How would you make the case for fundamental change in the telecoms sector? One thing that is going to get your telecoms executive to sit up is (hopefully) the numbers. So before diving in to think about the future of telecoms, let’s start there, with a (very) brief look at telecom financials – is the sector making good money?
The short answer is: no. Whilst of course there are exceptions, the industry as a whole is under-performing. A 2013 report from PwC concluded that the European telecoms sector has not covered its cost of capital in years, which means that it is destroying, rather than creating, economic value. The chart below – adapted from the report – illustrates this well.
For various reasons we can get into later, telecoms service providers are suffering. Let me take an example close to (my) home. Bouygues Telecom, the third French mobile operator, saw a 23 percent drop in operating profit in Q1 2014, and confirmed that they, like “all telecom operators … are considering all possibilities and all opportunities…”. They are aiming for “slightly positive free cash flow” in 2014, which raises the question: where will the money to invest in new strategies come from?
It’s always easy to find a company in any sector undergoing difficulties, of course. However the quarterly telecom financials from across Europe have been fairly grim reading of late. Vodafone’s revenues are down 2% year on year, EBITDA is down 7%. Telefonica’s revenue is down 18%, net income is down 23%. Need I go on? In the USA, T-Mobile and Sprint are suffering the fallout from a self-induced price war.
Now, my 400 word blog post hardly counts as an investment analyst report – and we will revise the financial topic at a future point, but clearly telecom financials could be a lot better. As we start to dig into the causes and solutions, it’s worth keeping this context in mind.
There is one silver lining of course. At least the widespread malaise means that no-one need look bad. We can all blame ‘macro trends’ or whatnot and keep on with business-as-usual…
I’d be very interested in seeing other people’s analysis of current telecom financials. Do drop me a comment with your perspective…