Vendors' Q2 earnings mark a pause in recovery

Network infrastructure revenues for 35 telecoms vendors grew just 2.3% to $44.7 billion in 2Q10 over 2Q09, down slightly from the growth recorded in the previous two quarters.

 

Vendors’ wireline and services revenues are growing, but mobile is still falling year-on-year, reflecting the decline in telco capex. Several big vendors face more cost cutting and reorganization/M&A to become profitable.

 

Upcoming 3Q10 results need to be watched closely for further signs of a double-dip recession. Some vendors are positioned well for more hard times, including Juniper, Tellabs, Amdocs, and Tekelec, but many others remain at risk.

 

Service provider (SP) capex is the primary driver behind telecoms vendors’ network infrastructure (NI) revenues. Preliminary SP capex for the period ended 2Q10 was uninspiring.

 

On a rolling 12-month basis, capex fell 1.3% sequentially in 2Q10. Rolling capex has remained in the range of $260 billion to $280 billion for the last five quarters.

 

t hasn’t crashed, but remains under pressure. One factor is that pressure from Chinese vendors helps SPs get more for less; price competition is clearly a factor in capex weakness, as Huawei and ZTE gain share globally.

 

But not all regions follow the same trend. Variations stem from government intervention; spectrum licensing; multinational carriers such as Telefonica prioritizing spending by country; uncertain broadband regulations; and postponed spending due to M&A activity.

 

 

Most regions are down, but India has plummeted: its rolling (3Q09–2Q10) capex was down 44% year-on-year. South and Central America’s 29% drop was also big, and in dollar terms more significant.

 

In the 3Q09–2Q10 period, rolling capex increased by 1% and 2% in China and Asia-Pacific excluding China/India, respectively. India’s outlook looks good, and Middle East and Africa should pick up as new M&A activity brings in new capital, but macroeconomic troubles in North America and Europe are bigger concerns.

 

Vendors’ NI revenues grew 2% year-on-year in 2Q10. Rolling NI revenues grew 0.5% sequentially to $183.3 billion for the four quarters ended 2Q10.

 

Each of the three major categories of NI – “Ovum wireline” (optical, broadband and switching & routing), mobile infrastructure, and services – had weaker year-on-year growth in 2Q10 than in 1Q10.

 

Growth for wireline and services remained positive, while mobile dropped 5% year-on-year.

 

More consolidation in mobile infrastructure was announced recently, though, which might reduce margin pressure.

 

As usual, Cisco looks better than many peers: nearly $40 billion reserve of cash and short-term assets, strong margins, and a second straight quarter of 27% year-on-year revenue growth.

 

But several smaller vendors including Tellabs, Amdocs, Tekelec, and Juniper look solid on several fronts, including their debt level and opex reserve relative to cash.

 

Focusing on ebitda margins and trends from 2Q08 to 2Q09 to 2Q10:

Tellabs, Motorola, and Adva have shown improvement for three straight years.

 

Cisco, Adtran, Juniper, Arris, and Brocade have maintained high margins throughout.

 

Network connectivity players Commscope and ADC (being acquired by Tyco Electronics) have only medium margins but are consistent.

 

The top public mobile vendors – Ericsson, Nokia/NSN, Alcatel-Lucent, and ZTE – all have margins towards the bottom of the pack, but Ericsson is the strongest, perhaps due to its number one position in mobile NI.

 

Huawei doesn’t report publicly, so we can’t evaluate its financial stability or survivability using the same criteria as the other vendors.

 

 

However, we view its 20% revenue growth target for 2010 as challenging given its sales results to date, and the dynamics of the geographic (e.g. US) and product (e.g. tablet computers) markets it is trying to break into.

 

Putting aside the prospects of any specific vendors, the macroeconomy remains fragile. The IMF’s July economic forecast update emphasized that improved baseline prospects were clouded by serious downside risks for a return to recession.

 

Vendors’ upcoming 3Q10 earnings season should be watched closely to gauge the market’s collective wisdom about how telecoms will close out its year in 2010.