Telecommunications Network Operators: 3Q21 Market Review

This market review provides a comprehensive assessment of the global telecommunications industry based on financial results through September 2021 (3Q21). The report tracks revenue, capex and employee for 138 individual telecommunications network operators (TNOs). For a sub-group of 68 large TNOs, the report also assesses labor cost, opex and operating profit trends. The report also covers annual data for other financial metrics such as debt, cash & short term investments, M&A spend and cash flow from operations for 50 companies from the TNO-68 subset. Our coverage timeframe spans 1Q11-3Q21 (43 quarters). The report’s format is Excel.

ABSTRACT

3Q21 RESULTS SUMMARY

Telco revenue growth unscathed but slowing down

After unusually high growth in the past two quarters mainly due to a pandemic-induced low base period, the telecom network operator (telco) market witnessed revenue growth tapering in the latest quarter. For the single quarter 3Q21, telco revenues grew by just 3.9% on a YoY basis to post $464.4 billion (B).

While telco market revenues are notably affected by exchange rate fluctuations, they weren’t a factor in the latest quarter. In a fixed exchange rate scenario, where all currency exchange rates are held constant to the 1Q11 value, YoY revenue growth historically has been much more stable in the telecom sector than when using actual rates. However, 3Q21 was different with telco revenue growth at 4% on a fixed exchange rate basis, almost in line with the growth rate of 3.9% on actual exchange rates basis. Regardless, for the slow growth telecom market, a 3.9% growth rate is good news.

Annualized revenues also grew for the third straight quarter, posting $1.89 trillion with a YoY growth rate of 6.6% in 3Q21. At the operator level, four of the top 20 best performing telcos by topline in 3Q21 posted double-digit growth on an annualized basis. These include Deutsche Telekom (20.9% YoY vs. annualized 3Q20), China Mobile (20.4%), China Telecom (20.2%), and China Unicom (16.4%). By the same criteria, the worst telco growth came from Softbank (-22.7%) during the same period. Telefonica was the only other operator among the top 20 to post a decline in revenues. While the big swings at Deutsche Telekom and Softbank are due to the former closing its acquisition of Sprint from Softbank in April 2020, growth witnessed by other operators was mostly an outcome of low base effect in the previous quarters. Another factor for some operators is non-service revenues, as these have grown with 5G device sales in many markets. China Mobile, for instance, saw device revenues grow from 48.7B RMB in the first 9 months of 2020, to 75.8B for the 1Q-3Q21 period.

Capex grows faster than revenues again

Telcos continue to loosen their purse strings on capex which grew at a much faster rate than revenues for the second straight quarter. Single-quarter capex growth jumped at a double-digit rate of 10% on a YoY basis, totaling $80.4B in 3Q21. With topline growth improving and the desire to deploy 5G network capability still strong, telco investments surged. As a result, annualized capital intensity was 16.6% in 3Q21 vs. 16.4% in the prior quarter. Telcos have resumed investments in infrastructure upgrades and 5G buildouts. For instance, Globe Telecom’s annualized capital intensity stood at 55% in 3Q21 due to a network infrastructure buildup that includes 1,080  new cell sites, upgrades to at least 12,900 sites including both 4G LTE and 5G, and installation of over one million fiber-to-the-home lines. Vodafone’s annualized capital intensity has also spiked recently, from 16.0% in 3Q20 to 17.5% in 3Q21, as spending ramped both for meeting connectivity demands and new digital platforms.

The biggest capex spender in 3Q21 on a single quarter and annualized basis was China Mobile. This was despite the company’s YoY drop of 5.7% in the annualized 3Q21 period, enabled by China Mobile’s network partnership with China Broadcasting Network. Ten out of the top 20 operators by annualized capex spend posted double-digit growth rates in the period ended 3Q21. Some of these include: Deutsche Telekom (34.2% YoY vs. annualized 3Q20, due in part to absorbing Sprint in April 2020), China Unicom (17.2%), Vodafone (15.9%), Orange (14.5%), and BT (30.5%). On an annualized capital intensity basis, Rakuten beats all other telcos handily with a roughly 201% capex/revenue ratio for the quarter; its greenfield network rollout is reaching its peak. Other capital intensity standouts include: Globe Telecom (55.5%), PLDT (48.1%), Oi (40.4%), Telecom Egypt (34.6%), CK Hutchison (32.4%), Consolidated Communications (31.4%), and Digi Communications (31.2%).

Telcos will increasingly rely on software-based solutions and automation to drive profitability

Telco profitability maintained a strong stance into 3Q21. Annualized operating margins ended the latest quarter at 15%, up from 14.3% in the same quarter of 2020. Annualized EBITDA margins improved marginally, up from 33.9% in 3Q20 to 34% in 3Q21. While labor costs as a percentage of opex ex-D&A have moderated in the recent quarters, they are not the direct cause of this margin growth. Rather, within the overall telco opex budget, telcos are having success in cutting their sales & marketing and G&A spending, as telcos adjust to working from home and accelerate the migration of sales & support to digital platforms. These efforts accelerated in 2Q20 and 3Q20, as COVID-19 spread and telcos were forced to do business with minimal human intervention, but have continued in 2021. Meanwhile, many telcos are reporting that network operations is taking up a larger portion of the opex pie. Managing costs is core to telcos’ willingness to partner with webscale providers, whose sales of software licenses to telcos are growing, posing a grave challenge to the more traditional telco-centric vendors like Cisco and Nokia.

No respite to industry headcount downtrend even as labor costs rise

Telco industry headcount continues to decline, falling to 4.789 million in 3Q21, down from 4.903 million a year ago. Telco spending on digital transformation, software-defined networks (SDN) and AI tools have facilitated a smaller but higher-skilled workforce. MTN Consulting expects headcount reductions to continue via attrition and voluntary retirement schemes, heading towards 4.5 million by 2025. However, we also expect telcos to invest heavily in their workforce: retraining existing employees on digital platforms, and hiring highly skilled software savvy employees. The average telco employee salary will rise as a result, an outlook consistent with 3Q21 results – annualized labor costs per employee increased to $57.2K in 3Q21 from $53.5K in 3Q20.

Asia just shy of Americas on revenue basis; Europe dips on revenue basis but capex growth intact

Regionally, all but Asia were a mixed bag – MEA region topped revenue growth among the four major regions in 3Q21, but was also the only to post declines in capex. Similarly, Europe’s revenues declined YoY but posted growth in capex in the latest quarter. The Americas region maintained its stronghold as the largest single region on a revenue basis, but its share fell slightly in 3Q21 to 37.5% from 38.1% in the same quarter of the prior year as economies in the region have been hit by currency depreciation. The Asia region is fast catching up with the Americas though, with its share trailing by just 1.5 ppts at 36.5% in 3Q21. On a capex basis, the Asia region has been outspending the Americas for many year. Europe’s capex growth story is courtesy of a late start to 5G spending due to delayed spectrum auctions, coupled with increased efforts in FTTH deployments and government-supported rural rollouts. Europe’s annualized capital intensity of 18.5% surpassed the 18.2% recorded in Asia for the same quarter, and Europe was the only region to witness an uptick in annualized capital intensity in 3Q21 when compared to 3Q20.