ROCE Remains Depressed for Europe's Big Telcos

Amid growing concerns about an over-supply of telecoms capacity, Europe's major telcos continue to struggle to make an adequate return on their capital employed (ROCE). In this decade, Telefónica, Orange and Telecom Italia have generated a lower average ROCE than they did in the previous decade, while Deutsche Telekom has seen an uptick, mostly thanks to its success in the US. After making some divestments, Vodafone is performing significantly better on this metric, albeit after a woeful return between 2010 and 2019. 

The charts in this post show ROCE before tax, calculated as EBIT divided by the average capital employed.

In 2021, Telefónica's performance was boosted by gains on the sale of the towers divisions of Telxius, amounting to almost 6.1 million billion euros and from the establishment of VMO2 amounting to almost 4.5 billion euros. Even so, its average ROCE remains close to its weighted average cost of capital.

Still, the aggregate ROCE for Deutsche Telekom, Vodafone, Telefónica, Orange and Telecom Italia is at least rising again (see chart below), as they cut back on spending on infrastructure and spectrum.

Network Slicing Now Generating Revenues for Telefónica

Telefónica reported a 2% year-on-year increase in total connections for the second quarter of 2024 to 392 million, with FTTH (fibre-to-the-home) connections up 12%. The telco also highlighted its efforts to lower capex, which was down 4% year-on-year in the first half of 2024 to 2.3 billion euros, excluding spectrum. That equates to 11.3% of sales. 

Telefónica Germany claims to have achieved the world's first software upgrade for a 5G core network’s user plane without interrupting ongoing operations, as well as becoming the first telecoms  operator worldwide to switch its core network to a public cloud (AWS). "This is a milestone in our multicloud strategy towards cloud-based and automated architectures, which will allow us to save investments in setting up computing capacities and, in addition, reduce costs and time to update core network functions, designed as software," the Madrid-based telco added.

Telefónica also said a higher degree of virtualisation is accelerating its deployments of FTTH and 5G: its 5G network now covers 89% of the population in Spain, 96% in Germany, 50% in Brazil and 65% in the UK. With the switch-off of the retail copper service in Spain earlier this year, the telco has been able to close a further 123 central offices, taking the total to 4,272 since 2014.

Telefónica has launched 5G standalone (SA) in Spain, Brazil, Germany, and the UK, allowing  enterprises to implement advanced mobile connectivity services. "Our network cores have been completely updated in the four core markets so they can manage all types of traffic (4G, 5G NSA and 5G SA).. we are already generating revenues from services provided on the 5G SA network as slicing services." Source: Telefónica statement

Alphabet to Invest a Further $5 Billion in Waymo

Alphabet reported a 15% year-on-year rise in revenues to 84.7 billion US dollars for the second quarter of 2024 in constant currencies. It also announced that it would invest a further 5 billion dollars in its self-driving developer Waymo. 

Sundar Pichai, CEO of Alphabet, said: "In Other Bets, I'm really pleased with the progress Waymo is making, a real leader in space and getting rave reviews from users. Waymo served more than two million trips to date and driven more than 20 million fully autonomous miles on public roads. Waymo is now delivering well over 50,000 weekly paid public rides, primarily in San Francisco and Phoenix. And in June, we removed the wait list in San Francisco, so anyone can take a ride. Fully autonomous testing is underway in other Bay Area locations without a human in the driver seat." Source: Alphabet collateral

Energy Business Offsets Automotive Slowdown for Tesla

Tesla said its vehicle volume growth rate may be notably lower in 2024 than the growth rate achieved in 2023, as its teams work on the launch of a "next generation vehicle and other products." It added that the growth in its energy generation and storage business should outpace the automotive business.

Energy generation and storage revenue doubled year-on-year to more than 3 billion US dollars in the second quarter of 2024, while automotive revenues fell 7% to 19.9 billion dollars.

Tesla said "though the timing of robotaxi deployment depends on technological advancement and regulatory approval, we are working vigorously on this opportunity given the outsized potential value." Tesla invested 600 million dollars in AI infrastructure in the second quarter. 

In the second quarter, Tesla rolled out a version of its FSD (Supervised) automation system that primarily relies on eye tracking software to monitor driver attentiveness. The company also said it increased the robustness of its next gen FSD (Supervised) model with substantially more parameters.

Source: Tesla collateral 

Netflix Talks Up Growth Opportunities

Netflix increased its forecast for revenue growth for 2024 slightly from 13% to 15% to 14% to 15%, after reporting revenue growth of 22% on a currency neutral basis for the second quarter to almost 9.6 billion US dollars. Streaming paid memberships rose 17% to almost 278 million worldwide. 

Citing figures from Nielsen, Netflix claimed that, together with YouTube, it accounts for 50% of all streaming to the TV in the US. However, it also stressed it has plenty of scope to grow: "Across streaming, pay TV, film, games and branded advertising, it’s a 600 billion dollar + market, and today Netflix accounts for just ~6% of that revenue." 

Having launched more than 100 games so far, Netflix says it has 80-plus games in development. It is particularly excited about "interactive narrative games", based on its own intellectual property. Source: Netflix collateral

Slump in India Drags Down Ericsson

 

Ericsson reported a 7% decline in sales year on year for the second quarter of 2024 on an organic basis to 59.8 billion Swedish krona (5.6 billion US dollars). Börje Ekholm, CEO, said: “We expect market conditions to remain challenging this year, as the pace of India investments slow, however our sales will benefit during the second half from contract deliveries in North America.”  Source: Ericsson report