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Summary

Earnings for over 90% of the communications service provider (CSP) market are now in. CSPs continue to see weak revenue growth amidst a shifting competitive landscape. Capex as a share of revenues (capital intensity) remains 18% on an annualized basis, which is a multi-year peak, and will start to decline in 2H15.

Communications provider capex continues shifting to ICPs

As reported earlier, capex for the Internet content provider (ICP) market grew nearly 20% YoY in 1Q15, driven by Apple and Google. By the end of this year, ICP capex will reach roughly half the total of the fixed CSP market. ICP technology capex tends to be concentrated on data center and cloud investments, and capitalized software. Over time, this ICP segment is becoming more important to technology vendors, as evidenced by many recent vendor announcements targeting ICPs (for instance, see "OFC 2015: Data center rules Executive Forum").

Based on preliminary 1Q15 earnings figures, CSPs continue spending as much as they can afford to, given weak revenues. That has kept their capital intensity steady for the last four quarters at around 18%, the highest level since early 2009. Investments related to LTE have dominated recently, along with data center, fiber access, virtualization, analytics, IoT, and other areas.

CSPs' guidance for full-year 2015 capex varies. Some expect capital intensity growth, such as Comcast, MegaFon, and Telenor, while many others are projecting capex declines relative to revenues, such as KDDI, NTT, Swisscom, and Verizon. China, always important, is a big question mark; revenues for its top three CSPs fell again YoY in 1Q15, for the third straight quarter. Continued 4G capex buildouts in China have pushed annualized capital intensity to 29%, the highest since 2009. Something has to give in China. Officially we expect China capex to grow 5% in 2015, then decline for the next two years.

Ovum's most recent CSP revenue-capex forecast is consistent with 1Q15 results. We expect CSP capex to be flat in 2015 at about $340bn, and capital intensity to fall slightly. However, recent currency fluctuations, especially in the ruble, yen, and euro, complicate the interpretation of growth rates, and may have some effect on our forecast. We will address this soon in our review of final 1Q15 capex and revenue results.

Appendix

Further reading

"Data center build-outs power ICP capex in 1Q15," TE0006-001065 (May 2015)

LTE Deployment Tracker: 1Q15, TE0006-001068 (May 2015)

Communications Provider Revenues & Capex, 2014: CSPs, ICPs, and CNPs, TE0006-001046 (April 2015)

4Q14 Capex Spreadsheet: Global, TE0006-001043 (April 2015)

"OFC 2015: Data center rules Executive Forum," TE0006-001041 (March 2015)

"LTE isn't enough to sustain RAN market growth," TE0006-001015 (February 2015)

Communications Service Provider (CSP) Revenue & Capex Forecast: 2014‒19, TE0006-000979 (January 2015)

Author

Matt Walker, Principal Analyst, Intelligent Networks

matt.walker@ovum.com

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