It is still early days to assess the impact of the Covid-19 pandemic on mobile operators, and the broader industry. As we have stated before, our view is that there is significant disruption to investment and deployment in the short term, but that should ease from the third quarter of this year, such that 5G roll-outs and capital spending will be back to the levels forecast pre-Covid by mid-2021 (although there may be a more permanent negative impact on 4G investments).
However, that is not to downplay the effect of the virus. It has created economic uncertainty; restricted access to labor and components; reductions in operators’ market value and access to financing. There will be a boost to 5G in many countries’ national recovery plans, as seen already in China; and of course, working from home, and high video consumption during lockdowns, have demonstrated the importance of broadband connectivity (which in countries or locations with limited fiber may be over 5G). But those upsides will be counterweighed by the disastrous effect of the pandemic on many of the enterprise sectors, such as automotive and retail, which were expected to be early adopters of new 5G-enabled services.
So far, the operators which have reported quarterly results since the pandemic took hold are showing very varied effects. In some cases, the virus and overall disruption is driving accelerated investment programs for 5G, in the hope of getting quicker returns from its automation, cost efficiencies and new service platforms. In others, the crisis is stimulating operators to adopt or intensify digital services initiatives so they can tap into rising use of digital content and applications, while making their operations leaner.
Others, of course, are taking a severe hit for now, and mainly spent their earnings calls explaining their strategies to bounce back as soon as possible.
Most operators outside China do not expect to understand the full impact until the end of this quarter, since most countries did not initiate lockdowns until the later part of Q1. Russia’s MTS said it is bracing itself for a bad Q2, but was aiming to mitigate the impact by stepping up its digital services push.
In March, the operator predicted sales and EBITDA growth of about 3% in 2020, but it has now reduced that forecast to zero sales growth at worst, though it is sticking to the 3% figure as its best case scenario. It said EBITDA could fall by 2% compared to 2019.
It will be building on a strong Q1, when revenues were up 9% year-on-year before the virus took hold, to RUB120bn ($1.7bn), and EBITDA rose by 5.6% to RUB51.5bn ($720m). MTS has been the most successful of the three large Russian MNOs in chasing digital services in a highly saturated mobile market, and offers app-based services in
finance, entertainment, media and IT, supporting 22m customers, up almost 50% on the year-ago figure of 15m. By contrast, the mobile business added about 1m customers, to reach 78.5m.
MTS is committing between 15% and 20% of its capex to digital products and this year plans to spend about RUB90bn ($1.3bn) in total.
Other operators which have discussed the pandemic effect on recent quarterly earnings calls include:
Singtel said the combined effects of Covid-19, a one-off spectrum fee for its Indian joint venture Bharti Airtel, and currency devaluation wiped 65% off its full-year earnings.
It reported income of S$1.08bn (US$760m) on revenue down 5% to S$16.54bn ($11.66bn).
CEO Chua Sock Koong described it had been a “challenging year” because of the weak economic conditions, Airtel’s spectrum and other charges, and the arrival of Covid-19.
“Travel and movement restrictions have led to significant reductions in roaming and prepaid revenues and slowing economic growth has impacted business spend,” she said. Pandemic effects were felt severely in Singapore and the Australian unit Optus in Singtel’s fiscal fourth quarter.
Singapore revenue was down 14%, and device sales fell by 35% as a result of supply disruptions. The digital content business fell by 15% and the telco shut down its ailing streaming service Hooq, while its advertising subsidiary Amobee was hit by the sudden slowdown in ad campaigns.
Singtel would not provide guidance for the current fiscal year because of the pandemic disruption, but stated: “Importantly, the Group will continue its multiyear 5G capital expenditure programme to strengthen its network and market leadership, and to create new revenue opportunities.”
Switzerland-based Sunrise lowered its revenue guidance slightly for 2020, blaming coronavirus uncertainty, down to between CHF1.84bn ($1.89bn) and CHF1.88bn ($1.93bn), down from a range of CH1.87bn to CHF1.91bn. Bit it maintained its outlook for EBITDA. The main impact of the pandemic so far has been on roaming revenues, as for most operators.
If assumptions on a gradual recovery from the pandemic prove too optimistic, Sunrise said it would expect an additional risk to revenue, mainly from roaming decline, of between CHF5m ($5m) and CHF10m ($10m).
Deutsche Telekom (DT) is so far playing down the impact of the pandemic. It reported first quarter growth in all its businesses except the T-Systems IT services unit. Overall, earnings and adjusted profits were up, and DT does not expect the virus to weaken performance significantly in the rest of 2020. Germany has, so far, managed to avoid the worst pandemic crises that have affected some of its western neighbors, as have some of the eastern European countries in which DT has a strong presence. That relative stability extends to the national telco, according to CEO Timotheus Höttges, who said on the earnings call: “Deutsche Telekom is an anchor of stability in a global crisis. Our networks are working reliably as digital lifelines for society.”
The quarter showed a 2.3% year-on-year rise in sales, to €19.9bn ($21.5bn), as well as 8.5% growth in adjusted net profit, to nearly €1.3bn ($1.4bn). And there was a 10% increase in EBITDA to €7.6bn ($8.2bn). DT is forecasting sales growth in all its operating segments in 2020 and a rise in EBITDA, compared to 2019, of €25.5bn ($27.6bn) to €800m ($865m).
However, there are some clouds on the horizon. DT did acknowledge that store closures, decline in roaming revenues, and the cancellation of some large IT projects would impact revenue, but this would be offset by increased use of broadband and mobile services, and even voice telephony, plus lower churn.
Of course, DT’s mobile performance is heavily influenced by its US arm, T-Mobile USA< now significantly enlarged by the acquisition of Sprint. One uncertainty is whether Softbank, Sprint’s owner, will sell most of its stake in the merged entity as a result of its own financial problems (see Wireless Watch May 22 2020).
Even in the pre-merger Q1, US sales were up 4% to €10.2bn ($11bn), and adjusted EBITDA by 17%, to €3.9bn ($4.2bn). Across Europe, revenues grew by 0.4%, to €2.9bn ($3.1bn), and adjusted EBITDA gained 1.3%, to €1.1bn ($1.2bn).
The telco expects to invest about €13bn ($14.1bn) in capex this year, down slightly from €13.1bn ($14.2bn) in 2019 – about 16% of revenue, excluding the impact of Sprint.
Some of its robust profits picture comes from cost-cutting as it pursues its policy of leveraging 5G-era networks to introduce “brutal automation”, as Höttges has called it. In the first quarter, DT cut more than 4,000 jobs, bringing the total since 2015 to 20,000 lay-offs, or 10% of its workforce.
Data compiled by Light Reading shows that per-employee revenues have increased from about €275,000 ($296,900) in 2014 to more than €382,000 ($412,400) last year.
“Savings in indirect costs, primarily thanks to lower personnel costs, had an increasing effect on earnings,” said the company in its report, with tools including AI chatbots for customer service, and the introduction of automated network operations systems which enable almost staff-free network operating centers (NOCs).
José María Álvarez-Pallete, Telefónica’s CEO, said his company was remaining “resilient”, despite the severe pandemic effects on its largest market, Spain, and other territories like the UK and Brazil.
“Telefónica is not immune to this crisis, but it is resilient,” he said. “Our four key markets have performed well in a unique and challenging environment. Lower revenues from roaming, prepaid and business customers were partially compensated by lower commercial costs and lower customer churn.”
The firm refrained from making the widely anticipated dividend cut, and announced that its net debt was down by 5% year-on-year, though the figure remains hefty at €38.2bn (US$41.2bn) as of the end of March.
And on the dark side, net income fell from €926m ($999m) in Q1 2019 to €406m ($438m). Without exceptional items, though, Telefónica said net income would have been €619m ($668m).
Álvarez-Pallete said that the pandemic had had “limited impact” on financials during the first quarter, though of course the main effects in Europe and Latin America will be seen from Q2. Like many telcos, the uncertainty surrounding the rest of 2020 led Telefónica to abandon attempts to provide detailed guidance for the financial year. It did say that the outlook for OIBDA (operating income before depreciation and amortization) minus capex will be “slightly negative to flat year-on-year” in organic terms. But for the medium term, 2022, it repeated former guidance of growth in revenue, and improvement of two percentage points in OIBDA minus capex.
In Q1, turnover was €11.37bn ($12.26bn), down 5.1% year-on-year, but without currency shifts, it would have fallen by only 1.3%. In organic terms, revenue in Germany and the UK grew by 3.8% and 1.5% respectively, while in Spain, revenue was down 1.6% year-on-year.
In the UK, incumbent BT was pointing to the pressures of the pandemic at an earlier stage than some of its European peers, announcing that it was targeting €1bn in further cuts over the next three years and suspending its dividend in 2020 and 2021, to make a saving of about £2.5bn. Orange has also reduced its dividend, by 30%, as a result of pandemic-related downturn in profits. But Vodafone, like DT and Telefónica, will preserve the dividend.
Also like DT, Vodafone believes recent rounds of cost-cutting, and moves towards software-driven and automated networks and operations, have put it in a strong position to withstand the unexpected buffeting of the coronavirus storm. In the past two fiscal years, Vodafone has reduced operating costs by €800m, and boosted its earnings margin by almost 5% to 33.1%.
CEO Nick Read is eyeing further cuts and said Vodafone will aim for a further €1bn in operating cost reductions over the next three years. This is partly driven by the huge fees and fines the group has had to shoulder for its Indian subsidiary, Vodafone Idea. Last year, that was the biggest contributor to a group loss of €7.6bn loss, but in Q120, the loss was just €455m.
However, debt levels are still high at €42.2bn, up from around €27bn, though this will be alleviated by the plan to carve out the European tower operations, which could be worth as much as €20bn.