Thursday, January 16, 2014

2014 Telecom Revenue Growth Picture is Mixed

Of all the trends affecting the global telecom business since the advent of competition, nothing is more striking than  diverging strategy and revenue performance.

For example, telecom service providers in Asia and North America are posting three perent to four percent annual revenue growth, while revenues in Europe have been dropping for some years.

Moody's Investors Service has said  the outlook for telecommunications service providers is “stable” in the  Asia Pacific region, with “ moderate revenues and earnings growth” and  gradual declines in profit margins.

"The telecommunications companies that we rate in Asia Pacific should record average revenue growth of around four percent over the next 12 months to 18 months, a level which is broadly in line with average GDP growth rates in the region," says Yoshio Takahashi, a Moody’s analyst.

In contrast, Europe's telecom operators will see a fifth year of revenue decline in 2014, although operating margins will stabilize, helped by cost cutting and the end of regulatory cuts to mobile call termination fees, Moody's said.

About the best outcome would be “revenue stabilization” in 2014, Moody’s says, with the telecommunications service sector remaining on negative outlook.

"While we expect revenues to stabilize or marginally decline by zero percent  to -0.5 percent in 2014, it is not clear how sustainable any recovery will be," said Carlos Winzer, a Moody's Corporate Finance group SVP. "We have had a negative outlook on the sector since November 2011 and would expect to see a predictable and sustainable one percent to three percent annual revenue growth to make it stable."

Moody's estimates that the European industry's average EBITDA margin will be down approximately one percent in 2013, but will probably stabilize in 2014.

In Latin America, Moody’s think both 2013 and 2014 will be good years. Moody's says South African, Russia as well as Middle East, market trends are more stable than in Europe.

In the U.S market, the mobile segment of the business “will continue to generate strong levels of free cash flow,” acording to Moody’s.  Earnings (EBITDA) minus capital spending growth, a proxy for free cash flow, will accelerate to 13 percent to 15 percent in 2014 for the six largest carriers.

“We also expect overall industry EBITDA to gain eight percent next year as industry service revenues grow three percent to four percent,” Moody’s forecasts.

Moody's expects that prices in some of the most competitive European markets will continue to drop Integrated incumbent operators such as Deutsche Telekom, Orange, KPN, Telefonica and Portugal Telecom will fare better than companies with just mobile or fixed offerings.

That’s an important observation: the firms that will fare best own both fixed and mobile assets. The other obviously significant observation is that revenue growth rates now have diverged around the world, with some regions faring better than others.

Despite the tough European conditions, or perhaps because revenues are challenged, Moody’s forecasts an average capex/revenue ratio of approximately 18 percent or higher in 2014.

In Asia, Moody’s predicts mobile service provider capex will decline to about 20 percent of revenue in 2014.

But it is possible European capital investment could increase, especially as Vodafone begins to upgrade its networks and other competitors invest to keep up.

But Asia remains a bright spot for the global industry. Moody's forecasts average adjusted EBITDA margins in the region will contract by approximately 0.5 percent to one percent in 2014.

"Increased data usage on mobile phones will continue to drive the Asia Pacific industry's revenue growth, although rising mobile-penetration rates and competition will slow the pace of growth,” Moody’s said.

But profit margins will stay at 37 percent to 38 percent. The area to watch in Asia is financial leverage, which will remain “moderately high,” Moody’s says,  as the companies deploy excess cash to increase shareholder returns, rather than significantly reducing debt.

While specific in-market consolidation deals may be completed in the next 12 months to 18 months in Europe, Moody's does not expect a wave of cross-border consolidation.

The four largest integrated incumbent telcos, including Telefonica, Deutsche Telekom, Orange and Telecom Italia, are either in selling mode or do not have much flexibility or appetite to lead this process.

But that obviously should shift attention to U.S., Mexican or other potential acquirers.

The main point is that competition now has lead larger telecom providers to diverge, in terms of strategy, revenue models and actual revenue growth.

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