Operators are increasingly investing in network access vendors' services to help them transform their business via the deployment of next-generation technologies, analytics and automation.
From professional services to maintenance, service providers can reduce internal expenses by relying on vendor partners' teams, deploy their own employees on more business-critical tasks, act more rapidly and agilely and leverage vendors' expertise in their own technologies. As a result, vendors are investing more money and resources into their service offerings to support existing clients and compliment their solutions when pitching prospects.
ADTRAN -- which this month won a contract to provide Australia's nbn with software, hardware and services -- saw its total service and support revenue increase to $26.7 million in its most recent quarter, representing growth of 46% year-over-year, said CEO Tom Stanton in an earnings call. (See ADTRAN Enjoys Record 2Q Earnings.)
"The majority of the services we have, our customers want them in as fast as we can do it," he said.
In the case of nbn, for example, ADTRAN IT specialists worked in an agile, collaborative environment with nbn's internal technology team to implement ADTRAN's standards-based, multi-vendor distribution point unit (DPU) management solution, using an open, microservices architecture.
Professional and technical services are vital to the design, deployment and success of nbn's ultra-broadband network, which will serve people across Australia, said Kathrine Dyer, chief network deployment officer at nbn, in a statement. By 2020, the operator plans to have in place a fiber-to-the-curb (FTTC) solution that supports more than 1 million customers, she said.
Today is similar to the late 1990s when MPLS entered the communications world and operators recognized they did not have adequate internal skillsets to leverage the new technology, Ronan Kelly, chief technology officer for EMEA and APAC regions at ADTRAN, told UBB2020.
"We see a similar scenario playing out now, in a world of software-defined access where the reality is the skillset doesn't exist in the operator community at large -- there are one or two exceptions to that -- so the reality is if we expect the operator community to embrace these new opportunities at the pace we hope they embrace them, we need to step in to the breach there and bridge that knowledge gap for them, help train their engineers so they can become more self-sufficient and then they can take that ball and run with it," Kelly said.
Likewise Calix sees growing demand for its services, starting with a consultative approach into how new access solutions can address business pain points and opportunities, Greg Billings, senior vice president of services at Calix, said in an interview.
"The service piece is big growth and on all three levels -- professional service, education and customer support/managed services -- are all nice, positive growth streams for us," he said.
In its first quarter of 2017, Calix broke out service revenue for the first time, showing the company earned $25.9 million out of a total $117.5 million, or 22% of that quarter's revenue. That's a 287% increase from $6.7 million in the same period in 2016, when Calix earned a total of $98.4 million or 6.8% of the quarterly revenue.
Indeed service revenue is an important contributor to ADTRAN'S bottom line. "Gross margin for the June quarter hit 45.9%, exceeding our 43.7% expectation (Street = 43.6%)," wrote George Notter, managing director for Equity Research and Telecom & Networking Equipment analyst at Jefferies, LLC, in a post-earnings-call report. "Gross margin was helped by a positive mix of domestic revenue and higher margin engineering services in the quarter."
Investing in service
As demand for next-generation access technologies continue to grow and operators further scrutinize spending, vendors expect services revenue will also increase. They're investing in their own resources to ensure they can deliver across the spectrum of in-demand services and develop new offerings to suit operators large and small, said Kelly.
Although investments can be costly at first -- especially when scaled rapidly, ADTRAN expects to recoup and expand on these dollars through further streamlining of best practices, enhanced revenue, even stronger customer relationships and new efficiencies, Chief Financial Officer Roger Stone said on the vendor's most recent earnings call.
"I would continue to reiterate that our services business has scaled rapidly and we certainly see opportunity as to improve gross margins through efficiencies and we are actively working," he said.
Calix, too, is adding resources to its service offerings.
"We're clearly investing in building competency and scale for the size of the programs that our customers are embarking on and the speed of the shift. They're consciously saying they have to lower their operating costs and so they're literally cutting things faster and so we're taking them up on the other side and investing in those competencies," Billings said. "We're investing into service areas in a big way."
By going beyond the consultative sale into expanded professional services, education, interoperability and support, network access vendors save operators money, accelerate their adoption of new technologies and integration with legacy systems allowing more rapid deployment of new end-customer offerings, and time to focus on digital transformation, predictive analytics and automation.
— Alison Diana, Editor, UBB2020. Follow us on Twitter @UBB2020 or @alisoncdiana.