Bumpy road ahead for 5G transition

Bumpy road ahead for 5G transition
Telco technology spending in 4Q19: Early reports point to weak spending climate amidst supply chain uncertainty, with more vendor dislocation likely in 1H20
By Matt Walker

Report summary

Telecommunications network operators (TNOs, or telcos) have struggled for many years with flat revenues. They have faced a declining core market, yet have had to make continual network investments to support growth markets, or engage in expensive, risky mergers & acquisitions (M&A). Telcos have consequently been heavily concerned with optimizing their costs, especially those in the network.

Vendors sell a range of technology products to the telco market, including hardware, software and services. MTN Consulting closely tracks vendor sales of such “Telco Network Infrastructure” (Telco NI) products on a quarterly basis. For the three months ended December 31, 2019 (4Q19), we have now analyzed financials for 83 vendors, representing approximately 60% of the market. For this large preliminary dataset, vendor revenues are down 2.9% on a year-over-year (YoY) basis, which puts the preliminary 2019 market about 2.2% below 2018. For the same group of 83 vendors, YoY revenue growth was negative in all quarters of 2019. While many vendors have not yet reported, and a few growth vendors (such as Parallel Wireless) are private, we believe the final results for 2019 will find a decline in Telco NI vendor revenues.

A cross-check of this vendor data with telco capital expenditure (capex) results reveals a similarly conservative climate for spending. For the approximately 75% of the market reporting, single-quarter capex in 4Q19 declined by 2.5% YoY. That yields a 14.7% capital intensity (capex/revenues ratio), from 15.3% in 4Q18. Tech vendors sell products to telcos which come out of operating expense (opex) budgets as well, not just capex, but capex remains a good indicator.

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. Opportunities will arise for vendors, too, related to the integration of technologies, monetization of technology platforms, and digital transformation. As vendors pursue these opportunities, we expect vigorous M&A activity in the vendor space.

Table Of Contents

  • Summary
    • Telco spending climate is weak and 5G is no panacea
    • About this report
  • What’s the current situation?
    • Telcos are starting to realize that they can’t rush on 5G
    • Key findings
  • How did we get here
    • Limited top line growth opportunity puts pressure on costs
  • What happens next?
    • Predictions
  • Appendix 1
  • Appendix 2

Figure & Charts

Figures & Charts

  1. Figure 1: Vendor sales to telcos, YoY growth: Preliminary dataset vs. all vendors
  2. Figure 2: Biggest vendors reporting to date and their YoY growth rates in 4Q19
  3. Figure 3: Capex to revenue ratio for telcos: Preliminary 4Q19 view
  4. Figure 4: Telco capex and vendor NI sales to telcos, annualized ($B)

Coverage

Companies mentioned in this report include the following:

  1. A10 Networks
  2. Accenture plc
  3. ADVA
  4. Amdocs
  5. America Movil
  6. Apple
  7. China Telecom
  8. China Tower
  9. China Unicom
  10. Cisco Systems
  11. Comcast
  12. CommScope Holding
  13. Corning
  14. Ericsson
  15. Etisalat
  16. F5
  17. FiberHome
  18. Fujitsu Limited
  19. Hengtong
  20. Huawei Technologies
  21. IBM
  22. Intel
  23. Juniper Networks
  24. Liberty Global
  25. NBN
  26. NEC Corporation
  27. Nokia
  28. NTT
  29. Oracle
  30. Parallel Wireless
  31. Red Hat
  32. Reliance Jio
  33. Samsung Electronics
  34. Sky
  35. Technicolor
  36. Telecom Italia
  37. Telstra
  38. Veon
  39. Verizon
  40. Vodafone
  41. ZTE

Visuals