – it plays a key role in the telecom supply chain, and that of many other sectors. This issue is the elephant in the room that few like to address, but all vendors need to have a plan for this worst case scenario.

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Source of cover image: iStock

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Vendor landscape continues to shift in telecom market as cloud and 5G scale

Posted on | by Matt Walker

Telco network spending has been on the rise over the last few quarters. Vendor sales of network infrastructure to the telco vertical (“Telco NI”) totaled $55.5B in 1Q22, up 5.7% YoY. On an annualized basis, Telco NI revenues through 1Q22 were $234.8B, the highest total in our 1Q13-1Q22 database and 6.8% higher than the 1Q21 annualized figure. Telco capex has been strong the last few quarters, and vendors are benefiting. The growth is not dramatic, but any kind of growth at all in telecom is a plus, and often a surprise.

As telco spending has risen post-COVID, the top few vendors remain at the top. While share always varies a bit by quarter, the biggest five network equipment providers (NEPs; excludes China Comservice) have collectively accounted for about 50% of the Telco NI market over the last few years. Figure 1 shows annualized share evolution for these vendors, from 1Q19 through 1Q22.

Figure 1: Annualized market share of top 5 NEPs in the telco vertical, 1Q19-1Q22

Source: MTN Consulting

While the top 5 remain the same and their aggregate share of wallet is stable, there are some significant shifts underway in the vendor landscape.

What drives these shifts? Some are driven by financial machinations or politics, but most are aimed at improving competitive positioning. More specifically, improving a vendor’s ability to address key customer needs. In the telco vertical, these include: deploying telco cloud functions and architectures; monetizing new network capabilities, in particular 5G; lowering the cost of transport and routing; improving the energy efficiency of networks; automating networks; lowering the cost of customer acquisition and retention; and, developing revenue streams in new areas like mobile payments, digital advertising, home networking, connected cars and security. There are probably more shifts underway nowadays because 5G cores are beginning to be implemented in a big way, and Huawei’s problems continue to open up new opportunities for smaller vendors.

Most of the shifts in the vendor landscape involve smaller players, outside the top 5. Ericsson’s acquisition of Vonage is an exception; MTN Consulting published a blog post on this deal in May. Setting aside the top 5, ongoing changes in the vendor landscape fall into a few broad categories.

Growth of the cloud providers

Alphabet (GCP), Amazon (AWS), and Microsoft (Azure) together booked approximately $3 billion in revenues to the telco vertical for the 1Q22 annualized period, from less than half a billion USD in 2Q18-1Q19. They now partner with telcos on a range of areas, as MTN Consulting mapped out in the report “Telcos aim for the cloud by partnering with webscale cloud providers.” Their aggregate share of Telco NI is now about 1.3%, around the same as Accenture and a bit more than IBM. They have a long way to go, but they are already making a dent in the market and continue to invest heavily in the telco vertical.

Most of the cloud providers’ success in telecom stems from organic investment, but not all; Microsoft has completed three acquisitions that accelerated its push into telecom: Affirmed Networks, Metaswitch, and AT&T’s Network Cloud.

Vendor partnerships with webscalers

As webscalers began to make a real dent in the telecom market in 2020, traditional telco-facing vendors realized they could benefit from some joint development and marketing ventures with the webscalers. That was especially apparent as telcos began to deploy 5G cores and needed cloud smarts from their suppliers. Over the last three years, most big telco-focused vendors have entered into partnerships with traditional telco-facing vendors like Ericsson, Nokia, NEC, Fujitsu, and Amdocs. Some of these are generic, some are customized for specific large telco accounts, e.g. Telecom Italia.

Restructuring and realignment 

Dell, including its majority holding in VMWare, saw its revenues in the telco vertical rise steadily in the 2019-21 period. The company’s 2021 revenues in telecom amounted to just over $2.7B. VMWare is responsible for much of this, boosted by its Telco Cloud offerings. Late last year, Dell spun out its majority holding in VMWare. This was aimed partly at raising cash, but also at creating more value in VMWare, which has a different business model and profit margins than parent Dell. The two retain strong connections and partnerships, including in the telco space.

Since the Dell-VMWare spin-off in 4Q21, a bigger shift has occurred: in May 2022, Broadcom agreed to acquire VMWare, for $61 billion. Broadcom says the deal will combine its software portfolio with VMWare’s multi-cloud offerings. Telco is only one of many reasons for this deal, not a central one. Prior to the deal, Broadcom alone did have some small position in Telco NI, due largely to previous acquisitions (Brocade, and CA Technologies). The synergies involved in this deal seem questionable, but importantly Broadcom claims it will allow VMWare to operate with a degree of independence.

In the same quarter as Dell’s spinoff of VMWare, IBM separated its services group into a new company, Kyndryl. This deal was also driven by an interest in separating two companies with significantly different business models and profit margins. Both go after telco business though. Red Hat is at the core of IBM’s efforts to improve its penetration of the telco sector, and it has had some success. Kyndryl inherits many relationships with telcos cultivated by IBM’s services group over the years. That includes deals with Bharti in India, including a blockbuster $1.4B deal for IT operations outsourcing, way back in 2004. Interestingly, 5G monetization is front and center of Kyndryl’s messaging for the telco vertical, which is a similar driver to what’s behind Ericsson-Vonage.

Still pending: CommScope has been attempting to spin out its Home (CPE) division for several quarters, but there is no confirmed buyer. There’s some chance that the company will just reintegrate the division, as options are limited. Acquisition by private equity is likely being considered, though.

Telcos investing directly in technology supply

There are a few cases of telcos either creating a vendor in-house or acquiring a large ownership stake in one which already exists:

  • Rakuten Symphony: Rakuten’s creation of Symphony is most notable in recent years – the highest stakes, and probably the most expensive. Payoffs may be many years down the road, as more telcos consider open RAN for brownfield networks and Symphony develops more of a track record.
  • Tata Sons-Tejas Networks: Tejas Networks sold a controlling stake (43.4%) in July 2021 to Tata Sons group, which wants to help Tejas grow. The Tata group includes a telecom division, Tata Communications, with $2.3B in 2021 revenues, making it India’s fourth largest private telco. Tejas is focused on optical networks.
  • Verizon-Casa: in April 2022, Verizon announced it would invest $40M in one of its smaller vendors, Casa Systems, at the same time as agreeing to a multi-year contract.
  • NTT-NEC: further back, in June 2020, NTT announced a $560M investment into key supplier NEC, for a 4.8% stake in the company. This aimed partly at helping NEC expand its 5G offerings and leverage an opening in the global market for wireless technology opened up when Huawei began to face supply chain and political constraints in 2019-20.

Vendor-vendor M&A deals

The vendor landscape also continues to be impacted by more traditional M&A deals, where a vendor acquires another technology supplier. Some of the recent transactions include: 

  • NEC: this Japanese vendor has committed to expand in the mobile technology space, with focus on open RAN. Earlier in July, NEC agreed to acquire Aspire Technology Unlimited, an Ireland-based systems integrator, to help with this pursuit.
  • ADVA-Adtran: these two small but profitable wireline vendors announced plans to merge in late 2021, and the deal just closed. The new company, ADTRAN Holdings, may have a leg up in pursuing the many transport network upgrades and broadband access buildouts underway worldwide right now. The new ADTRAN may also be better able to deal with supply chain constraints, which continue to be an issue for smaller NEPs.
  • Sterlite: this India-based optical supplier has been growing over the last few quarters, exploring overseas markets for fiber optics, launching a small range of wireless products, and acquiring a UK-based systems integrator, Clearcomm Group, in 2021.
  • Accenture: has spent heavily on a wide range of acquisitions in the last two years, across industry verticals. Deals impacting telecom include Arca, a Spanish engineering services company, in 2020; umlaut, a German network engineering, testing and analytics company, in 2021; and Advocate Networks, a technology consultancy and managed services provider, in 2022.
  • Aviat-Ceragon: most mergers are friendly, where both sides agree. As Elon Musk’s attempted purchase of Twitter reminded the world, there are also less friendly forms of acquisition. This Aviat-Ceragon deal is basically a hostile takeover of Ceragon, proposed by Aviat. It’s still pending and the two parties may not come to agreement. However, the motive is worth noting. Aviat’s hope is that the deal would give the combined company more scale and better margins, and a stronger ability to compete with Huawei, Ericsson and Nokia in the wireless transport space as opportunities arise for 5G backhaul & fronthaul and support for private wireless networks.

Finally, one significant acquisition involves a large established telco-facing vendor acquiring telco assets. In September 2021, Ciena acquired AT&T’s “Vyatta” virtual switching and routing technology.  As Ciena said at the time, the deal aims to address “the growing market opportunity to transform the edge, including 5G networks and cloud environments.” Many shifts in the vendor landscape aim at this same opportunity.

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Photo by Hans-Peter Gauster on Unsplash

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Telecom’s top 3 vendors betting big on enterprise expansion; Huawei has early lead

Posted on | by Matt Walker

Telco NI’s top 3

Telcos buy products & services from dozens of different vendors. Our research tracks 130. Some are relatively easy to classify into a segment, e.g. Corning, a “cabling & connectivity” vendor in our terminology. Most are much harder. Even those which may once have been called NEPs (network equipment providers), such as Ericsson, went beyond the implications of this term long ago. They also provide software and services, and most of their future development – measured by both R&D spend and acquisitions – is targeted towards software and the cloud.

Setting aside the vendor classifications, there is less dispute about who the overall top suppliers are in telecom. According to MTN Consulting’s most recent vendor share report on this “telco network infrastructure” (telco NI) market, the top 3 are Huawei, Ericsson, and Nokia. Nobody else comes close. ZTE and Cisco round out the top 5, if you set aside the strange creature that is China Comservice, a services specialist which is majority-owned by China’s telcos. Figure 1 illustrates recent trends in annualized telco NI revenues for these top 5.

Figure 1: Vendor revenues in telco vertical, annualized ($B)


Source: MTN Consulting

Top 3 trying to expand beyond telecom

Focusing on the top 3, all face challenges related to addressable market. For Ericsson and Nokia, the common issue is that telco spending is relatively flat, even with the occasional growth spurt from a new generation of technology (e.g. 5G RAN). For Huawei, the problem is due to US-driven supply chain restrictions and boycotts by a number of countries that used to be important markets for the vendor.

Prior to Huawei’s current issues, its diversification was impressive, as its huge consumer business helped offset some of the risk in focusing on one primary market, telcos. But Huawei’s consumer business revenues have collapsed in the last 2 years: they ended 1Q22 at approximately 209.7B RMB (annualized), from 462.9B RMB  in the 1Q20 annualized period. Its carrier revenues have also fallen, as overseas telcos have been reticent to commit, but the drop is modest due to strong support from Chinese telcos and key overseas partners. Still, the writing is on the wall. Huawei recognized two years ago that it needed to reinvent itself, committing more to R&D and exploring new business opportunities beyond telco. One major focus is finding ways to expand its enterprise market. Its starting point in this expansion is a strong position in global optical and IP markets, and a solid offering for data centers. The company’s April analyst event made clear that its datacom group would play a central role in attacking the enterprise (CloudCampus, SD-WAN, Wi-Fi 6 and 7, etc.), as would Huawei Cloud. 

Both Ericsson and Nokia also view enterprise as important. Ericsson is focused mainly on private wireless, and acquired Cradlepoint in large part to pursue this opportunity. Ericsson’s microwave transport gear, security and software, and IoT solutions also have applications outside the telco. Nokia has a larger enterprise business to begin with. It’s also pursuing private wireless, and trying to leverage its wireline gear (optical and IP) further into enterprise markets. It also has had success in the webscale market, including a data center switching at Microsoft recently.

Figure 2 illustrates the revenue breakdown for these three vendors into several major categories: telco, enterprise, consumer, IP licensing, and all other.

Figure 2: Annualized revenues by market, % total (2Q21-1Q22) 

Source: MTN Consulting

 As shown above, Huawei gets less than half its corporate revenues from telcos, even after Consumer’s decline. What may surprise some is how much of its revenue base comes from enterprise. For the 1Q22 annualized period, the enterprise market accounted for 18% of Huawei revenues. Nokia and Ericsson recorded 7% and 4%, respectively.

Moreover, enterprise as a percent of total revenues was about the same for Ericsson and Nokia two years ago, in the 1Q20 annualized period. For Huawei, though, enterprise has nearly doubled, from about 9.7% in 2Q19-1Q20 to 18.2% in the most recent four quarters. As Huawei has faced pressure in other markets, the enterprise has proved to be more resilient. And Huawei has plowed new resources into enterprise to grow it further.

The enterprise is not a hobby  

To date, Huawei’s big enterprise wins are mostly in China. For the company overall, 65% of 2021 revenues were in China. It’s likely that well over 80% of enterprise division revenues are in China. But this was true of Huawei’s carrier group revenues in the early years. With any new product line or market, Huawei has usually penetrated Chinese accounts first while it has ramped up resources overseas to support an expansion. 

Clearly there is no guarantee that Huawei’s enterprise group will thrive outside China. For larger enterprises subject to public pressure, some will still be concerned about the politics of picking Huawei. Even without concerns about appearances, Huawei’s reputation has taken a hit over the last couple of years, which it is working to overcome. Another challenge is channels. Even for the large enterprise targets – such as big banks, government agencies, railways, and energy companies – Huawei will need to rely on channel partners. It can’t develop its own internal team as it did with telco; there are too many enterprises, and the average size is too small. Huawei needs to identify the best country and vertical markets to attack, and develop a network of trusted, certified partners to both sell into this market and support it after the sale. Enterprise market leader Cisco has invested heavily in building and maintaining its network of channel partners for decades. Huawei also has to battle numerous vendors with established positions in specific enterprise verticals (e.g. energy) or product areas (e.g. Ethernet switching).

All this won’t be easy, but don’t count out Huawei. It has exceeded expectations many times in the past, and views the enterprise as crucial to growth. One indicator of the importance of the enterprise market to Huawei is its leadership. For most of the last half of the 2010s through 2020, Yan Li Da served as Enterprise group president. Yan was in charge of international marketing for Huawei’s early 2000s push into overseas optical markets. That push was key to Huawei initially establishing its name in the global telecom market. Yan is now on Huawei’s board of directors. 

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Cover image: Marvin Meyer on Unsplash 

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Cisco, Samsung, and ZTE benefit most from Huawei bans in 2021 telco NI market

Posted on | by Matt Walker

2021 results for the 100+ vendors selling into the telco market are just about finalized. Contrasting 2021 “telco network infrastructure” (Telco NI) share with 2020, Cisco clearly came out on top, gaining 0.7% share in a market worth $231.4 billion (B). Cisco was helped both by a telco shift in 5G spending towards core networks, and Huawei’s entity list troubles. Samsung’s share growth of 0.3% was due to a big win with Verizon and a growing telco interest in seeking RAN alternatives beyond Ericsson and Nokia. ZTE, which has escaped the US entity list to date, also picked up some unexpected 5G wins but its growth is more broad-based due to optical, fixed broadband, and emerging market 4G business.

Dell (including VMWare), Microsoft, and Amazon also picked up share as telcos have begun investing in 5G core and cloud technologies. Their growth has little to do with Huawei, and more due to telcos’ ongoing changes to network architecture and service deployment patterns. Corning was an unexpected winner in 2021, gaining 0.2% share on the back of fiber-rich wireless deployments and government support for rural fiber builds.

On the flip side, both Nokia and Ericsson lost share in the overall telco NI market in 2021. Their RAN revenues benefited from Huawei’s troubles in 2020 but telco spending has since shifted towards product areas with more non-Huawei competition. Both vendors are attempting to diversify beyond the telco market, with Nokia so far having more success; its non-telco revenues grew 12% in 2021.

Huawei’s share of telco NI declined to 18.9% in 2021, down from a bit over 20% in both 2019 and 2020. The US Commerce Department’s entity list restrictions were issued in May 2019 but hit the hardest in late 2020 and 2021, after Huawei’s inventory stockpiles began running out.

Huawei’s messaging on its recent fall is muddled. During its annual report webcast yesterday, it cited three factors behind its 2021 revenue decline: supply continuity challenges, a drop in Chinese 5G construction, and COVID. In MTN Consulting’s opinion, supply continuity was the main factor. A related factor were the many government-imposed restrictions on using Huawei gear around the world, especially in Europe where 5G spending was strong in 2021. The other two factors cited by Huawei’s CFO, however, are misleading. Chinese telco network spending, overall, was relatively strong in 2021: total capex for the big three telcos was $52.8B, up 8% from 2020. Without this rise, Huawei’s 2021 results would have been worse. As for COVID, few other vendors cite the pandemic as a factor restraining 2021 telco spend. More vendors cite the opposite: 2021 spending was strong in part because telcos were forced to delay many projects during COVID’s early spread.   

To date, Huawei’s troubles have impacted RAN markets the most, but in 2022 and 2023 will begin spreading more clearly to IP infrastructure, optical, microwave, fixed broadband, and other areas. A number of vendors are eager to pursue new opportunities as this happens, including Adtran/ADVA, Ciena, Cisco, CommScope, DZS, and Infinera. The CEO of Infinera, in fact, said on its 4Q21 earnings call that “it was a nice taste, a nice appetizer in 2021, but…we said all along that we would see the design wins and RFPs really scaling and we thought that we’d see revenues from that really beginning to take hold as we got into 2023.”

To date, Huawei has been unable to fully adapt to the supply chain restrictions put in place in 2019. It remains the global #1 in telco NI, however, due to dominance in China and a huge installed base across the globe. The company is investing heavily in carrier services & software, Huawei Cloud and new product areas. One certainty is that it won’t simply fade away, despite the current decline.

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Telco NI vendor market in 2Q21 – preliminary findings

Posted on | by Matt Walker

Growth returns to telco NI market; momentum shifts to cloud, away from Huawei 

Preliminary results show 2% YoY sales growth in 2Q21

Enough vendors have now reported their 2Q21 results to allow for some preliminary conclusions about the market. As of August 10, we have compiled earnings figures and analyzed customer segmentation for 72 vendors, including Huawei. These 72 account for roughly 3/4 of the market based on historic revenue trends.

Focusing on vendors’ sales to the telco vertical, what MTNC refers to as “telco network infrastructure” or telco NI, revenues climbed 2% YoY in 2Q21.

That’s slower than the 8.7% YoY growth rate recorded by this subset of vendors in 1Q21. However, the 1Q21 surge was influenced by a weak base period (1Q20), when economies were dragged down by COVID’s early spread. On a six month basis, telco NI revenues in 1H21 grew 5.1% YoY. Annualized (12 month) telco NI revenues through 2Q21 grew 2.8% over the 2Q20 figure. These growth rates may be modest in other parts of the tech sector, but for telco NI they are an improvement.

As Figure 1 shows, Huawei has tracked very differently from the overall market: outperforming in 1H20 due to Chinese 5G spending, and lagging in the last two quarters as supply chain restrictions and security concerns caught up to the company. 

Figure 1: YoY change in annualized sales to telcos: Huawei vs. all others (preliminary)

Source: MTN Consulting
*Data for “all others” represents the sum of 71 vendors already reporting 2Q21 earnings, including historical data for acquired companies (e.g. Amdocs-Openet)

This growth is welcome news for the many vendors with strong positions in the telco sector. Moreover, the growth comes despite Huawei’s 7% decline in first half telco NI revenues. As the market’s (still) largest vendor, this 7% drop has a big impact on the overall market. Removing Huawei’s figures from our calculations, for 2Q21 alone preliminary telco NI vendor revenues grew by 11% on a YoY basis.

Among reporting vendors, the best 2Q21 results in terms of YoY change in telco NI revenues (on a USD basis) came from Ericsson, Nokia, Samsung, Microsoft and Capgemini. Ericsson and Nokia are benefiting from uptake of 5G worldwide and picking up some of Huawei’s old business. Samsung’s improvement is due both to its Verizon 5G deal and to making strides in smaller 5G markets like Canada and New Zealand. Microsoft’s result is due to a long list of telco collaborations, as well as two 2020 acquisitions (Affirmed and Metaswitch). Capgemini’s growth is due largely to acquiring Altran, an engineering services business with strong telco roots. As far as YoY drops in telco NI revenues in 2Q21, the only significant one among companies reporting to date is Huawei: we estimate its 2Q21 revenues at $12.2B, down from $14.4B in 2Q20.

Moving back to a more long-term comparison, Figure 2 illustrates the biggest swings in annualized telco NI revenues for 2Q21 (versus 2Q20 annualized).

Figure 2: Biggest swings in annualized telco NI revenues, 2Q21 vs. 2Q20

Source: MTN Consulting

As Figure 2 makes clear, Microsoft (shown as “Azure”) is not the only cloud provider making progress in the telco sector. AWS also recorded an impressive bump in annualized telco NI revenues in 2Q21, just a bit behind Microsoft. GCP is not in the top 10 but its 2Q21 annualized telco NI revenues measured $129M, double the 3Q19-2Q20 figure. Combined, the three companies accounted for approximately $1.9B in annualized sales to telcos in 2Q21, from $970M a year earlier. That puts the three companies’ collective telco NI market share a bit ahead of Juniper Networks. Increasingly these webscale-based cloud providers are competing against vendors with a much longer track record in the telco industry: Amdocs, Cisco, Nokia, etc. AT&T’s recent deal with Microsoft will accelerate this competition as it entices more telcos to consider outsourcing and collaborating with the cloud. 

Huawei’s changing fortunes opening up opportunities

The Huawei dip in 1H21 is not unexpected. We wrote earlier this year that Chinese telco NI vendors would likely lose $4B of revenues in 2021 due to supply chain restrictions and security concerns. What we predicted is largely coming true:

“US policy will continue to restrict much of the Chinese technology sector’s access to US supply chains; the US government will aim to minimize deployment of Chinese technology in both US communications networks and those in allied countries; and, US policy will support alternative technologies and companies that can help smooth the transition away from China. Implications: Huawei will see market share in the telecom sector decline markedly over the next 2 years; China will push harder on its own allies to purchase Huawei/ZTE gear; Huawei and ZTE will emphasize services and software more, and hardware less; China will explore many ways around the rules but see limited success without crucial chipmaking technology; Open RAN will see an accelerated adoption curve; US companies like Ciena, Cisco, and Infinera, and others (e.g. Fujitsu and NEC), will see telecom opportunities pick up significantly in 2H21 and 2022.”

In recent earnings reports and calls, many vendors are pointing to the recent Huawei weakness as one driver for improved results; for instance:

  • ADVA: “With some of the Chinese competitors being limited in Europe due to security relevant issues, we see additional growth potential here.”
  • Dasan Zhone: cites “numerous Huawei and ZTE replacement opportunities”
  • Infinera: “On the competitive side, we see significant competitive disruption with the situation in Huawei being removed from the European and Asia operator
    networks over the course of the next 2 years to 5 years type time frame”
  • Ribbon: “Competing in large addressable markets such as optical and IP networking…there are opportunities for significant share growth and a favorable competitive environment with the global pressure on Huawei and other Chinese suppliers.”
  • Nokia: “there are cases…where operators for various, sometimes politically-driven
    reasons, have decided to … switch suppliers. And we have already estimated and I can confirm that, that we have won approximately 50% of such opportunities.”

As Nokia’s discrete wording suggests, discussing Huawei publicly can still be tricky for top execs. Many of these companies rely on China for various parts of their supply chain, or as an end use market. Ericsson’s decision to go after Chinese business more aggressively than Nokia has put it in a tough spot. Chinese officials are explicitly linking Sweden’s ban on Huawei in 5G with Chinese telco procurement decisions. This is a good reminder that China’s telcos are not private entities, and that Huawei’s fate is extremely important to Chinese politicians.

Final results available in September

As noted, this short note is based upon roughly 75% of the market reporting. A number of significant vendors have not yet published 2Q21 earnings. The largest of these, by far, are Cisco and ZTE. We will publish final results and commentary on the 2Q21 telco NI market in September.

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India unlikely to rise above 4% share of telco NI in 2021

Posted on | by Arun

Prediction: India-based vendors almost certain to capture less than 4% of global telco network infrastructure market in 2021  

Prospects for 2021

The year 2021 is likely to see some significant shifts in vendor share in the global market for telecom network infrastructure products & services (“Telco NI”). Spending on 5G is picking up, interest is growing in open RAN architectures (and open networking in general), telcos are making more carefully thought out decisions without the chaos of COVID-19 dominating discussions, software’s share of capex is rising, and Chinese vendors continue to face supply chain and security constraints to their global position. Many telcos, and policymakers in the US, have pointed to India as a potential alternative player in the Telco NI market. India and the US are allies, after all, and India has a program aimed at developing local manufacturing – which calls to mind similar programs in China that helped Huawei and ZTE. The question arises, then: what are the prospects for India-based vendors globally in 2021? More specifically: what is the chance that India-based vendors can grow their share of Telco NI above 4% in 2021?

After reviewing the question, our conclusion is that there is less than 10% chance of this happening. Not impossible, but nearly so. Here is our assessment of a few key issues.

Current share below 3%

For the four quarters ended 3Q20, MTN Consulting estimates that vendors based in India captured roughly 2.6% of vendor revenues in the global telco network infrastructure (telco NI) market. That is based on sales to telcos for eight vendors we currently track (HCL, Infosys, Sterlite, Subex, TCS, Tech Mahindra, Tejas Networks, and Wipro), plus three vendors we are in the process of adding to our database: Cyient, HFCL, and ITI Limited. Annualized telco NI revenues for these 11 companies, by our estimation, amounted to $5.7 billion in 3Q20, out of a global market of $216.3 billion.  Nearly 70% of that $5.7 billion is recorded by three IT services players: Infosys, TCS, and Tech Mahindra, with the latter slightly ahead of the first two. (see chart, below)

India telcoNI vendors 3Q20-2

So, India’s starting point is low. Jumping from less than 3% to above 4% in the space of a few quarters is a challenge. Adding one percentage point in share is not the issue; larger vendors with the ability to ramp manufacturing to satisfy big one-time orders can do this easily. Most of India’s Telco NI strength lies in services, integration, and software development contracts, though, which tend to take more time to implement. Moreover, India is a relatively small market within global telecom. Local vendors do benefit from set-asides and easier access to local customers, but India accounted for less than 3% of global capex in the last four quarters. It has been higher in the past, in fact reaching 6.1% of global capex in the 1Q19 annualized period. But that was during Jio’s massive network buildout and aimed at helping the company jump ahead of the competition rapidly, which it succeeded in. 

India’s 5G buildout will be hobbled by pricey spectrum

Last month the FCC held an auction for 5G-suitable spectrum in the US. Winning bids totaled up to just under $81 billion, a bit more than 90% of the US telco market’s total annual capex of $88B (2019). Many observers have warned that this outcome could hobble the telcos financially, as they now also need to come up with capital to deploy the networks. These concerns are well-founded.

India could be in an even more precarious situation. Its primary 5G auction won’t be held until next month, but could potentially raise up to $50B or more for the Indian state treasury. This figure is several times India’s 2019 telco capex figure of $10.9B. 

Contrast this with China’s approach, where spectrum is generally given away for free (or nearly so), and the government uses its control of key operators to drive procurement practices and the pace of deployment. Because of this, 5G in China is seeing rapid adoption and local vendors have benefited massively. Huawei and ZTE gained share last year in the Telco NI market, in fact, despite all of their problems. 

A slow 5G rollout in India means fewer opportunities for local vendors to win new deals and gain crucial experience that they could leverage in global markets.

State-run operators are small and procurement is slow 

One area where India’s vendors clearly shine is with state-run operators BSNL and MTNL. Government procurement rules favor local suppliers strongly. However, the two together accounted for just $614M in 2019 capex, under 6% of India’s total. Further, the hoops they must jump through to build new network projects are cumbersome. Disputes about winners and losers can slow down final decisions and the actual spending connected to the decision.

BSNL’s long-planned 4G tender is a good example. It’s now more than 4 years since Jio debuted its 4G network in 2016, and BSNL is still at the early procurement stage with 4G. The project has been delayed several times. Most recently, BSNL did issue an expression of interest document covering a potential network with 57,000 sites. As promising as that sounds, it remains unclear what it means to be local. Partnering with a foreign vendor such as Samsung or Ericsson might qualify; having a large R&D presence in India (e.g. Mavenir) might also allow one to slip through. The challenge is that there does not exist a truly Indian company able to build a 4G network end-to-end, and it cannot be created overnight.

Hiring a truly Indian services firm like Tech Mahindra is one option for BSNL, as TM can get more experience putting together the piece parts for a network in way that will help with Open RAN opportunities. Tech Mahindra already works with Telefonica and Rakuten on Open RAN.   

Jio succeeded while avoiding local NI vendors

Indian telecom’s big success story in recent years is clearly that of Jio Platforms, which emerged from little in 2016 to become the market’s largest wireless provider in just over three years. Jio did many things differently than its rivals, one of which was to rely almost entirely on foreign vendors – but avoiding the Chinese. Jio has some gear from Tejas in its network and a few other small local vendors, but it’s minimal given the telco’s size. There is no current sign to suggest Jio will be more eager to adopt local tech as part of a future 5G rollout. If spectrum was to be issued on a cheaper (or even free) basis but come with some ‘buy local’ requirements, clearly the outcome would differ.  

Bharatnet is not that big a project in global terms

India has made impressive strides in expanding connectivity in rural regions over the last few years, due largely to the Bharat Broadband Network, or Bharatnet. This project has been especially helpful to local fiber manufacturers. It continues, but the scope of the project needs context. For the fiscal year 2020-21, approximately $800M was budgeted for Bharatnet. That is a sizable amount, and many local vendors (e.g. Tejas) cite national or state-level Bharatnet projects as contributing to recent revenue growth. But $800M works out to roughly 2% of telco industry capex in China alone for 2019. The project is just not big enough to help a local vendor go global. 

What could swing things the other way?

In my opinion, it would be great to see a globally competitive vendor emerge from India. At one point in the distant past, it seemed that Tejas had potential to be a real player in the optical market. That has not happened; lack of a local supply chain and manufacturing are among the many issues.

Currently Tech Mahindra is looking like it has real potential, with a growing focus on the blossoming Open RAN market, and helping telcos integrate these new networks. Tech Mahindra’s collaboration with Rakuten on this point is promising. TM will have competition from many other companies going after these projects, though – not just RAN vendors but other telcos, including NTT DoCoMo. It’s not just Tech Mahindra with potential, though; Infosys, TCS, and Wipro are already active in 5G RAN networks. If these IT services specialists can quickly help telcos review and implement new network architectures that have verifiable cost savings, then India’s vendor prospects may brighten. 

The biggest thing that could support the local industry, though, is a different government philosophy on spectrum auctions. Clearly the government needs to raise funds to operate, and auctions are one easy way. But if there is interest in developing local 5G ecosystems and helping local companies make it big globally, then maximizing auction proceeds cannot be the overriding goal.

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COVID-19 impact on network operators and their suppliers

Posted on | by Arun

“The COVID-19 impact is, of course, hard to assess…”

With this comment, Ericsson’s CEO has captured the general sentiment of the market. Many tech companies to report earnings over the last 1-2 weeks have withdrawn financial guidance. That includes Avnet, Infosys, Sanmina, and Wipro. Some have provided guidance for the next quarter only, but withdrawn full-year guidance (Harmonic). Chipmaker NXP has provided a high-low range on its revenue forecast, projecting between 14-23% lower revenues in 2Q20 than the prior year period. All companies emphasize how unstable the current environment has become, where – as F5 CEO puts it – “COVID-19 has altered just about everything about our daily lives.”

New economic forecasts emphasize uncertainty, downside risk

As we covered in our last newsletter, the IMF issued its latest World Economic Outlook on April 14. That called for a three percent contraction in global GDP in 2020. While the COVID-19 curve may be flattening in some countries, the economic outlook remains stark. An advisor to US President Trump says US GDP could drop as much as 20-30% in 2Q20. JP Morgan expects the second quarter drop to be even worse, projecting a 40% decline. Europe also faces a recession; for full-year 2020, the Bank of America expects GDP to fall nearly 8%. Oxford Economics expects world trade in goods and services to fall by 10-15% in 2020. 

The prospects for the China market are, in theory, better than countries more recently dealing with COVID-19’s spread. China is getting back to work in 2Q, after all. However, reliable information from China on COVID topics continues to be limited. Like other countries, China could face a double dip if things are loosened too quickly and a second lockdown is required. There are political risks to the current regime given both pressure from the US and domestic frustration. Moreover, nearly every tech manufacturer is now re-evaluating their supply chain strategy, looking to enhance resilience and lower China’s leverage. 

Vendor revenues started showing signs of weakness in 1Q20 

The biggest tech vendor to report 1Q20 earnings so far may be chip specialist Intel, which reported a surprising 23% growth in revenues to hit $19.8B. Intel found itself in a sweet spot of growth with its Data Center Group in 1Q20, whose revenues rose 43% to $7B. Even the telco (comms service provider) segment of DCG saw double digit growth, up 33% YoY. Intel is an exception though, and it expects its own growth to moderate to 12% in 2Q20.

Other chip companies didn’t do quite so well. Maxim reported 4% YoY revenue growth in 1Q20, while NXP and Sanmina saw revenue declines of -3% and -25% respectively. Revenue decline was worse for NXP and Sanmina in their communications segments, down 10% (NXP Comm Infra) and 38% YoY (Sanmina Comms Networks). 

A number of the biggest vendors active in the telecom network infrastructure segment

have reported, including Ericsson, ZTE, Juniper, F5, and Harmonic. F5 reported a 7% growth in revenues, to $583M, and Juniper reported flat revenues at $998M. All others reported YoY revenue declines (on a US$-basis) in 1Q20. Ericsson corporate revenues fell 4% YoY, while networks revenues dropped at a more modest 0.6% YoY rate due to an uptick in new 5G network deployments. Corning revenues fell 15% overall in 1Q20 to $2.39B, but optical communications revenues to telcos/CSPs dropped faster, down 27% YoY to $568M.  

Two large IT services vendors, Wipro and Infosys, have done slightly better than some of their hardware-focused counterparts. Infosys corporate revenues increased 4.5% YoY to $3.2B, while Wipro stayed flat at $2.7B. Communications sector revenues were flat for both: $416M for Infosys (from $413M in 1Q19), $114M for Wipro ($118M).

One other early reporter is Avnet, an electronics parts distributor with a peripheral role in the network infrastructure supply chain. Avnet’s revenues dropped 8.3% YoY in 1Q20 to $4.31B. This is one of the companies which withdrew guidance for 2020. Avnet’s commentary by region is interesting, and optimistic in places. It is “cautious” about the Americas and expects a drop-off in revenues in EMEA, but the rest of Asia is mixed, and “Greater China is operational and appears to be recovering.” 

The figure below illustrates reported 1Q20 revenues for the companies mentioned, along with the YoY growth rate. 

covid-3

Implications of earnings

A few trends are apparent from a review of early earnings reports.

Companies are spending a lot of time rearranging operations to support working from home (WFH). Employee safety is the key priority for most companies right at the outset. This is not a small task, as some of these vendors are huge and accustomed to team working environments. Ericsson says that about 85,000 of its employees now work from home; for Wipro, it’s 90% of 165,000 employees. Transitioning to WFH while getting work done and keeping customer satisfaction high is the ultimate goal. On that note, Wipro says its SLA performance on services contracts was stable in 1Q20. More companies may need to address this directly.

Networks may be largely software-based nowadays but building and maintaining them still requires human interaction. As such, vendors have had to modify processes to ensure customer safety, too. This hits telcos harder, especially fixed network operators who need to install or maintain service in residential units. That’s something to watch as telcos report.

Cloud and data center spending in general appeared to hold up better in 1Q20 than telecom, and lifted several vendors. Some of this is due to COVID’s (modest) positive affect on cloud usage in general, and services/apps that cater to the work (and study) from home market. Webscale operators continue to make big investment announcements. Facebook pushing into India with its Jio tie-up is one. Equinix announced a $1B joint venture with GIC to build data centers in Japan. There is even a rumor that Rackspace is hoping to go public (again) in 2020. Public equity markets will need to stabilize before the IPO market kicks up, though.

Vendors are spending more time and ink addressing their liquidity position than usual. Faced with a potentially double digit drop in global GDP in 2020, they have to consider the long-run. Some companies won’t make it. And when you choose your supplier, their financial viability in this climate needs to be a primary criteria.

Changes in tech supply chains are underway. Companies need to diversify sources away from China, most important. The trade war started this, and COVID-19 will give it new life. For IT services vendors, this is an opportunity for them to advise other companies, and help to foster new processes and value chains. TCS notes that it is “helping customers re-orient supply chains to ensure resilience and meet critical needs.” For most vendors, it is about better managing risk. Ericsson notes that its strategy “since long has been to secure a dual mode production,” regularly conducting continuity assessments including multi-source component sourcing. Smaller vendors will have to address the issue too, and it will stress some. The need for more resilient supply chains will add to the industry’s momentum towards consolidation.

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Coronavirus will accelerate consolidation in vendor market

Posted on | by Matt Walker

The S&P 500 Index fell 12% yesterday after a weekend full of bad news surrounding the coronavirus and its spread. This health crisis is rapidly turning into an economic crisis.   

A lot can happen in three weeks

In a report published 3 weeks ago, MTN Consulting concluded that vigorous consolidation in the vendor market was likely for 2020:

“As enticing as 5G may be, many factors are holding back a telco capex surge right now, including supply chain issues surrounding China-U.S. trade and Huawei, as well as business model uncertainties around how telcos will monetize 5G. The rest of 2020 is likely to be challenging for vendors, as telcos continue to slim assets, share networks, deploy more software, embrace open networking, and delay or downsize major network upgrades pending a more certain investment climate…Add in the coronavirus, which is already impacting telecom supply chains, and 2020 is looking like a potentially bleak year for the vendors selling into the telco market.”

Since the “Bumpy road ahead for 5G transition” report was published, coronavirus has spread rapidly throughout the world. While several Asian countries have gotten it under control, the US, Canada, and most of Europe has shut down normal life to slow the spread and avoid healthcare system overload. In the US, the social distancing, quarantines and curfews that initially seemed like short-term necessities are now looking like they may be long-term solutions until a workable vaccine is produced. Everyone is being encouraged to work from home (WFH), and students are being forced into online learning as schools close. This is unprecedented. As author Stephen King tweeted yesterday, “This is going to change America, long-term.”

Stay healthy, keep your company afloat, and prepare for the long term

Given the highly contagious element of coronavirus and its relatively high mortality rate, everyone should be first and foremost concerned with health and safety issues. But business leaders also need to keep their eyes on the horizon, to consider how their companies can escape this crisis afloat and prosper in the long run.

As coronavirus lingers, both telecom operators and their suppliers are going to see demand erosion. This could be severe in the next 6-12 months. Many companies in telecom will struggle to survive during this period, even with government stimulus. It’s hard to know how bad it will get. As a NYSE trader said yesterday, “It’s very hard to model what that real impact is going to be… because it’s going to be very large.”

Based on current trends, a few things will likely happen to telecom in 2020:

  • telco revenues will fall in most countries, along with consumer spending overall
  • major telcos will layoff staff in the thousands
  • telco capex will decline in 2020 by 5% at minimum
  • mobile operators will stretch their 4G networks, and slow 5G network deployment rates
  • telcos will actively lobby for state relief on multiple fronts, from subsidies to antitrust review of mergers to reimbursement for Chinese vendor rip and replace efforts
  • Some governments, including the US, Canada and most of Europe, will consider massive stimulus projects in areas like physical infrastructure – in particular fiber construction – but most support will take 1-2 years to materialize 
  • China’s government will double down on state support for its tech sector

Based on this likely path, there will be severe pressure on many vendors selling into the telco market. That’s where M&A comes in.

Consolidation will pick up once markets stabilize

MTN Consulting tracks quarterly revenues for over 100 vendors, with a focus on those selling into the telecom network operator (TNO, or telco) market. As part of this, we track entry and exit into the market, as well as M&A among vendors. In the telecom vendor space, M&A is an ongoing reality – a way to enter new markets, and to improve your cost position. Huawei’s nonstop growth has added pressure on others to team up, as with Nokia’s 2015-6 acquisition of Alcatel-Lucent. Even though M&A often fails, it often appears to be the only option for a company under pressure.

Looking ahead to 2020, a number of vendors will be hit hard by the inevitable downturn facing the telecom market. Those vendors most at risk are the ones highly leveraged to the telco market, as telco spending may take a deep cut in 2020. Other signs of vulnerability include relatively low operating margins, limited cash reserve, and/or high debt loads. Some of the companies that have weak spots going into the coronavirus downturn are shown in Table 1, below. Potential problem areas are shaded red.

Table 1: Select telecom vendors and their financial position as of 4Q19 

Company 4Q19 revenue (M) Currency Telco/total revenues Operating margin Cash months of opex Net debt to Revenue* 
Adtran        116.0 USD 100% -12.1%          2.47         (0.71)
Aviat Networks          56.0 USD 47% -1.8%          2.00         (0.52)
Casa Systems        113.0 USD 100% 8.8%          3.32          1.58
Ceragon Networks        286.0 USD 80% 2.8%          0.26         (0.03)
CommScope Holding     2,299.0 USD 82% -14.7%          0.68          4.02
Infinera        385.0 USD 87% -15.6%          0.73          0.65
Kudelski        208.0 USD 48% -0.5%          1.77          1.87
Ribbon Communications        161.0 USD 71% 13.0%          0.96          0.09
Technicolor     1,033.0 Euro 51% -0.1%          0.23          1.18

Sources: FT, MTN Consulting
*Net debt = total debt minus cash & short term investments.

Several companies in Table 1 face a challenging 2020. Two are US-based companies still recovering from major acquisitions, CommScope Holding (ARRIS) and Infinera (Coriant). These vendors focus on connectivity/cabling and optical transmission, respectively. The other two, Kudelski and Technicolor, are European companies with exposure to the media segment and cable television, in particular. In addition, several of the companies in Table 1 are highly exposed to a single product market within the telecom space: microwave for Ceragon and Aviat, access for Adtran and Casa. Diversification can help in a downturn.

Telecom’s two biggest (publicly traded) vendors are not included in Table 1. Nokia is probably the subject of the most M&A rumors nowadays, due to a relatively slow start in 5G commercial rollouts. Nokia benefits from its US ties, though, as well as its good position outside the telco vertical, in transport, energy and government networks. By contrast, Ericsson gets almost all its revenues from telcos, and has bet big on a quick 5G uptake. Given both companies’ broad exposure to telco spending, though, 2020 will be a jittery year for both vendors.

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Photo by CDC on Unsplash.

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5G vendors report earnings

Posted on | by Arun

5G vendors report earnings

The top five vendors selling 5G network infrastructure have now reported 3Q19 earnings. Nokia, Ericsson, and Samsung each reported public earnings data allowing a breakout of revenues to telcos. ZTE provided its usual interim (1st and 3rd quarter) report, which lacks revenues by customer segment. Huawei published a press release including total revenues and high-level commentary on demand trends.

Our take

There are modest signs of an uptick in telco spending in these results. Overall, the five recorded approximately $25.9B in 2Q19 revenues to the telco vertical (“Telco NI”), up 1% from the group’s 3Q18 total of $25.5B. For each of these vendors, except perhaps Samsung, 5G is only a small slice of their overall activities – and many things are being re-branded as 5G, so true 5G breakouts are challenging. Nevertheless, early figures do suggest commercial 5G momentum is spreading, despite ongoing trade wars and supply chain interruptions.

These are preliminary figures, based on a few assumptions. One is that Huawei’s actual carrier (Telco NI) revenues grew 3% in local currency terms; this is an assumption that needs to be further verified given Huawei’s limited reporting. Second is that ZTE’s carrier (Telco NI) revenues amount to 70% of total, which also needs to be confirmed.

With these assumptions, Samsung and ZTE are the clear growth standouts, growing Telco NI revenues by 17% and 13% YoY in 3Q19, respectively. Samsung continues to ride its domestic market’s early adoption of 5G. ZTE’s recorded growth benefits from an unusual 3Q18 base period, when sanctions were in place.

Huawei’s assumed 3% annual growth in RMB translates to a -0.2% decline in USD revenues. If this bears out, this would be a significant improvement over 2Q19, when we estimate that Huawei’s Telco NI revenues declined 6% YoY. The push by Chinese telcos to accelerate 5G and invest in new areas (including overseas, for China Mobile) is helping both Huawei and ZTE, as it has in the past.

Ericsson and Nokia grew Telco NI revenues at roughly the same rate in 2Q19 (in USD), about +2% YoY, but Ericsson opened up a lead in 3Q19 with 0.7% YoY growth (Nokia: -1.3%).

There is lots of noise around the number of signed commercial contracts, especially deals involving deep-pocketed telcos. However, it’s notable that 5G is much more of a multi-vertical technology than previous generations, with complex use cases being laid out across sectors. All key 5G vendors are exploring these. Of the top 5, Ericsson will likely be the most reliant on partnerships, given its relatively high dependence on the telco market for its revenues (Figure, below).   

vendor sales telco ni corp

Source: MTN Consulting

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Vendor sales to telcos up ~2% in 2Q19 so far

Posted on | by Matt Walker

About 20% of telecom’s 100 or so key vendors have now reported second quarter 2019 (2Q19) results. From these early vendor results, there are modest signs of a ramp-up in 5G-related spending.

Preliminary totals indicate growth of +1.9% YoY in vendor revenues to telecom operators (or telcos). Revenues for all vendors dropped last quarter, by 0.6% YoY, so this would be a slight trend reversal.

Ericsson only big NEP to report so far

Of the vendors reporting so far, the only large Network Equipment Provider (NEP) is Ericsson. (We also track IT services providers, and fiber/cabling vendors selling to telcos). Ericsson is also by far the largest to report so far, accounting for over 50% of reported revenues.

Per MTN Consulting estimates, Ericsson’s telco sales grew 2.1% YoY (on a USD basis), near the market average of 1.9% to date (see figure, below). That’s the fastest growth seen by Ericsson in several years, but it appears to have come at a price. Ericsson notes a negative margin impact from its push for “strategic contracts” in the Networks division.

There is a broad range of growth rates around the Ericsson-driven average. Vendors are finding growth in different aspects of the market, including high-capacity switches & open networking (Accton), high-speed test equipment (EXFO), 5G-related services & software (Infosys, TCS, Wipro), FTTx (Adtran, Nexans), and digital transformation consulting (Accenture). Some of these vendors sell to multiple segments, some are more specialized in the telecom vertical.

Source: MTN Consulting estimates of vendor sales to telcos (adjusted for M&A, US$ basis)

Some vendors also saw revenue dips in the telco segment, per our estimates; that includes Oracle and IBM, most importantly. These two vendors sell a range of software and services to telcos, as well as some network equipment, but are facing new competition. For example just last week Microsoft signed a large cloud deal with AT&T, a multiyear collaboration to help lower the company’s network and IT costs, moving more apps to the public cloud. At the same time, AT&T also expanded an existing cloud partnership with IBM. Both Oracle and IBM have annual sales to telcos in the $2-3B range, so don’t count them out.

The revenue drop shown above for TE Connectivity is estimated: SubCom is now part of Cerberus Capital, and does not report. However, SubCom’s pipeline was weak at the time of acquisition and deal integration usually causes a slowdown. Parts of the submarine market are picking up though, due to webscale investment and much-needed gap-filling in the Middle East & Africa. Nexans appears to be a beneficiary. Corning, Prysmian and other key fiber suppliers have not yet reported.

Growth trajectory remains modest

The figure below compares YoY growth rates for the sample with the market, i.e. the sum of all companies in MTN Consulting’s telecom vendor share coverage database.

Source: MTN Consulting

When including all vendors (black line, above), revenues have largely been flat over the last several quarters.  The sample of companies reporting appears broadly similar. However, on the demand side, guidance from telcos on expected spending levels (capex and network opex) was quite conservative for 2Q19. The final growth rate for 2Q19 vendor revenues in the telco vertical will likely be below +2%.

To reiterate findings from our latest (1Q19) telco sector Market Review:

Telco profit margins remain tight, nothing new for the telecom industry. Operators are getting more concerned about debt, though. The net debt (debt minus cash) of the global telco sector was roughly half of revenues in 2018, after having been in the 30-40% range of revenues at the cusp of the LTE buildout cycle. Few telcos have room in their budgets for a 5G capex splurge.

Telco network investments continued a declining trend, as capex touched $70B in 1Q19, down almost 2.5% YoY. The weak 1Q19 result and continued supply side uncertainty does not bode well for 2019. The slowdown could be due to operator caution about market demand. Yet competitive realities will require operators to spend big on 5G and fiber in 2019-20. The market’s average capital intensity will exceed 17% by the end of this year.

We expect to publish further commentary on the market after Nokia and Samsung report next week.