Telecom's Biggest Vendors - 2Q23 Edition

Telco NI vendor revenues dip 4% YoY in 1Q23 due to macro pressures and fading 5G rollout pace

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 1Q13-2Q23 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.

Telcos tighten the purse strings

The Telco NI market is focused on one big vertical, telecommunications, so we track technology spend by telcos closely. Telco spending results for 2Q23 are not yet available, but in the two prior quarters, telco capex growth had turned negative. Annualized capex fell by 1.5% YoY in both 4Q22 and 1Q23, and there are many signs of further decline for 2Q23, even if final numbers are not yet available. This constrained capex environment is not alarming, as capex surged to high levels in 2022, reaching a record high capital intensity of 18.3% in the annualized 1Q23 period. Increased fiber roll-out and upgrade activities to support fixed broadband and to connect all the new radio infra (including small cells) needed for 5G, coupled with continued expansion of 5G in major markets like India, have pushed capital intensity higher.

Telco NI quarterly topline records steepest falloff across the coverage period

Telco NI vendor revenues amounted to $55.3B and $226.3B for the single quarter and annualized periods in 2Q23, down 8.0% and 4.2% on a YoY basis, respectively. The single quarter fall of 8% in the latest quarter is the steepest decline recorded in at least a decade, while the 4.2% dip in annualized Telco NI revenue marked the second consecutive decline. This 4.2% decline is a big change from 2Q22, when annualized Telco NI revenues surged 6.6% YoY as telcos invested in 5G and catch-up projects delayed by the COVID-19 pandemic. 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. It breached the $230B barrier in the last two years before dropping below the $230B mark again in the 2Q23 annualized period.

Huawei’s troubles persist as its dominance fades

Huawei continues to dominate the Telco NI market despite the challenges posed to the company in the last three years amid government-imposed restrictions on using Huawei gear around the world. While the total market declined by 4.2% in the annualized 2Q23 period, it slumped by 2.7% if Huawei is excluded from the sample list of vendors. Amid restrictions, Huawei is attempting to grow 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. To date, Huawei’s troubles have impacted RAN markets the most, but the effect will begin spreading more clearly in 2023 to IP infrastructure, optical, microwave, fixed broadband, and other areas. And if that happens, a number of vendors are eager to pursue new opportunities, including Adtran/ADVA, Ciena, Cisco, CommScope, DZS, and Infinera.

Top 10 vendors

The top three Telco NI vendors continue to be the usual three: Huawei, Ericsson, and Nokia. They account for 37.5% of the total market in annualized 2Q23, or 39.5% in 2Q23 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 recent quarters, 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 picked up in 2Q23 thanks to the strong RAN growth in India along with some benefits from catch-up sales related to 2022’s supply chain challenges.

ZTE and China Comservice have been jostling for the 4th and 5th positions since early 2019, but it’s important to note that China Comservice is predominantly owned by Chinese telecom companies and lacks complete independence. CommScope jumped one place to secure 6th position, while Intel held the 7th position thanks to its involvement in various telco projects, including data centers, virtualization, and edge computing, both directly and as an OEM provider. NEC maintained its 8th position, while Amdocs and Fiberhome ousted Cisco to secure 9th and 10th position, respectively, in the annualized 2Q23 period.

Biggest Telco NI revenue changes on a YoY basis

Three out of the top five vendors are common, in terms of YoY revenue growth, for both single quarter and annualized 2Q23: Alphabet, Microsoft, and Tejas Networks. Two of these are cloud vendors (Alphabet and Microsoft) who are steadily expanding their influence in the telco sector through various offerings, such as digital transformation, service design, 5G core, workload offshift, etc. Tejas Networks secured a $900 million contract for the BSNL-MTNL’s pan-India 4G/5G network, to supply gear alongside support and maintenance services. Another vendor to gain big in the annualized 2Q23 period is Lenovo which is gaining traction with its disaggregated, virtual radio access network (vRAN), and multi-access edge computing (MEC) solutions. Then there’s Clearfield which is a small fiber company focused on the booming US market; a small portion of its annualized 2Q23 gains came from an acquisition (Nestor Cables).

Other companies to show improvement in both periods include Calix driven by “broadband service providers that are providing broadband as a service rather than just the dumb pipe”; Harmonic which has benefited from strong cable access spending and a growing customer list; and two additional large cloud vendors (Amazon and Oracle) benefiting from telco digital transformation and cloud shift.

Declines in the 2Q23 annualized period include Cisco which continues to be worrisome on account of lower customer spending, though it remains optimistic about prospects as telcos move to 5G SA cores. Extreme Networks, Casa, and Airspan all dipped, but noted that the supply chain challenges of previous quarters are improving.

Improved supply chain situation and fiber funding initiatives are key positives

After being plagued with supply chain constraints for the past two years, vendors in the Telco NI market are approaching a state of semi normalcy on the supply chain side. 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.

In its latest earnings call, Ciena pointed to improvement in lead times from 52 weeks during COVID-19 two years back to “the high teens” at present.  At the Citi Global Technology Conference held on September 7, 2023, Ciena noted “…supply chain lead times went from 4 weeks and 6 weeks to 52 weeks. They’re now well below 26 weeks… 12 to 18 weeks is not a bad range for our lead times.”

Nokia corroborated the trend of an improving supply chain, in a June 2023 investor call, noting that the “…supply chain crisis is certainly at a much better position compared to 2022… We are not confronting a supply chain situation anymore, in general. I mean there are [issues with] components here and there.”. Casa, and Calix 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.

For fiber-focused vendors, government funding initiatives and subsidies will play a key role in translating into orders over the coming years. For instance, Clearfield expects the $42.45B allocated under the government “BEAD” initiative, which targets high-speed internet access in unserved and underserved areas, will “peak next year and will continue at significant levels for the next several years….”

Sustainability goals rising in importance for telcos

Telco sustainability reports emphasize the importance of adopting energy efficient technologies and network designs. Telcos consume significant amounts of non-electric energy (diesel, propane, heating oil, etc.) to power their facilities, especially mobile base stations. Africa’s Group, for instance, relied on diesel for 46% of its total energy consumption in 2021. For telcos to really begin reducing their carbon footprint and reduce energy costs, big improvements in both energy efficiency and fuel mix will be required. Telcos are pushing its vendors to increase the sustainability of their operations. When it comes to energy, telcos need two things from vendors. First, they need energy efficient technologies that help reduce the amount of energy input per unit of output. This impacts the amount of energy the telco consumes in its operations, and (all else equal) the cost of energy. Second, vendors need to reduce their own carbon footprints, as these are reflected in the Scope 3 emissions recorded by the telco in its sustainability reports.

Vendors are rightly putting energy efficiency at the center of their marketing pitches. For example:

• Ciena: “We have invested in the sustainable evolution of our WaveLogic coherent optics technology. WaveLogic 5 Extreme (WL5e) increases fiber capacity three times while reducing power per bit by 80% and space needed by 85% compared to the previous generation…”
• Ericsson: “the Company has an ambition to reduce the energy consumption of a typical new radio base station site by approximately 40% by 2025, compared to a 2021 baseline.”
• Nokia: “…in Mobile Networks, we are on target for a 50% reduction in average power consumption of 5G mMIMO base stations by 2023 (from the 2019 baseline)”

Spending outlook

Per our latest official forecast, we expect telco capex - the main driver of the Telco NI market - to dip to $320B in 2023, and decline a bit more to $318B in 2024. Both figures represent slight downwards adjustments from our last forecast. 

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.