Late last year, Ovum predicted 2014 revenue growth of 0.9% for telcos (aka communications service providers or CSPs). We expected CSP capex to end the year at around 18.3% of revenues. With roughly 85% of providers reporting, results are in line with projections. If anything, revenue growth is trending a bit lower than expected.
CSPs ended 2014 with nearly flat revenues; preliminary results suggest 0.5–1% growth from the 2013 level, in line with our 0.9% forecast. Because of LTE-driven mobile upgrades and ongoing fiber network investments, capex grew faster, up approximately 3% to $340bn in 2014, and is likely to stay around this level in 2015.
While CSPs try to improve their competitive positioning and roll out new services, the short-term reality is 1–2% annual revenue growth. That will keep pressure on capex budgets. CSPs are used to this, though, and they are also getting better at directing capex to where it brings the most benefit.
Effective use of limited capex budgets has been a major focus of many CSPs’ strategies. Most CSPs are emphasizing increased network investments as a way to position themselves better competitively, either by lowering churn or offering new services. Vodafone, for instance, has spent heavily on its Project Spring, increasing its 2014 capex to $14.6bn, or 21.4% of revenues, an impressive boost from 15.3% and 17.4% capital intensity in 2012 and 2013. Vodafone has been aggressive about expanding 4G coverage across its markets, scaling up its fixed broadband efforts and extending fiber to more base stations. It also has used some of its cash reserves to buy its way into broadband markets, acquiring Spain’s Ono last year. Vodafone is an outlier, though, having benefited from a big influx of cash stemming from the sale of its stake in Verizon Wireless last year.
More carriers are looking to streamline capex budgets. Belgacom, for instance, spent €977m on capex last year and expects to invest €900m in 2015, aiming to “further improve customer experience” across mobile and fixed networks and enhance its IT systems. Other carriers are torn by the need to constrain capex but invest in new services. Telefonica is one. Its 2015–16 guidance is for a temporary increase in capital intensity, from 16.7% in 2014 to 17% in both 2015 and 2016. The driver is the need to build new infrastructure to support organic revenue growth: broader LTE coverage, more FTTH homes passed, deeper video offerings, and network transformation. Even Telefonica, though, expects to lower 2017 capital intensity back down to about 15%.
Ovum will continue to carefully track capex on a quarterly basis, looking for any signs of potential upside to our fairly conservative “most likely” forecast scenario. The success of incremental capex in supporting new service rollouts and generating increased revenue growth would be a welcome trend.
“Verizon spin-off caps boom year in network and tower sharing deals,” TE0006-001018 (February 2015)
Communications Provider Capex Forecast Report: 2014–19, TE0006-000993 (January 2015)
Telco Services Innovation Radar 1H14: Analysis and Case Studies, TE0009-001364 (October 2014)
Matt Walker, Principal Analyst, Intelligent Networks
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