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1Q09 results highlight importance of emerging markets

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Opinion piece by John Lively, VP & Chief Forecaster Exchange rate shifts can mask real growth Dramatic changes in exchange rates occurred in 4Q08 and 1Q09, compared to previous periods, with many currencies weakening versus the dollar. The euro fell 15%, the Indian rupee declined 27%, the Mexican peso 33%, the Australian dollar 36%, and the Korean won was down 48%. For an operator reporting EUR 100 million of capex in both 1Q08 and 1Q09, exchange rate shifts would translate the 0% growth into a decline of 13% if the results were converted to US dollars at the going rate for each period.

In contrast, the yen and the renminbi strengthened against the US dollar in 1Q09 versus 1Q08, such that dollar-denominated results for operators in Japan and China would show growth of 12% and 5% respectively, due solely to forex shifts.

This distortion can be removed via calculating growth rates for each operator in its reported currency, or by using a constant exchange rate. In this analysis, the latter approach was taken, using a constant 1Q09 rate for both 1Q08 and 1Q09 data.

With the impact of exchange-rate shifts removed, global fixed revenues fell 1% in 1Q09, and mobile revenues rose 2.3%, versus 1Q08. Fixed capital expenditure was flat, while mobile capex increased by 21.6%.

Capex in emerging markets appears undaunted by recession

North America exhibited the greatest recession impact among regions in 1Q09. Wireline revenues fell 7.4%, and cable TV and mobile grew by 3.8% and 3.1% respectively, 8 to 10 percentage points off pre-recession rates. Capital expenditure in the three groups fell 22.0%, 14.6%, and 12.2% respectively compared to 1Q08.

The advanced Asia-Pacific region (excluding China and India) had the next worst results, with wireline revenues down 2.4% and capex down 9.8% (using constant exchange rates). Mobile revenues were down 7.6% (more due to competitive issues than recession impact), and mobile capex fell 11.6%.

In Western Europe, wireline revenues were basically flat, and associated capex increased by a scant 0.8%. Mobile revenues grew just 1.9%, and mobile capex grew by 6.2%. Mobile capex growth spanned a large range, with 3040% increases at Deutsche Telekom, KPN, TDC, and Vodafone, and cuts of 8 to 22% among other tier-1 operators.

In South and Central America, wireline revenues grew 4.3% and wireline capex declined 5.8%. The mobile sector was particularly robust, with revenues up 14.3%, and capex up 67.0%. America Movil, Telefonica, Telemar, and Vivo had especially large percentage increases in capex, partly due to light spending in 1Q08. (Capex was down sequentially from 4Q08, as is the normal pattern.)

The Chinese domestic telecom market also showed strength, with wireline revenues increasing by 10.6% and mobile revenues up 5.3%, compared to 1Q08. Wireline and mobile capex increased by 74% and 68%, respectively. Although the capex growth rates were inflated by an unusually low capex in 1Q08, the recent completion of the China Netcom restructuring also played a role in driving investment.

Finally, India was the fastest growing market in 1Q09, with wireline revenues up 16.4% and mobile climbing 27.5% versus 1Q08. Capital spending was up 60% among fixed operators, and grew by a similar amount among mobile operators.

One of the standout features of these results is the fact that in South America, China, and India, capex increased at rates ranging from 55% to 75%, while among North America, Western Europe, and Asia Pacific, capex growth ranged from an anemic +6% to a dismal -22%. Equipment vendors must have traction in emerging markets to avoid being left behind by their competitors in 2009.

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