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Telco Revenue Growth Skidded to Halt in 4Q '08
According to a study from Ovum, telecom service providers underlying 4Q08 performance has been surprisingly strong, despite chaos in credit markets, a drop in consumer confidence, and macroeconomic uncertainty. Large write-downs in some markets do not negate this underlying strength.
Based on Ovum's report for 130 service providers across 4 regions of the world, revenues grew 1.8% year-over-year (YoY) in 4Q08 to $377.6 billion, far slower than the 19.0% YoY growth in 4Q07. However, growth in operating expenses for the same period was just 1.4%, and capex dropped 2.3%.
While the capex decline – which has worsened in early 2009 – is certainly unwelcome news to vendors, the net impact of telcos' cost reductions was to increase operating cash flow (OCF) margins (revenues less opex less capex, all divided by revenues) globally to 14.3% in 4Q08, from 13.2% in 4Q07. Average OCF margin increased in every individual region except South and Central America (SCA) .
One important measure of sustainability – EBITDA divided by net debt – was stable YoY in 4Q08, falling only in North America.
"The NA region, however, handily increased its cash reserves (as a portion of monthly opex) in 4Q08, signalling its continued ability to attract capital despite a tough public market", said Matt Walker, Principal Analyst based in Thailand.
On the downside, carriers around the world but especially Tier 1s in NA and EMEA (Europe, Middle East & Africa) have been taking some large write-offs/impairment charges related to goodwill and/or network or investment assets. This has impacted net profitability so has attracted headlines. Matt Walker said "the focus on the sensational one-time accounting issues (e.g. asset write-offs) has overlooked the industry fundamentals, even if many of these adjustments were necessary, sometimes overdue".
Looking ahead, as 1Q09 telco earnings reports have trickled out, Walker believes that the results have been largely consistent with our analysis of 4Q08. Carriers are cutting costs fairly aggressively – with a focus on discretionary capex items with immediate affect on cash flow. Walker noted that overall most are relatively healthy despite the harsh macro conditions. "The vendor market may be more challenged by this downturn", added Walker, "as Huawei, ZTE and a handful of other Chinese vendors build on their already strong positions in global markets with a range of tools, such as ability to facilitate or directly offer financing for their customers".
Posted to the site on 19th May 2009