Cost-cutting improves challenges for vendors

 

Telecom service providers’ underlying 4Q08 performance was 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 new report, Review of 4Q 2008 Telco financials,www.ovum.com,for 130 service providers across four 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%. The CAPEX decline – which has worsened in early 2009 – is unwelcome news for vendors, the net impact of telcos’ cost reductions has been 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).
 
Operators’ stability maintained
One important measure of sustainability – EBITDA divided by net debt – was stable YoY in 4Q08, falling only in North America, which fortunately increased its cash reserves (as a portion of monthly OPEX in 4Q08), signaling its continued ability to attract capital despite a tough public market.
 
On the downside, carriers around the world, especially Tier 1s in North America and Europe, Middle East & Africa have been taking some large write-offs/impairment charges related to goodwill and/or network or investment assets. This has affected net profitability and has attracted headlines. The focus on the sensational once-only accounting issues (such as asset write-offs) has overlooked the industry fundamentals, even if many of these adjustments were necessary and sometimes overdue.
 
As 1Q09 telco earnings reports have trickled out, we believe 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.
 
Overall most are relatively healthy despite the harsh macro conditions. The vendor market may be more challenged by this downturn as Huawei, ZTE and a handful of other Chinese vendors build on their already strong positions in global markets with a range of tools, including the offer of facilitating finance for or directly financing their customers.

 

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