U.S. Telcos Struggle to Cover Cost of Capital

The big four telcos in the U.S. are not exactly raking it in. Between 2010 and 2018, AT&T, Verizon, T-Mobile USA and Sprint achieved an average aggregate return-on-capital employed (ROCE) of just 7%. The NYU Stern School of Business has estimated that the average cost of capital for the U.S. telecoms service sector is 6.9%. In 2018, aggregate ROCE was also 7%.

In other words, the industry is barely covering its cost of capital. Within that overall picture, some telcos are performing better than others. Verizon has been the best long-term performer on this measure, making an average ROCE of 10% across the nine years. T-Mobile USA has made an extraordinary recovery in the past six years, lifting ROCE to almost 10% in 2017 and 2018 from a low of -20% in 2012. But the company’s average annual ROCE for the decade is just 1%, underlining why it is pursuing the merger with Sprint.  Sprint is the weakest of the four, earning almost no return on the capital it has employed across the decade.

AT&T’s average ROCE in the 2010-2018 period is just 7%. The telco’s performance on this metric has been dragged down in recent years by a massive leap in the capital it has employed following the acquisitions of DirecTV and Time Warner.

The chart above is one of many in a high-level guide to the financial state of the U.S.’s top telcos. This new report enables long-term investors and policymakers to easily track the progress of the big four telcos - AT&T, Verizon, T-Mobile USA and Sprint - over the past nine years on a range of financial metrics.

The iPad edition is available here and the Kindle edition here.

The Cash Chasm in U.S. Telecoms

Although T-Mobile USA has made the U.S. telecoms market more competitive in recent years, it remains a fraction of the size of the big two: AT&T and Verizon. As the above graphic shows, in this decade, T-Mobile USA has generated less than 15% of the cash thrown off by AT&T, while Sprint’s operations have produced less than 12%.

In 2018, AT&T generated approximately $45 billion from its operations, bringing the total for the decade up to $334 billion. By contrast, T-Mobile USA is now generating about $8 billion a year from its operations, up from just $4 billion in the middle of the decade.

Those stats help explain why T-Mobile USA and Sprint are so keen to merge, ahead of the rollout of 5G. Individually, they are not generating anywhere near enough cash to invest in the next generation infrastructure required to challenge the market leaders.

The chart above is one of many in a high-level guide to the financial state of the U.S.’s top telcos. This new report enables long-term investors and policymakers to easily track the progress of the big four telcos - AT&T, Verizon, T-Mobile USA and Sprint - over the past nine years on a range of financial metrics.

The iPad edition is available here and the Kindle edition here.

Note, the above figures are based on the accounting methodology used by these telcos for most of the decade, but include estimates for 2018, when the industry switched to a new accounting standard.

Online Payments and Advertising Drive Tencent Forward

Tencent reported a 32% increase in revenues to 313 billion yuan for 2018 (45.6 billion US dollars). However, in the fourth quarter revenue growth slowed to 28%.

Revenues from its VAS business (online gaming and social networks) increased by 9% in the fourth quarter of 2018, as online games revenues were flat at 24.2 billion yuan. However, social networks revenues grew by 25% to 19.5 billion yuan, lifted by growth in revenues from digital content services, such as live broadcast services and video streaming subscriptions. Tencent said its total digital content subscriptions exceeded 100 million at the end of 2018, up 50% year-on-year.

Revenues from the online advertising business increased by 38% to 17 billion yuan for the fourth quarter. That rise was driven by a 44% rise in "social and others advertising" revenues to 11.8 billion yuan, thanks to Weixin Moments, Mini Programs and QQ KanDian.  Tencent increased its advertising inventory by adding a second ad unit in Weixin Moments, and started to insert ad units into Mini Programs, which run within the WeChat/Weixin messaging service. The Mini Programs now cover more than 200 service sectors. Media advertising revenues grew by 26% to 5.2 billion yuan, fuelled by contributions from Tencent Video and Tencent News.

Revenues from other businesses, such as digital payments, cloud services and TV production, increased by 72% to 24.2 billion yuan for the fourth quarter. Tencent reported that its payment platforms supported more than one billion transactions a day in 2018, driven by rapid growth in commercial payments, which accounted for more than half the transactions. Source: Tencent statement

Large Scale IoT Lifts China Mobile

China Mobile reported a 1.8% rise in revenues for 2018 to 737 billion Chinese yuan (110 billion US dollars) on a like-for-like basis. Service revenue rose 3.7% on a like-for-like basis, and 0.4% on a reported basis. Intriguingly, China Mobile even reported a rise in SMS/MMS revenue (see chart above).

IoT revenue climbed 40% to 7.53 billion yuan (1.12 billion dollars), as China Mobile said it is now  serving 551 million "smart IoT" connections up from from 229 million at the end of 2017. That suggests an average annual revenue per IoT connection of about 3 dollars. China Mobile is aiming to add a further 300 million net IoT connections in 2019, as it seeks to become the first operator serving two billion connections in total. However, it is planning another cut in capex in 2019 (see chart below). Source: China Mobile presentation

How Cash-strapped are Europe's Top Telcos?

Cash flow will play a big part in determining how fast Europe's debt-laden telcos roll out 5G. The chart above aggregates the net cash flow generated by the operations of Deutsche Telekom, Vodafone, Telefónica, Orange and Telecom Italia, and their capital spending, over the course of this decade. Despite an upswing in recent years, it shows how their operations are still not generating as much cash as they were in 2010. The chart also flags how the big five telcos' capex has slid downwards since 2015.

Worryingly, the upward trend in cash flow came to an abrupt halt in 2018 as competition and economic uncertainty kept a lid on pricing power. Only Deutsche Telekom, boosted by revenue growth in the U.S. and cost cutting, generated significantly more net cash from its operating activities in 2017 and 2018 than in previous years. Since 2010, the Bonn-based group has seen cash generation rise by 22%.

At the other end of the spectrum, Orange has seen a 24% decline in the cash generated by its operations since 2010. The Paris-based telco has had to cut prices in response to aggressive tactics by new entrants in its home market. In 2018, this metric declined again as Orange made large payments to French employees impacted by restructuring, but the group has forecast growth in operating cash flow for 2019.

Pringle Media has just published a report tracking and comparing the key financial metrics of these five major telcos over the past nine years. 

The Kindle version of the report is available here and the iPad version is here.

MTN Delivers Double Digit Growth

MTN reported a 10.2% increase in revenue for 2018 at constant exchange rates to 134 billion South African rand (9.3 billion US dollars). In Nigeria, service revenue leapt 17%, fuelled by strong demand for both voice and data services.

Group revenues from digital services, such as music, fell 33% to 3.9 billion rand "as a result of the ongoing value-added-services optimisation", while fintech revenues climbed 47% to 7.8 billion rand. Group capex fell to 19.3% of revenues, from 24% in 2017, as MTN benefitted from the deployment of low frequency spectrum offering broad coverage. MTN expects service revenues, including those from digital services, to grow at double digit rates in the medium-term. Source: MTN statements