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Telecommunications Network Operators: 1Q20 Market Review

This market review provides a comprehensive assessment of the global telecommunications industry based on financial results through January 2020 (1Q20). The report tracks revenue, capex and employee for 138 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 1Q11-1Q20 (37 quarters). The report's format is Excel.
After staging a mild recovery in 4Q19, the industry’s top-line growth remained under pressure yet again in 1Q20. Single-quarter revenues declined YoY by 2.2 % in 1Q20, to $446B ($1,813B annualized). Total capex was about $70B in 1Q20, down 1.3% YoY as debt concerns grew, and operators became keen on open networking, cloud partnerships, and asset spinoffs to cut capex. Telco investments in 5G and media slowed.
In the near term, the bigger concern for telcos is the global economy slipping into a prolonged recession. On June 24, the International Monetary Fund updated its forecast for 2020, now projecting global gross domestic product (GDP) to sink 4.9% for the year, and noted that “the labor market has been severely hit and at record speed, and particularly so for lower-income and semi-skilled workers who do not have the option of teleworking.” A 5% dip in GDP will hit both revenues and capex hard, and more telco layoffs are expected. Further, the manufacture and distribution of network gear will also be delayed, due to supply chain constraints, thus slowing 5G and fiber network builds in the short term.
Key findings from our 1Q20 analysis include:
1) Telecom revenues in 1Q20 were $446.3B, dropping a bit faster than capex, down 2.2% from 1Q19. Decline in handset sales – due to closure of retail stores and supply chain disruption – and decrease in roaming revenues arising from global travel restrictions are a few factors for this declining revenue. Going forward, telco revenues will drop by several percentage points, at a minimum, even with offsetting effects such as government stimulus and an increase in online activity.
2) Global capex declined by approximately 1.3% YoY to $70.2 billion in 1Q20, in line with the expectations, due to the uncertainty around the COVID situation. Telcos are prioritizing their investment on maintenance and capacity upgrades rather than network coverage expansion projects, to preserve cash. The industry’s annualized capex to revenue ratio was 16.3% in 1Q20 compared to 16.5% a year ago.
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 $351K. Labor costs per employee, on an annualized basis, increased from $55.6K in 1Q19 to $56.3K in 1Q20.
4) Telcos employed 5.1M people in 1Q20, down 1.4% compared to its previous quarter. Global telco headcount has been relatively stable for several years, due in part to growth in Asia, but the 2020 recession could change this. Layoffs on the retail front are on the rise, with consumers opting for online purchases given the current pandemic situation thus forcing telcos to shut down their physical stores. We expect more layoffs to happen 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, America Movil’s acquisition of Nextel in Brazil, 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 13.7%, on an annualized basis. Single quarter operating margins increased in 1Q20, to 14.5% from 13.8% in 1Q19. The rise in margins is due to a fall in opex which declined by 1.4% in 1Q20 versus 1Q19.
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