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Bumpy road ahead for 5G transition

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.
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Best regards,
Matt Walker
Chief Analyst