Carrier-Neutral Network Operators: 3Q18 Market Review & Spending Outlook

Carrier-neutral providers of network infrastructure are playing a crucial role in the development of the telecom sector. From US$17.6 Billion ($B) in revenues in 2011, CNNOs recorded $53.7B in 2017, reflecting a CAGR of 21%. In that same time, the sector doubled its data centers under management, almost tripled fiber route miles, and increased its cell tower count by over 10x.

Much of the CNNO sector’s growth has been acquisition-induced. In fact from 2011-17, acquisitions have burned more cash than capex in the sector. CNNO capex in the 2011-17 period totaled $73.5.0B, versus $95.3B for M&A. However, M&A spending slowed to a trickle in 2018, and CNNO revenue growth for the first three quarters of 2018 has been relatively flat: 12 month revenues through September were $54B, up just 4%. Growth in the data center segment remains strong, but the tower & bandwidth segments have slowed; the latter is affected in part by CenturyLink's acquisition of Level 3. 

Other findings from our 3Q18 analysis include:

-Capital spending among CNNOs remains high as a % of revenues. In 3Q18, CNNO capex of $5.4B was 40% of revenues. Most CNNO capex is for the purchase of property and related construction costs, with telecom equipment & software taking up a small percentage. Some CNNOs are deploying more intelligence in their networks and evolving business models, though, such as Crown Castle and Zayo.

-CNNOs have low employee costs (or high revenues per employee), but high capital costs. Most CNNOs reap benefits from REIT classification, but they still have huge debt loads. As of September 2018, CNNOs had a total of $137.7B in debt, and just $8.5B in cash & investments. Gauging their ability to manage this debt & raise new funds for expansion is essential to tracking the sector.

-The number of data centers operated by CNNOs globally is now 593. Few would be classified as “hyperscale” or “webscale” data centers, but this asset base is still significant. The CNNO data center segment has been driven by the growth of cloud & mobile computing, IoT, and increased telco & webscale reliance on carrier-neutral players to complement their networks.

-CNNOs' tower count as of September 2018 was roughly 2.3 million, including China Tower. Many telcos have spun off tower assets over the years, leaving most towers now in independent hands.

-In the bandwidth segment, CNNOs now operate over 461K route miles of fiber, used mainly for wholesale or similar services. This segment is the least stable of the three. There is a strong incentive for telcos to retain ownership and control of their fiber resources. The acquisition of leading CNNO bandwidth provider Level 3 by a telco, CenturyLink, illustrates this urge.

We expect CNNOs with a proven track record of acquisitions to continue looking for multi-billion dollar asset deals for the next several years. That assumes a favorable financing & tax climate. We also expect CNNOs to function as market consolidators when the next market downturn hits. The larger CNNOs will push the envelope on their business model as they grow, adding services on top of their infrastructure and building further to the edge of the network. Top-line growth will tick up again with M&A deals, and the continued growth of new build CNNO networks such as NBN Australia.