Report: Telecoms outperforming world economy

jimoThese are challenging times for businesses around the world as economies totter along, competition tightens margins and technology advancements swing a double-edged sword--better and faster on one edge, costlier and more complex on the other.

For telecoms, that's really just business as usual.

But a new report gives the industry props for the way in which it copes with change, and in how it has thrived; in fact, it says the segment worldwide has outperformed the global economy.

Informa Telecoms & Media's World Telecoms Financial Benchmarks report said the 40 leading telecom operating groups--which include AT&T (NYSE: T) and Verizon (NYSE: VZ)--beat the global economy by some 5 percent, increasing their revenues to $327.6 billion worldwide, in the second quarter of 2011, a 6.8 percent increase year-on-year. The global economy, meanwhile, grew a more modest 1.8 percent.

Both AT&T and Verizon, meanwhile, are generating high revenues in comparison to their peers in the industry, from a tech-savvy base made up of users of telecoms services who are spending more on services overall year-on-year, despite the on-going decline in the price they pay for voice services.

"Given the head-winds created by the global economy, plus often intense competition from non-telecoms players on core services, the operators have, looked at as a whole, successfully implemented strategies that have enabled them to significantly outperform the global economy," said Milena Konecna, CFA and financial data analyst at Informa.

Some of that, said Konecna, is attributable to the "amount consumers and enterprises spend on telecoms services," which are continuing to evolve as services like IPTV, video-on-demand, high-speed Internet, video conferencing, VoIP and collaboration demand increases. Part, Konecna said, is due to "the effectiveness of operators' financial and operational discipline" in the face of some tough times.

"This... has taken place against the back-drop not just of weak growth in the global economy, but bruising competition from new entrants and MVNO players in conjunction with regulatory-led reductions in the amounts operators can charge each other for terminating traffic on their networks (MTRs), each of which has put considerable pressure on revenues, especially those generated by voice services," said Konecna. Operators, though, have seen EBITDA margins erode, falling to 35.7 percent in the second quarter of 2011 from 36.6 percent a year ago.

But, one of the big movers in the second quarer of 2011 from the margin point of view was Verizon, the report said. It saw its EBITDA margin increasing by 9.5 percent, from 23.2 percent in the second quarter of 2010, to 32.7 percent in the second quarter of 2011. The main reason, said the report, was a low reported EBITDA last year due to higher cost of sales and SG&A expenses, caused mainly by severance, pension and benefit charges in the second quarter last year. Verizon’s margin still remains below the industry average by 2.8 percent.

Both AT&T and Verizon were on the list of operators that overspent in the second quarters of both 2010 and 2011 when compared to their peers, said Informa. (The rest? China Mobile, NTT Group and Telefonica.)

AT&T and Verizon’s capex were driven primarily by LTE roll-outs. Investments in increasing smartphone penetration in the form of subsidies are also taking their toll on the two U.S. operators’ profitability, although initial costs are expected to be outweighed over time through higher ARPU generated by an increasing spend on data. Informa said that, for example, AT&T saw a 1.2 percent year-over-year decline in EBITDA margins, despite increasing revenue by 2.23 percent over the period.

Margins also are being squeezed by higher OPEX, initiatives such as subsidizing smartphones and falling MTRs.

Konecna said operators worldwide are now less concerned with growing their subscriber base and have shifted their focus to retention, working to expand triple- and quad-play bundles.

But going forward isn't going to be any easier, said Konecna, as operators look to continue expanding their service offerings and face pressure from additional competitors. For the moment, though, the industry can take a deep breath, savor a little of the spotlight and then get back to business.--Jim

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