Communications service provider (CSP/telco) revenues fell 5% last year, but 1Q16 earnings suggest a modest recovery. For the ~75% of the market already reporting, year-over-year revenues are up 1% versus 1Q15. Preliminary telco capex dropped 7% YoY, consistent with our forecast. Capex prospects are brighter in the Internet content provider (ICP) segment: after two weak quarters, OTT/cloud capex is growing again, thanks largely to Microsoft and Facebook.
As of May 6, most large communications providers (CPs) have reported 1Q16 earnings. Roughly 75% of the telco (CSP) segment has reported, 85% of ICPs, and 65% of carrier-neutral providers (CNPs). For vendors selling network equipment and software, telcos remain the most important (though declining) segment, accounting for over 80% of last year’s $405bn total CP capex.
For the telcos/CSPs, preliminary capex declined 7% YoY in the first quarter. That’s worse than the full-year 2015 decline of 1% but in line with our forecast. There are some signs of a slight recovery in CSP revenues, though. For the CSPs reporting sales grew by 1% in 1Q16 versus the year-earlier quarter – a modest result but the best one in nine quarters for this group. A stabler dollar in 1Q16 is one factor. Continued revenue improvement would tend to free up capex budgets somewhat. Among the telcos with good 1Q16 revenue growth, in local currency terms, were China Mobile (up 8.7% YoY, helped by 4G devices), Comcast (+6.7%, with strong enterprise services growth), Globe Telecom (+12.5%, acquired Bayan), Idea Cellular (+12.1%, launched LTE in December 2015), and Telenor (+5%, expansion in South Asia and Myanmar).
ICPs’ revenue growth rates declined every quarter of 2015. Preliminary results suggest this erosion continued into 1Q16. For the 21 ICPs that have already reported 1Q16 results, revenue growth was just 1.0% in 1Q16, down from a solid 13.2% five quarters ago (4Q14). Capex budgets are tighter. ICP capex growth in 2015 was, up 6% from 2014 but off the 25% pace of growth in the preceding year. Last year’s capex moderation was mostly in 2H15, though. Early 2016 results suggest an uptick, with preliminary 1Q16 ICP capex up 8% year over year. Microsoft and Facebook are the main growth drivers; together their capex grew 80% from 1Q15.
For both these ICPs, big data center investments continue, as do internal tech development projects. Facebook is notable for telco bypass-type access projects (Terragraph, Project ARIES, drones), contributions to the Open Compute Project, and recently helping to set up the Telecom Infra Project to “reimagine the traditional approach to building and deploying telecom network infrastructure.” Microsoft, whose 1Q16 capex of $2.3bn was roughly double Facebook’s, has created lots of the technology used in its Azure cloud. It makes its own Azure Cloud Servers and Azure Cloud Switches, and (like many other ICPs) often works directly with components suppliers such as Inphi. The ICPs are starting to change how technology is developed for networks, not just how they are run.
OFC 2016: More Innovation and Volume for Data Center Intra- and Interconnect, TE0017-000066 (April 2016)
Market Share Spreadsheet: 4Q15 Data Center Interconnect (DCI), TE0006-001210 (March 2016)
Communications Service Provider (CSP) Revenue & Capex Tracker: 4Q15, TE0006-001217 (April 2016)
“OTT capex exceeds $60bn in 2015 on back of data center builds,” TE0006-001187 (February 2016)
Communications Provider Revenue & Capex Forecast: 2015–20, TE0006-001167 (December 2015)
Matt Walker, Principal Analyst, Intelligent Networks
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