Across the most significant global telecoms groups, as measured by Ovum's World Telecoms Financial Benchmarks (WTFB), capex and indebtedness have risen. There are signs, however, that operators are leaner and well positioned to benefit from even a modest upturn in fortunes as 5G business models get underway.
Profitability margins and cash flow offer glimmers of hope as the 5G era begins
The latest quarterly WTFB slides show that in the aggregate, the indebtedness of major telecom groups is the highest it has been for several years, as measured by the ratio of net debt to EBITDA of 2.0x, although Etisalat, China Mobile, and China Unicom notably maintain a conservative net cash position. This comes at a time when investment requirements are increasing, with 5G and fixed wireless access services being launched in some technologically ambitious markets, and fiber coverage and capacity improvements being made in countries where it makes sense locally. The tension between delivering shorter-term returns for shareholders and investing in the business has long existed and is set to persist. In some mature developed markets, companies such as Vodafone and BT have cut or considered cutting dividends, marking a shift toward investment. Some lucrative parts of the industry, particularly messaging, termination rates, and roaming, have for many years been targeted and damaged by regulation, competition, and the advent of over-the-top messaging models such as WhatsApp. Lessons have also been learned from the excessive enthusiasm seen in the 3G and 4G investment cycles.
As we enter the opening stages of the 5G cycle, EBITDA margins are broadly stable to rising, and operating free cash flow has been particularly healthy after an effective capex holiday, or lower investment levels in 5G compared to 4G (or 4G compared to 3G, in some developing markets). 5G has been approached more cautiously than previous generations in many markets. WTFB data also suggests that industry employee headcount peaked in 2018, and appears under control.
From a financial perspective, Ovum does not expect 5G to lead to step changes in revenues, because incessant competition makes price premia hard to maintain, but there is, therefore, scope for a combination of speed-based service levels and usage-based bundles to surprise us. Similarly, Internet of Things (IoT) use cases are fragmented, with limited revenues expected initially, but these could become more significant over the next decade. Even a moderation of further regulatory pressures together with increasing data usage may be enough to see revenue growth accelerate.
Ovum's group telecoms financial benchmarking products and quarterly reported financial data and analysis are available to WTFB subscribers. Please contact me or your Ovum representative for further details.
Telecom Industry and Operator Benchmarks by Key Financial Metrics: 1Q19, PT0016-000011 (July 2019)
World Telecoms Financial Benchmarks – Group Guidance Tracker, PT0016-000004 (May 2019)
IFRS 16 accounting standard set to muddy reported financials (again), GLB007-000179 (December 2018)
"IFRS 15 will encourage deeper scrutiny of the business of handset subsidies," GLB007-000028 (January 2018)
Upin Dattani, CFA, Principal Financial Analyst