U.S. carriers to see 2% drop in free cash flow this year, Moody's predicts

Cellular antennas on tower
Operators are upping their network investments in response to increased traffic

The proliferation of unlimited-data plans will drive down the free cash flow of U.S. carriers this year, according to a new report from Moody’s Investor Service. For European mobile network operators, though, 2017 marks a light at the end of a tunnel of several years of declining revenues.

The telecom markets in America and Europe “are at different stages of the industry cycle,” wrote Carlos Winzer, a Moody’s analyst, in a research note to subscribers this week: U.S. carriers have rushed to deploy unlimited-data plans as competition has ramped up over the last year, while European operators are reversing a downward trend by selling bundled services.

“U.S. telcos’ revenue growth will slow and free cash flow drop by 2% in 2017 as price pressures intensify with the proliferation of wireless unlimited price plans and ongoing challenges in the wireline segment,” Winzer wrote. “In Europe, however, telcos look set to enjoy a sustained period of growth into 2018 after several years of decline with revenues expected to climb by up to 1.5% as consumer spending strengthens and high-speed data demand grows.”

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European operators have more opportunities to cross-sell services “as boundaries between cable and telecoms disappear,” Winzer continued, while the U.S. market “is more unified for services” but generally maintains separate wireless and fixed-line infrastructures, with cable operators such as Comcast and Charter elbowing their way into the mobile segment.

“Wireless services in the U.S. are now more exposed to lack of product differentiation, price competition and inroads by cable TV operators,” Winzer noted.

And the uptake of unlimited-data plans is forcing U.S. carriers to up their network investments to support increased traffic, which is also having an impact on the bottom line.

“In the U.S., we expect the proliferation of unlimited price plans to drive heavier network usage and higher capital investment,” according to Winzer. “We also anticipate margins to remain under pressure but stable as low churn is offset by promotional activity, in particular device promotions and rebates for customers who switch. Therefore, we forecast EBITDA-less-capex (our proxy for cash flow) to fall by 2% in 2017 with EBITDA growth of less than 2% offset by 7% higher capital investment to support higher traffic volume. In 2018, we expect approximately flat EBITDA-less-capex vs. 2017, although spending for wireless capacity growth may accelerate further and result in another step down in cash flows in 2018.”

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