Corporate health of telcos grows

Julian Hewett, Chief Analyst

EuroView's corporate analysis of European telcos compares the financial performance of 24 top European telcos during their two most recent financial years, providing a valuable reference source about the performance of players in the sector.

Together these 24 telcos generated a combined euro 315bn of revenues during 2003. Eight incumbents accounted for euro 220bn, or 70%, of this total. In 2002, their total revenues were euro 306bn. Thus, growth on an 'as reported' basis was 3%. However, 'real' growth (ie net of currency effects, and M&A) was a little better at 5% - in spite of a much stronger euro in 2003 versus 2002 which tended to depress 'real' growth. This was the result of telcos improving their assets by acquiring higher-growth companies (eg mobile operators in developing markets) and divesting lower-growth ones.

All the key financial metrics of the telecom services industry improved dramatically in 2003. After the massive 'write-down' party in 2002, there was little sign of a hangover in 2003! See the chart below. And from what we've seen so far in 2004, most of these trends will continue, although change will not be nearly so dramatic.

Across the 24 telcos, average EBITDA margins grew by just under 4 points to 37% in 2003. However, this (weighted) average is dominated by the large players. Margins are much lower for many of the smaller players. 2003 was a year of operational improvement for most telcos. The result was that all telcos - with the exception of Tele2 and Infonet - raised their EBITDA margins in 2003.

Combined net loss for the industry was an astonishing euro 108bn in 2002. Indeed, only three of the 24 telcos recorded a positive bottom line result. After these massive write downs in 2002, combined net income climbed back to a loss of just under euro 1bn. In 2003, only Vodafone continued to record a large negative loss at the bottom line (euro 13bn in 2003), as it continues to amortise the goodwill from its mega-acquisitions of Airtouch and Mannesmann.

Total capex was euro 40bn in 2003, down 14% from euro 46bn in 2002. Mobile operators now account for nearly 60% of all capex. The largest single capex spender was Vodafone, which spent euro 6.7bn in 2003, down 15% from euro 7.8bn in 2002. Expressed as a % of revenues, capex fell from 15% in 2002 to 13% in 2003.

The telecom services industry remains highly cash generative. In 2003, these 24 telcos generated euro 72bn of operating free cash flow (EBITDA minus capex) - a very healthy 24% of revenues - up from euro 53bn in 2002, 17% of revenues. Fixed services still generated substantially higher cash flows than mobile in 2003, per unit of revenue.

Net debt fell from euro 253bn at the end of 2002 to euro 193bn at the end of 2003. Euro 38bn of this euro 60bn reduction in debt was due to drastic measures required at France Telecom (including a euro 15bn rights issue) and Deutsche Telekom. As a result, the combined net debt to revenue ratio fell from 0.86 to 0.66.

Combined employee numbers were 1.05 million in 2003, down 77,000 (7%) from 1.12 million in 2002. Fixed network operators still account for 60% of the employees in the industry. However, the efficiency of the fixed network sector - measured in terms of revenues per employee - is still over 60% lower than the mobile sector (all those local loops to maintain!).

Julian is responsible for the high-level direction of Ovum's research. He is also responsible for Ovum's EuroView service, which provides high-level opinion and insight on Europe's ICT markets.