And so to another week in Telecom PR, where earnings season has provided some unexpectedly positive results for beleaguered operators, both sides of the pond.
In the past couple of weeks Q2 earnings have been reported by: Orange, Deutsche Telekom and Telefónica in Europe; EE, Three, O2, and Vodafone in the UK; and Sprint, T-Mobile, AT&T and Verizon in the US.
Orange increased its overall revenue by 1.4 per cent to €10.2bn. Mobile contract customers in France and the rest of Europe grew by 35,000.
CEO Stéphane Richard attributed its positive outlook on performance to the growing demand for bundled products including mobile, broadband and pay-tv product.
Spanish company Telefónica also improved its performance, growing 1.9 per cent in Q2 to €13bn. Organic growth and data volumes both increased.
Overall revenues for Deutsche Telekom rose 0.6% to €5.4 billion, with European-specific revenues rising 2.4%, to around €2.9 billion.
Convergence is a theme in Europe. The number of Spanish households signing up to fixed-mobile bundles drove up ARPU for Telefonica by 6.4 per cent. Meanwhile Deutsche Telekom now has 3.4 million customers on fixed-mobile deals, and attributed its 1.5% organic growth to growing interest in converged services.
EE’s adjusted revenue rose 4 per cent to £1.29b, with adjusted EBITDA up 19 per cent to £335 million. Mobile customers rose to 29.8, with the company’s 4G base now hitting 19 million.
EE warned that abolishing EU roaming charges, as well as the launch of new smart phones leading to higher costs, will hit future earnings.
Three reported good growth, increasing its customer base by 9 per cent to 9.9 million since January, with an associated 10 per cent rise in revenues to £1.1 billion.
The operator attributed the growth to its expanded Feel at Home roaming offers, as well as its new zero rating service, which offer unlimited data for customer to watch streaming services.
Telefónica-owned O2 drove a 1.4 per cent rise in the group’s revenue in the UK, where it added 178,000 customers.
While Vodafone improved on its Q1 decline of almost 5 per cent, it still reported a 2.7 per cent drop in organic service revenue, bringing it to £1.7bn. The pressure is on for the operator to deliver on a plan to improve performance against its rivals over the next three years.
This is all against a strong backdrop in the US, where unlimited bundles seem to pose no limits to operator growth as they look to simultaneously shed costs.
First up Verizon posted a revenue growth as a result of an increase in subscribers drawn by its unlimited data plans. Reporting a 0.1 per cent revenue rise top $30.5bn, the company added 590,000 new contract smartphone customer in Q2. It also plans to strip roughly $1bn in costs from its digital arm Oath (comprising AOL and Yahoo).
Sprint posted a quarterly profit rise, and a 1.8 per cent revenue rise to $8.16bn. The operator has been on a cost-cutting mission in a bid to improve its business, reducing costs by $370m in the past year, and targeting an additional reduction of $1.3bn - $1.5bn this fiscal year.
AT&T beat estimates, with net income rising to $3.9 billion despite overall revenue falling 1.7 per cent to $39.8 billion. The carrier is also attracting new customers with promotions bundling video and phone services.
Unlimited data posterchild T-Mobile “blew Wall Street out of the water”, posting a total revenue increase of 10 per cent up to $10.2 billion. Net income was up 158 per cent to $581 million. The operator experienced customer growth of 1.3 million total net additions.
What does this mean?
For the most part, this level of growth seems positive. Yet when compared with last year, US telecoms gains are actually down 15 per cent. Monetisation remains an issue in the US. Competition remains intense, driving up data use (T-Mobile data volumes grew by 40 per cent last year), but not necessarily driving up ARPU.
Furthermore, compare the numbers above to the level of earnings reported by the FANGs (Facebook, Amazon, Netflix, Google) this week. Facebook revenues grew 47 per cent, Google by 21 per cent.
Alan Livsey at the FT calls out this disparity, pointing out that the market dismisses the value and importance of telcos and the crucial connectivity that they provide. It may be the fate of any utility to be taken for granted, but let’s bear in mind that without operators and the networks they build and manage, the FANG tech giants would still be a pipe (excuse the pun) dream.
The difference in profit and growth delivered between telcos and the FANG service providers that run over their networks is stark. In developed markets, telco revenues remain static for the most part, while the FANGS continue to deliver growth and revenue for shareholders.
It’s a “tortoise and hare” scenario – the telco is the safe, mature, predictable stock, trudging along in a slow and stable delivering small, regular dividends. In contrast, Netflix and its peers steam ahead, gaining new subscribers, expanding worldwide and generating more revenue. The question is, how long can the FANGs keep this pace up and continue to deliver this kind of return?
Telecoms operators, which often control the backbone of their local broadband networks, mostly trade at enterprise values of about six times their earnings before interest, tax, depreciation and amortisation. Data, for them at least, does not pay. Tech trades on at least double that ratio. While no one expects to see the valuations of telecoms operators roaring back soon to their highs of the early millennium, the infrastructure of the internet deserves a higher rating.