Telecom’s biggest vendors – 1Q23 edition

The goal of this report series is to equip telecom industry decision-makers with a comprehensive view of spending trends and vendor market power in their industry. To do this we assess technology vendors’ revenues in the telecom vertical, across a wide range of company types and technology segments. We call this market “telco network infrastructure”, or “Telco NI.” This study tracks 134 Telco NI vendors, providing revenue and market share estimates for the 1Q13-1Q23 period. Of these 134 vendors, 110 are actively selling to telcos; most others have been acquired by other companies in the database. For instance, ADVA is now part of Adtran, but both companies remain in the database because of historic sales.

Vendors fret as telcos apply brakes on capex spend

Vendors in the Telco NI market are keeping a close watch on the earnings and spending needles of telcos, as both indicators declined in the past year. While 1Q23 telco earnings are not yet available, the revenue trendline is negative: in 4Q22, global telco revenues plunged the most in more than a decade to post $429.6B, down 9.3% YoY – the fifth consecutive slump in a row. This impacted annual revenues and its growth rate for the year 2022 – they were $1,779.9B, down 5.9% YoY over the previous year. The sluggish top-line turned telcos cautious around spending on capex, the main driver for the Telco NI market, which declined for the second straight quarter to post $87.9B in 4Q22, down 5.1% YoY. This decline also knocked down annualized capex to $322.1B in 4Q22, from the peak of $330.0B in 2Q22.

On the brighter side, capex has held out better than revenues, pushing annualized capital intensity to a new all-time high of 18.1% in 4Q22. This was driven by a few countries who are in the midst of deploying 5G networks, notably India; while many more continue to scale up 5G to reach mass market coverage, and deploy fiber to support fixed broadband and to connect all the new radio infra (including small cells) needed for 5G. Cloud vendors are also making critical inroads into the telco sector, aided by a growing number of stand-alone 5G core networks.

Telco NI annualized revenue growth decline by 1.2% in 1Q23 – a first since 4Q20

Telco NI revenues were $232.5B for the annualized 1Q23 period and $53.4B in 1Q23, down 1.2% and 3.9% on a YoY basis, respectively. The 1.2% revenue dip in the annualized 1Q23 period also marks the first ever decline in more than two years, since the market fell by 0.7% in the annualized 4Q20 period. On a YoY basis, the decline in the annualized 1Q23 period is significant considering the 6.7% growth recorded in annualized 1Q22, when telcos continued to splurge on 5G and on COVID catch-up projects hit by delays in 2020. Overall, Telco NI revenues for our entire set of vendors have been flat for most of the last decade, hovering in the $210-220B range in most years, while breaching the $230B barrier in the last two years.

Huawei is a key factor considering the clout it has in the Telco NI market, and the challenges posed to the company in the last three years.  Market growth w/ and w/o Huawei has been mixed in the last two quarters. While the total market declined by 1.2% in the annualized 1Q23 period, it stayed flat in the same period when Huawei is excluded from the sample. The company has been slowly losing its sheen marred by sanctions in the last three years, and is looking to offset the trend by growing its market share in its domestic market, China. The company has invested heavily in its software, services and cloud groups to counteract the effect of the bans. In mid-June, Huawei won the bulk of a $1.1B contract from China Mobile to build more 5G base stations in 2023-24. Huawei also retains a number of large accounts in big overseas markets, e.g. Etisalat, Telkom South Africa, Orange, and others. Many European telcos – including Deutsche Telekom – remain reluctant to fully close the door on Huawei, and Huawei remains a popular choice in many parts of Asia, MEA, and Latin America.

Saudi Arabia is also emerging as a key market for Huawei. The company, in addition to building cloud computing infrastructure, data centers, and high-tech centers in various cities of Saudi Arabia, has committed to moving its Middle East headquarters to Saudi Arabia. Pressure from the US continues to grow, though: the US introduced a new bill in December 2022 to put more restrictions on Huawei, and the company’s lack of access to certain components will hobble it more over the next 2 years, as telcos upgrade IP/optical networks post-5G rollout, and start looking at 5.5G/5G-Advanced.

Top 10 vendors

The top three Telco NI vendors continue to be the usual trio: Huawei, Ericsson, and Nokia. They account for 37.4% of the total market in annualized 1Q23, or 34.8% in 1Q23 alone. While the trio has captured >40% share of the market for most of 2016-22, Huawei’s share has fallen recently, and all three giants have been pressured by vendors in the cloud and IT services space (e.g. Amazon, Microsoft, Alphabet, Dell, VMWare…). Focusing on the top three, Huawei has dropped in the last three periods, but remains dominant due to China. Ericsson’s share decline was a function of lower RAN spending among its largest customers as the 5G rollout pace ebbs. The Swedish vendor hopes to offset this decline soon with new revenues from its blockbuster acquisition of network API platform vendor, Vonage. It expects the first revenues from the acquisition later this year and a ramp up further in the next two years. Nokia, including ALU for pre-acquisition years, has also dipped as 5G RAN rollouts slowed. But it gained market share slightly in 1Q23 on account of 45% growth in its optical networks business along with some benefits from catch-up sales related to the supply chain challenges it witnessed in 2022.

China Comservice and ZTE have been trading the 4 and 5 spots off and on since early 2019. Notably, though, China Comservice is majority owned by Chinese telcos, and is not truly independent. Intel is in the 6th position due to data center, virtualization, edge compute and other telco projects, some done directly and some on an OEM basis. CommScope remained at seventh position while NEC managed to surpass Cisco in the latest annualized 1Q23 period, as Cisco (9th position) witnessed a stark drop in its Telco NI revenues in 1Q23. Cisco’s decline is worrying, as its largest market (the US) has a growing focus on 5G core, which Cisco has flagged in the past as key to the company growing telco revenues. Amdocs is ranked 10th due to its strength in network software.

Biggest Telco NI revenue changes on a YoY basis

Three out of the top five vendors, in terms of YoY revenue growth, are the same for both single quarter and annualized 1Q23: Alphabet, Microsoft, and Lenovo. Two of these are cloud vendors (Alphabet and Microsoft) who are steadily improving their penetration of the telco vertical with a range of solutions – digital transformation, service design, 5G core, workload offshift, etc. Lenovo is gaining traction with its disaggregated, virtual radio access network (vRAN), and multi-access edge computing (MEC) solutions. Clearfield is a small fiber company focused on the booming US market.

Other companies to show improvement in both periods include Tejas Networks which bagged a mega deal for a BSNL-MTNL 4G network; Rakuten Group (Symphony) benefiting from key deployments of its cloud-based Open RAN solutions; Harmonic which has benefited from strong cable access spending and a growing customer list; YOFC (a Chinese fiber company), and two large US-based engineering services-focused companies (DyCom and MasTec) benefiting from a fiber boom. 

Declines in the 1Q23 annualized period include Cisco which continues to be worrisome on account of lower customer spending, though it noted improvement in supply chain constraints in the latest quarter. Extreme Networks, Casa, and Airspan all dipped, but noted that the supply chain challenges of previous quarters are improving. Cisco, the largest among the annualized decliners, remains optimistic about prospects as telcos move to 5G SA cores.

Supply chain issues improving

For the past two years, vendors in the Telco NI market have been plagued with supply chain constraints. The situation is now easing though, if a review of vendor earnings from 1Q23 is anything to go by.  Most significant vendors confirm the assessment of three months ago: shortages in specific component areas continue to be an issue but are improving with time, with normalcy likely in 2H23.

Nokia notes that “Going forward, growth rates are expected to slow in the coming quarters as Q1 benefited from some catch-up, as supply chains normalize”. Ericsson echoed this, saying that “…the big effect really comes from the ongoing inventory adjustments, and that comes because they build up large inventories when supply chain was tight and those inventory levels are now normalizing. We expect these adjustments to be completed during Q2, but some could slip into Q3 clearly”.

Juniper has a slightly more cautious view – “While supply has improved for the majority of our products, we continue to experience supply constraints for certain components, and supply chain costs remain elevated”.

Casa, Calix, and Ciena are also witnessing good improvements in supply chain and are expecting further improvements over the course of 2023. F5 Networks is benefiting from its strategy of redesigning the “hardest-to-get components” and “opening up new supply” sources.

Spending outlook

Most large vendors appear to be cautiously optimistic about the spending outlook in Telco NI. While supply chain issues are expected to clear up by 2Q or 3Q 2023, MTN Consulting expects the market will start to flatten in the next few quarters. Per our latest official forecast, we expect telco capex – the main driver of Telco NI market – to reach $330B in 2023, and a small decline to $325B in 2024. However, it’s likely that both figures may be $5B or more too high. Ericsson, a key telco vendor, has signaled a cautious telco capex spend outlook in its latest earnings call: “In the second quarter, we expect operators to remain cautious with CapEx similar to Q1 and continue with the inventory adjustment that we have described”.

Lower expectations have been apparent on many 4Q22 earnings calls. DT, for instance, expects US capex will see a “strong decrease” in 2023, and thereafter stability. Verizon’s capex is set to fall nearly 20% YoY in 2023. Charter Communications cut its capex outlook for 2023 by about $500M, hitting both the low & high range. Orange expects a “strong decrease” (same wording) in total “ecapex” this year as its FTTH deployment peak has passed and it aims to increase its dividend. Canada’s BCE says that 2022 was the peak year in its accelerated capex program, and capex will begin to fall this year until capital intensity is back down to pre-COVID levels. Vodafone expects group capex in its current fiscal year to be flat to slightly down, as it pursues a “disciplined approach to capital allocation.” Telefonica says its declining capital intensity is proof that the investment peak is behind it. The MTN Group says capital intensity will decline from 18% to 15% over the next few years.

There are several factors to help explain lower expectations: some are company-specific, e.g. BCE is naturally reaching a latter phase in its buildout. There are also general factors, such as: rising interest rates; higher operating costs due to inflation, especially in energy; 5G’s failure to lift service revenues, leaving telcos highly dependent on volatile device revenues for any topline growth; and, cloud providers’ continually more aggressive pitches of new solutions to telcos. Cloud-based offerings can shift some capex to opex.

Amid all the cautious optimism, India as a market has emerged as a bright spot for the vendors. In 1Q23, Ericsson saw strong growth for its Networks business in India where it continues to rapidly roll out 5G. “It will make India a leading 5G nation and the leading nation for digitalization. And what we see is that the subscribers on 5G are using even more data than on 4G…” said Ericsson in its earnings call.

Ciena attributed its 60% YoY revenue growth in the Asia Pacific region to India, “which was up 88% year-over-year in Q2 to about $70 million, reflecting consistent strong demand from service providers in that market. India is going through a big cycle of 5G rollout and extension. And I think that’s going to happen over the next 1 to 3 years”.

Nokia also witnessed double-digit growth in both its Network Infrastructure and Mobile Networks divisions, reflecting the rapid 5G deployments in India: “…quarter 1 largely played out as we expected, with 5G deployments in India heavily influencing our Q1 top line”.