Telcos are in the Middle Where it Comes to Exploring Generative AI

Telcos are in the middle of industry organizations that have set up generative AI teams with budgets. And telcos are fairly close to the all-industry average, in that regard. The point is that, on many measures, telcos are not “industry leaders” when it comes to some forms of innovation, but are not laggards, either. 

source: Capgemini 

AI already is in widespread use across many industries. Common uses already include:

• Customer service: AI chatbots are now widely used to answer customer questions and resolve issues. They can also be used to provide personalized recommendations and suggestions.

• Fraud detection: AI is used to detect fraudulent transactions and prevent financial losses. This is done by analyzing large amounts of data to identify patterns that are indicative of fraud.

• Risk assessment: AI is used to assess risk in a variety of areas, such as credit lending, insurance, and healthcare. This is done by analyzing data to identify factors that are associated with risk.

• Product recommendations: AI is used to recommend products to customers based on their past purchases, browsing history, and other factors. This can help businesses increase sales and improve customer satisfaction.

• Personalization: AI is used to personalize the customer experience across a variety of channels, such as website, email, and mobile app. This can be done by using data to understand customer preferences and deliver content that is relevant to them.

• Marketing automation: AI is used to automate marketing tasks, such as email marketing and social media marketing. This can help businesses save time and money and improve the efficiency of their marketing campaigns.

• Logistics and supply chain management: AI is used to optimize logistics and supply chain management. This can help businesses reduce costs, improve efficiency, and deliver products to customers more quickly.

• Manufacturing: AI is used to automate manufacturing tasks, such as quality control and predictive maintenance. This can help businesses improve efficiency and productivity.

• Research and development: AI is used to accelerate research and development. This is done by automating tasks, such as data analysis and experimentation.

 

And though connectivity networks routinely are referred to as "capital intensive", telco networks are in the middle of industries in terms of debt usage, compared to equity, earnings, revenue or cash flow. . 

Industry	Debt to Equity Ratio	Debt to EBITDA Ratio	Debt to Revenue Ratio	Debt to Cash Flow Ratio
Telecommunications	0.9	1.1	0.2	0.5
Airlines	2.0	2.5	0.5	1.0
Banks	1.5	1.8	0.4	0.8
Retailers	1.0	1.2	0.2	0.5
Pharma	0.6	0.8	0.1	0.3
Meta	0.5	0.6	0.1	0.3
Apple	0.3	0.4	0.05	0.2
Alphabet	0.2	0.3	0.05	0.1
Microsoft	0.1	0.2	0.03	0.1

Similarly, the connectivity business is neither the “worst” nor the “best” industry where it comes to revenue growth or profitability. 

But connectivity is among the “best” industries where it comes to the effective use of capital, using either the return on capital employed (ROCE) or return on invested capital (ROIC) methods. 

Industry	Average ROCE
Telecommunications	15%
Energy	12%
Financials	11%
Healthcare	10%
Technology	9%
Consumer Discretionary	8%
Consumer Staples	7%
Industrials	6%
Materials	5%
Utilities	4%

Industry	Average ROIC
Telecommunications (Mobile)	17%
Telecommunications (Fixed)	13%
Energy	12%
Financials	11%
Healthcare	10%
Technology	9%
Consumer Discretionary	8%
Consumer Staples	7%
Industrials	6%
Materials	5%
Utilities	4%

Perhaps being “in the middle of the pack” on many measures is not the “best” position. But neither is it the “worst.”

Do Telcos Reap the Best Returns on Invested Capital?

By some measures, the connectivity business is neither the “worst” nor the “best” industry where it comes to revenue growth or profitability. But connectivity is among the “best” industries where it comes to the effective use of capital, using either the return on capital employed (ROCE) or return on invested capital (ROIC) methods. 

Industry	Average ROCE
Telecommunications	15%
Energy	12%
Financials	11%
Healthcare	10%
Technology	9%
Consumer Discretionary	8%
Consumer Staples	7%
Industrials	6%
Materials	5%
Utilities	4%

Industry	Average ROIC
Telecommunications (Mobile)	17%
Telecommunications (Fixed)	13%
Energy	12%
Financials	11%
Healthcare	10%
Technology	9%
Consumer Discretionary	8%
Consumer Staples	7%
Industrials	6%
Materials	5%
Utilities	4%

ROCE is calculated by dividing earnings before interest and taxes (EBIT) by capital employed. Capital employed is the total assets of a company minus its liabilities. This means that ROCE measures how effectively a company is using all of its assets, including its debt, to generate profits.

ROIC is calculated by dividing net operating profit after taxes (NOPAT) by invested capital. Invested capital is the total amount of money that a company has invested in its business, including equity, debt, and other liabilities. This means that ROIC measures how effectively a company is using its equity and debt to generate profits.

Here is a table summarizing the key differences between ROCE and ROIC:

Characteristic	ROCE	ROIC
Formula	EBIT / Capital employed	NOPAT / Invested capital
Denominator	Total assets - liabilities	Equity + debt + other liabilities
Perspective	Company's perspective	Investor's perspective
Ease of use	Easier to calculate	More difficult to calculate
Relevance	More relevant for comparing companies in different industries	More relevant for comparing companies in the same industry

In general, a higher ROCE or ROIC is better. This means that a company is using its capital more effectively to generate profits. However, it is important to consider the industry that a company is in when interpreting these ratios. For example, a company in a capital-intensive industry, such as manufacturing, may have a lower ROCE or ROIC than a company in a less capital-intensive industry, such as software.

ROCE is based on pre-tax figures, while ROIC is based on after-tax figures. This means that ROCE may be more volatile than ROIC, as it can be affected by changes in tax rates.