The spread of COVID-19 across the world has caused a standstill in many sectors of the economy, as hundreds of millions shelter in place. Parts of the telecom supply chain benefit from this shift, but the net effect on the sector is a negative. Preliminary results from vendors selling to the telco sector verify this: First quarter revenues dropped 6% year over year, and the worst is yet to come.
Each quarter MTN Consulting tracks just over 100 vendors selling to the telco vertical, from relatively traditional network equipment providers (NEPs) like Adva and ZTE, to specialists in software and services such as Amdocs, IBM and NetScout. Our preliminary results for Q1 include results for the 61 vendors reporting to date, which account for approximately 75% of the market (based on fourth quarter 2019 revenues.) In total, this preliminary group of 61 recorded corporate revenues of $203.5 billion in Q1, roughly the same total as the same quarter, which marked zero growth. For this group’s sales to the telco sector, though, revenues were down 5.8%.
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Nearly all vendors in the group are publicly traded companies with audited financials. Huawei, one member of the group, does not report audited results. The company’s CFO remains under house arrest in Canada. Huawei is subject to a different type of political pressure than the average tech giant. As such, any analyst should take its data with a grain of salt even at the best of times. Based on available data, we’ve estimated Huawei Q1 billion carrier revenues at $9.8B, down 6.7% year over year (YoY.) If Huawei is removed from the calculations, the rest of the market —60 vendors—still dropped 5.5% YoY in 1Q20 (see figure, below).
Negative growth rates should not surprise anyone. Even before COVID-19 hit, vendor revenues from telcos fell 4% YoY in the fourth quarter of last year. Just three months ago, though, many vendors expected a turnaround in 2020 as their customers began to scale 5G. Those hopes are a distant memory. 2020 is a crisis year. Even if your long-term strategy is stellar, you need to survive the next 6 to9 months to have a hope of seeing the strategy bear fruit.
Charting the Q1 winners and losers
Even in a down market there are bound to be some growth companies. For the largest 20 vendors reporting to date (based on telco sales), the figure below shows YoY growth in Q1.
The standout is clearly CommScope, but that is due to its acquisition of Arris, which closed in April of 2019. Growth at IBM is also due partly to M&A, as its purchase of Red Hat closed in July 2019. Intel’s growth was strongest in Q1 due largely to organic investments aimed at penetrating the telco sector. Intel hopes that its new 5G base station chip, released in February, will keep this momentum going. IT services specialists like TCS, Accenture, and Infosys also grew in Q1, and many such vendors see opportunities to grow in helping telcos cope with COVID-related dislocation.
The declines are more important. All five of the big RAN vendors – Nokia, Ericsson, Huawei, ZTE, and Samsung – saw telco revenues fall in the first quarter. These dips come as the vendors had hoped to begin seeing returns on their many years of 5G R&D investments.
Vendors focused on basic connectivity products like fiber optic cables also struggled in Q1. That’s in part cyclical, but also because fixed network construction has taken a direct hit from the coronavirus pandemic. You can’t lay cable or provision an FTTH service quickly when engineers need to socially distance and secure their personal protective equipment (PPE) as a first priority.
Moreover, the global fiber optics industry has a direct, strong connection with Wuhan province in China, the source of the original COVID outbreak. Wuhan has long promoted itself as the “optics valley” of China, a center of both academic and industry activities. Fiberhome is headquartered there, as is YOFC, and Corning has a local plant. Fiberhome’s dramatic 42% YoY revenue decline was the worst recorded in the top 20 group.
CEOs keep eyes on the prize
Corporate leadership has a tough job in the current climate: trying to plan realistically for a highly uncertain future with immense downside risk in the next two to three quarters while still pursuing long-term strategy.
CEOs have tried to present a “glass half full” view of the market in recent earnings. While accepting that things look bleak, they also talk about how COVID-19 has “underscored the value and integral role the telecommunications industry plays in keeping everyone connected, according to Adva, and “has made vividly clear the critical importance of connectivity to keep society functioning” (Nokia.)
They are right, but it doesn’t mean their companies will thrive. That is why nearly all vendors have stopped providing earnings guidance; the short-term is tough. As Corning’s CFO notes, there is upside from telcos’ increased demand for bandwidth, plus ongoing 5G and data center investments, but “we are also seeing negative impact, as carriers and enterprise customers face site access, health and safety concerns, supply chain interruptions, and cash constraints.”
Many vendors are looking carefully at cash flow and liquidity, and beginning to adjust cost structures. And many need to. Just consider one useful financial metric, the quick ratio: current assets (less inventory) divided by liabilities. In other words, can the company pay its bills in the short term? It does not provide a complete picture, but a low ratio can raise red flags. According to the Financial Times telecom vendors with quick ratios below 1 today include Calix, Citrix, Dell/VMWare, Ericsson, EXFO, Extreme, Fiberhome, Fujikura, Furukawa, HPE, Infinera, IBM, Nexans, Prysmian, and Technicolor.
What's ahead?
Many vendors still have on rose-colored glasses, claiming that their long-term product strategy remains solid, and it will begin to pay off as COVID’s effects subside later this year. For some, these assertions are sketchy given how fast things have deteriorated, and how badly the COVID-19 crisis is being managed (and at times, ignored) in the U.S. market. Let’s not forget that there is a presidential election in the U.S. later this year, which will add to the chaos. Hopefully vendors’ internal discussions are more frank about the outlook.
Matt Walker is the founder and Chief Analyst of MTN Consulting, LLC, an independent market research firm. He has over 20 years of experience in telecom industry analysis, consulting and research program management. Based in Asia for most of his career, Matt currently lives in Chandler, Arizona. He can be reached by email at [email protected]. Follow him @mattwtelecom, or LinkedIn
Industry Voices are opinion columns written by outside contributors—often industry experts or analysts—who are invited to the conversation by Fierce staff. They do not represent the opinions of Fierce.