Moody's: Expected Further Revenue Declines in 2013 Keeps EMEA Telecoms Sector on Negative Outlook

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The outlook for telecommunications service providers in the Europe Middle East Africa (EMEA) region in 2013 remains negative as revenues are likely to decline in Europe by up to 2% next year due to continuing macroeconomic weakness aggressive price cuts and tough regulation says Moody's Investors Service in an Industry Outlook report published today.

"European telecom service providers are likely to find 2013 as challenging as this year," says Carlos Winzer, a Senior Vice President in Moody's Corporate Finance Group and co-author of the report. "We expect the intense competition on prices and declining domestic revenues to significantly eat into their profits despite the positive contribution from international diversification to their consolidated accounts. In companies' domestic businesses alone, we forecast an average decline of between 5% and 10% in those countries most affected by the deteriorating macroeconomic environment in the euro area," adds Mr. Winzer.

Moody's says that as consumer spending contracts, residential customers will continue to be price-sensitive, adding to pressure on the companies' revenues. The business segment will also remain under pressure as corporate clients continue to cut expenses. Competition, especially in the mobile segment, has grown more fierce, with some operators making aggressive price cuts. Many companies are subsidising the growing smartphone segment in the aim of gaining better penetration and market share, mostly to the detriment of profit.

It is still unclear as to when companies will be able to monetise underlying demand for broadband-related traffic to support revenue stability and future growth.

The industry remains capital-intensive, and fast-moving technology makes it imperative that companies step up investments to provide resilient, secure, high-speed and high-capacity networks in order to differentiate their services. As such, Moody's expects greater demand for higher capital expenditure (capex) will persist among EMEA telecom service providers.

Trends in Russia and the Gulf states are more positive. Moody's expects single-digit revenue growth for the major Russian operators, largely based on continuing strong demand in the mobile data segment. The picture is also relatively healthy for Arabian Gulf providers, although there will be a slowdown in growth in mobile revenues as that market becomes saturated. Operators there are looking for additional growth drivers such as data services.

While the liquidity of EMEA telecom service providers remains strong, Moody's anticipates some deterioration in financial ratios as companies face increasing pressure on cash flow and find it difficult to reduce operating expenses (opex) to offset pressure on revenues. Companies with the lowest financial flexibility are running out of options to support their balance sheets and Moody's believes that if dividend cuts are not sufficient, at some point, some of these companies may need to raise equity.

Moody's is more optimistic about the industry's medium-term prospects given that (1) the rating agency's central scenario anticipates that most euro economies will return to growth trends over the next three to five years; (2) regulator-driven declines in mobile termination rates (MTRs) will for the most part come to an end in 2013, with the EU commission becoming more supportive of network investments; and (3) competition is likely to become more rational.

Moody's negative outlook factors in its central macroeconomic scenario that euro area GDP will grow in the range of -0.5% to 0.5% in 2013 .

The outlook could move to stable if there is average flat to slightly increasing revenue growth across the industry, combined with stable margins and sustainable cash flow.

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