Telecom recovery on track

Preliminary results from an analyst of the 2010 financial results of the bulk of the service provider  market are reassuring - the telecom recovery appears on track. Telecom service provider revenues increased by 3.6% in 2010, and capex fell by 0.9%.  

 

Capital intensity (capex/revenues) declined, from 17% in 2009 to 16.3% in 2010, a milder decline than expected. Average profitability was stable or up relative to 2009. 

 

Our preliminary database includes 75 service providers, or about 80% of the world by revenues. For this group, capex took a late-year upwards turn: 4Q10 capex increased 5.5% year-over-year (YoY), to $72 billion, while the first three quarters of 2010 (in aggregate) declined by 3.7%.  

 

There is usually a Q4 budget flush, but 2010 was much stronger than 2009, when most carriers remained jittery. Vendors benefited from the flush. Total network infrastructure revenues grew by 1% or so in 2010. Growth was much stronger at year-end: versus 4Q09, vendor revenues grew 8% in 4Q10, and telco capex grew 5%. 

 

Admittedly, currency exchange rates often complicate the interpretation of growth rates. But setting these aside, most big vendors had healthy top-line 4Q10 growth in their native currencies, for instance: Ericsson (+8% YoY), NSN (+9%), Alcatel-Lucent (+23%), and ZTE (+39%). 

 

Vendors faced with several quarters of lean times are certainly happy to see the capex spigot turned on again. However, the capex flow can be a drain on carriers’ profitability, at least in the short term. Operating cash flow falls directly, due to the out-of-pocket cash capex requirement. Measured net income may fall due to higher depreciation costs.  

 

Given this, it’s a plus that net profit margin grew significantly YoY in 4Q10, from 7.2% to 9.0%, and operating cash flow margin was stable. Another measure of profitability, ebitda margin, increased slightly on average across the globe, from 32.2% in 4Q09 to 32.4% in 4Q10.  

 

Another metric to consider is net debt, or total debt minus cash. The 75 service providers’  collective net debt did increase in 2010, but by just 1.1% to $688.3 billion, but this was less than top-line revenue growth. So, it’s too early to break out the champagne, but within the context of a slowly improving global economy, telecom is also returning to sustainable growth. 

 

Our 2010 forecast predicted +2% and -4% growth rates for revenues and capex in that year, respectively. Actual growth, at the global level, was very close to this. 

 

Inevitably, there were some variations at the regional level. The biggest was probably North America (NA), which was slightly above expectations in both revenues and, especially, capex.