Earnings rewind: Telco spending is tepid and 5G isn't a cure-all

With the bulk of service providers and vendors wrapping up their earnings reports, the telco spending climate remains weak, according to research by MTN Consulting. And don't expect 5G to be a panacea for capex spending this year by telcos, according to the report.

Barriers to a surge in 5G capex spending include global supply chain issues, which are only getting worse with the coronavirus, U.S. and China trade tariffs, and the uncertainties around how telcos will monetize 5G, according to Matt Walker, chief analyst for MTN Consulting.

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Other constraints for rapid 5G deployments include the lack of a Apple 5G device, the high cost of spectrum auctions, a lack of a killer 5G app for telcos, and regulatory costs, the latter of which includes costs telcos face when ripping and replacing Huawei gear due to government regulations.

All of which also means slim 2020 pickings for vendors as telcos continue to deploy more automation and software, embrace open networking and delay or downsize network upgrades while they wait for the investment climate to improve around new technologies such as 400G.

MTN Consulting's "Telco Network Infrastructure" (Telco NI) report analyzed the results of 83 vendors, representing 60% of the market, for the quarter that ended in December. Overall, vendor revenues were down 3% on a year-over-year basis, which put the preliminary 2019 market roughly 2.2% below 2018.

For those same vendors, year-over-year revenue growth was down in all of the quarters for 2019. With the caveat that not all vendors had reported their results in time for the Telco NI report, MTN Consulting said it believes that the final results of 2019 will find an overall decline in vendor revenues.

Source: MTN Consulting
*CommScope closed its Arris acquisition in 2Q19; CommScope’s growth above includes Arris retroactively to 4Q18.

Year-over-year declines in telco sales were turned in by the three largest radio access network (RAN) vendors, Ericsson, Nokia, and Samsung, which combined didn't give any indications of rapid 5G deployments. Other notable under-achievers in the fourth quarter included CommScope, Corning and Cisco.

Companies that were more successful in the fourth quarter included Intel, due to customers adopting its x86-based architecture; IBM, due to is absorption of Red Hat; and Accenture, which is finding traction with digital transformations as well as software and integration projects with telcos. Amdocs has a steady software business with a diversified mix of customers, including one strong strategic partner, AT&T, according to MTN Consulting

In addition to those vendors, some smaller vendors are growing their revenue base with telcos, including A10 Networks, which was up about 26% year-over-year: Adva, up 11.5% year-over-year; and F5 Networks, which was up 19.6%. 

Cross-checking the vendor data with telco capital expenditure (capex) results reveals a similarly conservative climate for spending. For the approximately 75% of the market that has reported earnings, single-quarter capex in the fourth quarter  declined by 2.5% year-over-year. According to MTN Consulting, that yielded a 14.7% capital intensity (capex/revenues ratio), from 15.3% the fourth quarter of 2018. 

Reliance Jio, Liberty Global and America Movil were among the service providers that saw big declines in the fourth quarter. Telcos that increased their capex in the same timeframe were Verizon, related to its 5G rollout; NTT, with overseas investments including submarine cables and data centers; Etisalat, due to 5G and data center build outs; and Veon, which made network upgrades in Russia in order to be more competitive the mobile market.

Overall, telcos have felt pressure over the past few years as telecommunication revenues have been in the 0% to 2% range. In the third quarter of 2019, revenue of 11 of the top-20 telecom operators declined. MTN Consulting cited ongoing erosion of core fixed/voice revenues, inflationary pressure, currency headwinds, heavy competition from OTTs and a challenging macro and external environment as the primary reasons for the revenue declines. 

Service providers are trying to get back on the growth treadmill bt undergoing digital transformation projects, engaging in M&A, diversifying service offerings, and preparing to upgrade networks to support 5G services. "Still, M&A is the only sure way to grow the topline. For instance, Comcast recorded double- digit growth largely due to the acquisition of Sky," the report said.

While service providers are looking for growth in revenues, vendors are left with hoping that revenue growth will in turn drive more capex spending their way, but don't expect either anytime soon, according to Walker.