Key findings from the 1Q20 analysis include:
- Telecom revenues in 1Q20 were $446.3B, dropping a bit faster than capex, down 2.2% from 1Q19. Decline in handset sales - due to closure of retail stores and supply chain disruption - and decrease in roaming revenues arising from global travel restrictions are a few factors for this declining revenue. Going forward, telco revenues will drop by several percentage points, at a minimum, even with offsetting effects such as government stimulus and an increase in online activity.
- Global capex declined by approximately 1.3% YoY to $70.2 billion in 1Q20, in line with the expectations, due to the uncertainty around the COVID situation. Telcos are prioritizing their investment on maitenance and capacity upgrades rather than network coverage expansion projects, to preserve cash. The industry's annualized capex to revenue ratio was 16.3% in 1Q20 compared to 16.5% a year ago.
- On a revenue per employee (RPE) basis, the telco sector has been stagnant since 2011: the annualized figure was $362K that year, and the average figure for the last four quarters was $351K. Labor costs per employee, on an annualized basis, increased from $55.6K in 1Q19 to $56.3K in 1Q20.
- Telcos employed 5.1M people in 1Q20, down 1.4% compared to its previous quarter. Global telco headcount has been relatively stable for several years, due in part to growth in Asia, but the 2020 recession could change this. Layoffs on the retail front are on the rise, with consumers opting for online purchases given the current pandemic situation thus forcing telcos to shut down their physical stores. We expect more layoffs to happen in the next 1-2 years. India alone may cut up to 100K employees in that timeframe, due to Jio's consolidation & BSNL reforms.
- The M&A climate remains strong for the sector in 2020. Many telcos see their core markets declining, and are buying their way into other markets while also streamlining their asset base. Noteworthy recent deals include the recent merger of T-Mobile and Sprint, America Movil's acquisition of Nextel in Brazil, Comcast's acquisition of Sky, the merger of Vodafone India and Idea Cellular; and Vodafone's $18B acquisition of Liberty Global's Germany and Eastern Europe cable and broadband assets. However, after the M&A deal paperwork is signed, integrating operations and actually achieving synergies continues to be a challenge for telcos. Managing the debt from these acquisitions is just as hard, as AT&T and others are discovering.
- Telco industry operating margins have been stable for the last 11 quarters, averaging around 13.7%, on an annualized basis. Single quarter operating margins increased in 1Q20, to 14.5% from 13.8% in 1Q19. The rise in margins is due to a fall in opex which declined by 1.4% in 1Q20 versus 1Q19.