1Q09 results showing greater recession impact on suppliers than operators

MAY 8, 2009 -- Ovum reports that both mobile and fixed service provider revenues are down a few percentage points compared to pre-recession rates, which is in line with the researcher's forecasts.

MAY 8, 2009 -- Two weeks into the 1Q09 earnings cycle, industry research firm Ovum (search Lightwave for Ovum) looked at results to date across a broad spectrum of industry participants to get a sense of how the recession is affecting the telecom industry. Specifically, the company looked at results for 10 telecom operators, 7 equipment vendors, 6 component makers, and 2 contract manufacturers. The operators are all based in North America, whereas the revenues of the other companies represent global operations.

In an analyst comment, John Lively, vice president of forecasting at Ovum, says that the good news is telecom services are not feeling the impact of the recession as severely as other segments.

Service provider revenues from mobile operations in the sample grew just 3.4% in 1Q09, several percentage points lower than the pre-recession growth rates, which ranged from 9.4% to 11.8% (1Q07 through 4Q07, since the recession began in December 2007). North American results are heavily skewed by Sprint, whose revenues fell 12%. With Sprint's results removed, mobile revenues grew 8.7%, which is closer to the company's expectation for other regions and the global average growth in 1Q09.

Service provider revenues from fixed operations declined 3.2% in 1Q09 compared to 1Q08. In comparison, pre-recession quarterly growth in 2007 ranged from -1.8% to +0.5%. Level 3 posted the largest decline (10.3%) and Time Warner Cable the best showing, with revenue growth of 4.9%. Time Warner's growth was driven by a 23% increase in voice revenues and an 11% increase in high-speed access subscriptions, highlighting consumers' growing acceptance of voice over IP and the "stickiness" of broadband services.

Ovum concludes that both mobile and fixed service provider revenues are down a few percentage points compared to pre-recession rates. Given the double-digit declines seen in many other industries, Lively says this is good news. These results are also generally in line with the firm's forecasts, which assume that telecom services are somewhat recession resistant and the impact felt will be relatively mild compared to other industries.

However, says Lively, the bad news is that large capex reductions are hurting most telecom suppliers.

While service providers' revenues in the sample fell only a few percentage points in 1Q09, the results thus far show operators are making widespread and deep cuts in capital spending. Among fixed operators in the sample, capex fell 16%; among mobile operators it fell 27% (the latter heavily skewed by Sprint). Even companies with above-average revenue growth made cuts: Verizon Wireless grew revenues 9% and cut capex by 7.4%, and Time Warner Cable grew revenues nearly 5% and cut capex by 9%.

The capex reductions have clearly hurt suppliers, notes Lively. Among equipment vendors in the sample, revenues declined 15% on average, with Alcatel-Lucent down 6.9%, Nokia Siemens Networks down 12.1%, and Cisco down 21.5% (with exchange rate effects factored out for Alcatel-Lucent and NSN). Operating margins were down across the board, with some, including Alcatel-Lucent and NSN, reporting losses.

Further down the supply chain, component revenues were down almost 20% in the Ovum sample, and contract manufacturing revenues were down nearly 28%, once again proving that the "bullwhip effect" is alive and well, says Lively.

A couple of bright spots are also starting to appear. Wireless backhaul leader Ceragon reported a revenue decline of only 7%, and software vendor VMware's revenues actually grew by 7%, driven by a 48% increase in services revenues.

All in all, the results appear to be falling in line with Ovum's expectations and previous opinions. More complete analysis of the 1Q09 results will be forthcoming at the conclusion of the period reporting cycle, says the analyst firm.

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