Telecom operator (telco) network spending is growing again, based on preliminary reports from the vendor side.
Most key suppliers of telco network infrastructure (Telco NI) have announced third quarter results already, as of November 8. We have tracked 68 vendors’ results, amounting to about 85% of market revenues. The most significant company to not yet report is Cisco. For those reporting, top-line revenue growth was 1.5% year-over-year (YoY) in Q319, a bit up from +0.4% the previous quarter. Results include some glimmers of hope for 5G’s emergence, and signs that telcos are building out their fiber networks to get ready for 5G, but total market revenues are constrained.
Telecom operator spending climate
Telecom operator capex had a mini-surge in the quarter ended June 2019 (2Q19), growing 5% YoY to $72 billion. That was due largely to a double-digit percentage increase in China; the rest of the world grew just 3% YoY. Still, that 3% was not bad by telecom standards. Telco earnings reports from 2Q showed some clear, though modest, signs of 5G buildouts beginning to scale in select markets.
It’s still early in the 3Q reporting season for telecom operators, but many of those reporting have discussed their path to 5G and the costs involved. There is clear enthusiasm for 5G despite the current supply chain issues surrounding Huawei’s ban. Yet telco expectations for 5G revenue upside in the near term are generally modest, as they should be. It’s true that 5G will support many new use cases in vertical markets, and telcos have a role to play. But industry players from other sectors also aspire to exploit 5G. So telco CFOs are not suddenly loosening the purse strings on 5G construction budgets.
Telcos continue to explore multiple ways to lower the cost burden of 5G. Tactics include implementation of different network architectures—such as OpenRAN)— a heavier reliance on rented passive infrastructure, cloud/webscale partnerships, lobbying regulators for affordable spectrum, joint construction agreements, M&A and more. Those expecting telco capex to suddenly spike with 5G may be disappointed.
Telco NI vendor results from 3Q19
As shown in Figure 1, in 2Q19, vendors’ revenues from selling network infrastructure to telcos declined slightly year-over-year (-0.6%). As the figure also shows, the trend reversed modestly in the 3Q with a 1.5% growth in revenues for the companies reporting. Once all companies report, the market’s actual YoY growth is likely to be around 1% on a YoY basis.
Among the largest 15 vendors reporting to date, the strongest YoY growth rates (in estimated sales to telcos) were recorded by Samsung, NEC, ZTE, Intel, and Ericsson. Other companies with strong YoY growth rates in Telco NI include Anritsu (+21%), Infosys (+17%), and Adva (+14.5%) (Figure 2). Early 5G rollouts are a common driver, as well as virtualization, edge computing, and digital transformation:
- Ericsson’s surge is due to aggressive pursuit of early 5G opportunities.
- ZTE’s growth is due partly to an unusually weak base quarter (3Q, 2018) when sanctions were (partly) in place, but 5G spending growth in China is another factor
- NEC points to “increased fixed-line infrastructure development in preparation for the introduction of 5G” – something we see at several other vendors
- Samsung points to commercialization of 5G in Korea, plus 4G/LTE growth overseas including in India.
- Infosys: digital transformation projects, in which it helps telcos “traverse the digital-cost, takeout journey in order to stay relevant in the market," according to COO Pravin Rao)
- Anritsu is benefiting from 5G testing.
- Adva cites interest in its FSP-150 Pro Series (packet edge with NGV) for 5G-related network applications
- Intel says its work with telcos around programmability, NFV and SDN continues to pay off, and CEO Bob Swan is bullish about 5G opportunities as “more and more compute” moves from the cloud and data centers out to the network’s edge.
The Huawei factor
As shown above, Huawei’s YoY growth is estimated at 3% in local currency. Its financial reporting allows only limited confidence around this estimate. That’s especially the case nowadays given the push by the Chinese government to appear strong during negotiations, both those directly related to trade disputes and the separate legal troubles faced by Huawei. Assuming 3% growth, though, Huawei’s share of Telco NI will come out to roughly 21.8% for the annualized period ended 3Q19 (Figure 3).
This means Huawei’s final share for 3Q will again be roughly the sum of its two closest rivals in the Telco NI market, Ericsson and Nokia. Yet Huawei’s share isn’t much higher than three years ago, and is flat relative to 3Q17 and 3Q18. The company’s most dramatic growth in telco markets came between 2014-16, when mobile operators’ spending on 4G/LTE networks peaked. Huawei’s growth was broad-based in those years, as it also benefited from IP and optical spending by telcos needed to scale up 4G.
All the big RAN vendors keep a running total of 5G commercial contracts signed. These are good signs of telco interest, but not at all equivalent to market share. No third party vets the contracts or reviews the size of the deals. 5G right now is in part a marketing war, with everyone trying to appear as the leader. But it’s too early to call anyone a leader. The market is far too young and capabilities of the top three vendors too comparable for any conclusions to be drawn.
Moreover, Huawei’s legal troubles in the U.S. will not likely end anytime soon, and it’s still taking reputation hits in many of its key markets. Even if the vendor were as self-sufficient as it aspires to be, the 5G infrastructure market is a competitive one. Further, Open RAN solutions are maturing. That creates more options for telcos reluctant to deploy a Chinese vendor, but unwilling to rely on Ericsson and Nokia. The 5G wars are just beginning.
Matt Walker is the founder and Chief Analyst of MTN Consulting, LLC, an independent market research firm. He has over 20 years of experience in telecom industry analysis, consulting and research program management. Based in Asia for most of his career, Matt currently lives in Chandler, Arizona. He can be reached by email at [email protected]. Follow him @mattwtelecom, or LinkedIn
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