Network infrastructure vendors face tough Q2, road ahead

Relatively weak results from the world's largest network infrastructure vendors indicate that the market is being squeezed by cautious carrier spending and that LTE deployments are not yet compensating for declines in 2G and 3G technology sales.

For example:

  • Nokia Siemens Networks reported an 8 percent drop in second-quarter sales and saw sales decline year-over-year in every region except Asia Pacific.
  • Ericsson (NASDAQ:ERIC) said its net income fell 63 percent and reported weaker sales as carriers cut back on networks sales.
  • Alcatel-Lucent (NASDAQ: ALU) said it will post an operating loss in the second quarter of around $48.8 million on revenue of $4.27 billion, and will miss its profit target for 2012.
  • And ZTE warned its first-half profit may have fallen 80 percent from a year earlier. ZTE blamed the slide on reduced investment income, foreign-exchange losses and delayed network contracts.

Taken together, the news presents a weakened picture of the network infrastructure market for the second quarter and for perhaps longer. According to ABI Research, first-quarter network infrastructure market revenues were $11.4 billion, the lowest since the third quarter of 2003, and the second quarter does not look much better. 

"With continued economic uncertainty around the world, mobile network operators are holding back on investments in their network infrastructure," said ABI Research analyst Aditya Kaul. "Instead of buying new equipment, many operators are choosing to upgrade existing equipment, which is less profitable for the equipment vendors. We expect wireless infrastructure spending to be weak for at least two more quarters, until operators might be able to see a light at the end of the tunnel."

Still, some are skeptical that an uptick in sales, especially of LTE gear, will be enough to revive the fortunes of the vendors. The market "hasn't grown in 12 years, despite the explosion of traffic we have seen over that period," Handelsbanken analyst Martin Nilsson told Reuters, noting that the network equipment market isn't much bigger than the $55 billion it was worth in 2000. "3G has come in, and 2G has dropped out. It is the same thing that is going to happen now."

Verizon Wireless (NYSE:VZ), which lavished major LTE contracts on Ericsson and Alcatel-Lucent, is speeding ahead with its deployment (now covering 230 million POPs). However, the carrier plans to reduce overall capital expenditures as it reaches its LTE buildout targets.  Verizon Communications CFO Fran Shammo said Thursday the carrier's wireless capex in the second quarter was $2 billion, which was 23 percent lower than last year, and that through the first half, wireless capex totaled $3.9 billion, down 27 percent year-over-year.  Shammo said Verizon's total capex outlook for the full year is "flat to down" compared to $16.2 billion in 2011.

In an interview with FierceWireless, Ericsson CFO Jan Frykhammar said that while the network infrastructure market faces challenges, Ericsson is well positioned to handle them. From a broader perspective, he said "we need to make sure that mobile broadband becomes a profitable growth case" for carriers so that vendors can make money. "Both operators and vendors need to make money," he said.

For more:
- see this release
- see this Reuters article
- see this Verizon transcript (PDF)

Related Articles:
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Ericsson's Q2 profit drops 63% on weaker network sales
Alcatel-Lucent to post Q2 operating loss, will miss annual profit goal
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