Average Telecom Infrastructure Services (TIS) margins for Tier 1 telecom vendors fell 2016, according to Technology Business Research.
The main reasons for the drop in TIS margins were the high upfront costs associated with large-scale transformation contracts, legacy infrastructure decommissioning and unfavorable deployment mix skewed toward coverage rollouts in relatively low-margin emerging markets.
“Transformation-related contracts have thus far proven to be high risk and carry lower margins compared to traditional service offerings,” said TBR Telecom Senior Analyst Chris Antlitz.
Huawei, Ericsson, Nokia, among others are facing the margin pressure.
Sweden-based telecom equipment maker Ericsson said its gross margin fell to 27.9 percent in Q2 2017 from 32.3 percent in Q2 2016. Gross margin, excluding restructuring charges, dipped to 29.8 percent from 33.2 percent.
Ericsson said it will accelerate cost reduction activities to achieve an annual run rate reduction of at least SEK 10 billion by mid-2018.
The company sees an increased risk of further market and customer project adjustments with an estimated negative impact on operating income of SEK 3-5 billion for the coming 12 months.
Ericsson is also facing a net negative impact on operating income of SEK 2.9 billion (SEK 1.3 billion) in the second half of 2017 due to reduction in technology and portfolio shifts capitalization of costs.
Though restructuring and more discernment on contract scoping and pricing will help mitigate the impact of industry headwinds, vendors will need to evolve their service delivery organizations to stabilize and grow margins sustainably.”
Telecom equipment vendors are in some phase of restructuring to counter these adverse industry trends. The report said TIS margins are unlikely to increase on an incremental, sustainable basis until service delivery evolution initiatives are widely implemented.
Finland-based Nokia is the leader in driving automation and is building analytics-driven cognitive computing into its service delivery platforms to improve operational efficiency.
Nokia’s management team has a vision and a strategy it has been aggressively carrying out over the past few years to leverage innovations in automation and cognitive analytics to evolve its service delivery organization.
TIS margins will further decline in 2017 as telecom vendors incur restructuring costs to right-size their businesses and mitigate the impact of industry trends, particularly the impact from NFV/SDN, cloud and legacy decommissioning.
With the pricing environment expected to remain weak, telecom vendors will prioritize margin optimization through service delivery evolution. Since telecom vendors are in the early stages of this evolutionary phase, it will take a couple of years before these initiatives yield a meaningful and sustainable improvement in TIS margins.
