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Telecommunications Network Operators: 4Q19 Market Review

This market review provides a comprehensive assessment of the global telecommunications industry based on financial results through December 2019 (4Q19). The report tracks revenue, capex and employee for 133 individual telecommunications network operators (TNOs). For a sub-group of 50 large TNOs, the report also assesses labor cost, opex and operating profit trends. Our coverage timeframe spans 1Q11-4Q19 (36 quarters). The report's format is Excel.
After a slump in revenue for five straight quarters, the global telecom industry staged a mild recovery. The industry’s 4Q19 revenues increased 1% YoY, as telcos diversified their services into IoT and media/content. The slight uptick in revenue was accompanied by a decline in capex and labor costs. Fourth quarter capex declined 3.2% from 4Q18. Annualized capex declined 1.6% to $297B in 4Q19, as debt concerns grew, and operators became keen on open networking, cloud partnerships, and asset spinoffs to cut capex. Telco spending on employees, or labor costs reached $291B in 4Q19 on an annualized basis, down 0.4% from the 4Q18 figure.
This month’s warning by the IMF about an imminent recession which could be worse than the 2007 global financial crisis has had telcos acting more cautiously. 5G deployments and investments in media will be slower. More layoffs are expected. Though not new for telcos, tighter margins will add to their grief.
Key findings:
1)  The long-term revenue growth of the telecom sector is 1.4% per year, on average, after adjusting for currency translation. In 4Q19, revenue was up 1.3% YoY on a fixed exchange rate basis. Actual revenue growth in 4Q19 increased 1% YoY to $465B. Both figures are consistent with the sector’s long-term growth average.
2) Even the modest growth currently achieved by the telecom sector requires high levels of capital investment in networks. The industry’s long-term capex to revenue ratio (capital intensity) is in the 16-17% range, on average (16.3% in 4Q19, annualized). Telcos also use M&A to expand their core business or move into adjacent markets; AT&T-Time Warner and Sprint-T-Mobile are just a few examples. The debt from such deals can drive up the operator’s interest payments and make it harder to fund capex, however. Such deals also inevitably come with layoffs.
3) On a revenue per employee (RPE) basis, the telco sector has been stagnant since 2011: the annualized figure was $362K that year, and the average figure for the last four quarters was $350K. Labor costs per employee, on an annualized basis were flat in 4Q19 compared to a year earlier at $56.1K.
4) Telcos employed 5.2M people in 4Q19, in line with recent quarters. Total headcount has not varied much since 2011 as telcos have focused instead on reshaping their workforce - cutting field engineers and installers, and hiring software developers, for instance. We expect employee totals to begin declining in the next 1-2 years. India alone may cut up to 100K employees in that timeframe, due to Jio’s consolidation & BSNL reforms.
5) The M&A climate remains strong for the sector in 2020. Many telcos see their core markets declining, and are buying their way into other markets while also streamlining their asset base. Noteworthy recent deals include the recent merger of T-Mobile and Sprint, Comcast’s acquisition of Sky, the merger of Vodafone India and Idea Cellular; and Vodafone’s $18B acquisition of Liberty Global’s Germany and Eastern Europe cable and broadband assets. However, after the M&A deal paperwork is signed, integrating operations and actually achieving synergies continues to be a challenge for telcos. Managing the debt from these acquisitions is just as hard, as AT&T and others are discovering.
6) Telco industry operating margins have been stable for the last 11 quarters, averaging around 13.6%, on an annualized basis. Single quarter operating margins increased in 4Q19, to 13.3% from 11.1% in 4Q18. The rise in margins is due to a fall in opex which declined by 1.4% in 4Q19 versus 4Q18.
Impact of the COVID-19 pandemic in 2020: Lower handset and ad revenue, delayed 5G rollout
With the world reeling under the impact of the COVID-19 pandemic, most industries are feeling the heat of this unprecedented situation. Businesses worldwide are faced with a recessionary climate and telcos are no exception. The impact of the pandemic will likely be felt across their operations.
The telecom sector faces supply chain risks, and handset/device revenue will take a hit due to reduced production of 5G smartphones and handset components.
Lower consumer spending due to lockdown in most countries and a rise in defaults on financed handset plans will also hurt revenue generation. On the enterprise side, wireline operations could see revenue declines accelerate due to lower corporate spending and higher unemployment. Telcos with significant media and advertising segments will see revenue declines due to suspension of upcoming sporting events. Examples include Telefonica, BT Altice and AT&T.
In European countries, 5G auctions anytime in the next several months are next to impossible amid the COVID-19 pandemic; France has already postponed an auction. This will directly affect any near-term sales prospects for the telcos. Looking ahead, TNOs are likely to revisit their capex budgets and slash spending on 5G.
Amid all the bad news, the increase in data traffic and higher demand for virtual private network (VPN) capacity could offer some relief for the operators. Although not immediately, operators are likely to migrate some users in the consumer segment to more premium packages and make attempts to monetize the rise in data traffic.
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Best regards,
Matt Walker
Chief Analyst