Vendors reaping the rewards from restructures, experts say

Restructuring continues to reap cost savings for vendors, according to the 2015 Telecom Infrastructure Services Margin Benchmark from Technology Business Research.

However, despite the cost savings enjoyed in 2015, TBR says the runway for additional margin growth is narrowing as the full impact of these initiatives is realised.

“Telecom infrastructure services (TIS) suppliers will engage in M&A for further operating leverage, as Nokia has done with Alcatel-Lucent,” explains Chris Antlitz, TBR Telecom senior analyst.

“But the key focus should be on automation, which is an area Nokia is also leading in, since this will enable vendors to extract more margin out of existing operations and create opportunities for revenue growth,” he says.

According to TBR’s benchmark, Nokia Networks remained the TIS margin leader in gross margin and operating margin among Tier 1 peers and is expected to remain the leader in 2016 post-Alcatel-Lucent merger.

“Nokia Networks has become the model among network equipment providers of how to restructure and reap optimal margin benefits from service delivery transformation,” Antlitz says.

“Rivals are also getting some margin accretion from restructuring efforts, but they are not experiencing the same magnitude of change Nokia Networks underwent,” he explains.

Antlitz says vendors continue to seek ways to balance revenue growth and margin improvement, but are struggling to increase both ends of that equation, especially with new technologies such as NFV, SDN and cloud threatening to disrupt the traditional sales model.

“TBR believes automation will address this challenge, and vendors are in the early stages of investing in cognitive computing (i.e., artificial intelligence), augmented reality, drones and other automation technologies to reduce costs while growing revenue by providing operators with more flexible services that allow for improved compliance with stricter service level agreements,” he says.