October 17, 2019

Dear Subscribers,

This is MTN Consulting's first regular newsletter to subscribers. This edition recaps recent research on vendor dynamics in the telco sector, reviews the growth of the carrier-neutral operator market, and introduces a new contributor to MTN Consulting research. As a thank you for subscribing, we also provide a complimentary summary of our 2Q19 Telco NI vendor market share report.

Please feel free to send feedback.

Best regards,
Matt Walker
Chief Analyst

New report – Telco NI market drops 1.2% in 2Q19

Telecom’s big vendors began releasing third quarter 2019 (3Q19) results this week, with Huawei and Ericsson going first. As such, we are in the early stages of updating our quarterly report on “Telco NI” vendor market share. This is a good time to recap findings from our 2Q19 study:
  • Annualized network infrastructure sales to telcos ("Telco NI") for the four quarters ended 2Q19 totaled $201.1B, slightly down from $201.7B in the previous quarter. In 2Q19, single quarter NI revenues across vendor segments were $50.2B, down -1.2% YoY, after falling at a more modest rate of -0.6% YoY in 1Q19.
  • Market revenues were pulled down by a slow ramp-up in 5G revenues, recession worries, a relatively weak China market, and uncertainties surrounding the future of market share leader Huawei.
  • In the 2Q19 annualized period, the top 5 vendors accounted for 55% of market share in NI: Huawei, Ericsson Nokia, Cisco, and ZTE. Despite its recent troubles, Huawei's share remains over 22%, nearly as much as the sum of Ericsson and Nokia. The Chinese vendor is facing some serious legal challenges, however. In the short term we expect lots of M&A and new JV activity aimed at helping cope with (or even better, profit from) this changing reality.
  • In 2Q19 vendor earnings calls, 5G was the highlight but few agree on when and how it will benefit their specific operations. Samsung has already gotten a 5G kick, primarily from its home market. Other mobile RAN suppliers focus on the number of contracts and/or "commercial engagements" entered into with telcos. Ericsson has been a bit more aggressive than others in going after early 5G business, possibly to the detriment of margins.
  • Nokia expects a good 4Q19 but in the meantime is revamping efforts to attack non-telco opportunities. Cisco continues to struggle in the telco market and sees 5G as a long-term opportunity but weak capex in its strongest markets - and political challenges in China - both pose problems. ZTE has recovered nicely from a weak 2018 but its main upside remains in China, where capex will be under pressure from new network-sharing arrangements.
  • IT services providers, one of three vendor types we track, are generally positive on outlook as they see opportunities from a telco shift to more software & services (e.g. digital transformation) spending, but growth rates are modest. The cabling & connectivity vendor segment (CCV) is strong now. However, fiber cable spending tends to go in cycles and is impacted heavily by government regulations. Corning continues to do well due in part to a wide base of customers and ongoing M&A activity.
  • Vendors focused on the data center and/or implementing SDN/NFV based architectures and open networking are generally positive but remain reliant on telco capex growth, which has been weak.
  • Ciena may have the strongest outlook of all, as it is positioned in a sweet spot for market growth and has a good track record of acquisitions - which will be increasingly important as some vendors struggle amidst weak capex and supply chain shifts. The China-US trade battles have not only hurt Huawei, they also have hit western NEPs' ability to access the China market easily for manufacturing, R&D, component supply, and sales to Chinese telcos.
We expect the telco NI spending climate in 2019 to remain challenged. There is upside from increased 5G spending, but 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 would result in both additional layoffs and a slower growth rate in 5G spending. Huawei’s latest troubles will also slow down the procurement process for many telcos as they reevaluate priorities and assess risks.

To get up to speed on the Telco NI market, we are offering newsletter subscribers a complimentary report. This short report is based upon our full interactive Excel model, Telecom's biggest vendors: 2Q19. To download the free version, click below:

New report -- Carrier-neutral network operators (CNNOs) now operate 624 data centers, 2.4 million cell towers, and over 542K route miles of fiber

Our latest report on the carrier-neutral sector finds that CNNOs continue to play a pivotal role in the telecom sector's development.

CNNOs have grown by 3.3x since 2011 to post $58.8 billion (B) in revenues in 2018 - now more than half of those revenues have been recorded in 1H19 ($30.3B). Since 2011, the sector's data centers under management have more than doubled, to 624 facilities; fiber route miles have almost tripled, and the cell tower count increased over 10x to 2.4 million.

Historically, much of the CNNO sector’s growth has been acquisition-induced, and M&A has burned nearly as much cash as capex in the sector. However, M&A spending has slowed down of late, and CNNO revenue growth in 1H19 was relatively flat. Year over year revenue growth was just 4.2% in 1H19. Growth in the data center segment remained strong in the latest quarter, but both the tower and bandwidth segments slowed.

Other findings from our 2Q19 analysis include:
  • Capital spending among CNNOs picked up slightly in 2Q19 and remains high as a % of revenues. In 2Q19, CNNO capex of $5.3B was 34% of revenues vs. 32% in 1Q19 (and 40% in 4Q18). 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, NBN 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 June 2019, CNNOs had a total of $127.5B in debt, and just $8.6B in cash & investments. Gauging their ability to manage this debt and raise new funds for expansion is essential to tracking the sector.
  • The number of data centers operated by CNNOs globally is now 624, up from 613 at year-end 2018. Few would be classified as “hyperscale” or “webscale” data centers (based on size or power consumption, for instance), 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 December 2018 was roughly 2.4 million, including China Tower. Many telcos have spun off tower assets over the years, leaving most towers now in independent hands. 5G is driving a need for new construction.
  • In the bandwidth segment, CNNOs now operate over 542K route miles of fiber, used mainly for wholesale or similar services.
Despite the recent blip in growth, we expect CNNOs with a proven track record of acquisitions to continue looking for multi-billion dollar asset deals for the next several quarters and even years. The market could also see some more consolidation as the next telecom 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 (e.g. NBN).

For more information on this report, click here.

MTN Consulting Update – New Contributing Analyst, Saad Asif

MTN Consulting is pleased to announce a new Contributing Analyst, Saad Asif.
Saad is a recognized industry expert in wireless communications. He has worked in the field of telecommunication for over 21 years, and has authored three books and multiple peer-reviewed technical papers. Saad has been granted multiple patents and is a senior member of the IEEE.

Saad authored the recent MTN Consulting blog post, "5G - Need for Harmonized Spectrum."
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