European capex up 19% in 2Q05

By John Lively, Vice President, Ovum-RHK

European telecom network operator capex rose 18.6 percent in the second quarter of 2005, even though revenues grew only 3.1 percent overall versus 1Q05 (Figure 1). Wireless revenues exceeded wireline, and grew slightly faster. The jump in capital expenditures was driven largely by the 32 percent jump in wireline spending, as mobile capex increased only 4.7 percent.

Figure 1 Revenue and capex for top-tier western European operators-2Q05

	Revenues			Capex
Segment	2Q05	1Q05	Change	2Q05	1Q05	Change
Total	€ 78.6	€ 76.2	3.1%	€ 10.4	€ 8.8	18.6%
Wireline	€ 38.0	€ 36.7	3.4%	€ 5.8	€ 4.4	32.5%
Wireless	€ 40.6	€ 39.5	2.7%	€ 4.6	€ 4.4	4.7%

Source: Company financial statements, Ovum-RHK

On a half-year basis (Figure 2) the overall revenue trend is clear: mobile continues to grow while wireline continues to decline, with mobile now the larger of the two.

Figure 2 Revenue trends for top-tier telecom operators-western Europe

Source: Company financial statements, Ovum-RHK

Capital expenditures

Figure 3 shows wireline and mobile capital expenditure trends on a half-year basis.

As is typical, capex in 1H05 was lower than in the second half of the previous year. Mobile capex declined slightly compared to 1H04, while wireline rose 16 percent. As mentioned above, reported wireline capex among top-tier players grew 32 percent in 2Q05. No single company or initiative can be singled out as the driver for the capex increase, which spanned many companies and countries. This suggests the increase may be related to general economic conditions and the depletion of excess bubble-era network capacity. Mobile capex for 1H05 was 43 percent of the forecast, equal to the historical average value.

Figure 3 Capex trends for top-tier telecom operators-western Europe



Source: Company financial statements, Ovum-RHK

In this report, revenues and capex are converted to euros for the purpose of showing regional trends. Exchange rate fluctuations between the euro, dollar, and other currencies can reduce or inflate real changes in the revenues and capex of individual companies located in countries with floating exchange rates. For your convenience, the spreadsheet accompanying this report provides revenue and capex data in native home-country currency, euros, and U.S. dollars.

Capital intensity

Figure 4 shows capital intensity for top-tier western European operators on a half-year basis. The pattern for the past few years has been for lower capital intensity in the first half of the year than in the second half of the previous year, and while this held true again in 2005 for the wireless segment, wireline capital intensity remained at the 2H04 level of 14 percent, and in 1H05 was nearly 3 percent higher than the year-ago level of 11 percent. On the other hand, wireless capital intensity fell to just 11 percent, the lowest level seen in the past few years.

Figure 4 Capital intensity trends for top-tier operators-western Europe



Source: Company financial statements, Ovum-RHK

Outlook for 2005

With half-year results in hand, we can evaluate our 2005 revenue and capex forecasts based on historical half-year/full-year ratios. The following table shows the revenues and capex as originally forecast, and as calculated using 1H05 results and the historical average 1H/FY ratio.

Figure 5 Revenue and capex forecasts for Europe in light of 1H05 results

	Original forecast (April 2005)		Revised based on 1H05
Segment	Forecast	05/04 growth	Forecast	05/04 growth
Wireline revenue	€ 201,746	-3.0%	€ 200,998	-3.4%
Wireless revenue	€ 189,367	6.7%	€ 200,179	12.8%
Wireline capex	€ 28,427	-1.9%	€ 33,924	17.0%
Wireless capex	€ 27,319	4.0%	€ 27,485	4.7%

Source: Company financial statements, Ovum-RHK

The main conclusions from this analysis are as follows:

• Wireline revenues are still expected to decline by approximately 3 percent this year.
• Mobile revenues in 1H05 are not consistent with the original forecast of 7 percent growth; growth in the range of 12-14 percent now seems more probable.
• Wireline capex should grow 14-16 percent this year, if the historical 1H/FY ratios hold true. This is a significant change in outlook from the prior forecast of slightly negative growth in spending.
• Mobile capex is still on track to grow at a rate of 4-5 percent this year.

The spreadsheet accompanying this report provides a complete historical time series of revenue, capex, and capital intensity for individual network operators in the European region.

John Lively has more than 16 years of telecommunications industry experience. As the leader of Ovum-RHK's Forecasting and Analysis team, John is responsible for overseeing the production of Ovum-RHK's market forecasts, market share analyses, and market update reports for all wireline, wireless, financial, and services subscription research. John's experience spans many technologies, from components and optical fiber to broadband access and long-haul DWDM.