Original article: Vendor M&A resumes; telecom revenues look healthy
Tough conditions fuel vendor M&A
Last week, Google announced it would buy Motorola Mobility. Will there be more big deals between troubled telecom vendors and deep-pocketed players in adjacent sectors? Probably. The ever-growing strength of Chinese vendors and weak macro economy have raised all sorts of M&A speculation.
Telecom vendor’s 2Q11 results, though, suggest that, at the very least, the sky is not falling. Mobile device revenue growth was very strong – up well over 40% from the year-ago quarter. Network infrastructure revenues also grew, up 7% for the quarter and up 10% for the first half. That’s consistent with Ovum’s projection for 2011 capex. But M&A is in the tech sector’s DNA and will continue to change the industry. Like evolution, it is unpredictable, messy, and lumpy, but it often produces sensible results in the long term.
Currently, for non-Chinese vendors, we are in the first stage on the road to 2020: full-service vendors are focused on cost efficiency and continue to downsize, outsource, and integrate operations. The pressure is high on middle-tier vendors such as Tellabs and Juniper, but there is plenty of room for specialized vendors (e.g. Tekelec, ADVA, Arris, Acme Packet), even if a weak venture capital market temporarily limits the flow of new players.
The competitive landscape faced by vendors is being shaped by many forces, including: the financial crisis and need for cutbacks; the further rise of the Chinese vendors; the increased reliance on chips and components for competitive, timely offerings; the urge to enter new markets and acquire intellectual property through M&A and VC investments; and the introduction of new technology and standards simultaneous with improvements in the last generation (e.g. LTE vs. HSPA+, FTTH PON vs. VDSL).
In short, it’s not an easy time to be a vendor. Growth and profits are difficult to achieve.
Revenue growth for vendors in 2Q11 was good
The analysis of telecom vendor’s 2Q11 results is preliminary; revenues are in now for all but a few relatively small vendors.
Network infrastructure (NI, including services to telcos) revenues amounted to $38.9 billion (€26.8 billion) in 2Q11, up 8.2% from 2Q10. Annualized revenues were $158.5 billion and have increased steadily since they bottomed out in 4Q09. The five largest vendors in 2Q11 were Ericsson, Huawei, Cisco, Alcatel-Lucent, and Nokia Siemens Networks, in that order.
The vendors with the highest percentage revenue growth versus 2Q10 are Acme Packet (49%), CSG Systems (38%), Ericsson (34%), ZTE (32%), and NEC (26%). Ericsson, NSN, and NEC were helped by the appreciation of their reporting currency versus the US dollar (+15%, +7%, and +10% respectively) and also benefited from LTE and HSPA+ mobile broadband upgrades.
Devices (handsets, mobile devices) revenues have been on a tear, growing 47% in 2Q11 year-on-year to reach $49.9 billion after 42% growth in 1Q11. We include Apple, Sony Ericsson, HTC, Huawei, LG, Motorola, NEC, Nokia, RIM, Samsung, and ZTE. Apple may be an outlier – the popularity of its devices has been incredible, and its iPhone revenue reporting is quite liberal (including “related products and services”) – but even without Apple, the group’s revenues still grew by roughly 28%. Lots of new devices, more mature smartphones, more sophisticated consumers, faster networks finally turning up, and other factors are supporting this growth.
Looking ahead to full-year 2011 results, not much has changed. On 2Q11 calls, some vendors upgraded expectations and some downgraded (notably Cisco), but most were unchanged relative to post-1Q11 results. Huawei and ZTE remain optimistic, both about global prospects and 2H11 capex in China. Even Japanese vendors had some optimism, with the earthquake’s main impacts behind them and a recovery in domestic spending.
Still, as long as there are bankers, there will be M&A – they are uniquely skilled in arguing that one plus one is greater than two. Expect to see more big deals in the coming months.