All three infrastructure segments were weaker than earlier in 2011: wireline equipment, mobile infrastructure, and services. The latter was strongest: telecom infra vendors’ services revenues increased 3% in 4Q11, as service providers (SPs) continue to outsource operations. The two segments tied more closely to capex, wireline and mobile, declined by 3% and 9% respectively. That’s in line with preliminary capex results showing that 4Q11 global capex was down around 6% YoY.
Since year-end 2011, the economic outlook has improved, but vendors’ guidance for near-term results is mixed. Many vendors are in transition to new business models. Layoffs, spin-offs/asset sales, reorganizations, and repositioning are happening across the industry. Vendors must navigate this chaos amidst rapid changes in end-user behavior and technology, all while constrained by their customers’ tight budgets.
The fourth quarter is sometimes a period of budget flushes for service providers. Fourth-quarter capex averaged 31% of the full-year global total in 2009 and 2010, for instance. But 2011 was different: Preliminary data suggests 4Q11 telco capex was weaker, though, at roughly 28% of 2011′s total. That’s similar to the 27% actual figure for the same carriers in 4Q08. Vendors’ services revenues, which track opex more than capex, also were hit in 4Q11. Services revenue growth moderated for infra vendors to 3% YoY, down from 17% the previous quarter. Carriers are still outsourcing, and vendors are still optimistic about professional services, but 4Q11′s caution hit all budget holders.
Ovum publishes a quarterly report on telecom vendors’ financial results, the most recent of which is Telecom Vendors’ Earnings and Strategy – 3Q11 (January 2012). Our 4Q11 update will follow publication of annual results from Huawei and ZTE, likely to come in late March or early April. The figures in this Opinion include estimates for Huawei and ZTE and actual reported figures for 27 additional vendors.
In 4Q11, telecom infrastructure vendor revenues (including services, excluding devices) amounted to $42.2 billion (€32 billion), down 5% from 4Q10. For full-year 2011, vendor revenues were $163.5 billion, up 8% from 2010. Service provider capex for 2011, based on preliminary results, also grew at an 8% annual rate. Ovum’s published prediction for SP capex growth in 2011 is higher, up 12%, so it’s possible the weak 4Q caused 2011 to underperform. We’ll know when final capex figures are available in two to three weeks.
We divide vendors’ telecom infrastructure revenues into several segments. –For all vendors, including our estimates for Huawei and ZTE, preliminary results for the largest three segments are as follows:
- Wireline equipment: 4Q11 revenues of $10.1 billion, down 3% YoY (2011 total of $39.8 billion, up 9% from 2010)
- Mobile infrastructure: 4Q11 revenues of $14.3 billion, down 9% YoY (2011 total of $54.4 billion, up 8% from 2010)
- Telco infrastructure services for SPs: 4Q11 revenues of $11.3 billion, up 3% YoY (2011 total of $42.2 billion, up 12% from 2010).
(Note that these three categories include about 85% of the total vendor revenues cited in the prior paragraph; the remaining 15% comprises microwave and miscellaneous enterprise and other categories.) As we discuss in our quarterly report, the services segment was first to recover after the recession. It remains resilient given its alignment with service providers’ cost-reduction desires.
Outlook remains mixed
The International Monetary Fund’s managing director, Christine Lagarde, spoke last week of signs that the “dark clouds over the world economy…may be beginning to disperse.” This month The Economist magazine’s cover story was titled “Can it be…the recovery?” There are many short-term signs of improvement, from debt deals to unemployment releases.
But in telecom, vendors in general remain cautious. Those that have recently issued negative guidance include Broadcom, Juniper, Tellabs, and NSN. Positive guidance has come from Alcatel-Lucent, NEC, and Qualcomm. Mixed outlooks have emerged from Amdocs, Ceragon, Cisco, JSDU, and others.
Even with market recovery, service providers are dealing with a slower revenue growth outlook; capex is following that curve, as will vendors’ non-service revenue prospects. Professional services are becoming more important for top-line growth. Chinese vendors are getting no less aggressive. Device, application, and content spending growth now routinely puts infrastructure spending to shame. In this climate, we expect lots more mergers and acquisitions (M&A) in the infrastructure space, even as the challenge of actually integrating acquired companies remains steep. M&A bankers, start chasing those fees.
Matt Walker is a principal analyst in Ovum’s network infrastructure practice.