Tài liệu Network Equipment Providers Restoring Investor Trust ppt

Network Equipment Providers
Restoring Investor Trust
1
Global penetration of mobile data subscription is expected
to exceed 100 percent by 2015. In some markets that
figure could reach as high as 150 percent (ie 1.5 times
more subscriptions than individual subscribers).
1
The
growth of smartphones and IP-connected devices has
driven exponential growth in data traffic. And examining
the volume of data sent and received by devices such
as smartphones it is easy to see why the increase is so
marked. When compared to a standard phone, the data
traffic generated by new devices is many times higher.
Smartphones, for example, send and receive 35 times and
tablets over 100 times the amount of data of a standard
mobile phone.
2
The use of mobile devices is extending
to almost all activities and areas of life, from travel to
education, and from social networking to making financial
transactions. And as more and more people do more and
more online, and IP-enabled devices directly communicate,
the demand for data traffic will only continue to grow
around the world.
1
In that context, it would be easy to assume
that all participants along the broad
communications industry value chain, from
telcos, to network equipment providers and

newer entrants such as over the top content
and service providers would benefit – albeit to
different extents – from that huge increase in
traffic. After all, network operators should be
able to capitalize on the increasing demand
for data traffic and accordingly would need to
continue investing in improving their network
capacity and performance. That should mean
investors would view all their prospects with a
degree of optimism. But the financial picture
shows that intuition could be wrong. Investors’
sentiment towards network equipment
providers (NEPs) does not demonstrate a
high degree of confidence in NEPs’ ability
to achieve growth. Comparing the multiples
at which NEPs are traded with others in the
communications value chain shows a marked
discrepancy: investors do not necessarily trust
NEPs to generate returns in line with present
results, let alone deliver growth.
3

To try and understand the reasons behind
this apparent lack of trust, Accenture has
carried out detailed financial analysis of
listed businesses in the sector and carried out
in-depth interviews with investor analysts
who cover at least two companies in the NEP
segment. This point of view looks at some of
the underlying factors and suggests some steps

that NEPs may need to address in order to
rebuild investor trust.
Growth forecasts for the NEP sector show only
modest annual increase (+ 4 percent 2011
to 2016) for the core area of their business:
carrier network infrastructure. The important
area of telecoms operations management
system licenses shows just slightly higher
annual increase (+ 6 percent 2011 to 2016).
4

Limited growth is partly attributable to
advances in technology that are eroding
equipment prices. Greater competition from
lower cost manufacturers in China has also
played a part.
On the other hand, telecom operators’ demand
for professional services is expected to grow
annually by 12 percent, which should, on the
surface, open up a strong growth opportunity.
5

However, services is a broad area. It’s partly
new territory for NEPs, in particular system
integration and related changes to business
operations. Furthermore, the large IT service
providers and software providers are already
well established in this segment, which means
it presents a different competitive landscape
for NEPs to navigate.

+4%
2016
100,561
2011
82,807
Professional Services,
Total addressable market*
USDm
+12%
2016
164,800
2011
93,500
Carrier Network
Infrastructure Equipment
USDm
Source: Gartner forecast Carrier Network Infrastructure,
Worldwide, 2009-2016, 2Q12 update
Source: Informa Telecoms and Media: Managed Services:
Strategies for network, service and support systems
outsourcing, Dec 2011
* Total addressable market includes services related to
Consulting/Advisory, Integration and Management across th
e
areas of Networks, Data/Applications, and OSS/BSS
9,053
+6%
2016
12,181
2011

Telecom Operations Management
Systems, Licenses only
USDm
Source: Gartner forecast Telecom Operations
Management Systems, 2009-2016, 2Q12 update
Financial analysis methodology
Accenture carried out financial analysis
to validate the hypothesis that Network
Equipment Providers (NEP) are traded at
lower multiples and hence lower investor
expectations of their future performance.
To do this, we compared NEP peerset
performance across a number of financial
metrics including:
•Currentvalue/futurevaluebreakdownon
enterprise value
•EnterpriseValueperInvestedCapital
•RevenueandFreeCash-Flowdevelopment
Peersets include
•NetworkEquipmentProviders:Allmain
vendors
•Telecomoperators(22companiesacross
global geographies)
•ITserviceproviders(6companies)
•OverTheTopserviceproviders(7companies)
1. Source: Pyramid Research DataTracker, Q4 2011
2.Source:Cisco,VirtualNetworkingIndexMobile,2012
3. Source: Accenture analysis based on data from S&P Capital IQ
4. Source: Gartner, Forecast: Carrier Network Infrastructure, Worldwide, 2009-2016, 2Q12 update, June 2012 (Peter Kjeldsen,
Ian Keene and Akiyoshi Ishiwata); Gartner, Forecast: Telecom Operations Management Systems, 2009-2016, 2Q12 update,

June 2012 (Kamlesh Bhatia, Norbert Scholz and Martina Kurth)
5. Source: Informa Telecoms and Media: Managed Services: Strategies for network, service and support systems outsourcing,
Dec 2011 (Kris Szaniawski)
Forecast growth per market sector
2
No recovery in sight
Over the last decade, the NEP industry
has seen increased competition leading
to significant consolidation. This has
taken the form of M&A activity as well
as the development of joint ventures and
the failure of some players in the market
alongside the emergence of new players
from emerging markets. In 10 years, the
number of major players has contracted
from nine to six, who between them make
up more than 80 percent of the market.
6

From 2003 until 2007 NEPs enjoyed
steady growth in enterprise value with an
almost equal weight consistently placed
on current and future values. However,
in 2008 as a result of the financial crisis,
value collapsed. Future value shrank from
an average of 41 percent in 2007 to just 3
percent in 2008. Unlike other companies
in the communications sector, NEPs’ value
has failed to bounce back. In 2011 the
future value of the sector entered negative

territory, seeing its total valuation fall by
more than 60 percent from peak levels in
2007. Yet in 2007, investors displayed more
confidence in the prospects of NEPs than
they did for telcos. Today, that has reversed
completely, and telecom operators’ value
puts them back at the level they were at in
2006, with investors still identifying some
future value.
7

In even more marked contrast, however, is
the valuation of the most recently emerged
segment in the value chain: the over the
top (OTT) content and value added service
providers. While the comparison has to take
into account other factors driving the high
valuation given to the segment (such as
participation in other industries – there are
few pure OTT businesses for which public
data is available) investor confidence in the
ability of the segment to achieve strong
future performance stands in marked contrast
to NEPs. IT service providers have also fared
better than NEPs, showing steady growth
over the last decade, with current values
continuing to grow after the financial crisis,
and maintaining a consistent proportion of
future value over the last few years.
An additional measure of investor sentiment

is the investor premium on invested
capital. Here again, NEPs are seriously
underperforming their peers in other industry
sub-segments. Investor premium for NEPs
is negative and has more than halved since
2003. Given that this headline figure includes
an assessment of services (an area that
typically requires less capital to generate
returns) as well as equipment, the figure may
mask an even greater negative sentiment for
equipment than face value suggests.
From our analysis of available financial data,
it’s clear that from an investors’ point of view
NEPs do not present an attractive proposition
for future returns. On the measures that we
used, they compare poorly to other segments
of the communications value chain. To try to
find out what some of the reasons for that
perception might be, we conducted in-depth
interviews with investor analysts that cover at
least two NEPs.
Enterprise value defined
•Enterprisevalue=totalvalueofabusiness.
Formula: Market capitalization + Net debt
•Currentvalue=thepresentvalueofcurrent
operations. Formula: Net operating profit less
tax/weightedaveragecostofcapital
•Futurevalue=theportionofEnterprise
value that represents the expectations from
investors on future cash-flow levels. Formula:

Enterprise value – current value
2,5
1,8
1,2
6,6
1,4
2,0
3,0
7,9
1,9
2,9
5,4
0,9
IT service
provider subset
OTT subset
Telco subset
NEP
201120072003
Source: Accenture analysis based on data from S&P Capital IQ
Investor premium on Invested Capital multiple
(Enterprise Value/Invested Capital)
6. Accenture analysis of company performance
7. Source: Accenture analysis based on data from S&P
Capital IQ
EnterpriseValue(bnUSD)andFutureValueweight
Investor premium on Invested Capital
multiple(EnterpriseValue/Invested
Capital)
2011

160
-19%
2010
232
15%
2009
241
21%
2008
232
3%
2007
420
41%
2006
357
38%
2005
373
50%
2004
355
48%
2003
343
50%
Future value
Current value
Enterprise Value (bn USD) and Future Value weight
279

6%
280
13%
253
18%
232
8%
330
38%
282
27%
285
37%
238
32%
196
25%
20072006200520042003 20112008 2009 2010
NEPs
Telecom operator subset
Source: Accenture analysis based on data from S&P Capital IQ
2011
592
49%
2010
477
56%
2009
364
56%

2008
191
45%
2007
357
82%
2006
201
82%
2005
169
83%
2004
78
86%
2003
25
92%
OTT subset
2011
433
22%
2010
434
22%
2009
397
21%
2008
287

-4%
2007
366
39%
2006
333
48%
2005
274
41%
2004
276
48%
2003
256
55%
IT service provider subset
3
4
7
5
3
6
2
3
4
Predicting/understanding customer
demand, market development
Lack of detailed information
on products, contracts etc

Understanding competitive
dynamics and differentiation
Understanding impact of
future technology development
Measuring/predicting
gross margins
Understand operators’ technology
roadmaps and intentions
Other
Top 3 challenges in analyzing the Network Equipment Provider segment
Number of responses
Base: All (14 interviews)
Source: Accenture survey of Network Equipment Provider Investment Analysts, 2012
Top 3 challenges in analyzing the Network Equipment Provider segment
A clearer picture needed
The survey reveals that analysts face some
serious challenges understanding the network
equipment industry. They express their difficulty
in obtaining a clear picture of the market’s
development and associated demand as the
largest single barrier, followed by the lack of
detailed information on products and NEPs’
contracts as well as more generally the impact
of technological development on the future
shape of the market and the demand it will
drive. While analysts do not find it hard to
understand NEP’s present business models,
they struggle to display the same confidence
when it comes to predicting future earnings
and the drivers behind them. And one of the

reasons for that lack of confidence is the dearth
of information analysts have to help support
their view of the industry’s future – and their
requests for additional information include both
broad and more detailed information.
“The disconnect between carrier capex
and equipment spending, […] they give
their capex budgets only about half
the budget or less to spend on active
equipment linking what carriers are doing
back to what equipment revenues are
likely to be.”
“…the main problem is actually lack
of information on their contracts
so it is essentially a business which is
determined by some very, very large
contracts but we have very little
understanding of these contracts.”
“How productivity and equipment
improve going forward I think is
probably the #1 issue […] There are things
we know today but it is technology so
there will always be innovation.”
”It is really hard to know what is going
to happen next. Revenues can be very
volatile and market shares can change
quickly.”
5
“The OTT guys are high-growth
profitability companies, the carriers are

low growth but high profitability and the
vendors are low growth, low profitability
companies. That’s why the multiples move
the way they do.”
“…for OTT’s, compare growth…
… service providers show superior earnings
and stability in earnings compared to the
equipment vendors.”
“The over the top guys
are growing, the other ones (NEPs
and Telcos) aren’t.”
Revenue & Free Cash-Flow (USD m)
NEPs
200,000
100,000
0
201120102009200820072006200520042003
40,000
30,000
20,000
10,000
0
400,000
300,000
Revenue
Huawei revenue
FCF
Source: Accenture analysis based on data from S&P Capital IQ,
Accenture survey of Network Equipment Provider Investment Analysts, 2012
OTT subset

40,000
30,000
20,000
10,000
0
100,000
200,000
300,000
0
201120102009200820072006200520042003
FCF
Revenue
Revenue & Free Cash-Flow (USD m)
Comparing segments
When asked about the difference in the basis
for valuing NEPs compared with OTTs and
telcos, investor analysts generally point to the
difference in growth. Some analysts ascribe
the slightly higher valuation of the telcos
to their higher and more stable earnings.
Analysts see the returns from investments in
telcos producing smoother returns, with fewer
surprises. NEPs, on the other hand, have been
subject to significant volatility and cyclicality.
6
Variation from Analyst Consensus on Net Income in quarterly reporting, 2006-2011
NEP
Telco subset
IT Service Provider subset
Telco subset average

IT Service Provider subset average
NEP average
% of Reporting Times Below
Consensus Expectations
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Average Negative Deviation from
Consensus Expectations, (% of revenue)
16%14%12%10%8%6%4%2%0%
VariationfromAnalystConsensusonNetIncomeinquarterlyreporting,2006-2011
Not only do NEPs have more volatile earnings,
they also more frequently fail to communicate
effectively with investors about those
fluctuations. On average, in two out of three
reporting instances over the past five years
NEPs failed to meet analyst consensus on
earnings (net income), and negative deviations
expressed as a percentage of revenue are on
average 6.1 percent.
8
This is clearly higher

than for the IT service provider peer set
studied during the same period. NEPs also
on average underperform when compared
to the telco peer set. However there are big
differences in the performance of individual
companies in both groups.
8. Source: Accenture analysis based on data from S&P Capital IQ
7
No future consensus
Analysts’ recommendations about where NEPs
should invest show no clear consensus. They
demonstrate a wide range of views about
the extent to which investments should
be focused on existing and new revenue
opportunities. The areas for future investment
are similarly vague and diverse with very few
concrete suggestions – though solutions to
manage data and traffic bottlenecks attract
the largest number of recommendations.
The conservatism of those views is echoed
in analyst projections of the shape of the
industry in the future. Most believe that
there will be fewer larger providers in
five years’ time, and believe that network
equipment will remain the core business for
leading competitors, though some argue that
provision of services will dominate in future.
In sum, analysts’ relative pessimism about
the prospects for the sector continues to
depress their assessments of value. They see

little evidence that the growth the sector
experienced in the years between 2003
and 2007 will return.
9
However, the lack
of evidence that they see may be partially
explained by the lack of information that they
identify and the associated inability to spot
the future trends – whether in the market,
from technology or from customers – that will
drive future growth.
“I think there is [sufficient] investor
confidence. I don’t know if much can be
done to boost it any further ”
“[Owing to] cyclicality [these businesses]
can go from boom to bust very
quickly and with very little warning,
[therefore] you don’t want to overpay
for these companies.”
“[One challenge] for investors [is that
they]
can be completely blindsided by a
real slowdown - [without that] it would
be more predictable and they could invest
with more confidence.”
9. Source: Accenture survey of Network Equipment Provider
Investment Analysts, 2012
Investor analysts’ examples of attractive
investment areas
Most attractive investment balance between existing

and new revenue opportunities
0% 20% 40% 60% 80% 100%
Analyst K
Analyst J
Analyst I
Analyst H
Analyst G
Analyst F
Analyst E
Analyst D
Analyst C
Analyst B
Analyst A
Existing
New
8
2
3
6
Higher level networking
(layer 4-7)
Next generation wireless
in general
Solutions to manage data and/or
reduce traffic bottle necks
Other
• When asked, most investor analysts suggest investments in
traditional network equipment domains
• Several investor analysts want to see investments in
technology to help operators manage the growing data

volumes
• Expansions into new domains, such as new verticals, or new
business models, such as Cloud computing, are not frequently
mentioned
• There is no consensus view among the investor analysts on how
investments should be balanced by existing and new revenue
opportunities
Source: Accenture survey of Network Equipment Provider Investment Analysts, 2012
Number of responses
Base: All (14 interviews)
Most attractive investment balance between existing and
new revenue opportunities
Investor analysts’ examples of attractive investment areas
•Thereisnoconsensusviewamongthe
investor analysts on how investments should
be balanced by existing and new revenue
opportunities
•Whenasked,mostinvestoranalysts
suggest investments in traditional network
equipment domains
•Severalinvestoranalystswanttosee
investments in technology to help operators
manage the growing data volumes
•Expansionsintonewdomains,suchasnew
verticals, or new business models, such
as Cloud computing, are not frequently
mentioned
Investor analysts’ examples of attractive
investment areas
Most attractive investment balance between existing

and new revenue opportunities
0% 20% 40% 60% 80% 100%
Analyst K
Analyst J
Analyst I
Analyst H
Analyst G
Analyst F
Analyst E
Analyst D
Analyst C
Analyst B
Analyst A
Existing
New
8
2
3
6
Higher level networking
(layer 4-7)
Next generation wireless
in general
Solutions to manage data and/or
reduce traffic bottle necks
Other
• When asked, most investor analysts suggest investments in
traditional network equipment domains
• Several investor analysts want to see investments in
technology to help operators manage the growing data

volumes
• Expansions into new domains, such as new verticals, or new
business models, such as Cloud computing, are not frequently
mentioned
• There is no consensus view among the investor analysts on how
investments should be balanced by existing and new revenue
opportunities
Source: Accenture survey of Network Equipment Provider Investment Analysts, 2012
Number of responses
Base: All (14 interviews)
8
Regaining investor trust
Addressing investors’ concerns is likely
to require two fundamental things: first,
delivering both top and bottom-line growth
and second, enabling better predictability
by stabilizing earnings and communicating
performance to the market more effectively.
In a context, such as the NEP industry,
where companies are struggling to deliver on
the former, the latter is still important but
may not yield a significant positive impact
on investors’ trust. But for all companies,
effective execution and demonstrating
tangible results is key to regaining investors’
trust. NEPs need to establish some clear and
measurable success stories before they set
expectations about future performance.
The range of industry options
While this paper does not intend to address

the fundamental growth challenge facing
the NEP industry, it is worth reflecting on
the various positions in which different NEP
players find themselves. Each of the major
NEP players exhibits different financial
positions, as shown by the growth-and
spread-matrix (above). Companies with a
positive spread should focus on growing top
line with maintained margin. Creating growth
in a mature market is not easy and there
is no one-size-fits-all solution. Essentially,
companies have two options. They can either
try to capture additional market share, or
they can grow their addressable market by
expanding their coverage both horizontally
and/orvertically.Weseeexamplesofboth
in the market. One of the more successful
examples of the latter is Ericsson’s expansion
into the service domain. Another example,
which is too early to evaluate, is Huawei’s
move into semiconductors.
Companies with negative spread but positive
growth could remain in this position short-
term to gain market share, but eventually
need to define a plan to turn the growth they
achieve into a sustainable business. Fast-
growing companies in particular could have
much to gain from taking measures to improve
their internal efficiency.
For companies with negative spread and

negative growth, survival is the name of the
game. Finding a way out of their current
position could be very challenging. They need
to focus on one dimension at a time and
should prioritize profitability over top line
growth. One option for them could be to focus
on specific areas where they could establish
a profitable position as one of the leading
competitors and divest other, non-profitable
segments.
Stabilize and communicate
Companies in the sector will need to achieve
closer alignment between reported results
and consensus forecasts. That means avoiding
successive profit warnings that have been so
obviously damaging to investor trust. NEPs
may also need to explore business models
that can help smooth the flow or revenues
and profits in order to reduce the obvious
manifestations of volatility that have made it
hard for analysts to create a picture of future
performance.
As well as addressing performance stability,
NEPs may need to invest time in how they
communicate with investors. There is a clear
information gap between what analysts
are able to acquire today and what they
say that they need to make more accurate
assessments of potential for the sector.
NEPs should, where possible, try to augment

existing information with the insights that
could serve to increase investors’ analysis
-20
-10
0
10
20
-30 -20 -10 0 10 20 30
Company 5
Company 1
Company 3
Company 2
Company 8
Company 7
Company 6
Company 4
Spread* (Percent)
Year-on Year Revenue Growth (Percent)
Growth and Spread Matrix over Network Equipment
Providers, Fiscal Year 2011
* Spread: Post-tax Return on Invested Capital less the Capital Charge
of future developments. While balancing
transparency with competitive pressures is
clearly not easy, the more information that
NEPs can offer the greater their chances of
increasing levels of trust among investors.
That may mean creating a clearer link between
the evolution of technology and its likely
impact on financial performance. It may also
mean providing guidance on future market

trends and company performance. That
might involve rethinking how performance is
reported by redrawing it in line with different
segments or categories that are independent
of organizational structures, for instance
by giving insights into volumes and related
financial dynamics for both services and
products. In that way, analysts will have
greater transparency and find it easier to make
comparisons over time than they do today.
And finally
Our analysis shows that NEPs have
considerable work to do to transform their
prospects. But with the continued strong
growth across all markets in the need for
better, faster and broader data networks
there is still much to play for. There are
opportunities for NEPs to capture growth and
generate profits. But they need to make sure
that they create and communicate a clear
strategic response to investors in order to
rebuild trust.
Growth and Spread Matrix over Network Equipment
Providers, Fiscal Year 2011
9
10
Contact us
Mattias Gyllerup
Senior Principal Communications, Media &
Technology Practice

+46 730 51 3352
Agneta Björnsjö
E&HT Research Director
+46 730 51 3441
About Accenture
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