Tighter margins, more grief this year for telcos—report

While the global telecom market staged a slight comeback in Q4, tighter margins due to the COVID-19 crisis will add to telcos' grief this year, according to recent research by MTN Consulting.

With the International Monetary Fund warning this month that a recession was imminent, and could be worse than the 2007 financial crisis, telcos are taking a more cautious approach to their 5G deployments, according to MTN Consulting. In addition, the effects of the coronavirus pandemic is also putting the telecom sector's supply chains at risk while handset and device revenue will be down due to reduced production of 5G smartphones and handset components.

According to MTN Consulting, telcos have been operating on slim, but stable, margins for the past 11 quarters, averaging around 13.6%, on an annualized basis. Single quarter operating margins increased in the most recent fourth quarter to 13.3% from 11.1% in the same quarter a year ago. In its report, MTN Consulting said the rise in margins was due to a fall in opex, which declined by 1.4% in Q4 of this year compared to Q4 in 2018.

The long-term revenue growth of the telecom sector clocks in at 1.4% per year, on average, after adjusting for currency translation. In the fourth quarter, revenue was up 1.3% year-over-year on a fixed exchange rate basis. Actual revenue growth in the fourth quarter climbed by 1% year-over-year to $465 billion. Both of those figures were consistent with the sector’s long-term growth average, according to Matt Walker, chief analyst for MTN Consulting.

After a slump in revenues for five straight quarters, the telecom industry battled back in the fourth quarter by increasing revenues by 1%. MTN Consulting said the increase was due telcos diversifying their revenues into IoT, media and content services.

The slight bounce in Q4 revenue was accompanied by declines in capex and labor cost. Fourth quarter capex was down 3.2% from the same quarter a year ago. Annualized capex was down 1.6% to $297 billion in this year's fourth quarter as debt concerns grew, and operators focused more on open networking, cloud partnerships and asset spinoffs to cut capex.

Telco spending on employees, or labor costs, reached $291 billion in the fourth quarter of 2019 on an annualized basis, down 0.4% from 2018's fourth quarter.

The telco sector had 5.2 million employees in the recent fourth quarter, which was in line with previous quarters. While the telco headcount hasn't changed that much since 2011, telcos have focused on cutting field engineers and installers in favor of software developers. While not mentioning software-defined networking (SDN) specifically, SDN and automation have led to job cuts by AT&T and CenturyLink over the past few years. MTN Consulting expects employee totals to decline over the next one or two years.

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While some of MTN Consulting's numbers paint a grim picture going forward, the mergers and acquisitions (M&A) sector remains strong this year. With telcos seeing declines in their core markets, they are buying their way into other markets.

MTN Consulting cited the recent merger between Sprint and T-Mobile, Comcast’s acquisition of Sky, the merger of Vodafone India and Idea Cellular; and Vodafone’s $18 billion acquisition of Liberty Global’s Germany and Eastern Europe cable and broadband assets as examples of noteworthy M&A deals.

With M&A, MTN Consulting noted that integration and achieving synergies would continue to be challenges for telcos, as well as managing the increases in debt load. A&T is an example of a telco that has had to manage its debt after Elliott Management came forward with a list of demands last year.

MTN Consulting's report tracked revenue, capex and employees for 133 individual telecommunications network operators (TNOs.) For a sub-group of 50 large TNOs, the report looked at labor cost, opex and operating profit trends. The coverage timeframe spanned the first quarter of 2011 through the most recent fourth quarter.