January 16, 2020

Dear Subscribers,

Happy New Year!

Our first newsletter of the year presents a few findings from recent research on telecom and webscale operators, vendor share in the telecom sector, and our views on the 2020 outlook for networks as published recently in Fierce Telecom.

I hope you enjoy this edition. As always, feel free to unsubscribe using the link at the bottom of this note, or by replying "unsubscribe".

Best regards,
Matt Walker
Chief Analyst
From Fierce Telecom

Industry Voices—Walker: What will drive network change in 2020?

Twenty years ago, telecom was riding high on a surge of telco capital investment and influx of cash from venture capitalists eager to ride the dotcom boom. There were already signs that market hype wouldn’t last, and indeed it didn’t – valuations and growth outlooks came crashing down a year later.

Ten years ago, telecom was at the other end of a crisis, mired in the aftermath of a stark global recession, which forced steep cutbacks in spending and headcounts. The sector survived without severe changes in basic structure, though, and most telcos would soon benefit from widespread adoption of mobile broadband and the now ubiquitous smartphones.

Now in early 2020, global economic stability has been hit by U.S.-China trade disputes, the Huawei problem, an unsettled EU, global warming’s growing impact, and other factors such as the rise of authoritarianism. But market sentiment around networks and the industry’s key players is relatively strong. Even if this market situation persists, some significant changes in industry structure, technology, consumer adoption and public policy are underway. Here’s a brief glimpse at a few of the things MTN Consulting expects for 2020.

The network has new owners

Starting with the basics, over the last few years webscale providers like Facebook and carrier-neutrals like Equinix have built enormous networks. The global telecom sector still owns most network infrastructure with roughly $700 billion worth of net property, plant, and equipment (PP&E) in 2018, but the webscale sector’s total is now over $300 billion, and carrier-neutral providers just over $150 billion (including China Tower). The webscale sector has been an important driver of innovation across the broader economy, driving the cloud’s growth and giving users something to do on their phones on all day. As much as telcos envy the webscale sector’s margins, growth rates, and cash hordes, telcos are at least benefiting from the smartphone addiction that all these apps have enabled.

Webscale capex has slowed down recently, and growth rates will stay moderate in 2020-21 even as capacity is absorbed and key players find new reasons to build, such as pushing data centers further out to the edge to support 5G and latency-sensitive IoT business models. The webscale sector’s capital intensity will edge closer to 10%, from the current 8-9% average. Moreover the carrier-neutral sector has emerged as an important piece part in the overall network space, renting space, capacity, and other assets to the big players in need of neutral access. Nobody can build it all on their own. Telcos, who are faced with steep spending bills to deploy 5G (and buy the underlying spectrum), will rely more on carrier-neutral network operators (CNNOs) and look for other ways to cut infrastructure costs along the way, just as China Unicom and China Telecom are teaming up on their 5G RAN buildout.

Webscale sector aims to make cloud investments pay off with telco partnerships

When the webscale sector emerged years ago, one consideration was whether they would compete directly with telcos’ core business of providing last mile access... CONTINUE READING AT FIERCE TELECOM

Telecom’s biggest vendors – 3Q19 edition
Telco NI vendor revenues fall YoY for third straight quarter, as Huawei dips again; 5G emerging slowly

Market growth trending downwards, Huawei still dominates

Telco NI vendor revenues amounted to $52.5B in 3Q19, down 0.3% from 3Q18. That’s the third consecutive YoY drop in single quarter sales. Annualized (12 month rolling) revenues were $218.9B through 3Q19, up just under 1% from the year prior.

On an annualized basis, Huawei’s $44.4B in Telco NI revenues easily beats all rivals, and nearly exceeds the sum of the second and third ranked vendors Ericsson and Nokia. Cisco places fourth with just under half the revenues of Nokia. China Communications Services is fifth, and the only Engineering Services (ES) vendor in the top 10. ZTE ranks sixth due largely to its position in wireless infrastructure and optical in China and emerging markets. NEC ranks 7th due to strong Japanese fixed networks and in global microwave and submarine markets. CommScope places 8th and is the only cabling & connectivity vendor in the top 10. Intel and Samsung round out the top 10 due to sales in telco data centers and 4G/5G networks, respectively.

Comparing 3Q19 annualized share with 2Q19, Huawei, Nokia, Samsung, Amdocs, Hengtong, Corning and a few others held steady. Ericsson, ZTE, NEC, CommScope, Intel saw modest improvements in share. Cisco, China Communications Services, and Fiberhome experienced modest declines. Cisco has been falling for some time in the telco segment, while Fiberhome and China Communications Services have been affected by relatively weak spending trends in China’s fixed network sector.

Capex, Opex, and Telco NI vendor revenues

The vast majority of Telco NI vendor revenues still draw on telco capex budgets, so capex remains a useful metric to track. Annualized telco capex was in the $320-330B+ range during the 4G/LTE construction boom, but is now below $300B...CONTINUE READING

Webscale Network Operators: 3Q19 Market Review
Webscale capex stages a mild recovery with 1% YoY growth in 3Q19, while R&D outlays remain robust

After successive slumps in capex during the first two quarters of 2019, global webscale operators loosened their purse strings somewhat in 3Q19. Capex spend grew slightly by 1% YoY in 3Q19 – a modest recovery considering declines of 18% and 11% during 1Q19 and 2Q19, respectively. The marginal respite in the latest quarter, however, wasn’t enough to lift capex growth on an annualized and YTD (9 months) basis, which posted a 0.9% and 9.3% decline, respectively, for the period ending 3Q19.

By contrast, R&D investments continued their robust growth journey as most of the “Top 8” webscale network operators (WNOs) continue to invest heavily in R&D projects across a wide spectrum – from self-developed AI-based chips customized for their datacenters and more grandiose moonshot projects such as driverless vehicles.

Long-term growth story still intact

Webscale networks are centered around immense, “hyperscale” data centers and undersea cable systems that support network traffic from the tech companies’ online retail, video, and social media platforms, along with cloud services. Webscale operators may also own access networks, typically using fiber, microwave or mmWave, and even fixed satellite. WNOs exploring outer space for providing connectivity include Amazon, Facebook, Alphabet, and Microsoft. Apple is the latest entrant (reportedly) to the group of operators pursuing satellite technology for internet connectivity.

A broad set of vendors are benefiting from WNO capex, from semiconductor players selling into the data center market (Intel, Nvidia, Broadcom, etc), to optical components & transport vendors selling into data center interconnect markets (Ciena, Infinera, Neophotonics, Lumentum, etc.), to contract manufacturers of white box/OCP servers such as Wistron and Quanta. Despite tightened capex spending in the recent quarters, the long-term growth story for the webscale sector looks intact. Top line revenue growth in the sector was 11% during the first nine months (YTD19), emulating the average annual rate of 10.6% during 2011-18 period. This is expected to continue as WNOs continue to pursue aggressive organic and inorganic expansion.

Geopolitical and slowdown risks keep operators guessing for now

2018 was the year of a spending explosion by WNOs with annualized capex surpassing $100B for the first time in 2Q18, and ending the year at $113.1B. Since then, the going has been tougher for WNO suppliers as the sector invested just $105.3B in the twelve-month ending 3Q19, down by 0.9% YoY compared to high double-digit growth rate in the previous year. The stall in capex spend meant the sector’s cash & short-term investments swell by 10.1% YoY during the same period. However, when looked from a single quarter perspective, 3Q19 provided a small ray of hope for WNO suppliers with capex rebounding slightly to post 1% growth YoY. Free cash flow margins also witnessed a strong uptick YoY in 3Q19 on an annualized basis... CONTINUE READING

Telecommunications Network Operators: 3Q19 Market Review
Telcos curb capex spending as global revenues decline for fifth straight quarter

The global telecom industry continues to be constrained at the top line. Single quarter revenues declined YoY by 0.6% in 3Q19, to $450B marking its fifth consecutive quarter decline. Third quarter capex also declined by 2.4% from 3Q18 to $73B. Annualized capex thereby declined by 1.7% to $300B in 3Q19. Telco spending on employees, or labor costs reached $295B in 3Q19 on an annualized basis, up 0.4% from the 3Q18 figure.

Telcos are beginning to deploy 5G and invest in the media business, but most are doing so cautiously as recession warnings are growing. On October 14, the IMF downgraded expectations for 2019 and said the macroeconomic outlook remains “precarious.” Recessions tend to hit telco revenues hard. A slowdown in telco revenues result in both additional layoffs and a slower growth rate in 5G spending. Few telcos have room in their budgets for a 5G capex splurge. Telco profit margins remain tight, nothing new for the telecom industry. Operators are getting more concerned about debt, though, and more interested in open networking, cloud partnerships, asset spinoffs, and other tactics to reduce capex requirements.

Key findings of our 3Q19 “Market Review” include:

1) The long-term revenue growth rate of the telecom sector is in the 0% to 2% range, after adjusting for currency translation. In 3Q19, single-quarter revenue dropped by 0.1% YoY on a fixed exchange rate basis. Actual revenue growth in 3Q19 was lower, down 0.6% YoY to $450B. Both figures are slightly below the sector’s long term growth range.

2) Even the modest growth currently achieved by the telecom sector requires high levels of capital investment in networks. The industry’s long-term capex to revenue ratio (capital intensity) is in the 16-17% range, on average (16.5% in 3Q19, annualized)... CONTINUE READING
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