Industry Voices—Walker: Q1 vendor earnings reveal bright spots, but Huawei clouds markets

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While the overall market is flat for first quarter earnings, Samsung and Corning post solid results. (Pixabay)

Samsung and Corning published first-quarter 2019 earnings this week, and again posted good results in the telecom vertical. Samsung’s mobile infrastructure revenue were up 54% from the same quarter a year ago to $1.14 billion, due to early 5G rollouts in Korea. Corning’s optical fiber sales to carriers were up 15% year over year to $776 million, due to Verizon purchases, mobile densification projects and the acquisition of 3M’s small fiber business.

Both companies are solidly optimistic about future growth. Corning says the performance of its optical communications divisions “continues to be outstanding,” and expects $5 billion in annual sales next year. Korea-based Samsung expects domestic 5G revenue to scale up in the second quarter, and hopes for U.S. 5G revenues in the second half of 2019. It also cites overseas (non-Korea) LTE revenues as a driver.

Overall market growing at ~1% annualized rate

Samsung and Corning are exceptions, though; they are exposed to specific product and geographic markets that are currently performing well. The overall market is flat. Based on the ~70% of vendors (by revenues) which have now reported, the annualized growth rate for this year's first quarter is likely to come in around 1% (figure below).

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* Estimated growth in 42 reporting vendors’ sales of network equipment, software and services to telcos, 2Q18-1Q19 vs. 2Q17-1Q18. Source: MTN Consulting, LLC

 

The slow overall growth is not new. Vendor revenues to telcos have hovered in the $195 billion to $200 billion a year range since 2014, growing 1.2% in 2018. Many OEMs are pointing to tight capex budgets and the rapid adoption of software-based network functions as constraints on revenue growth. Cost control remains a central concern for telcos as they plan and deploy their networks.

Telcos are also concerned with their supply chains. When asked, they usually say three to four competitive vendors per major technology area is a reasonable target. This is already hard to achieve, given industry consolidation and a dearth of new startups in the telecom network infra space. This target is more at risk today due to ongoing Huawei disputes.

Huawei’s complicated corporate history is catching up to it, and its activities may be restricted in a number of countries. This may be a good thing from a policy perspective, but not all carriers are fans. They need to save cost, and now may need to consider fewer suppliers, and/or replace existing equipment. Even if many of these execs have private concerns about Huawei’s growing dominance in the industry, next year’s budgets are more immediate. Without regulatory intervention Huawei is likely to find a continued receptive audience in most of its existing markets. Australia, Canada, New Zealand, the U.K. and the U.S. are obvious exceptions.

Huawei bigger than Nokia and Ericsson combined

That’s not to say there isn’t a problem.

When Huawei first emerged onto the international scene 20 years ago, it was clear that the company had strong government backing, whether through legal ownership or other means. But its positioning was that of an eager upstart. It explained how it was employee-owned, not state-owned like ZTE and others. It boasted of its willingness to throw a sea of people at any problem, and customize solutions rapidly. It emphasized how small it was relative to established players like Alcatel, Lucent, Marconi, and Nortel. All it wanted to do was become a top-10 vendor, eventually, and compete with some of these players. Most operators welcomed the new supplier, especially after the financial crisis of 2008-10 whittled down other parts of the supply chain.

Today, Huawei’s reported 2018 revenues of $108.8 billion make it among the world’s largest private companies. Huawei has been No. 1 in sales of network infrastructure to telcos/carriers for many years, and become more dominant with time: its 14.2% share in 2013 grew to 22.4% in 2018 (figure, below), making it bigger than the sum of its two closest rivals (Nokia and Ericsson). 

Source: MTN Consulting LLC

Many large European and Asian operators have deployed Huawei gear across their networks; some have long-term services contracts; some have made long-term technology commitments to Huawei, including joint R&D. Many of these operators now find themselves highly leveraged to a single vendor.

Beyond simply being overleveraged, operators are also wrestling with security issues. Many countries are considering a ban on Huawei gear in aspects of their network, such as the 5G core. The U.S. is pushing for a Huawei ban with a number of allies, quietly presenting evidence and warning publicly those who don’t comply. This is not an anomaly due to Trump administration policies. Concerns have been building in many countries for years. This dispute won’t be resolved quickly—nor without headlines.

Vendor revenue outlook

Vendors with 5G in their portfolio, whether in the RAN or elsewhere, are waiting eagerly for a 5G uptick to come. Some earnings calls pointed to hopes of growth in the second half of this year.

RELATED: Industry Voices—Walker: The hidden truth about 5G is layoffs

Personally, I am skeptical. Telcos are pushing for cheap upgrades. They are biding their time on rollout schedules given spectrum constraints, the uncertainties of 5G-based business models, and the huge cost of densifying the network enough to support these new services. Networks are becoming more pay-as-you-grow with software function turn-ups. Capital intensity will rise with 5G but more slowly than past generations, and with a lower peak. One reason is that more and more tech spending is not booked as capex, but opex.

On a related note, vendors whose telco sales are more weighted toward services and software are doing better than equipment-focused providers. Accenture, for instance, had an estimated $656 million in revenues to telcos in the first quarter of this year for an increase of 9% year over year. Accenture has had multiyear success in the telco market due to its investments around digital transformation and customer experience. For similar reasons, Tata Consultancy Services and Infosys have also seen steady share growth in the telco vertical over the last several quarters.

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

Industry Voices are opinion columns written by outside contributors—often industry experts or analysts—who are invited to the conversation by FierceTelecom staff. They do not represent the opinions of FierceTelecom.

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