Growth slows, but telcos’ cut costs to maintain financial health

Peter Dinham
Monday, 18 May 2009 15:31

IT Industry - Strategy

Worldwide growth in the telecommunications industry slowed to just 1.8% for the last quarter of 2008, way below the 19 percent growth in the same quarter of 2007, but Ovum says there’s still an underlying strength in the industry as telcos improve their financial health through cost cutting.

According to Ovum, the world’s telecommunications service providers underlying performance in the fourth quarter of last year was “surprisingly strong”, despite chaos in credit markets, a drop in consumer confidence, and macroeconomic uncertainty, and that “large write-downs in some markets do not negate this underlying strength.”

Of 130 service providers surveyed across four regions of the world, Ovum says revenues grew 1.8% year-over-year in 4Q08 to $377.6 billion, well down on the 19.0% year-on-year growth in 4Q07.

“However, growth in operating expenses for the same period was just 1.4%, and capex dropped 2.3%,” says Ovum, adding that while the capex decline, which had worsened in early 2009, was “certainly unwelcome news to vendors,” the net impact of telcos’ cost reductions was to increase operating cash flow (OCF) margins (revenues less opex less capex, all divided by revenues) globally to 14.3% in 4Q08, from 13.2% in 4Q07.

According to Matt Walker, an Ovum principal analyst based in Thailand, one important measure of industry sustainability – EBITDA divided by net debt – was stable year-on-year in the fourth quarter of last year, falling only in North America.

“The North American region, however, handily increased its cash reserves (as a portion of monthly opex) in 4Q08, signalling its continued ability to attract capital despite a tough public market.”

Walker says that, on the downside, carriers around the world, but especially tier one carriers in North America and Europe, the Middle East and Africa, have been taking some large write-offs/impairment charges related to goodwill and/or network or investment assets.
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