This is why vendors are hurting

• Telco purse strings are still tighter than normal
• Vendors have been suffering for almost two years
• Capex budgets shrunk and network infrastructure spending slumped during the first half of 2024, according to Dell’Oro
• And it’s not getting any better, the research firm predicts 

Telecom capital expenditure (capex) budgets were cut by 10% during the first half of this year and spending on network equipment slumped by 17% during the same period, according to the analyst team at Dell’Oro Group and, despite some talk of recovery, the research house doesn’t expect the news to get any better for the vendor community any time soon. 

According to Dell’Oro, the value of cumulative worldwide telco capex budgets declined by 10% in the first half of 2024 compared with the first six months of last year as operators scaled back their fibre-to-the-premises (FTTP) and 5G investments after years of heavy spending. The Dell’Oro team mainly attributed the budget cuts to “built-up inventory” – telcos using equipment they had already acquired while not continuing to stockpile network products – a slow-down in network rollouts in China, India and the US, less of a need in general for telcos to add network capacity and greater financial uncertainty. 

“The high-level message is clear,” stated Stefan Pongratz, vice president for RAN and telecom capex research at Dell’Oro Group. “The flattish revenue trajectory and the difficulties with monetising new technologies and opportunities are impacting the risk appetite and willingness to raise the capital intensity levels for extended periods. In addition, the reduced gap between advanced and less advanced regions, when it comes to adopting new technologies, is impacting the investment intensity on the way up and down,” he added.

And those capex budgets aren’t set to rise. According to Dell’Oro’s predictions, the value of worldwide telco capex budgets is set to dip by a mid-single digit rate for the full year 2024 and then decline at a negative compound annual growth rate (CAGR) of 2% until 2026, with wireless network capex expected to be cut more, and a negative CAGR of 3%. 

As a result, capital intensity – the percentage of revenues assigned to capex budgets – is set to slip from an average of 17% in 2023 to 15% by 2026, while annual telco revenues are set to increase at a CAGR of just 1% over the next three years.

With capex budgets shrinking, telcos are spending less on their network equipment. Dell’Oro tracks telco spending on a broad range of network equipment in six categories – broadband access, microwave & optical transport, mobile core network (MCN), radio access network (RAN), and SP router & switch – and combines the spending on these to track the value of the worldwide telecom equipment sector. 

According to Dell’Oro’s calculations, the value of that global sector slumped by 17% year on year during the first six months of this year: The firm didn’t put a value to the size of the market in its press release but, based on previous announcements, this would have sent the value of the sector for the half year down to around $40bn. 

As the chart above shows, there have been four quarters of year-on-year double-digit decline. “The slump that shaped the second half of 2023 extended into the first half of 2024,” noted the Dell’Oro team in a recent blog. 

It’s still the same companies dominating the sector, with Huawei leading the pack, followed by Nokia, Ericsson, ZTE, Cisco, Ciena, and Samsung: Between them, these seven vendors accounted for 80% of the total sales during the first six months of this year. “Even with the ongoing efforts by the US government to curb Huawei’s rise, Huawei is still well positioned in the broader telecom equipment market, excluding China,” noted Pongratz. 

And here’s the analysis from the Dell’Oro analyst that will sink hearts across the vendor community as they prepare their third-quarter earnings report remarks. “Even with the second half expected to account for 54% of full-year revenues, market conditions are expected to remain challenging in 2024. The analyst team collectively forecasts global telecom equipment revenues to contract 8% to 10% in 2024, down from the 4% decline in 2023.”

Let’s see what the likes of Ericsson and Nokia have to say over the next few weeks. 

- Ray Le Maistre, Editorial Director, TelecomTV