Many operators are beginning to publicly set out the expected impact of IFRS 16 (ASC 842 in the US), a new accounting standard governing leases. Ovum tracks quarterly financial results of the world's largest telecoms service providers in its World Telecoms Financial Benchmarks.
IFRS 16 likely to increase EBITDA profitability and indebtedness for most operators
IFRS 16 takes effect from 1 January 2019, one year after the implementation of IFRS 15 (relating to revenue recognition and known as ASC 606 in the US). As such, the 1Q19 results, generally reported in April or May, would be the first quarter to which they apply, although some telcos such as MTS and Turkcell have already adopted it one year early. We understand that most companies do not intend to restate previous reporting periods for IFRS 16, just as most did not for IFRS 15.
The accounting changes have led some service providers to alter their financial terminology. Orange, by way of example, stated that the change "prompted us to review our [key performance] indicators – adjusted EBITDA will become EBITDAaL ('after lease') and capex will become eCapex (economic capex)." The company proceeded to give forward guidance for 2019 based on these new metrics, which Ovum will capture in its 2019 World Telecoms Financial Benchmarks: Group Guidance Tracker. Deutsche Telekom has similarly defined EBITDA AL and FCF AL as "after lease" measures. As operators complete preparations for implementation of the new standard, many have endeavored to outline the expected impact in 2019:
Millicom expects EBITDA to increase by between 6% and 8%, and underlying net debt (including Guatemala and Honduras) to increase by between 15% and 20%
Orange expects a decrease of approximately €300m (about 2%) in EBITDA AL
Swisscom said that 2019 EBITDA would increase by around CHF200m, and net debt at January 1, 2019 would increase around CHF1,300m (an increase of 18%)
Veon expects an increase of around $450m (+14%) in EBITDA.
In summary, the new accounting appears likely to increase EBITDA profitability and indebtedness in most, but not all, cases, as Ovum wrote about in the Opinion piece, IFRS 16 accounting standard set to muddy reported financials (again). Overall, free cash flow should not change (although "operating" cash flows may be recategorized as "financing"). This follows the changes in IFRS 15 in 2018, which also tended to increase EBITDA margins. Looking further ahead to 2020, there is a risk that EBITDA margins may dip, all things being equal, as the initial effects of this accounting unwind.
Telecom Industry and Operator Benchmarks by Key Financial Metrics: 3Q18, PT0016-000009 (December 2018)
"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)
World Telecoms Financial Benchmarks – Group Guidance Tracker, PT0016-000004 (November 2018)
Upin Dattani, CFA, Principal Financial Analyst